<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 December 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: (858) 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 January
7, 2000 was 5,639,297. There are no other classes of common stock.
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GARDEN FRESH RESTAURANT CORP.
FORM 10-Q
INDEX
PAGE
PART I: FINANCIAL INFORMATION
Item 1: Unaudited Financial Statements
Balance Sheet at September 30, 1999 and
December 31, 1999 3
Statement of Operations for the three months ended
December 31, 1998 and December 31, 1999 4
Statement of Cash Flows for the three months ended
December 31, 1998 and December 31, 1999 5
Notes to Unaudited Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3: Quantitative and Qualitative Disclosures About Market Risk 14
PART II: OTHER INFORMATION
Item 1: Legal Proceedings 15
Item 2: Changes in Securities 15
Item 3: Defaults Upon Senior Securities 15
Item 4: Submission of Matters to a Vote of Security Holders 15
Item 5: Other Information 15
Item 6: Exhibits and Reports on Form 8-K 15
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GARDEN FRESH RESTAURANT CORP
Balance Sheet
(Dollars in thousands)
September 30, 1999 December 31, 1999
(Unaudited)
Assets
Cash and cash equivalents $ 911 $ 3,330
Inventories 4,277 4,655
Other current assets 1,014 1,320
Deferred income taxes 460 1,307
---------- ---------
Total current assets 6,662 10,612
Property and equipment, net 104,716 110,286
Intangible and other assets 3,240 1,424
---------- ---------
Total assets $ 114,618 $ 122,322
========== =========
Liabilities and Shareholders' Equity
Accounts payable $ 4,075 $ 5,452
Current portion of long-term debt 7,512 7,677
Accrued liabilities 6,375 6,547
---------- ---------
Total current liabilities 17,962 19,676
Accrued rent 1,128 1,116
Deferred income taxes 1,479 1,994
Deferred compensation 514 685
Bank line of credit 5,001 8,510
Long term debt, net of current portion 21,685 23,800
Shareholders' equity:
Common stock, $.01 par value; 12,000,000
shares authorized at September 30, 1999
and December 31, 1999; 5,629,405 and
5,639,297 issued and outstanding at
September 30, 1999 and December 31, 1999,
respectively 56 56
Paid-in capital 59,240 59,364
Retained Earnings 7,553 7,121
---------- ---------
Total shareholders' equity 66,849 66,541
---------- ---------
Total liabilities and shareholders' equity $ 114,618 $ 122,322
========== =========
See notes to unaudited financial statements.
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GARDEN FRESH RESTAURANT CORP.
STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended
December 31, December 31,
1998 1999
NET SALES $ 28,448 $ 35,702
----------- -----------
Costs and expenses:
Cost of sales 7,474 9,077
Restaurant operating expenses:
Labor 8,802 11,603
Occupancy and other expenses 6,344 7,937
General and administrative expenses 1,803 2,327
Restaurant opening costs - 532
Depreciation and amortization expenses 2,219 2,156
----------- -----------
Total costs and expenses 26,642 33,632
----------- -----------
Operating income 1,806 2,070
Interest income 33 29
Interest expense (391) (724)
Other expense, net (41) (55)
----------- -----------
Income before income taxes and
cumulative effect of accounting change 1,407 1,320
Provision for income taxes (566) (519)
----------- -----------
Income before cumulative effect of
accounting change $ 841 $ 801
Cumulative effect of change in
accounting for startup costs, net of
income tax benefit of $800 - 1,233
----------- -----------
Net income(loss) $ 841 $ (432)
=========== ===========
Basic net income (loss) per share:
Income before cumulative effect
of accounting change $ 0.15 $ 0.14
Cumulative effect of change in
accounting for startup costs - $ (0.22)
----------- -----------
Net income (loss) $ 0.15 $ (0.08)
=========== ===========
Shares used in computing
basic net income (loss) per share 5,575 5,638
=========== ===========
Diluted net income per share:
Income before cumulative effect
of accounting change $ 0.14 $ 0.14
Cumulative effect of change in
accounting for startup costs - $ (0.21)
----------- -----------
Net income (loss) $ 0.14 $ (0.07)
=========== ===========
Shares used in computing
diluted net income (loss) per share 5,872 5,870
=========== ===========
See notes to unaudited financial statements.
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GARDEN FRESH RESTAURANT CORP.
STATEMENT OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three Months Ended
December 31, 1998 December 31, 1999
OPERATING ACTIVITIES:
Net income (loss) $ 841 $ (432)
Adjustments to reconcile net income
to net cash provided by operating activities:
Cumulative effect of accounting change,
net of income taxes - 1,233
Depreciation and amortization expenses 2,219 2,156
Loss on disposal of property 41 55
Provision for deferred income taxes 134 468
Tax benefits from exercise of stock options 160 5
Changes in operating assets and liabilities:
Increase in inventories (52) (378)
Increase in other assets (308) (306)
Increase (decrease) in accounts payable (483) 1,444
Increase in accrued liabilities 706 172
Decrease in accrued rent (27) (12)
Increase in deferred compensation 95 171
-------- --------
Net cash provided by operating activities 3,326 4,576
-------- --------
INVESTING ACTIVITIES:
Acquisition of property and equipment:
New restaurant development (6,471) (6,869)
Existing restaurant additions (681) (978)
Increase in intangible and other assets (516) (218)
-------- --------
Net cash used in investing activities (7,668) (8,065)
-------- --------
FINANCING ACTIVITIES:
Borrowings under line of credit 2,650 3,509
Proceeds from long-term debt - 4,515
Repayment of long-term debt (1,275) (2,235)
Net proceeds from issuance of common stock 542 119
-------- --------
Net cash provided by financing activities 1,917 5,908
-------- --------
Net increase (decrease) in cash and cash
equivalents (2,425) 2,419
Cash at beginning of period 3,382 911
-------- --------
Cash at end of period $ 957 $ 3,330
======== ========
See notes to unaudited financial statements.
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GARDEN FRESH RESTAURANT CORP.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. UNAUDITED FINANCIAL STATEMENTS
The accompanying 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, 1999 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 297,000 and 232,000 shares for the
three month periods ended December 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. ACCOUNTING CHANGE
Effective October 1, 1999 the Company adopted Statement of Position 98-5
"Reporting on the Costs of Startup Activities", (SOP 98-5) and began expensing
startup costs as incurred. Following are the pro forma effects on net income
(loss) assuming retroactive application of SOP 98-5.
December 31, 1998 December 31, 1999
Pro forma:
Net income $ 941 $ 801
Basic net income per share $ 0.17 $ 0.14
Diluted net income per share $ 0.16 $ 0.14
Historical
Net income (loss) $ 841 $ (432)
Basic net income (loss) per share $ 0.15 $(0.08)
Diluted net income (loss) per share $ 0.14 $(0.07)
4. 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.
5. SUBSEQUENT EVENTS
The Board of Directors of Garden Fresh Restaurant Corp. approved for the
Company to begin operating a delivery and distribution center for the
Souplantation, Sweet Tomatoes and Ladles restaurants on the West Coast.
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GARDEN FRESH RESTAURANT CORP.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
The delivery and distribution center is expected to begin operations on
April 1, 2000. This decision by the officers and Board of Directors was based
on the expiration of the current distribution vendor's contract on March 31,
2000, coupled with the potential control and long-term cost savings over other
distribution alternatives in this area of the business.
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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 cost savings that may result from a delivery and
distribution center 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 and budgeted capital
expenditures could be affected by the Company's ability to locate suitable
restaurant sites, construct new restaurants in a timely manner and obtain
additional funds. The Company's ability to successfully operate the delivery
and distribution center could be affected by the Company's lack of distribution
management experience, ability to obtain experienced employees, and obtain
supplier credit.
QUARTERLY RESULTS
The following table sets forth the percentage of net sales certain items
included in the Company's statement of operations for the periods indicated.
(Unaudited)
Three Months Ended
December 31, December 31,
1998 1999
NET SALES 100.0% 100.0%
----- -----
COST AND EXPENSES:
Cost of sales 26.3% 25.4%
Restaurant operating expenses:
Labor 30.9% 32.5%
Occupancy and other expenses 22.3% 22.2%
General and administrative expenses 6.3% 6.5%
Restaurant opening costs 0.0% 1.5%
Depreciation and amortization expenses 7.8% 6.1%
----- -----
Total costs and expenses 93.6% 94.2%
----- -----
Operating Income 6.4% 5.8%
Interest income 0.1% 0.1%
Interest expense (1.4%) (2.0%)
Other expense, net (0.1%) (0.2%)
----- -----
Income before income taxes and cumulative
effect of accounting change 5.0% 3.7%
Provision for income taxes (2.0%) (1.5%)
----- -----
Income before cumulative effect of
accounting change 3.0% 2.2%
----- -----
Cumulative effect of accounting for
startup costs, net of income tax benefit 0.0% (3.4%)
----- -----
Net income (loss) 3.0% (1.2%)
===== =====
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RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THREE MONTHS ENDED DECEMBER
31, 1998
NET SALES. Net sales for the three months ended December 31, 1999 increased
25.7% to $35.7 million from $28.4 million for the comparable 1998 period. This
increase was primarily due to the opening of thirteen restaurants since the
comparable 1998 period and the increase in comparable restaurant sales of 2.4%.
COST OF SALES. Cost of sales for the three months ended December 31, 1999
increased 21.3% to $9.1 million from $7.5 million for the comparable 1998
period. This increase was due to the addition of thirteen restaurants opened
since the comparable 1998 period. As a percentage of net sales, cost of sales
decreased to 25.4% from 26.3% since the comparable 1998 period due to an
increase in average meal price effective August 1, 1999, in most regions.
LABOR EXPENSE. Labor expense for the three months ended December 31, 1999
increased 31.8% to $11.6 million from $8.8 million for the comparable 1998
period. This increase was due to the addition of thirteen restaurants opened
since the comparable 1998 period, higher hourly wage rate and higher labor
usage in new restaurants. As a percentage of net sales, the labor expense
increased 1.6% to 32.5% from 30.9% in the comparable 1998 period due to an
increase in the average hourly wage rate of $.26 and the higher labor usage in
new restaurants.
OCCUPANCY AND OTHER EXPENSES. Occupancy and other operating costs for the
three months ended December 31, 1999 increased 25.4% to $7.9 million from $6.3
million for the comparable 1998 period. This was due primarily to the addition
of thirteen new restaurants. Occupancy and other operating costs as a
percentage of net sales decreased 0.1% to 22.2% from 22.3% 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 December 31, 1999 increased 27.8% to $2.3 million
from $1.8 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 increased .2% to 6.5% from 6.3% for the comparable 1998 period.
RESTAURANT OPENING COSTS. Restaurant opening costs for the three months
ended December 31, 1999 was $.5 million or 1.5% of sales. Prior to the
implementation of SOP 98-5, in the 1998 period $.5 million of startup costs
were amortized and included in depreciation and amortization expenses.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses for the three months ended December 31, 1999 approximated the 1998
period at $2.2 million. This was due to additional depreciation for the
thirteen restaurants opened since the comparable 1998 period and decreased
amortization resulting from the change in accounting for startup expense
effective October 1, 1999, which are now being expensed as incurred. See "New
Accounting Standard". Depreciation and amortization expense as a percentage of
net sales decreased 1.7% to 6.1%, from 7.8% for the comparable 1998.
INTEREST INCOME. Interest income for the three months ended December 31,
1999 decreased 12% to $29,000 from $33,000 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 December 31,
1999 increased 75% to $.7million from $.4 million for the comparable 1998
period due to an increase in borrowing during the 1999 period.
<PAGE> 10
LIQUIDITY 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 three months ended December 31, 1999,
the Company generated $4.6 million from operating activities and received $3.5
million under its bank line of credit, and $4.5 million from equipment and
mortgage financing (with repayments of $2.2 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 29 restaurants, including the land for certain sites
the Company expects to open in fiscal 2000. During the first three months of
fiscal 2000 the Company opened one owned restaurant site and three leased
sites. Capital expenditures totaled $7.8 million during the first three months
of fiscal 2000 and $7.2 million for the comparable period in fiscal 1998. As
of December 31, 1999, the Company operated 71 salad buffet restaurants, one
Ladles and one small quick service restaurant.
The cash investment required for the four restaurants opened during the
three month period ending December 31, 1999 was $7.4 million including land and
buildings, and excluding restaurant opening costs. The restaurant opening
costs incurred during the three month period ending December 31, 1999 for the
four restaurants opened was $393,000. The Company has signed 8 leases, and
purchased 6 sites planned to open in fiscal 2000, and signed 1 lease for a site
planned to open in fiscal 2001. In addition, the Company has signed 2 leases
for Ladles fiscal 2000 sites, and signed 1 lease for the delivery and
distribution center. 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 remaining budgeted capital expenditures for
fiscal 2000 of $25.0 million for new restaurant openings; the Company has a
remaining budgeted $1.4 million in expenditures for fiscal 2000 for capital
improvements at existing sites. See "BUSINESS RISKS - EXPANSION RISKS."
The Company will need to rely on funds generated from operations to finance
a portion of the expansion currently planned for fiscal 2000, as well as any
expansion taking place after fiscal 2000. 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 RISKS - CAPITAL REQUIREMENTS."
The Board of Directors of Garden Fresh Restaurant Corp. approved for the
Company to begin operating a delivery and distribution center for the
Souplantation, Sweet Tomatoes and Ladles restaurants on the West Coast.
The delivery and distribution center is expected to begin operations on
April 1, 2000. This decision by the officers and Board of Directors was based
on the expiration of the current distribution vendor's contract on March 31,
2000, coupled with the potential control and long-term cost savings over other
distribution alternatives in this area of the business.
The Company believes there will be an initial adverse impact to
profitability associated with the startup of the distribution and delivery
facility. The Company believes this operation in the long term will result in
on going cost savings.
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
Effective October 1, 1999 the Company adopted Statement of Position 98-5,
"Reporting on the Costs of Start-up Activities," (SOP 98-5). SOP 98-5 requires
that the costs of start-up activities, which are inclusive of pre-opening
costs, should be expensed as incurred. As is typical in the restaurant
industry, prior to October 1, 1999 the Company had
<PAGE> 11
deferred its restaurant pre-opening costs and amortized them over the
twelve-month period following the opening of each respective restaurant. The
Company recognized the cumulative effect of a change in accounting principle of
$1.2 million, net of the related income tax effect of $.8 million.
While total cash flows are unaffected by this change, pre-opening costs
previously reported as cash used in the investing activities are now 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 1998 and 1999, the Company experienced an increase of 7.5% and
3.7%, respectively, in comparable restaurant sales. In the first three months
of fiscal 1999 and 2000, the Company's comparable restaurant sales increased
5.3% and 2.4% 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 than average guest 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. On August
1, 1999 the Company increased prices in most of its markets. To date, this
increase has not resulted in fewer guests.
EXPANSION RISKS
The Company opened ten salad buffet restaurants in fiscal 1999, in new and
existing regions (Pacific Northwest, Florida, North Carolina, Texas, Georgia,
Colorado and Nevada); and has opened four restaurants to date in fiscal 2000,
all of which are in existing regions (Southern California, Florida). The
Company currently intends to open sixteen additional restaurants in fiscal
2000. Subsequent to December 31, 1999 the Company has opened its second
Ladles, A Soup and Salad Takery, a new take-out restaurant concept targeted for
on-the-go families and busy professionals. The first two Ladles are located 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 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.
<PAGE> 12
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 2000 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 experienced management and hourly
employees may also adversely affect the Company. There can be no assurance that
the increases in hourly wage rates and the availability of part-time labor will
not continue to impact the Company's 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 and
due to the tight part-time labor market resulting from historically low
unemployment levels. These increases have resulted in a decrease in the
Company's profitability. While there can be no assurance that the Company will
be able to manage and absorb these increases in the future, the Company is
exploring strategic ideas on how to better manage labor utilization in order to
minimize the impact.
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.
<PAGE> 13
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 has not to date resulted in
system failures or miscalculations causing disruptions of operations.
THE COMPANY'S STATE OF READINESS. The Company's operations were 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 did not have any interruption of
business as a result of any third party relationships.
COSTS. The Company did not incur significant costs to enable its proprietary
accounting and management information software, and the hardware upon which it
runs, is year 2000 compliant. Aggregate costs for year 2000 issues were below
$25,000 and were expensed as incurred.
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-nine of the Company's seventy-one existing salad buffet restaurants
are located in California, and sixteen 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
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> 14
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to the Company's operations result primarily from
changes in short-term interest rates as the Company's line of credit is tied to
the prime rate plus 25 basis points. As of December 31, 1999, the Company had
$8.5 million in debt outstanding under the credit facility, an increase of $3.5
million since September 30, 1999. Based on a hypothetical 50 basis point
adverse change in prime rates, net interest expense would increase by
approximately $42,500 on an annual basis, and likewise would decrease earnings
and cash flows. The Company cannot predict market fluctuations in interest
rates and their impact on debt, nor can there be any assurance that long-term
fixed rate debt will be available at favorable rates, if at all. Consequently,
future results may differ materially from the estimated results due to adverse
changes in interest rates or debt availability.
The Company did not have any foreign currency or other market risk or any
derivative financial instruments at December 31, 1999.
<PAGE> 15
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:
No reports on Form 8-K have been filed by the Company during the
fiscal quarter ended December 31, 1999.
<PAGE> 16
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: GARDEN FRESH RESTAURANT CORP.
February 14, 2000 (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.
10.15****** Securities to be offered to employees pursuant to employee benefit
plan dated December 22, 1999.
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, as amended by Amendment No. 1 to Form 10-Q filed
on April 28, 1998, Amendment No. 2 for Form 10-K filed on August
13, 1999, and Amendment No. 3 for Form 10-Q filed on December 29,
1999.
***** 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.
****** Incorporated by reference from the Exhibits with corresponding
numbers filed with the Company's Form S-8 (No. 333-93359) filed
December 22, 1999.
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