<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM 10-Q
(Mark One)
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
ACT OF 1934
For quarterly period ended June 30, 1998,
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________.
Commission file number 0-25886
GARDEN FRESH RESTAURANT CORP.
(Exact name of registrant as specified in its charter)
Delaware 33-0028786
(State or other jurisdiction of incorporation (I.R.S. Employee
or organization) Identification No.)
17180 Bernardo Center Drive, San Diego, CA 92128
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (619) 675-1600
Former name, former address and former fiscal year.
If changed since last report.
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No / /
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes / / No / /
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares of Common Stock, $.01 par value, outstanding as of July
24, 1998 was 5,540,651. There are no other classes of common stock.
<PAGE> 2
GARDEN FRESH RESTAURANT CORP.
FORM 10-Q
INDEX
PAGE
PART I: FINANCIAL INFORMATION
Item 1: Unaudited Condensed Financial Statements
Condensed Balance Sheet at September 30, 1997 and
June 30, 1998 3
Condensed Statement of Income for the three and the
nine months ended June 30, 1997 and June 30, 1998 4
Condensed Statement of Cash Flows for the nine months
ended June 30, 1997 and June 30, 1998 5
Notes to Unaudited Condensed Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 3: Quantitative and Qualitative Disclosures About
Market Risk 15
PART II: OTHER INFORMATION
Item 1: Legal Proceedings 16
Item 2: Changes in Securities and Use of Proceeds 16
Item 3: Defaults Upon Senior Securities 16
Item 4: Submission of Matters to a Vote of Security Holders 16
Item 5: Other Information 16
Item 6: Exhibits and Reports on Form 8-K 16
<PAGE> 3
GARDEN FRESH RESTAURANT CORP.
CONDENSED BALANCE SHEET
(Dollars in thousands)
September 30, 1997 June 30, 1998
(Unaudited)
ASSETS
Cash $ 2,345 $ 11,507
Inventories 2,886 3,207
Other current assets 550 2,867
Deferred income taxes 322 402
---------- ----------
Total current assets 6,103 17,983
Property and equipment, net 54,257 67,072
Intangible and other assets 1,472 1,907
Deferred income taxes 577 0
---------- ----------
Total assets $ 62,409 $ 86,962
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 5,012 $ 4,018
Current portion of long-term debt 4,456 4,898
Accrued liabilities 4,411 7,232
Deferred income taxes 0 186
---------- ----------
Total current liabilities 13,879 16,334
Accrued rent 1,397 1,320
Long term debt, net of current portion 12,965 12,173
Shareholders' equity:
Common stock, $.01 par value; 12,000,000
shares authorized at September 30, 1997
and June 30, 1998; 4,264,579 and
5,540,651 issued and outstanding at
September 30, 1997 and June 30, 1998,
respectively 43 56
Paid in capital 38,794 58,194
Accumulated deficit (4,669) (1,115)
---------- ----------
Total shareholders' equity 34,168 57,135
---------- ----------
Total liabilities and shareholders' equity $ 62,409 $ 86,962
========== ==========
See notes to unaudited condensed financial statements.
<PAGE> 4
GARDEN FRESH RESTAURANT CORP.
CONDENSED STATEMENT OF INCOME
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30, June 30, June 30,
1997 1998 1997 1998
<S> <C> <C> <C> <C>
NET SALES $ 23,502 $ 28,030 $ 66,238 $ 79,769
----------- ----------- ----------- -----------
COST AND EXPENSES:
Cost of sales 6,124 7,255 17,307 20,661
Restaurant operating expenses:
Labor 6,687 8,174 19,210 23,419
Occupancy and other 5,285 6,035 15,431 18,038
General and administrative expenses 1,411 1,596 4,215 5,079
Depreciation and amortization 1,604 1,773 4,665 5,236
----------- ----------- ----------- -----------
Total costs and expenses 21,111 24,833 60,828 72,433
----------- ----------- ----------- -----------
OPERATING INCOME 2,391 3,197 5,410 7,336
Interest expense, net (398) (448) (1,083) (1,410)
Other expense, net (19) (31) (42) (86)
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 1,974 2,718 4,285 5,840
Provision for income taxes (782) (1,068) (1,701) (2,286)
----------- ----------- ----------- -----------
NET INCOME $ 1,192 $ 1,650 $ 2,584 $ 3,554
=========== =========== =========== ===========
Basic net income per share $ .28 $ .34 $ .62 $ .79
=========== =========== =========== ===========
Shares used in computing
basic net income per share 4,212 4,795 4,171 4,478
=========== =========== =========== ===========
Diluted net income per share $ .27 $ .32 $ .59 $ .73
=========== =========== =========== ===========
Shares used in computing
diluted net income per share 4,377 5,204 4,360 4,846
=========== =========== =========== ===========
<FN>
See notes to unaudited condensed financial statements.
</TABLE>
<PAGE> 5
GARDEN FRESH RESTAURANT CORP.
CONDENSED STATEMENT OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine Months Ended
June 30, 1997 June 30, 1998
OPERATING ACTIVITIES:
Net income $ 2,584 $ 3,554
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 4,665 5,236
Loss on disposal of property 50 86
Deferred income taxes 638 683
Changes in operating assets and liabilities:
Increase in inventories (321) (321)
Increase in other assets (1,661) (2,317)
Decrease in accounts payable (632) (994)
Increase in accrued liabilities 922 2,821
Decrease in accrued rent (62) (77)
-------- --------
Net cash provided by operating activities $ 6,183 $ 8,671
-------- --------
INVESTING ACTIVITIES:
Acquisition of property and equipment:
New restaurants (9,913) (15,446)
Existing restaurant additions (1,315) (1,670)
Increase in intangible and other assets (792) (1,456)
-------- --------
Net cash used in investing activities (12,020) (18,572)
-------- --------
FINANCING ACTIVITIES:
Proceeds from long term debt 9,008 8,589
Repayment of long term debt (3,387) (8,939)
Net proceeds from issuance of common stock 790 19,413
-------- --------
Net cash provided by financing activities 6,411 19,063
-------- --------
Net increase in cash 574 9,162
Cash at beginning of period 615 2,345
-------- --------
Cash at end of period $ 1,189 $ 11,507
======== ========
See notes to unaudited condensed financial statements.
<PAGE> 6
GARDEN FRESH RESTAURANT CORP.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. UNAUDITED CONDENSED FINANCIAL STATEMENTS
The accompanying condensed financial statements have been prepared by the
Company without audit and reflect all adjustments, consisting of normal
recurring adjustments, which are, in the opinion of management, necessary for
a fair statement of financial position and the results of operations for the
interim periods. The statements have been prepared in accordance with the
regulations of the Securities and Exchange Commission and do not necessarily
include certain information and footnote disclosures necessary to present the
statements in accordance with generally accepted accounting principles. For
further information, refer to the financial statements and notes thereto for
the fiscal year ended September 30, 1997 included in the Company's Form 10-K.
2. NET INCOME PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 "Earnings Per Share"
("FAS 128"), which establishes new standards for computing earnings per share
and which became effective for financial statements for periods after December
15, 1997, including interim periods. Under the new requirements, historically
reported "primary" and "fully diluted" earnings per share have been replaced
with "basic" and "diluted" earnings per share.
Basic net income per share is computed based on the weighted average of
common shares outstanding during the period. Diluted net income per share is
computed based on the weighted average number of common shares and common
stock equivalents, which includes options under the Company's stock option
plans computed using the treasury stock method and common shares expected to
be issued under the Company's Employee Stock Purchase Plan.
Common stock equivalents of 165,000 and 409,000 shares for the three
month periods ended June 30, 1997 and 1998, respectively, and 189,000 and
368,000 shares for the nine months ended June 30, 1997 and 1998, respectively,
were used to calculate diluted earnings per share. There were no reconciling
items in calculating the numerator for basic and diluted earnings per share
for any of the periods presented.
3. PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
4. SECONDARY OFFERING
On May 22, 1998, the Company sold 1,000,000 shares of common stock at
$17.19 per share, and 27,500 shares were sold by a stockholder of the Company
resulting in net proceeds to the Company of approximately $15,720,000. The
Company did not receive any of the proceeds from the sale of shares by the
selling stockholder. Additionally, on June 19, 1998 the underwriters
exercised their over allotment option to purchase 154,125 shares of common
stock at $17.19 per share resulting in additional net proceeds of $2,498,000
to the Company.
<PAGE> 7
GARDEN FRESH RESTAURANT CORP.
STATEMENT OF OPERATING DATA
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
The statements contained in this Form 10-Q that are not purely historical
are forward looking statements, including statements regarding the Company's
expectations, hopes, beliefs, intentions or strategies regarding the future.
Statements which use the words "expects", "will", "may", "anticipates",
"believes", "intends" and "seeks" are forward looking statements. These
forward looking statements, including statements regarding the Company's
expansion efforts and plans to open new restaurants, are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward looking statement. It is important to
note that the Company's actual results could differ materially from those in
such forward looking statements. Among factors that could cause actual
results to differ materially are the factors set forth below under the heading
"Business Risks". In particular, the Company's expansion efforts and plans to
open new restaurants could be affected by the Company's ability to locate
suitable restaurant sites, construct new restaurants in a timely manner and
obtain additional funds.
On May 22, 1998, the Company sold 1,000,000 shares of common stock at
$17.19 per share resulting in net proceeds to the Company of approximately
$15,720,000. On June 19, 1998 the underwriters exercised their allotment
option to purchase 154,125 shares of common stock at $17.19 per share
resulting in additional net proceeds of $2,498,000 to the Company. The funds
were used to retire a portion of the Company's debt and to fund the
development of new restaurants.
<PAGE> 8
The following table sets forth the percentage of net sales of certain items
included in the Company's statement of income for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30, June 30, June 30,
1997 1998 1997 1998
<S> <C> <C> <C> <C>
NET SALES 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
COST AND EXPENSES:
Cost of sales 26.1% 25.9% 26.1% 25.9%
Restaurant operating expenses:
Labor 28.4% 29.2% 29.0% 29.3%
Occupancy and other 22.5% 21.5% 23.3% 22.6%
General and administrative expenses 6.0% 5.7% 6.4% 6.4%
Depreciation and amortization 6.8% 6.3% 7.0% 6.6%
----- ----- ----- -----
Total operating expenses 89.8% 88.6% 91.8% 90.8%
----- ----- ----- -----
OPERATING INCOME 10.2% 11.4% 8.2% 9.2%
Interest expense, net (1.7%) (1.6%) (1.6%) (1.8%)
Other expense, net (.1%) (.1%) (.1%) (.1%)
----- ----- ----- -----
INCOME BEFORE INCOME TAXES 8.4% 9.7% 6.5% 7.3%
Provision for income taxes (3.3%) (3.8%) (2.6%) (2.8%)
----- ----- ----- -----
NET INCOME 5.1% 5.9% 3.9% 4.5%
===== ===== ===== =====
</TABLE>
<PAGE> 9
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
NET SALES. Net sales for the three months ended June 30, 1998 increased
19.1% to $28.0 million from $23.5 million for the comparable 1997 period.
This increase was primarily due to the opening of six restaurants since the
comparable 1997 period and the increase in comparable restaurant sales of
7.0%.
COST OF SALES. Cost of sales for the three months ended June 30, 1998
increased 19.7% to $7.3 million from $6.1 million for the comparable 1997
period. As a percentage of net sales, cost of sales decreased .2% to 25.9%
from 26.1% in the comparable 1997 period due to a higher average meal price per
guest.
LABOR EXPENSE. Labor expense for the three months ended June 30, 1998
increased 22.4% to $8.2 million from $6.7 million for the comparable 1997
period. This increase was due to the six restaurants opened since the
comparable 1997 period. As a percentage of net sales, the labor expense
increased .8% from 28.4% in the comparable 1997 period due to increases in the
California minimum wage effective March 1, 1997 and March 1, 1998, and the
addition of six new restaurants which utilized higher than historical labor
hours.
OCCUPANCY AND OTHER OPERATING COSTS. Occupancy and other operating costs
for the three months ended June 30, 1998 increased 13.2% to $6.0 million from
$5.3 million for the comparable 1997 period. This was due to the addition of
six new restaurants. Occupancy and other operating costs as a percentage of
net sales decreased to 21.5% from 22.5% for the comparable 1997 period. This
was due to lower occupancy costs associated with more favorable rents in newer
stores, higher sales volume and the increase in average meal price per guest.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the three months ended June 30, 1998 increased 14.3% to $1.6 million from
$1.4 million for the comparable 1997 period. This increase was due to
personnel, training and relocation costs associated with supporting stores in
new regions. As a percentage of net sales, general and administrative
expenses decreased .3% to 5.7% from 6.0% for the comparable 1997 period.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses for the three months ended June 30, 1998 increased 12.5% to $1.8
million from $1.6 million for the comparable 1997 period. This increase was
due to depreciation and amortization for the new restaurants opened since the
comparable 1997 period. Depreciation and amortization expense as a percentage
of net sales was 6.3%, down from 6.8% for the comparable 1997 period.
INTEREST EXPENSE, NET. Interest expense, net for the three months ended
June 30, 1998 increased 25.0% to $.5 million from $.4 million for the
comparable 1997 period. Interest expense increased due to the increased debt
incurred for expansion since the comparable 1997 period.
NINE MONTHS ENDED JUNE 30, 1998 COMPARED TO NINE MONTHS ENDED JUNE 30, 1997
NET SALES. Net sales for the nine months ended June 30, 1998 increased
20.5% to $79.8 million from $66.2 million for the comparable 1997 period.
This was due to the opening of six restaurants since the comparable 1997
period and the increase in comparable restaurant sales of 7.4%.
COST OF SALES. Cost of sales for the nine months ended June 30, 1998 as
a percentage of net sales decreased .2% from the comparable 1997 period due to
higher average meal price per guest, but was higher in total dollars by 19.7%
at $20.7 million.
LABOR EXPENSE. Labor expense for the nine months ended June 30, 1998
increased 21.9% to $23.4 million from $19.2 million for the comparable 1997
period. This increase was due to the six restaurants opened since the
comparable 1997 period. As a percentage of net sales, labor expense increased
.3% from 29.0% in the comparable 1997 period due to increases in the
California minimum wage effective March 1, 1997 and March 1, 1998, and the
addition of six new restaurants which utilized higher than historical labor
hours.
OCCUPANCY AND OTHER OPERATING COSTS. Occupancy and other operating costs
for the nine months ended June 30, 1998 increased 16.9% to $18.0 million from
<PAGE> 10
$15.4 million for the comparable 1997 period. This was due mainly to the
addition of six new restaurants, additional advertising to support the
increase in same store sales in existing markets, increases in professional
services due to the change in minimum wage, and maintenance and repair costs
to maintain equipment and facilities in older buildings. Occupancy and other
operating costs as a percentage of net sales decreased to 22.6% from 23.3% for
the comparable 1997 period. This was due primarily to additional sales
volume.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the nine months ended June 30, 1998 increased 21.4% to $5.1 million from
$4.2 million for the comparable 1997 period. This was due primarily to the
increased personnel and relocation costs associated with supporting stores in
new regions. As a percentage of net sales, general and administrative
expenses was 6.4% which approximated the comparable 1997 period.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses for the nine months ended June 30, 1998 increased 10.6% to $5.2
million from $4.7 million for the comparable 1997 period. This increase was
due to depreciation and amortization for the new restaurants opened since the
comparable 1997 period. Depreciation and amortization as a percentage of net
sales was 6.6% down from 7.0% for the comparable 1997 period due to lower
amortization of preopening costs and higher sales volume.
INTEREST EXPENSE, NET. Interest expense, net for the nine months ended
June 30, 1998 increased 36.4% to $1.5 million from $1.1 million for the
comparable 1997 period. Interest expense increased due to the increase in
debt incurred for expansion.
LIQUIDITY AND CAPITAL RESOURCES
Since September 30, 1997 the Company sold 1,154,125 shares of common
stock on May 22, 1998 and June 19, 1998 resulting in net proceeds of
approximately $18,218,000. As of June 30, 1998 the Company has used
$5,000,000 to retire the Company's debt and to fund the development of new
restaurants.
The Company finances its cash requirements principally from cash flow
from operating activities, bank debt, mortgage, capital lease financing and
equity financing. The Company does not have significant receivables or
inventory, and receives trade credit based upon negotiated terms when
purchasing food and supplies. For the nine months ended June 30, 1998, the
Company generated $8.7 million in cash flow from operating activities,
received $8.6 million from bank debt and mortgages (with repayments of $8.9
million), and an additional $19.4 million from the sale of the Company's
Common Stock pursuant to a secondary public offering, stock options and the
Company's Employee Stock Purchase Plan.
The Company's principal capital requirement has been for funding the
development of restaurants. Historically the Company has primarily leased the
land and buildings for its restaurant operations. The Company does purchase
land and/or buildings when favorable conditions are available. The Company
currently owns the land and buildings for 17 restaurants, including the land
for sites the Company expects to open in fiscal 1998 and 1999. During the
first nine months of fiscal 1998, the Company opened three restaurants.
Capital expenditures totalled $17.1 million during the first nine months of
fiscal 1998 and $11.2 million for the comparable period in fiscal 1997. As of
June 30, 1998 the Company operated 52 salad buffet restaurants and one small
quick service restaurant.
The cash investment to open the three restaurants during the nine month
period ending June 30, 1998 was $7.2 million including land and buildings, and
excluding pre-opening costs. The pre-opening costs for the three restaurants
opened were $.6 million. The Company has signed one lease and purchased four
sites to be opened in fiscal 1998. In addition, the Company has signed one
lease, purchased two sites and five contracts to purchase sites to be opened
in fiscal 1999. The cash investment to open a new restaurant typically
includes the purchase or installation of furniture, fixtures, equipment and
leasehold improvements, and in the case of an owned site, the purchase of land
and a building. In addition to budgeted capital expenditures for fiscal 1998
of $20.0 million for new restaurant openings, the Company has budgeted $2.4
million in expenditures for fiscal 1998 for capital improvements at existing
sites. See "BUSINESS RISKS - EXPANSION RISKS".
The Company will need to rely on funds generated from operations to
<PAGE> 11
finance a portion of the expansion currently planned for fiscal 1998, as well
as any expansion taking place after fiscal 1998. Should the Company's results
of operations or its rate of growth fail to be adequate to finance expansion
or should costs or capital expenditures rise, the Company may not have the
ability to open new restaurants at its desired pace or at all, and could be
required to seek additional financing in the future. There can be no
assurance that the Company will be able to raise such capital when needed on
satisfactory terms or at all. See "BUSINESS RISK - CAPITAL REQUIREMENTS".
IMPACT OF INFLATION
The primary inflationary factors affecting the Company's operations
include food and beverage and labor costs. The Company does not believe that
inflation has materially affected earnings during the past three years.
Substantial increases in costs and expenses, particularly food, supplies,
labor and operating expenses, could have a significant impact on the Company's
operating results to the extent that such increases cannot be passed along to
guests.
NEW ACCOUNTING STANDARD
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up
Activities." This SOP requires that the costs of start-up activities, which
is inclusive of pre- opening costs, should be expensed as incurred. This new
accounting standard is effective for financial statements for fiscal years
beginning after December 15, 1998. Earlier application is encouraged in
fiscal years for which annual financial statements have not been issued.
Restatement of previously issued financial statements is not permitted.
As is typical in the restaurant industry, the Company defers its
restaurant pre-opening costs and amortizes them over the twelve-month period
following the opening of each respective restaurant. At June 30, 1998, total
deferred pre-opening costs were $2.0 million. For fiscal 1997 and the nine
months ended June 30, 1998, pre-opening expense amortization was approximately
$1.2 million and $.9 million, respectively. The Company has not yet
determined when it will adopt SOP 98-5. Upon adoption, the Company will
recognize the cumulative effect of a change in accounting principle, net of
any related income tax effect.
BUSINESS RISKS
The Company's business is subject to a number of risks. A comprehensive
summary of such risks can be found in the Company's Form 10K.
CERTAIN OPERATING RESULTS AND CONSIDERATIONS
In fiscal 1996 and 1997, respectively, the Company experienced an
increase of 2.5% and an increase of 4.7% in comparable restaurant sales. In
the first nine months of fiscal 1997 and 1998, respectively, the Company's
comparable restaurant sales increased by 3.0% and 7.4%, respectively. The
Company's newer restaurants have not historically experienced significant
increases in guest volume following their initial opening period. In
addition, the Company does not believe it has significant latitude to achieve
comparable restaurant sales growth through price increases. As a result, the
Company does not believe that recent comparable restaurant sales is indicative
of future trends in comparable restaurant sales. The Company believes that it
may from time to time in the future experience declines in comparable
restaurant sales, and that any future increases in comparable restaurant sales
would be modest.
EXPANSION RISKS
The Company opened seven salad buffet restaurants in fiscal 1997 and has
opened six restaurants to date in fiscal 1998, all of which are in new regions
(Oregon, Houston, Atlanta, Utah and Las Vegas). The Company currently intends
to open two additional restaurants in fiscal 1998. The Company's ability to
achieve its expansion plans will depend on a variety of factors, many of which
may be beyond the Company's control, including the Company's ability to locate
suitable restaurant sites, negotiate acceptable lease or purchase terms,
obtain required governmental approvals, construct new restaurants in a timely
manner, attract, train and retain qualified and experienced personnel and
<PAGE> 12
management, operate its restaurants profitably and obtain additional capital,
as well as general economic conditions and the degree of competition in the
particular region of expansion. The Company has experienced, and expects to
continue to experience, delays in restaurant openings from time to time. The
Company incurs substantial costs in opening a new restaurant and, in the
Company's experience, new restaurants experience fluctuating operational
levels for some time after opening. Owned restaurants generally require
significantly more upfront capital than leased restaurants, as a result of
which an increase in the percentage of owned restaurant openings as compared
to historical practice would increase the overall capital requirements,
required to meet the Company's growth plans. There can be no assurance that
the Company will successfully expand or that the Company's existing or new
restaurants will be profitable. The Company has encountered intense
competition for restaurant sites, and in many cases has had difficulty buying
or leasing desirable sites on terms that are acceptable to the Company. In
many cases, the Company's competitors are willing and able to pay more than
the Company for sites. The Company expects these difficulties in obtaining
desirable sites to continue for the foreseeable future.
Since its inception the Company has closed three non-performing
restaurants. Given the number of restaurants in current operation and the
Company's projected expansion rate there can be no assurances that the Company
will not close restaurants in the future. Any closure could result in a
significant write off of assets which could adversely affect the Company's
business, financial condition and results of operations.
RESTAURANT INDUSTRY AND COMPETITION
The restaurant industry is highly competitive. Key competitive factors
in the industry include the quality and value of the food products offered,
quality of service, price, dining experience, restaurant location and the
ambiance of the facilities. The Company's primary competitors include
mid-priced, full-service casual dining restaurants, as well as traditional
self-service buffet and other soup and salad restaurants and healthful and
nutrition-oriented restaurants. The Company competes with national and
regional chains, as well as individually owned restaurants. The number of
buffet and casual restaurants with operations generally similar to the
Company's has grown substantially in the last several years and the Company
believes competition among buffet-style and casual restaurants has increased
and will continue to increase as the Company's competitors expand operations
in various geographic areas. Such increased competition could increase the
Company's operating costs or adversely affect its revenues. The Company
believes it competes favorably in the industry, although many of the Company's
competitors have been in existence longer than the Company, have a more
established market presence and have substantially greater financial,
marketing and other resources than the Company, which may give them certain
competitive advantages. In addition, the restaurant industry has few
non-economic barriers to entry. Therefore, there can be no assurance that
third parties will not be able to successfully imitate and implement the
Company's concept. The Company has encountered intense competition for
restaurant sites, and in many cases has had difficulty buying or leasing
desirable sites on terms that are acceptable to the Company. In many cases,
the Company's competitors are willing and able to pay more than the Company
for sites. The Company expects these difficulties in obtaining desirable
sites to continue for the foreseeable future.
CAPITAL REQUIREMENTS
In addition to funds generated from operations, and public stock
offerings the Company will need to obtain external financing to complete its
expansion plans for fiscal year 1999 and beyond. There can be no assurance
that such funds will be available when needed. Additionally, should the
Company's results of operations decrease or should costs or capital
expenditures rise, the Company may not have the ability to open new
restaurants at its desired pace or at all, because capital may not be
available.
COST SENSITIVITY
The Company's profitability is highly sensitive to increases in food,
labor and other operating costs. The Company's dependence on frequent
deliveries of fresh produce and groceries subjects it to the risk that
shortages or interruptions in supply caused by adverse weather or other
conditions could materially adversely affect the availability, quality and
cost of ingredients. In addition, unfavorable trends or developments
concerning factors such as inflation, food, labor and employee benefit costs,
rent increases resulting from the rent escalation provisions in the Company's
leases, and the availability of experienced management and hourly employees
may also adversely affect the Company. The Company believes relatively
favorable inflation rates and part-time labor supplies in its principal market
area have contributed to relatively stable food and labor costs in recent
years. However, there can be no assurance that these conditions will continue
or that the Company will have the ability to control costs in the future.
<PAGE> 13
MINIMUM WAGE
The Company has recently experienced increases in the hourly wage rate
due to increases in the federal minimum wage on October 1, 1996 and September
30, 1997 and in the California minimum wage on March 1, 1997 and March 1,
1998. While the Company has managed to absorb the increases to date without
reduction in profitability there can be no assurance that the Company will be
able to do so in the future.
IMPORTANCE OF KEY EMPLOYEES
The Company is heavily dependent upon the services of its officers and
key management personnel involved in restaurant operations, purchasing,
expansion and administration. In particular, the Company is dependent upon
the management and leadership of its three executive officers, Michael P.
Mack, David W. Qualls and R. Gregory Keller. The loss of any of these three
individuals could have a material adverse effect on the Company's business,
financial condition and results of operations. The success of the Company and
its individual restaurants depends upon the Company's ability to attract and
retain highly motivated, well-qualified restaurant operations and other
management personnel. The Company faces significant competition in the
recruitment of qualified employees.
COMPUTER SYSTEMS AND YEAR 2000
Many installed computer systems and software products are coded to accept
only two digit entries in the date code field. As the year 2000 approaches,
these code fields may need to accept four digit entries to distinguish years
beginning with "19" from those beginning with "20". As a result, in less than
two years, computer systems and/or software products used by many companies
may need to be upgraded to comply with such year 2000 requirements. The
Company's proprietary accounting and management information software is year
2000 compliant; however, certain standard software used by the Company
pursuant to third party software licenses is not. The Company believes that
the cost of modifying the standard, non-proprietary software will be borne by
the licensors, and accordingly, does not believe that it will incur
significant costs with respect to year 2000 compliance. In addition, in the
event that the licensors do not achieve year 2000 compliance in a timely
manner, the Company believes that it can acquire alternative software that is
compliant and that performs substantially the same function as its current
software. The Company does not believe that the cost of acquiring and
converting to such alternative software would be significant or that it would
have a material adverse effect on the Company's business, financial condition
or results of operations. However, if the Company encounters any
unanticipated delays in, or costs associated with, the implementation of such
changes, the Company's business, financial condition and results of operations
could be materially adversely affected. There also can be no assurance that
computer systems operated by third parties, such as vendors and financial
institutions, with which the Company does business will achieve year 2000
compliance in a timely fashion or that any delays or problems on their part
will not have a material adverse effect on the Company's business.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company's business experiences seasonal fluctuations, as a
disproportionate amount of the Company's net income is generally realized in
the second, third and fourth fiscal quarters due to higher average sales and
lower average costs. Quarterly results have been and are expected to continue
to fluctuate as a result of a number of factors, including the timing of new
restaurant openings. As a result of these factors, net sales and net income
on a quarterly basis may fluctuate and are not necessarily indicative of the
results that may be achieved for a full fiscal year.
GEOGRAPHIC CONCENTRATION IN CALIFORNIA: RESTAURANT BASE
Twenty-eight of the Company's 56 existing salad buffet restaurants are
located in California. Accordingly, the Company is susceptible to
fluctuations in its business caused by adverse economic or other conditions in
this region, including natural disasters or other acts of God. As a result of
the Company's continued concentration in California, adverse economic or other
conditions in California could have a material adverse effect on the Company's
business. The Company's significant investment in, and long-term commitment
to, each of its restaurant sites limits its ability to respond quickly or
<PAGE> 14
effectively to changes in local competitive conditions or other changes that
could affect the Company's operations. In addition, the Company has a small
number of restaurants relative to some of its competitors. Consequently, a
decline in the profitability of an existing restaurant or the introduction of
an unsuccessful new restaurant could have a more significant effect on the
Company's result of operations than would be the case in a company with a
larger number of restaurants.
VOLATILITY OF STOCK PRICE
The market price of the Company's common stock has fluctuated since the
initial public offering of the common stock in May 1995. Quarterly operating
results of the Company and other restaurant companies, daily transactional
volume, changes in general conditions in the economy, the financial markets or
the restaurant industry, natural disasters or other developments affecting the
Company or its competitors could cause the market price of the common stock to
fluctuate substantially. In addition, in recent years the stock market has
experienced extreme price and volume fluctuations. This volatility has had a
significant effect on the market price of securities issued by many companies
for reasons unrelated to the operating performance of these companies.
<PAGE> 15
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk
No Information to Report
<PAGE> 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings Not Applicable
Item 2. Changes in Securities Not Applicable
Item 3. Default upon Senior Securities Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders Not Applicable
Item 5. Other Information
The Company's proxy for its next Annual Meeting of
Stockholders may confer discretionary authority to vote on any
proposal submitted by a stockholder if written notice of such proposal
is not delivered to the Company at its offices at 17180 Bernardo
Center Drive, San Diego, CA 92128, on or before November 30, 1998.
Any proposals of stockholders to be included in the Company's proxy
statement for that meeting must be received by the Company at its
offices not later than September 16, 1998, and must satisfy the
conditions established by the Securities and Exchange Commission for
stockholder proposals to be included in the Company's proxy statement
for that meeting.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
The Exhibits required by Item 6(a) of this report are listed in
the Exhibit Index on page 14 herewith.
(b) Report on Form 8-K:
No reports on Form 8-K have been filed by the Company during the
fiscal quarter ended June 30, 1998.
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GARDEN FRESH RESTAURANT CORP.
(Registrant)
/s/ Michael P. Mack
--------------------------------
Michael P. Mack
Chief Executive Officer/President
(Principal Executive Officer)
/s/ David W. Qualls
--------------------------------
David W. Qualls
Chief Financial Officer
(Principal Accounting and Financial
Officer)
DATED: August 13, 1998
<PAGE>
EXHIBIT NO. DESCRIPTION
3.1 * Restated Certificate of Incorporation of Garden Fresh Restaurant
Corp.
3.2 ** Bylaws of Garden Fresh Restaurant Corp., as amended.
10.1 ** Form of Indemnity Agreement for executive officers and directors.
10.14***** Indemnification Agreement between the Company and David Qualls
dated April 28, 1998.
10.13** Park Terrace Office Park lease between the Company and Park
Terrace Partners dated November 1, 1991
10.2 ** The Company's Restaurant Management Stock Option Plan, as
amended.
10.3 ** The Company's Key Employee Stock Option Plan, as amended.
10.4 ** The Company's 1995 Outside Director Stock Option Plan.
10.5 ** The Company's 1995 Key Employee Stock Option Plan, as amended.
10.6 *** Form of Executive Employment Agreement
10.7 *** Wells Fargo Bank Revolving Line of Credit Note
10.8 **** The Company's 1998 Stock Option Plan
10.9 **** The Company's Variable Deferred Compensation Plan for Executives
27.1 Financial Data Schedule
* Incorporated by reference from Exhibit 4.1 filed with the Company's
Registration Statement on Form S-8 (No. 33-93568) filed June 16,
1995.
** Incorporated by reference from the Exhibits with corresponding
numbers filed with the Company's Registration Statement on Form S-1
(No. 33-90404), as amended by Amendment No. 1 to Form S-1 filed
on April 19, 1995, Amendment No. 2 to Form S-1 filed May 8, 1995,
Amendment No. 3 to Form S-1 filed May 15, 1995, Exhibit 10.2 is
incorporated by reference from Exhibits 10.2 and 10.2A, Exhibit
10.3 is incorporated by reference from Exhibits 10.3 and 10.3A and
Exhibit 10.5 is incorporated by reference from Exhibit 10.5 and
10.5A.
*** Incorporated by reference from the Exhibits with corresponding
numbers filed with the Company's Form 10Q filed with the SEC on
February 13, 1998.
**** Incorporated by reference from the Exhibits with corresponding
numbers filed with the Company's Form 10Q filed with the SEC on
April 28, 1998. Exhibit 10.9 is incorporated by reference from
the Exhibits with corresponding numbers filed with the Company's
Form S-8 filed with the SEC on June 24, 1998.
***** Incorporated by reference from the Exhibits with corresponding
numbers filed with the Company's Form S-1 (No. 33-51267) filed with
the SEC on April 29, 1998.
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE CONSOLIDATED
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ANNUAL REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH ANNUAL REPORT ON FORM 10-Q
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<PERIOD-START> OCT-01-1997
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