<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 March 31, 1999
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 Sections 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 May 5,
1999 was 5,580,955. 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, 1998 and
March 31, 1999 3
Condensed Statement of Income for the three and six
months ended March 31, 1998 and March 31, 1999 4
Condensed Statement of Cash Flows for the six
months ended March 31, 1998 and March 31, 1999 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, 1998 March 31, 1999
(Unaudited)
Assets
Cash and cash equivalents $ 3,382 $ 1,607
Inventories 3,579 3,843
Other current assets 660 1,566
Deferred income taxes 376 318
---------- ---------
Total current assets 7,997 7,334
Property and equipment, net 74,601 84,747
Intangible and other assets 2,334 2,582
---------- ---------
Total assets $ 84,932 $ 94,663
========== =========
Liabilities and Shareholders' Equity
Accounts payable $ 3,657 $ 4,505
Current portion of long-term debt 5,712 10,221
Accrued liabilities 5,081 7,796
---------- ---------
Total current liabilities 14,450 22,522
Accrued rent 1,292 1,235
Deferred income taxes 618 1,104
Deferred compensation 171 325
Long term debt, net of current portion 9,154 8,193
Shareholders' equity:
Common stock, $.01 par value; 12,000,000
shares authorized at September 30, 1998
and March 31, 1999; 5,544,217 and
5,532,139 issued and outstanding at
September 30, 1998 and March 31, 1999,
respectively 56 55
Paid in capital 58,542 58,071
Retained Earnings 649 3,331
Treasury stock, at cost - (173)
---------- ---------
Total shareholders' equity 59,247 61,284
---------- ---------
Total liabilities and shareholders' equity $ 84,932 $ 94,663
========== =========
See notes to unaudited condensed financial statements.
<PAGE> 4
CONDENSED STATEMENT OF INCOME
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31, March 31, March 31,
1998 1999 1998 1999
<S> <C> <C> <C> <C>
NET SALES $ 27,836 $ 32,900 $ 51,739 $ 61,348
----------- ----------- ----------- -----------
Costs and expenses:
Cost of sales 7,125 8,423 13,406 15,897
Restaurant operating expenses:
Labor 8,058 9,807 15,245 18,609
Occupancy and other expenses 6,221 6,846 12,003 13,190
General and administrative expenses 1,901 2,136 3,483 3,939
Depreciation and amortization expenses 1,779 2,243 3,463 4,462
----------- ----------- ----------- -----------
Total costs and expenses 25,084 29,455 47,600 56,097
----------- ----------- ----------- -----------
Operating income 2,752 3,445 4,139 5,251
Interest income 15 24 56 57
Interest expense (558) (435) (1,018) (826)
Other expense, net (39) (26) (55) (67)
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 2,170 3,008 3,122 4,415
Provision for income taxes (852) (1,167) (1,218) (1,733)
----------- ----------- ----------- -----------
NET INCOME $ 1,318 $ 1,841 $ 1,904 $ 2,682
=========== =========== =========== ===========
Basic net income per share $ 0.31 $ .33 $ .44 $ .48
=========== =========== =========== ===========
Shares used in computing
basic net income per share 4,304 5,555 4,298 5,565
=========== =========== =========== ===========
Diluted net income per share $ .28 $ .32 $ .41 $ .46
=========== =========== =========== ===========
Shares used in computing
diluted net income per share 4,673 5,817 4,633 5,845
=========== =========== =========== ===========
<FN>
See notes to unaudited condensed financial statements.
<PAGE> 5
GARDEN FRESH RESTAURANT CORP.
CONDENSED STATEMENT OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Six Months Ended
March 31, 1998 March 31, 1999
OPERATING ACTIVITIES:
Net income $ 1,904 $ 2,682
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization expenses 3,463 4,462
Loss on disposal of property 55 75
Deferred income taxes 342 544
Tax benefits from exercise of stock options 29 348
Changes in operating assets and liabilities:
Increase in inventories (359) (264)
Increase in other assets (1,336) (906)
Increase (decrease) in accounts payable (1,289) 848
Increase in accrued liabilities 2,647 2,542
Decrease in accrued rent (50) (57)
(Decrease) increase in deferred
compensation (326) 154
-------- --------
Net cash provided by operating activities $ 5,080 $ 10,428
-------- --------
INVESTING ACTIVITIES:
Acquisition of property and equipment:
New restaurant development (9,361) (12,413)
Existing restaurant additions (600) (1,127)
Increase in intangible and other assets (1,020) (1,391)
-------- --------
Net cash used in investing activities (10,981) (14,931)
-------- --------
FINANCING ACTIVITIES:
Proceeds from long-term debt 8,339 6,772
Repayment of long-term debt (2,661) (3,224)
Net proceeds from issuance of common stock 466 914
Repurchase of common stock - (1,734)
-------- --------
Net cash provided by financing activities 6,144 2,728
-------- --------
Net increase (decrease) in cash and cash
equivalents 243 (1,775)
Cash at beginning of period 2,345 3,382
-------- --------
Cash at end of period $ 2,588 $ 1,607
======== ========
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
fiscal year ended September 30, 1998 included in the Company's Form 10-K.
2. NET INCOME PER SHARE
Basic net income per share is computed based on the weighted average of
common outstanding during the period. Diluted net income per share is computed
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.
Potential common stock of 369,000 and 262,000 shares for the three month
periods ended March 31, 1998 and 1999, respectively, and 335,000 and 280,000
shares for the six month periods ended March 31, 1998 and 1999, 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. STOCK REPURCHASE
In October 1998, the Company announced that it intended to repurchase up to
500,000 shares of its outstanding common stock. To date the Company has
repurchased 132,000 shares of common stock at an average price of $14.45, for a
total of $1,907,000. The Company has retired 120,000 shares of the total
common stock repurchased for a total of $1,734,000.
<PAGE> 7
GARDEN FRESH RESTAURANT CORP.
STATEMENT OF OPERATING DATA
ITEM 2: MANGEMENT'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," "planned," "budgeted," and "seeks," are forward looking
statements. These forward looking statements, including statements regarding
the Company's expansion efforts and plans to open new restaurants, and year
2000 compliance efforts 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 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.
QUARTERLY RESULTS
The following table sets forth the percentage of net sales certain items
included in the Company's statement of income for the periods indicated.
(Unaudited)
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31, March 31, March 31,
1998 1999 1998 1999
<S> <C> <C> <C> <C>
NET SALES 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
COST AND EXPENSES:
Cost of sales 25.6% 25.6% 25.9% 25.9%
Restaurant operating expenses:
Labor 28.9% 29.8% 29.5% 30.3%
Occupancy and other 22.4% 20.8% 23.2% 21.5%
General and administrative expenses 6.8% 6.5% 6.7% 6.4%
Depreciation and amortization 6.4% 6.8% 6.7% 7.3%
----- ----- ----- -----
Total costs and expenses 90.1% 89.5% 92.0% 91.4%
----- ----- ----- -----
OPERATING INCOME 9.9% 10.5% 8.0% 8.6%
Interest income 0.1% 0.0% 0.1% 0.1%
Interest expense (2.1%) (1.3%) (2.0%) (1.4%)
Other expense, net (0.1%) (0.1%) (0.1%) (0.1%)
----- ----- ----- -----
INCOME BEFORE INCOME TAXES 7.8% 9.1% 6.0% 7.2%
Provision for income taxes (3.1%) (3.5%) (2.3%) (2.8%)
----- ----- ----- -----
NET INCOME 4.7% 5.6% 3.7% 4.4%
===== ===== ===== =====
</TABLE>
<PAGE> 8
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
NET SALES. Net sales for the three months ended March 31, 1999 increased
18.3% to $32.9 million from $27.8 million for the comparable 1998 period. This
increase was primarily due to the opening of nine restaurants since the
comparable 1998 period and the increase in comparable restaurant sales of 5.3%.
COST OF SALES. Cost of sales for the three months ended March 31, 1999
increased 18.3% to $8.4 million from $7.1 million for the comparable 1998
period. This increase was due to the addition of nine restaurants since the
comparable 1998 period. As a percentage of net sales, cost of sales were
25.6%, which approximated the comparable 1998 period.
LABOR EXPENSE. Labor expense for the three months ended March 31, 1999
increased 21.0% to $9.8 million from $8.1 million for the comparable 1998
period. This increase was due to nine restaurants opened since the comparable
1998 period. As a percentage of net sales, the labor expense increased .9% to
29.8% from 28.9% in the comparable 1998 period. Of the percentage increase,
.6% was due to increases in the average hourly wage rate, with .3% of the
increase due to the addition of new restaurants, which utilized higher than
historical labor hours.
OCCUPANCY AND OTHER EXPENSES. Occupancy and other operating costs for
the three months ended March 31, 1999 increased 9.7% to $6.8 million from $6.2
million for the comparable 1998 period. This was due primarily to the addition
of nine new restaurants. Occupancy and other operating costs as a percentage
of net sales decreased 1.6% to 20.8% from 22.4% for the comparable 1998 period.
This was due to an increase of restaurant sites owned by the Company, which
have lower occupancy costs than restaurant sites leased by the Company of .9%,
lower marketing expense of .3%, uniform expense of .1%, and maintenance and
repair expense of .3%.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the three months ended March 31, 1999 increased 10.5% to $2.1 million from
$1.9 million for the comparable 1998 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 6.5% from 6.8% for the comparable 1998 period.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses for the three months ended March 31, 1999 increased 22.2% to $2.2
million from $1.8 million for the comparable 1998 period. This increase was
due to depreciation and amortization for the new restaurants opened since the
comparable 1998 period. Depreciation and amortization expense as a percentage
of net sales increased .4% to 6.8%, from 6.4% for the comparable 1998 primarily
due to amortization of startup expense associated with the nine restaurants
opened since the 1998 period.
INTEREST INCOME. Interest income for the three months ended March 31,
1999 increased 60.0% to $24,000 from $15,000 for the comparable 1998 period.
The increase in interest income was due to an increase in cash from operating
activities.
INTEREST EXPENSE. Interest expense for the three months ended March 31,
1999 decreased 33% to $.4 million from $.6 million for the comparable 1998
period. Interest expenses decreased due to a reduction of debt since the
comparable 1998 period.
SIX MONTHS ENDED MARCH 31, 1999 COMPARED TO SIX MONTHS ENDED MARCH 31, 1998
NET SALES. Net sales for the six months ended March 31, 1999 increased
18.6% to $61.3 million from $51.7 million for the comparable 1998 period. This
increase was primarily due to the opening of nine restaurants since the
comparable 1998 period and the increase in comparable restaurant sales of 5.3%.
COST OF SALES. Cost of sales for the six months ended March 31, 1999
increased 18.7% to $15.9 million from $13.4 million for the comparable 1998
period. This increase was due to the addition of nine restaurants since the
comparable 1998 period. As a percentage of net sales, cost of sales were
25.9%, which approximated the comparable 1998 period.
<PAGE> 9
LABOR EXPENSE. Labor expense for the six months ended March 31, 1999
increased 22.4% to $18.6 million from $15.2 million for the comparable 1998
period. This increase was due to wage increases totaling 10.0% and the nine
restaurants opened since the comparable 1998 period totaling 12.4%. As a
percentage of net sales, the labor expense increased .8% to 30.3% from 29.5% in
the comparable 1998 period due to an increase in wages.
OCCUPANCY AND OTHER EXPENSES. Occupancy and other operating costs for
the six months ended March 31, 1999 increased 10.0% to $13.2 million from $12.0
million for the comparable 1998 period. This was due to the addition of nine
new restaurants. Occupancy and other operating costs as a percentage of net
sales decreased 1.7% to 21.5% from 23.2% for the comparable 1998 period. This
was due to an increase of restaurant sites owned by the Company which have
lower occupancy costs than restaurant sites leased by the Company of 1.0%,
lower marketing expense of .2%, supplies expense of .2%, uniform expanses of
.1%, and maintenance and repair expense of .2%.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the six months ended March 31, 1999 increased 11.4% to $3.9 million from
$3.5 million for the comparable 1998 period. This was due to a 10.4% increase
in personnel and training expense, and a 1.0% increase in relocation costs
associated with supporting stores in new regions. As a percentage of net
sales, general and administrative expenses decreased .3% to 6.4% from 6.7% for
the comparable 1998 period this was due to additional personnel to support
stores new stores.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses for the six months ended March 31, 1999 increased 28.6% to $4.5
million from $3.5 million for the comparable 1998 period. This increase was
due to depreciation and amortization for the restaurants opened since the
comparable 1998 period. Depreciation and amortization expense as a percentage
of net sales increased .6% to 7.3%, from 6.7% for the comparable 1998 primarily
due to amortization of startup expense associated with nine restaurants opened
since the 1998 period.
INTEREST INCOME. Interest income for the six months ended March 31, 1999
approximated 1998 at $57,000 and $56,000, respectively.
INTEREST EXPENSE. Interest expense for the six months ended March 31,
1999 decreased 20% to $.8 million from $1.0 million for the comparable 1998
period. Interest expenses decreased due to pay down of debt since the
comparable 1998 period.
LIQUITY AND CAPITAL RESOURCES
The Company finances its cash requirements principally from cash flow
from operating activities, bank debt, mortgage and 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 six months ended March 31, 1999, the
Company generated $10.4 million from operating activities and received $6.8
million from bank debt and mortgage financing (with repayments of $3.2
million). The Company received $.9 million from the sale of the Company's
Common Stock pursuant to stock options and the Company's Employee Stock
Purchase Plan, and repurchased 132,000 shares of common stock for $1.9 million.
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 or land and buildings when favorable conditions are available. The
Company currently owns the land or land and buildings for 25 restaurants,
including the land for certain sites the Company expects to open in fiscal 1999
and 2000. During the first six months of fiscal 1999, the Company opened four
owned restaurant sites. Capital expenditures totaled $13.5 million during the
first six months of fiscal 1999 and $10.0 million for the comparable period in
fiscal 1998. As of March 31, 1999, the Company operated 61 salad buffet
restaurants and one small quick service restaurant.
The cash investment required for the four restaurants opened during the
six month period ending March 31, 1999 was $11.4 million including land and
buildings, and excluding pre-opening costs. The pre-opening costs for the four
restaurants opened was $1.0 million. The Company has signed 5 leases, and
purchased 6 sites planned to open in fiscal 1999. In addition, the Company has
opened 5 escrows for sites planned to open in fiscal 2000. 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 1999 of $31.4 million for new restaurant
openings, the Company has budgeted $2.4 million in expenditures for fiscal 1999
for capital improvements at existing sites. SEE "BUSINESS RISKS - EXPANSION
RISKS."
<PAGE> 10
The Company will need to rely on funds generated from operations to
finance a portion of the expansion currently planned for fiscal 1999, as well
as any expansion taking place after fiscal 1999. 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 increased 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
are 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. Total costs reflected in
the March 31, 1999 balance were $1.6 million. The Company has determined it
will adopt SOP 98-5 in fiscal 2000. Upon adoption, the Company will recognize
the cumulative effect of a change in accounting principle, net of any related
income tax effect.
While total cash flows are unaffected by this change, pre-opening costs
previously reported as cash used in the investing activities will be reported
as a component of net cash provided by operating activities.
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 10-K. In addition to
other information in this form 10-Q, shareholders and prospective investors
should consider carefully the following factors in evaluating the Company and
its business.
CERTAIN OPERATING RESULTS AND CONSIDERATIONS
In fiscal 1997 and 1998, respectively, the Company experienced an
increase of 4.7% and an increase of 7.5% in comparable restaurant sales. In
the first six months of fiscal 1998 and 1999, respectively, the Company's
comparable restaurant sales increased by 7.6% and 5.3%, respectively. The
Company's restaurants have not historically experienced significant increases
in guest volume following their initial opening period (15 months) due to the
fact that most sites open immediately at average or greater quest volume. 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 are 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 eight salad buffet restaurants in fiscal 1998 and has
opened four restaurants to date in fiscal 1999, all of which are in newer
regions (Pacific Northwest, Houston, Atlanta, Utah, Las Vegas and Jacksonville,
Florida). The Company currently intends to open eight additional restaurants
in fiscal 1999. 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
<PAGE> 11
restaurants in a timely manner, attract, train and retain qualified and
experienced personnel and 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. Tha 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 salad
buffet 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 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
provisions in the Company's leases, and the availability of experience
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 areas 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> 12
MINIMUM WAGE
The Company has experienced increases in the hourly wage rate due to
increases in the federal minimum wage and in the California minimum wage.
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 four executive officers, Michael P. Mack,
David W. Qualls, R. Gregory Keller and Kenneth J. Keane. The loss of any of
these four 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
The year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Certain
information technology systems and their associated software ("IT Systems"),
and certain equipment that utilizes programmable logic chips to control aspects
of their operation ("embedded chip equipment"), may recognize "00" as the year
1900, "01" as the year 1901, etc. The year 2000 issue could result, at the
Company and elsewhere, in system failures or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions or to engage in other normal business activities.
The Company's State of Readiness. The Company is addressing the year 2000
issue, including efforts relating to IT systems and embedded chip equipment
used with the Company, efforts to assess issues the Company faces if third
parties who do business with the Company are not prepared for the year 2000,
and contingency planning. The Company has determined that its proprietary
accounting and management information software, and the hardware upon which it
runs, is year 2000 compliant; third party software critical to the Company's
operation was upgraded as scheduled during the first calendar quarter of 1999.
Remaining third party software, consisting of word processing, spreadsheet and
personal computer operating systems, will be upgraded, as the updates become
available from the vendors. The Company plans for these to be completed during
the third calendar quarter of 1999. The Company has completed its review of
embedded chip equipment and will be year 2000 compliant by mid-1999.
The Company's operations are also dependent on the year 2000 readiness of
third parties that do business with the Company. In particular, the Company's
IT Systems interact with commercial electronic transaction processing systems
to handle customer credit card purchases, and the Company is dependent on
third-party suppliers of such infrastructure elements including, but not
limited to, telephone service, electric power, water and banking services.
Although the Company has not been put on notice that any known third party
problem will not be resolved; the Company has limited information and no
assurance of the year 2000 readiness of third parties. The Company has however
sent questions to its major suppliers requesting status as to state of
readiness for year 2000. To date, none of the responses received have
indicated any material weaknesses.
The Company has used and continues to use internal resources to identify,
correct, upgrade or replace and test internally deployed IT Systems and
embedded chip equipment for year 2000 compliance.
COSTS. The Company did not incur significant costs to enable its proprietary
accounting and management information software, and the hardware upon which it
runs, to be year 2000 compliant. The Company believes that the cost of
modifying the standard, non- proprietary software will be borne by the
licensors, and accordingly does not believe it will incur significant costs
with respect to such year 2000 compliance. Aggregate costs for year 2000
issues have been and are estimated to be below $25,000 and are being expensed
as incurred.
RISKS. The Company intends and expects to implement the changes necessary to
address the year 2000 issue for IT Systems and embedded chip equipment used
within the Company. The Company presently believes that, with modifications to
existing software, conversions to new software, and appropriate remediation of
embedded chip equipment, the year 2000 issue is not
<PAGE> 13
reasonably likely to impose significant operational problems for the Company's
IT Systems and embedded chip equipment so modified and converted. However, if
unforeseen difficulties arise or such modifications, conversions and
replacements are not completed timely, or if the Company's vendors' or
suppliers' systems are not modified to become year 2000 compliant, the year
2000 issue may have a material adverse impact on the Company's business,
financial condition and results of operations.
The Company is presently unable to assess the likelihood that the Company
will experience significant operational problems due to unresolved year 2000
problems of third parties that do business with the Company. There can be no
assurance that other entities will achieve timely year 2000 compliance; if they
do not, year 2000 problems could have a material impact on the Company's
operations. Similarly there can be no assurance that the Company can timely
mitigate its risks to a supplier's failure to resolve its year 2000 issues. If
such mitigation is not achievable, year 2000 problems could have a material
adverse impact on the Company's business, financial condition and results of
operations.
The Company's estimates of the cost of achieving year 2000 compliance and
the date by which year 2000 compliance will be achieved are based on
management's best estimates, which were derived using numerous assumptions
about future events including the continued availability of certain resources,
third party modification plans and other factors. However, there can be no
assurance that these estimates will be achieved, and actual results could
differ materially from these estimates.
The Company presently believes that the most reasonably likely worst cast
scenarios that the Company might confront with respect to year 2000 issues have
to do with a decline in business due to consumer preoccupation with media and
news reports of actual or anticipated events and actual events over which the
Company has no control, including, but not limited to, failure of power, water
and telephone service, or problems experienced by other companies without any
connection to the Company. If the Company experiences loss of power or similar
services in any affected geographic area, the Company would be forced to
temporarily close stores.
CONTINGENCY PLANS. The Company has a small number of suppliers who provide the
majority of the Company's inventory, including fresh produce and grocery
staples. The Company believes these suppliers are or will be year 2000
compliant by June of 1999. As part of the Company's normal contingency
planning, it has identified alternative suppliers. However, there can be no
assurance that there will be no disruption of supply resulting in the Company's
inability to maintain operations. In the event that the parties from whom the
Company licenses software 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, without significant cost. Additionally, in the event the Company
needs to replace equipment that uses embedded systems, the Company believes it
can do so without significant cost.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company's business experiences seasonal fluctuations, as a
disproportionate amount of the Company' 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: RESTAURANT BASE
Twenty-eight of the Company's sixty-one existing salad buffet restaurants
are located in California, and thirteen are located in Florida. 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 and Florida, adverse economic or other conditions in either state
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 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
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.
<PAGE> 14
VOLATILITY OF STOCK PRICE
The market price of the Company's common stock has fluctuated since the
initial public offering of its 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
Not Applicable
<PAGE> 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is from time to time the subject of complaints, threat
letters or litigation from guests alleging illness, injuries or other food
quality, health or operational concerns. The Company is also the subject of
complaints or allegations from former or prospective employees from time to
time. The Company believes that the lawsuits, claims and other legal matters
to which it has become subject in the course of its business are not material
to the Company's financial position. Nevertheless, future lawsuits or claims
could result in an adverse decision against the Company that could adversely
affect the Company or its business. Additionally, adverse publicity resulting
from such allegations may materially adversely affect the Company and its
restaurants, regardless of whether such allegations are valid or whether the
Company is liable.
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 Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
The Exhibits required by Item 6(a) of the report are listed in the
Exhibit Index on page 18 herewith.
(b) Report on Form 8-K:
The Company filed Form 8-K on February 26, 1999 to replace
PricewaterhouseCoopers LLP as its independent accountants.
The Company filed Form 8-K on March 5, 1999 to engage KPMG LLP as
its independent accountants.
<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.
DATED: May 14, 1999
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)
<PAGE> 18
EXHIBIT INDEX
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.
10.2 ** 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
10.13** Park Terrace Office Park lease between the Company and Park
Terrace Partners dated November 1, 1991
10.14***** Indemnification Agreement between the Company and David Qualls,
Greg Keller, and Michael Mack dated April 28, 1998.
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 for 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 10-Q filed with the SEC on February 13,
1998.
**** Incorporated by reference from the Exhibits with corresponding numbers
filed with the Company's Form 10-Q filed with the SEC on April 28, 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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