<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, 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 / /
The number of shares of Common Stock, $.01 par value, outstanding as of August
6, 1999 was 5,605,675. 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
June 30, 1999 3
Condensed Statement of Income for the three and nine months
ended June 30, 1998 and June 30, 1999 4
Condensed Statement of Cash Flows for the nine months
ended June 30, 1998 and June 30, 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 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 June 30, 1999
(Unaudited)
Assets
Cash and cash equivalents $ 3,382 $ 1,150
Inventories 3,579 3,868
Other current assets 660 2,303
Deferred income taxes 376 427
---------- ---------
Total current assets 7,997 7,748
Property and equipment, net 74,601 94,190
Intangible and other assets 2,334 2,436
---------- ---------
Total assets $ 84,932 $ 104,374
========== =========
Liabilities and Shareholders' Equity
Accounts payable $ 3,657 $ 5,462
Bank line of credit - 3,355
Current portion of long-term debt 5,712 6,003
Accrued liabilities 5,081 8,069
---------- ---------
Total current liabilities 14,450 22,889
Accrued rent 1,292 1,206
Deferred income taxes 618 1,184
Deferred compensation 171 373
Long term debt, net of current portion 9,154 14,659
Shareholders' equity:
Common stock, $.01 par value; 12,000,000
shares authorized at September 30, 1998
and June 30, 1999; 5,544,217 and
5,580,208 issued and outstanding at
September 30, 1998 and June 30, 1999,
respectively 56 56
Paid-in capital 58,542 58,621
Retained Earnings 649 5,386
---------- ---------
Total shareholders' equity 59,247 64,063
---------- ---------
Total liabilities and shareholders' equity $ 84,932 $ 104,374
========== =========
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,
1998 1999 1998 1999
<S> <C> <C> <C> <C>
NET SALES $ 28,030 $ 34,055 $ 79,769 $ 95,403
----------- ----------- ----------- -----------
Costs and expenses:
Cost of sales 7,255 8,650 20,661 24,547
Restaurant operating expenses:
Labor 8,174 10,236 23,419 28,845
Occupancy and other expenses 6,035 6,944 18,038 20,134
General and administrative expenses 1,596 1,894 5,079 5,833
Depreciation and amortization expenses 1,773 2,465 5,236 6,927
----------- ----------- ----------- -----------
Total costs and expenses 24,833 30,189 72,433 86,286
----------- ----------- ----------- -----------
Operating income 3,197 3,866 7,336 9,117
Interest income 37 14 93 71
Interest expense (485) (456) (1,503) (1,282)
Other expense, net (31) (55) (86) (122)
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 2,718 3,369 5,840 7,784
Provision for income taxes (1,068) (1,314) (2,286) (3,047)
----------- ----------- ----------- -----------
NET INCOME $ 1,650 $ 2,055 $ 3,554 $ 4,737
=========== =========== =========== ===========
Basic net income per share $ 0.34 $ 0.37 $ 0.79 $ 0.85
=========== =========== =========== ===========
Shares used in computing
basic net income per share 4,795 5,558 4,478 5,587
=========== =========== =========== ===========
Diluted net income per share $ 0.32 $ 0.35 $ 0.73 $ 0.81
=========== =========== =========== ===========
Shares used in computing
diluted net income per share 5,204 5,880 4,846 5,881
=========== =========== =========== ===========
<FN>
See notes to unaudited condensed financial statements.
<PAGE> 5
GARDEN FRESH RESTAURANT CORP.
CONDENSED STATEMENT OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine Months Ended
June 30, 1998 June 30, 1999
OPERATING ACTIVITIES:
Net income $ 3,554 $ 4,737
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization expenses 5,236 6,927
Loss on disposal of property 86 130
Provision for deferred income taxes 683 515
Tax benefits from exercise of stock options - 561
Changes in operating assets and liabilities:
Increase in inventories (321) (289)
Increase in other assets (2,317) (1,643)
Increase (decrease) in accounts payable (994) 1,805
Increase in accrued liabilities 2,699 2,988
Decrease in accrued rent (77) (86)
Increase in deferred compensation 122 202
-------- --------
Net cash provided by operating activities $ 8,671 $ 15,847
-------- --------
INVESTING ACTIVITIES:
Acquisition of property and equipment:
New restaurant development (15,446) (22,962)
Existing restaurant additions (1,670) (1,856)
Increase in intangible and other assets (1,456) (1,930)
-------- --------
Net cash used in investing activities (18,572) (26,748)
-------- --------
FINANCING ACTIVITIES:
Changes in line of credit - 3,355
Proceeds from long-term debt 3,839 10,310
Repayment of long-term debt (4,189) (4,514)
Net proceeds from issuance of common stock 19,413 1,425
Repurchase of common stock - (1,907)
-------- --------
Net cash provided by financing activities 19,063 8,669
-------- --------
Net increase (decrease) in cash and cash
equivalents 9,162 (2,232)
Cash at beginning of period 2,345 3,382
-------- --------
Cash at end of period $ 11,507 $ 1,150
======== ========
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
Garden Fresh Restaurant Corp. (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 number
of common shares outstanding during the period. Diluted net income per share
is computed on the weighted average number of common shares and potential
common shares, 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 issuances of common stock of 409,000 and 322,000 shares for the
three month periods ended June 30, 1998 and 1999, respectively, and 368,000
and 294,000 shares for the nine month periods ended June 30, 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. All shares repurchased have been retired.
<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, budgeted
capital expenditures 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 Nine Months Ended
June 30, June 30, June 30, June 30,
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 25.9% 25.4% 25.9% 25.7%
Restaurant operating expenses:
Labor 29.2% 30.0% 29.3% 30.2%
Occupancy and other expenses 21.5% 20.4% 22.6% 21.1%
General and administrative expenses 5.7% 5.6% 6.4% 6.1%
Depreciation and amortization 6.3% 7.2% 6.6% 7.3%
----- ----- ----- -----
Total costs and expenses 88.6% 88.6% 90.8% 90.4%
----- ----- ----- -----
OPERATING INCOME 11.4% 11.4% 9.2% 9.6%
Interest income 0.1% 0.0% 0.1% 0.0%
Interest expense (1.7%) (1.3%) (1.9%) (1.3%)
Other expense, net (0.1%) (0.2%) (0.1%) (0.1%)
----- ----- ----- -----
INCOME BEFORE INCOME TAXES 9.7% 9.9% 7.3% 8.2%
Provision for income taxes (3.8%) (3.9%) (2.8%) (3.2%)
----- ----- ----- -----
NET INCOME 5.9% 6.0% 4.5% 5.0%
===== ===== ===== =====
</TABLE>
<PAGE> 8
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
NET SALES. Net sales for the three months ended June 30, 1999 increased
21.8% to $34.1 million from $28.0 million for the comparable 1998 period.
This increase was primarily due to the opening of ten restaurants since the
comparable 1998 period and the increase in comparable restaurant sales of
3.0%.
COST OF SALES. Cost of sales for the three months ended June 30, 1999
increased 19.2% to $8.7 million from $7.3 million for the comparable 1998
period. This increase was due to the addition of ten restaurants opened since
the comparable 1998 period. As a percentage of net sales, cost of sales
decreased to 25.4% from 25.9% since the comparable 1998 period due to contract
pricing and menu management.
LABOR EXPENSE. Labor expense for the three months ended June 30, 1999
increased 24.4% to $10.2 million from $8.2 million for the comparable 1998
period. This increase was due to the addition of ten restaurants opened since
the comparable 1998 period. As a percentage of net sales, the labor expense
increased .9% to 30.0% from 29.2% in the comparable 1998 period due to an
increase in the average hourly wage rate of $.26.
OCCUPANCY AND OTHER EXPENSES. Occupancy and other operating costs for the
three months ended June 30, 1999 increased 15% to $6.9 million from $6.0
million for the comparable 1998 period. This was due primarily to the
addition of ten new restaurants. Occupancy and other operating costs as a
percentage of net sales decreased 1.1% to 20.4% from 21.5% for the comparable
1998 period. This was primarily due to an increase of restaurant sites owned
by the Company, which have lower occupancy costs than restaurant sites leased
by the Company.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the three months ended June 30, 1999 increased 18.8% to $1.9 million from
$1.6 million for the comparable 1998 period. 36% of this increase was due to
personnel costs and 64% was due to costs associated with supporting stores in
new regions. As a percentage of net sales, general and administrative
expenses decreased .1% to 5.6% from 5.7% for the comparable 1998 period.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses for the three months ended June 30, 1999 increased 38.9% to $2.5
million from $1.8 million for the comparable 1998 period. This increase was
due equally 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 .9% to 7.2%, from 6.3% for the comparable
1998. Amortization accounted for 48% and depreciation accounted for 52% of
the increase due to the addition of ten restaurants opened since the 1998
period.
INTEREST INCOME. Interest income for the three months ended June 30, 1999
decreased 62% to $14,000 from $37,000 for the comparable 1998 period. The
decrease in interest income was due to lower cash invested during the 1999
period.
INTEREST EXPENSE. Interest expense for the three months ended June 30,
1999 approximated the comparable 1998 period at $.5 million.
NINE MONTHS ENDED JUNE 30, 1999 COMPARED TO NINE MONTHS ENDED JUNE 30, 1998
NET SALES. Net sales for the nine months ended June 30, 1999 increased
19.5% to $95.4 million from $79.8 million for the comparable 1998 period.
This increase was primarily due to the opening of ten restaurants since the
comparable 1998 period and the increase in comparable restaurant sales of
4.5%.
COST OF SALES. Cost of sales for the nine months ended June 30, 1999
increased 18.4% to $24.5 million from $20.7 million for the comparable 1998
period. This increase was due to the addition of ten restaurants since the
comparable 1998 period. As a percentage of net sales, cost of sales decreased
to 25.7% from 25.9% since the comparable 1998 period due to contract pricing
and menu management.
<PAGE> 9
LABOR EXPENSE. Labor expense for the nine months ended June 30, 1999
increased 23.1% to $28.8 million from $23.4 million for the comparable 1998
period. Wage rate increases accounted for 28% of the increase and the
increased headcount accounted for 72% resulting from the ten restaurants
opened since the comparable 1998 period. As a percentage of net sales, the
labor expense increased .9% to 30.2% from 29.3% in the comparable 1998 period
due to an increase in wages.
OCCUPANCY AND OTHER EXPENSES. Occupancy and other operating costs for the
nine months ended June 30, 1999 increased 11.7% to $20.1 million from $18.0
million for the comparable 1998 period. This was due primarily to the
addition of ten new restaurants. Occupancy and other operating costs as a
percentage of net sales decreased 1.5% to 21.1% from 22.6% for the comparable
1998 period. This was primarily due to an increase of restaurant sites owned
by the Company, which have lower occupancy costs than restaurant sites leased
by the Company.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the nine months ended June 30, 1999 increased 13.7% to $5.8 million from
$5.1 million for the comparable 1998 period. This increase was due primarily
to personnel related expenses associated with supporting new stores. As a
percentage of net sales, general and administrative expenses decreased .3% to
6.1% from 6.4% for the comparable 1998 period.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses for the nine months ended June 30, 1999 increased 32.7% to $6.9
million from $5.2 million for the comparable 1998 period. 35% of this
increase was due to depreciation and 65% was due to amortization for the
restaurants opened since the comparable 1998 period. Depreciation and
amortization expense as a percentage of net sales increased .7% to 7.3%, from
6.6% for the comparable 1998. Amortization for accounted for 43% and
depreciation accounted for 57% for the ten restaurants opened since the 1998
period.
INTEREST INCOME. Interest income for the nine months ended June 30, 1999
decrease 23.7% to $71,000 from $93,000 for the comparable 1998 period. The
decrease in interest income was due to lower cash invested during the 1999
period.
INTEREST EXPENSE. Interest expense for the nine months ended June 30,
1999 decreased 13.3% to $1.3 million from $1.5 million for the comparable 1998
period. Interest expenses decreased due to a reduction 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 nine months ended June 30, 1999, the
Company generated $15.8 million from operating activities and received $3.4
million under its bank line of credit, and $10.3 million from equipment and
mortgage financing (with repayments of $4.5 million). The Company received
$1.4 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 nine
months of fiscal 1999, the Company opened five owned restaurant sites.
Capital expenditures totaled $24.8 million during the first nine months of
fiscal 1999 and $17.1 million for the comparable period in fiscal 1998. As of
June 30, 1999, the Company operated 62 salad buffet restaurants and one small
quick service restaurant.
The cash investment required for the five restaurants opened during the
nine month period ending June 30, 1999 was $14.8 million including land and
buildings, and excluding pre-opening costs. The pre-opening costs for the
five restaurants opened was $1.1 million. The Company has signed 4 leases,
and purchased 4 sites planned to open in fiscal 1999. In addition, the
Company has opened 5 escrows purchased 1 site, and signed 5 leases 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. Minimum wage increases have
affected earnings during the current fiscal year. 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
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 June 30, 1999 balance were $1.4 million, net. The Company has not
determined whether it will elect early adoption of SOP 98-5 or adopt 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
nine months of fiscal 1998 and 1999, respectively, the Company's comparable
restaurant sales increased by 7.4% and 4.5%, 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. Subsequent to June 30, 1999 the Company increased prices in
most of its markets which could result in fewer guests.
EXPANSION RISKS
The Company opened eight salad buffet restaurants in fiscal 1998 and has
opened seven restaurants to date in fiscal 1999, all of which are in newer
regions (Pacific Northwest, Houston, Atlanta, Denver, Raleigh, Las Vegas and
Jacksonville, Florida). The Company currently intends to open six additional
restaurants in fiscal 1999. Subsequent to June 30, 1999 the Company has
opened its first Ladles, A Soup and Salad Takery, a new take-out restaurant
concept targeted for on-the-go families and busy
<PAGE> 11
professionals. The first Ladles is located in a community in San Diego,
California. 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 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 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
<PAGE> 12
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.
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 to 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, are 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 is year 2000 compliant.
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.
The Company has received no information that any third party with which the
Company has a business relationship will not be year 2000 ready. However, 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 used by the Company
(including spreadsheet, word processing, and database programs) will continue
to be borne by the licensors, and accordingly does not believe it will incur
significant costs with respect to such year 2000 compliance. Some of these
modifications are provided by the licensor without charge, and some of these
modifications are included in program
<PAGE> 13
updates for which there are charges. 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 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 will 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 year 2000 compliant. 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, either regionally or nationally. This could result
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-four 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
<PAGE> 14
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
concept 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 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
(a) The Company's Annual Stockholder Meeting was held on April 20, 1999. The
election of two (2) directors, the proposal to amend the Company's 1998 Stock
Option Plan, and the ratification of appointment of independent accountants
were presented for shareholder approval. The results are listed below:
ELECTION OF TWO CLASS B DIRECTORS:
Director Total Votes For Total Votes Against
Edgar F. Berner 4,864,325 34,724
John M. Robbins, Jr. 4,864,325 34,724
APPROVAL OF THE AMENDMENT TO THE 1998 STOCK OPTION PLAN:
For Against Abstain Non-Vote
3,139,597 714,970 40,045 1,004,437
RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS:
For Against Abstain Non-Vote
4,861,716 3,091 24,242 0
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:
No reports on Form 8-K have been filed by the Company during the fiscal
quarter ended June 30, 1999.
<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: August 13, 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> 17
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
10.9A Amendment to 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.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE CONSOLIDATED
BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FILED AS PART OF THE
ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH ANNUAL REPORT ON FORM 10-K
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 1,150
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 3,868
<CURRENT-ASSETS> 7,748
<PP&E> 129,746
<DEPRECIATION> 35,556
<TOTAL-ASSETS> 104,374
<CURRENT-LIABILITIES> 22,889
<BONDS> 0
0
0
<COMMON> 56
<OTHER-SE> 58,621
<TOTAL-LIABILITY-AND-EQUITY> 104,374
<SALES> 95,403
<TOTAL-REVENUES> 95,403
<CGS> 24,547
<TOTAL-COSTS> 86,286
<OTHER-EXPENSES> 122
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,282
<INCOME-PRETAX> 7,784
<INCOME-TAX> 3,047
<INCOME-CONTINUING> 4,737
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,737
<EPS-BASIC> 0.85
<EPS-DILUTED> 0.81
</TABLE>
<PAGE>
Exhibit 10.9A
SECOND AMENDMENT
TO
GARDEN FRESH RESTAURANT CORP.
VARIABLE DEFERRED COMPENSATION PLAN
FOR EXECUTIVES
Pursuant to Section 11.1 of the Garden Fresh Restaurant Corp. Variable
Deferred Compensation Plan for Executives (the "Plan"), said Plan is amended
as follows:
1. Section 4.3 of the Plan relating to the amount of Matching Contributions
made by Garden Fresh Restaurant Corporation is amended to add a new subsection
(III) to read as follows effective for the Plan Year beginning January 1,
1999:
(III) 100% of deferrals up to $12,000 in deferrals (maximum $12,000
match). This enhanced match benefit is only for executive employees listed
on Appendix II to the Plan.
2. Section 9.1 of the Plan relating to the amount of the death benefit
payable under the Plan to eligible participants is amended to add the
following sentence after the second sentence of said section:
For eligible Participants who are executives named in Appendix II to the
Plan, the Company offers a death benefit of $250,000.
3. The Plan is amended to add a new Appendix II to read as follows:
Appendix II
Executive Employees entitled to Appendix II enhanced benefits under Plan
Sections 4.3 (III) and 9.1: Ken Keane
4. The effective date of this Second Amendment to the Plan is January 1,
1999.
GARDEN FRESH RESTAURANT CORP.
By: /s/ D W QUALLS
Its: CFO - Secretary
Date: 3-30-99
