<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
EXCHANGE ACT OF 1934
For quarterly period ended March 31, 2000
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 May 1,
2000 was 5,653,043. 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 Financial Statements
Balance Sheet at September 30, 1999 and
March 31, 2000 3
Statement of Operations for the three and six months ended
March 31, 1999 and March 31, 2000 4
Statement of Cash Flows for the six months ended
March 31, 1999 and March 31, 2000 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 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 18
<PAGE> 3
GARDEN FRESH RESTAURANT CORP
Balance Sheet
(Dollars in thousands)
September 30, 1999 March 31, 2000
(Unaudited)
Assets
Cash and cash equivalents $ 911 $ 1,196
Inventories 4,277 5,564
Other current assets 1,014 1,940
Deferred income taxes 460 1,401
---------- ---------
Total current assets 6,662 10,101
Property and equipment, net 104,716 119,456
Intangible and other assets 3,240 1,697
---------- ---------
Total assets $ 114,618 $ 131,254
========== =========
Liabilities and Shareholders' Equity
Accounts payable $ 4,075 $ 8,891
Current portion of long-term debt 7,512 8,739
Accrued liabilities 6,375 8,455
---------- ---------
Total current liabilities 17,962 26,085
Accrued rent 1,128 1,104
Deferred income taxes 1,479 2,402
Deferred compensation 514 801
Bank line of credit 5,001 6,010
Long term debt, net of current portion 21,685 26,406
Shareholders' equity:
Common stock, $.01 par value; 12,000,000
shares authorized at September 30, 1999
and March 31, 1999; 5,629,405 and
5,643,383 issued and outstanding at
September 30, 1999 and March 31, 2000,
respectively 56 56
Paid-in capital 59,240 59,402
Retained earnings 7,553 8,988
---------- ---------
Total shareholders' equity 66,849 68,446
---------- ---------
Total liabilities and shareholders' equity $ 114,618 $ 131,254
========== =========
See notes to unaudited financial statements.
<PAGE> 4
GARDEN FRESH RESTAURANT CORP.
STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31 March 31
1999 2000 1999 2000
<S> <C> <C> <C> <C>
NET SALES $ 32,900 $ 40,783 $ 61,348 $ 76,485
----------- ----------- ----------- -----------
Costs and expenses:
Cost of sales 8,423 10,190 15,897 19,267
Restaurant operating expenses:
Labor 9,807 12,763 18,609 24,366
Occupancy and other expenses 6,846 8,575 13,190 16,512
General and administrative expenses 2,136 2,690 3,939 5,017
Restaurant opening costs - 513 - 1,045
Depreciation and amortization expenses 2,243 2,291 4,462 4,447
----------- ----------- ----------- -----------
Total costs and expenses 29,455 37,022 56,097 70,654
Operating income 3,445 3,761 5,251 5,831
Interest income 24 38 57 67
Interest expense (435) (808) (826) (1,532)
Other income (expense), net (26) 105 (67) 50
----------- ----------- ----------- -----------
Income before income taxes and
cumulative effect of accounting change 3,008 3,096 4,415 4,416
Provision for income taxes (1,167) (1,229) (1,733) (1,748)
----------- ----------- ----------- -----------
Income before cumulative effect of
accounting change $ 1,841 $ 1,867 $ 2,682 $ 2,668
Cumulative effect of change in
accounting for startup costs, net of
income tax benefit of $800 - - - (1,233)
----------- ----------- ----------- -----------
Net income $ 1,841 $ 1,867 $ 2,682 $ 1,435
----------- ----------- ----------- -----------
Basic net income per share:
Income before cumulative effect
of accounting change $ 0.33 $ 0.33 $ 0.48 $ 0.47
Cumulative effect of change in
accounting for startup costs - - - (0.22)
----------- ----------- ----------- -----------
Net income $ 0.33 $ 0.33 $ 0.48 $ 0.25
=========== =========== =========== ===========
Shares used in computing
basic net income per share 5,555 5,641 5,565 5,639
=========== =========== =========== ===========
Diluted net income per share:
Income before cumulative effect
of accounting change $ 0.32 $ 0.32 $ 0.46 $ 0.46
Cumulative effect of change in
accounting for startup costs - - - (0.21)
----------- ----------- ----------- -----------
Net income $ 0.32 $ 0.32 $ 0.46 $ 0.25
=========== =========== =========== ===========
Shares used in computing
diluted net income per share 5,817 5,796 5,845 5,833
=========== =========== =========== ===========
<FN>
See notes to unaudited financial statements.
</FN>
</TABLE>
<PAGE> 5
GARDEN FRESH RESTAURANT CORP.
STATEMENT OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Six Months Ended
March 31, 1999 March 31, 2000
OPERATING ACTIVITIES:
Net income $ 2,682 $ 1,435
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 4,462 4,447
Loss on disposal of property 75 105
Provision for deferred income taxes 544 782
Tax benefits from exercise of stock options 348 5
Changes in operating assets and liabilities:
Increase in inventories (264) (1,287)
Increase in other assets (906) (926)
Increase in accounts payable 848 2,046
Increase in accrued liabilities 2,542 2,080
Decrease in accrued rent (57) (24)
Increase in deferred compensation 154 287
-------- --------
Net cash provided by operating activities 10,428 10,183
-------- --------
INVESTING ACTIVITIES:
Acquisition of property and equipment:
New restaurant development (12,413) (14,418)
Existing restaurant additions (1,127) (2,070)
Increase in intangible and other assets (1,391) (524)
-------- --------
Net cash used in investing activities (14,931) (17,012)
-------- --------
FINANCING ACTIVITIES:
Borrowings under line of credit 4,175 1,009
Proceeds from long-term debt 2,597 9,528
Repayment of long-term debt (3,224) (3,580)
Net proceeds from issuance of common stock 914 157
Repurchase of common stock (1,734) -
-------- --------
Net cash provided by financing activities 2,728 7,114
-------- --------
Net increase (decrease) in cash and cash
equivalents (1,775) 285
Cash and cash equivalent at beginning of period 3,382 911
-------- --------
Cash and cash equivalent at end of period $ 1,607 $ 1,196
======== ========
See notes to unaudited financial statements.
<PAGE> 6
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 262,000 and 155,000 shares for the
three month periods ended March 31, 1999 and 2000, respectively, and 280,000
and 194,000 shares for the six month periods ended March 31, 1999 and 2000,
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
assuming retroactive application of SOP 98-5.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, 1999 March 31, 2000 March 31, 1999 March 31, 2000
<S> <C> <C> <C> <C>
Pro forma:
Net income $1,765 $1,867 $2,664 $2,678
Basic net income per share .32 .33 .48 .47
Diluted net income per share $ .30 $ .32 $ .46 $ .46
Historical
Net income $1,841 $1,867 $2,682 $1,435
Basic net income per share .33 .33 .48 .25
Diluted net income per share $ .32 $ .32 $ .46 $ .25
</TABLE>
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.
<PAGE> 7
GARDEN FRESH RESTAURANT CORP.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
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.
The delivery and distribution center began operations on April 1, 2000.
<PAGE> 8
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 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.
QUARTERLY RESULTS
The following table sets forth the percentage of net sales of certain items
included in the Company's statement of operations for the periods indicated.
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, 1999 March 31, 2000 March 31, 1999 March 31, 2000
<S> <C> <C> <C> <C>
NET SALES 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
COST AND EXPENSES:
Cost of sales 25.6% 25.0% 25.9% 25.2%
Restaurant operating expenses:
Labor 29.8% 31.3% 30.3% 31.9%
Occupancy and other expenses 20.8% 21.0% 21.5% 21.6%
General and administrative expenses 6.5% 6.6% 6.4% 6.6%
Restaurant opening costs 0.0% 1.3% 0.0% 1.3%
Depreciation and amortization expenses 6.8% 5.6% 7.3% 5.8%
----- ----- ----- -----
Total costs and expenses 89.5% 90.8% 91.4% 92.4%
----- ----- ----- -----
Operating Income 10.5% 9.2% 8.6% 7.6%
Interest income 0.0% 0.1% 0.1% 0.1%
Interest expense (1.3%) (2.0%) (1.4%) (2.0%)
Other income (expense), net (0.1%) 0.3% (0.1%) 0.1%
----- ----- ----- -----
Income before income taxes and cumulative
effect of accounting change 9.1% 7.6% 7.2% 5.8%
Provision for income taxes (3.5%) (3.0%) (2.8%) (2.3%)
----- ----- ----- -----
Income before cumulative effect of
accounting change 5.6% 4.6% 4.4% 3.5%
----- ----- ----- -----
Cumulative effect of accounting for
startup costs, net of income tax benefit - - - (1.6%)
----- ----- ----- -----
Net income 5.6% 4.6% 4.4% 1.9%
</TABLE>
<PAGE> 9
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
NET SALES. Net sales for the three months ended March 31, 2000 increased
24.0% to $40.8 million from $32.9 million for the comparable 1999 period. This
increase was primarily due to the opening of eleven salad buffet restaurants
and two Ladles restaurants since the comparable 1999 period and the increase in
comparable restaurant sales of 2.4%.
COST OF SALES. Cost of sales for the three months ended March 31, 2000
increased 21.4% to $10.2 million from $8.4 million for the comparable 1999
period. This increase was due to the addition of eleven salad buffet
restaurants and two Ladles restaurants opened since the comparable 1999 period.
As a percentage of net sales, cost of sales decreased to 25.0% from 25.6% since
the comparable 1999 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 March 31, 2000
increased 30.6% to $12.8 million from $9.8 million for the comparable 1999
period. This increase was due to the addition of eleven salad buffet
restaurants and two Ladles restaurants opened since the comparable 1999 period
and higher hourly wage rates. As a percentage of net sales, the labor expense
increased 1.5% to 31.3% from 29.8% in the comparable 1999 period due to an
increase in the average hourly wage rate of $.25.
OCCUPANCY AND OTHER EXPENSES. Occupancy and other operating costs for the
three months ended March 31, 2000 increased 26.5% to $8.6 million from $6.8
million for the comparable 1999 period. This was due primarily to the addition
of eleven salad buffet restaurants and two Ladles restaurants. Occupancy and
other operating costs as a percentage of net sales approximated the comparable
1999 period.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the three months ended March 31, 2000 increased 28.6% to $2.7 million from
$2.1 million for the comparable 1999 period. 14.4% of this increase was due to
personnel costs, 5.9% was due to costs associated with training and management
development, 5.1% was due to administrative startup for distribution and 3.2%
was due to other general and administrative support costs. As a percentage of
net sales, general and administrative expenses increased .1% to 6.6% from 6.5%
for the comparable 1999 period.
RESTAURANT OPENING COSTS. Restaurant opening costs for the three months
ended March 31, 2000 was $.5 million or 1.3% of sales. Prior to the
implementation of SOP 98-5, in the 1999 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 March 31, 2000 increased 4.5% to $2.3
million from $2.2 million for the comparable 1999 period. This was due to
additional depreciation for the eleven salad buffet restaurants and two Ladles
restaurants opened since the comparable 1999 period, partially offset by
decreased amortization resulting from the change in accounting for startup
expense effective October 1, 1999, which are now being expensed as incurred.
Depreciation and amortization expense as a percentage of net sales decreased
1.2% to 5.6%, from 6.8% for the comparable 1999.
INTEREST INCOME. Interest income for the three months ended March 31, 2000
increased 58.3% to $38,000 from $24,000 for the comparable 1999 period. The
increase in interest income was due to higher cash invested during the 2000
period.
INTEREST EXPENSE. Interest expense for the three months ended March 31,
2000 increased 100% to $.8 million from $.4 million for the comparable 1999
period due to an increase in borrowing since the 2000 period.
OTHER INCOME AND EXPENSE, NET. Other income and expense for the three
months ended March 31, 2000 increased due to insurance reimbursement for the
loss of business at a San Diego restaurant, which burned down after the close
of business on December 31, 1999.
<PAGE> 10
SIX MONTHS ENDED MARCH 31, 2000 COMPARED TO SIX MONTHS ENDED MARCH 31, 1999
NET SALES. Net sales for the six months ended March 31, 2000 increased
24.8% to $76.5 million from $61.3 million for the comparable 1999 period. This
increase was primarily due to the opening of eleven salad buffet restaurants
and two Ladles restaurants since the comparable 1999 period and the increase in
comparable restaurant sales of 2.4%.
COST OF SALES. Cost of sales for the six months ended March 31, 2000
increased 21.4% to $19.3 million from $15.9 million for the comparable 1999
period. This increase was due to the addition of eleven salad buffet
restaurants and two Ladles restaurants since the comparable 1999 period. As a
percentage of net sales, cost of sales decreased to 25.2% from 25.9% since the
comparable 1999 period due to an increase in average meal price effective
August 1, 1999, in most regions.
LABOR EXPENSE. Labor expense for the six months ended March 31, 2000
increased 31.2% to $24.4 million from $18.6 million for the comparable 1999
period. This increase was due to wage rate increases totaling 3.8% and
increased personnel associated with the eleven salad buffet restaurants and two
Ladles restaurants opened since the comparable 1999 period totaling 27.4%. As
a percentage of net sales, the labor expense increased 1.6% to 31.9% from 30.3%
in the comparable 1999 period due to an increase in wages, and the addition of
eleven salad buffet restaurants and two Ladles restaurants, which due to
efficiency ramp down, utilized higher than historical labor hours during the
first ninety days of operations.
OCCUPANCY AND OTHER EXPENSES. Occupancy and other operating costs for the
six months ended March 31, 2000 increased 25.0% to $16.5 million from $13.2
million for the comparable 1999 period. This was due to the addition of eleven
salad buffet restaurants and two Ladles restaurants. Occupancy and other
operating costs as a percentage of net sales increased .1% to 21.6% from 21.5%
for the comparable 1999 period.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the six months ended March 31, 2000 increased 28.2% to $5.0 million from
$3.9 million for the comparable 1999 period. 12.6% of this increase was due to
personnel costs, 4.9% was due to costs associated with training and management
development, 2.6% was due to administrative startup for distribution and 8.1%
was other general and administrative support costs. As a percentage of net
sales, general and administrative expenses increased .2% to 6.6% from 6.4% for
the comparable 1999 period. This was due to additional personnel to support
new stores and distribution startup costs.
RESTAURANT OPENING COSTS. Restaurant opening costs for the six months ended
March 31, 2000 was $1.0 million or 1.3% of sales. Prior to the implementation
of SOP 98-5, in the 1999 period $1.1 million of startup costs were amortized
and included in depreciation and amortization expenses.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses for the six months ended March 31, 2000 remained flat compared to the
1999 period. Depreciation and amortization expense as a percentage of net
sales decreased 1.5% to 5.8%, from 7.3% for the comparable 1999. This was due
to additional depreciation for the eleven salad buffet restaurants and two
Ladles restaurants opened since the comparable 1999 period, and decreased
amortization resulting from the change in accounting for startup expense
effective October 1, 1999, which are now being expensed as incurred.
INTEREST INCOME. Interest income for the six months ended March 31, 2000
increased 17.5% to $67,000 and $57,000, respectively.
INTEREST EXPENSE. Interest expense for the six months ended March 31, 2000
increased 87.5% to $1.5 million from $.8 million for the comparable 1999
period, due to additional borrowings since the 1999 period
OTHER INCOME AND EXPENSE, NET. Other income and expense for the six months
ended March 31, 2000 increased due to insurance reimbursement for the loss of
business at a San Diego restaurant, which burned down after the close of
business on December 31, 1999.
<PAGE> 11
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 six months ended March 31, 2000, the
Company generated $10.2 million from operating activities and received a net of
$1.0 million under its bank line of credit, and $9.5 million from equipment and
mortgage financing (with repayments of $3.6 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, however 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 30 restaurants, including the land for
certain sites the Company expects to open in fiscal 2000. During the first six
months of fiscal 2000 the Company opened one owned restaurant site and four
leased sites. Capital expenditures totaled $16.5 million during the first six
months of fiscal 2000 and $13.5 million for the comparable period in fiscal
1999. As of March 31, 2000, the Company operated 71 salad buffet restaurants,
two Ladles and one small quick service restaurant.
The cash investment required for the five salad buffet restaurants opened
during the six month period ending March 31, 2000 was $9.4 million including
land and buildings, and excluding restaurant opening costs. The restaurant
opening costs incurred during the six month period ending March 31, 2000 for
the five restaurants opened was $540,000. The Company has signed 9 leases, and
purchased 3 sites planned to open in fiscal 2000, and signed 2 leases and
opened 2 escrows for sites planned to open in fiscal 2001. The cash investment
to open a new restaurant typically includes the purchase and 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 $17.5 million for new
restaurant openings; the Company has a remaining budgeted $.3 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 delivery and distribution center for the Souplantation, Sweet Tomatoes
and Ladles restaurants on the West Coast began 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 capital expenditures, to date associated with the startup of the
distribution and delivery facility, which opened April 1, 2000, was $264,0000.
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.
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.
<PAGE> 12
CERTAIN OPERATING RESULTS AND CONSIDERATIONS
In fiscal 1998 and 1999, respectively, the Company experienced an increase
of 7.5% and an increase of 3.7% in comparable restaurant sales. In the first
six months of fiscal 1999 and 2000, respectively, the Company's comparable
restaurant sales increased by 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 and one Ladles restaurant in
fiscal 1999, in new and existing regions (Pacific Northwest, Florida, North
Carolina, Texas, Georgia, Colorado and Nevada); and has opened eight salad
buffet restaurants and one Ladles restaurant to date in fiscal 2000, seven
salad buffet restaurants are in existing regions (Southern California, Florida,
Houston, Colorado). One salad buffet restaurant was opened in the new region
of Missouri. The Company currently intends to open twelve additional
restaurants in fiscal 2000. Both Ladles restaurants 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,
including higher labor utilization during the first ninety days. 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.
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, have more experienced distribution and delivery
personnel, and have substantially greater financial, marketing and other
resources than the Company, which may give them certain competitive advantages.
In addition, the
<PAGE> 13
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, including it's own distribution services 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.
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-four existing salad buffet restaurants
are located in California, and seventeen are located in Florida. Accordingly,
the Company is susceptible to fluctuations in its business caused by adverse
economic or other conditions in these regions, including natural disasters or
other acts of God. As a result of the
<PAGE> 14
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.
DISTRIBUTION CENTER
The Company's West Coast restaurant's food and supplies costs are heavily
dependent upon the results of operation and efficiency of the Company's new
distribution center. Increasing fuel costs and hourly wage rates could
adversely affect the distribution's ability to deliver groceries at favorable
costs in the future. In addition, the Company's management has little
experience operating a distribution center and may not be able to achieve cost
savings.
<PAGE> 15
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 the
prime rate plus 25 basis points. The interest rate as of March 31, 2000 was
9.5%, an increase of .5% since September 30, 1999. As of March 31, 2000, the
Company had $6.0 million in debt outstanding under the credit facility, an
increase of $1.0 million since September 30, 1999. Based on a hypothetical 50
basis point adverse change in prime rates, interest expense would increase by
approximately $30,000 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 March 31, 2000.
<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 March 7,
2000. The election of one (1) director and the ratification of
appointment of independent accountants were presented for
shareholder approval. The results are listed below:
ELECTION OF ONE CLASS A DIRECTOR:
Director Total Votes For Total Votes Against
--------------- --------------- -------------------
Michael P. Mack 5,105,844 40,100
RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS:
For Against Abstain Non-Vote
--------- ------- ------- --------
5,111,007 2,385 32,552 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 March 31, 2000.
<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:
GARDEN FRESH RESTAURANT CORP.
May 12, 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> 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
10.9A **** 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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