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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 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 (I.R.S. Employer
incorporation or organization) Identification No.)
17180 Bernardo Center Drive 92128
San Diego, CA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (858) 675-1600
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Indicate by 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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. / /
The approximate aggregate market value of the registrant's Common Stock held by
nonaffiliates of the registrant (based on the closing sales price of such stock
as reported in the Nasdaq National Market) on December 13, 1998 was
$88,690,518. Excludes shares of Common Stock held by directors, officers and
each person who holds 5% or more of the registrant's Common Stock.
Number of shares of Common Stock, $.01 par value, outstanding as of December
13, 1999 was 5,631,144.
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GARDEN FRESH RESTAURANT CORP.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
No.
PART I......................................................................3
Item 1. BUSINESS.........................................................3
Item 2. PROPERTIES......................................................15
Item 3. LEGAL PROCEEDINGS...............................................15
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............16
PART II....................................................................16
Item 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.............................................16
Item 6. SELECTED FINANCIAL DATA.........................................17
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............................19
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......29
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....................29
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.............................29
PART III...................................................................29
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.................29
Item 11. EXECUTIVE COMPENSATION AND OTHER MATTERS........................29
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT......................................................30
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................30
PART IV....................................................................31
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS
ON FORM 8-K.....................................................31
SIGNATURES.................................................................32
EXHIBIT INDEX..............................................................33
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PART 1
ITEM 1. BUSINESS
THE STATEMENTS CONTAINED IN THIS FORM 10-K 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," "ATTEMPTS," AND "SEEKS" ARE FORWARD LOOKING STATEMENTS.
THESE FORWARD LOOKING STATEMENTS, INCLUDING STATEMENTS REGARDING THE COMPANY'S
EXPANSION EFFORTS AND PLANS TO OPEN NEW RESTAURANTS, ARE BASED ON INFORMATION
AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE COMPANY ASSUMES NO
OBLIGATION TO UPDATE ANY SUCH FORWARD LOOKING STATEMENT. IT IS IMPORTANT TO
NOTE THAT THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE IN
SUCH FORWARD LOOKING STATEMENTS. AMONG THE FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY ARE THE FACTORS SET FORTH UNDER THE HEADING
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - 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.
GENERAL
Garden Fresh Restaurant Corp. was founded in 1983 and currently operates 71
salad buffet restaurants in California, Florida, Arizona, New Mexico, Utah,
Nevada, Washington, Georgia, Texas, North Carolina, Oregon and Colorado under
the names Souplantation and Sweet Tomatoes. The Company also operates one mini
Souplantation restaurant and one Ladles, A Soup and Salad Takery, ("Ladles") in
California. The Company's restaurants feature fresh, great tasting salads and
other complementary foods. Due to its salad focus, the Company's concept falls
within a segment of the restaurant industry that is distinct from other buffet
concepts and moderately priced casual restaurants. The Company believes that
it is well-positioned to further penetrate this segment and that the
opportunity for expansion within this segment currently is attractive relative
to expansion opportunities for many other restaurant segments.
BUSINESS STRATEGY
The Company's fundamental strategy is to provide a casual restaurant dining
experience that incorporates the variety and choice inherent in a buffet
restaurant but the food quality and service expected in casual chains. The
Company believes that this strategy will create restaurant operating margins
not normally found in the buffet/family dining segment. The key elements of
the Company's strategy are as follows:
COMMITMENT TO HIGH QUALITY FOOD. The Company seeks to provide fresh wholesome
food with a strong emphasis on salads, which are featured on two 55 foot bars
that include a wide range of salad offerings featuring three freshly tossed
salads as well as a large assortment of fresh cut produce, dressings and
toppings and several signature prepared salads. Various other offerings
include made from scratch soups, a hot pasta bar, a bakery which serves a
variety of hot muffins, focaccias and other breads and a dessert bar centered
around a frozen yogurt station with toppings complemented by fresh fruits and
puddings.
COMMITMENT TO GUEST SERVICE. The Company seeks to provide its guests with a
level of service that exceeds the standards set by other buffet concepts while
not inhibiting the guest from enjoying the benefits of selecting from a
cornucopia of choices offered at the various food bars within the restaurant.
In addition to high service standards the Company has implemented several
programs to maximize guest satisfaction. Included in these is a "zero defect"
program that focuses on the most popular offerings to ensure that each portion
is prepared exactly as specified by the recipes. The Company's high service
standards can only be maintained through intensive recruiting and training
programs designed to employ crew members and management that can sustain a
friendly, enjoyable environment thereby maximizing the guest's meal experience.
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EXCELLENT PRICE/VALUE RELATIONSHIP. The Company believes that the pricing and
product mix at each restaurant is maintained at such a high level that the
resulting meal experience can only be duplicated in other casual chains at
price points that average two to three dollars higher than at the Souplantation
and Sweet Tomatoes restaurants. The Company's management and front-line
personnel have embraced a company purpose and values that encompass commitment
to serving high quality foods. The company has involved the guests in
establishing a price value, such as notifying them in writing in advance of its
intent to raise prices that only cover increased costs, resulting in positive
guest feedback.
COST MANAGEMENT. The ability of the Company to maintain the highest possible
quality products combined with what the Company believes to be one of the
lowest cost structures in the casual chain segment is directly attributable to
the Company's ability to manage costs rigorously. This is achievable only
through the use of the Company's fully integrated, proprietary computer
management information system. The precision with which the system operates
allows a manager to review his/her entire cost structure in increments of cents
per guest or minutes per employee if need be. At the same time, every level of
management can review virtually any data in any store as quickly as the store
itself. This allows for rapid problem detection and resolution thereby
minimizing potential cost problems. The Company believes that the system's
sophistication combined with the ability of management to effectively use it
are unequaled in the industry.
EXPANSION STRATEGY
The Company intends to expand in fiscal 2000 primarily in existing markets.
In fiscal 1999, the Company opened two restaurants in Oregon, one restaurant in
Florida, one restaurant in North Carolina, one restaurant in Texas, one
restaurant in Las Vegas, three restaurants in Colorado, and one restaurant in
Georgia. Subsequent to the close of fiscal 1999, the Company opened four
additional restaurants, two in Orlando, Florida, one in San Diego, California
and one in Jacksonville, Florida. In fiscal 2000, the Company anticipates
opening a total of twenty new restaurants, and three Ladles of which two have
signed leases. The Company has signed nine leases, including two for Ladles,
has purchased land for five sites and has signed contracts to purchase one site
to be opened in fiscal 2000. Expansion within the Company's existing regions
will allow the Company to continue generally utilizing a central kitchen to
serve several restaurants located within a particular region. In addition, as a
part of its expansion strategy, the Company is evaluating the Ladles concept.
The Company currently has no plans to offer franchises.
The Company's ability to implement an expansion strategy will depend on a
variety of factors, including the Company's ability to locate suitable
restaurant sites, construct new restaurants in a timely manner and obtain
additional funds. See "Business Risks-Expansion Risks."
During fiscal 1999 the Company opened its first Ladles, A Soup and Salad
Takery, a new restaurant concept targeted for on-the-go families and busy
professionals. The first Ladles is located in a community in San Diego,
California. The Company plans to continue testing the Ladles concept by
expanding in the San Diego region during fiscal 2000.
UNIT ECONOMICS
For the twelve month period ended September 30, 1999, the 57 salad buffet
restaurants that were open for the entire period had an average of
approximately 309,000 guest visits during the period, generated average net
sales of approximately $2,156,000, average restaurant operating income (net
sales less cost of sales, restaurant operating expenses and depreciation and
amortization) of approximately $360,000 or 16.7% of net sales, and average
cash flow (operating income plus depreciation and amortization) of
approximately $501,000 or 23.2% of net sales. The Company's average cash
investment for the ten restaurants opened in the twelve month period ended
September 30, 1999 excluding land purchases and pre-opening costs, was
approximately $1,945,000. Pre-opening costs averaged approximately $214,000 for
these restaurants. The investment of capital 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. The Company currently leases the sites for most of its
restaurants, mixed between in-line locations and stand-alone sites, although
the Company purchases sites when necessary to acquire
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desirable locations.
CONCEPT AND MENU
The Company's menu is designed to focus on freshly made, great tasting food.
The focal point of the menu is the salad bar, but not to the point of
neglecting other interesting and exciting food offerings at the hot pasta,
soup, bakery, frozen yogurt and dessert bars. The Company seeks to provide
guests with an excellent value by offering unlimited access to its entire menu
of high quality fresh items at a fixed price. Depending on the region and time
of day, the price ranges from $6.19 to $6.99 at lunch and from $7.19 to $7.99
at dinner. Discounts are provided to children under 12 and senior citizens,
along with various other discount programs.
The following is a description of the Company's menu items in the order they
would appear to a guest walking along the various food bars in a typical
restaurant:
TOSSED SALADS. Upon entering the restaurant, guests are greeted at the door
and begin to walk along either of the salad bars. The initial featured
selections along the salad bars are two to three specialty salads that are
tossed fresh approximately every 20 minutes. The selections are changed weekly
for variety. The following is a partial listing of the Company's specialty
salad recipes:
Antipasto Salad Roasted Vegetable Salad with Feta & Olives
Barbecue Chicken Chopped Salad Roma Tomato, Mozzarella & Basil Salad
California Cobb Salad Shrimp & Krab Louie Salad
Caesar Salad Spinach Salad with Mandarin Oranges
Country French Salad with Bacon and Caramelized Walnuts
Ensalada Azteca Won Ton Chicken Salad
Greek Salad
Following are specialty tossed salads on the salad bar, guests can make their
own salads by choosing from a broad assortment of fresh cut salad ingredients.
The salad bar offers three types of lettuce (romaine, iceberg and one other
rotational lettuce), an assortment of eleven seasonal fresh cut vegetables
(such as grated carrots, sliced mushrooms, chopped bell peppers and diced
jicama), ten toppings (such as sunflower seeds, fresh bacon bits, grated
cheddar cheese and crumbled eggs), various condiments and ten dressings.
Employees located between the two salad bars replenish the salad offerings
frequently and assist guests.
Next, the salad bar features prepared signature salads. The following is a
partial list of the Company's signature salad recipes:
Artichoke Rice Salad Lemon Orzo Salad with Feta & Mint
Aunt Doris' Red Pepper Slaw Mandarin Noodles with Broccoli
Baja Bean with Cilantro Salad and Sesame Seeds
with Chipotle Vinaigrette Mandarin Shells with Almonds
BBQ Potato Salad and Snow Peas
Carrot Ginger Salad with Herb Marinated Summer Vegetable Salad
Vinaigrette Moroccan Marinated Vegetables
Carrot Raisin Salad Old Fashioned Macaroni Salad
Chinese Krab Salad Oriental Ginger Slaw with Krab
Confetti Pasta Salad with Picnic Potato Salad
Cheddar & Dill Pineapple Coconut Slaw
Cucumber Tomato Salad with Poppyseed Coleslaw
Chile Lime Roasted Potato Salad with
Dijon Potato Salad with Garlic Chipotle Vinaigrette
Dill Vinaigrette Southern Dill Potato Salad
Gemelli Pasta Salad with Chicken Spicy Southwestern Pasta
German Potato Salad Summer Barley with Black Bean Salad
Greek Couscous with Feta Cheese Thai Noodles with Peanut Sauce
Italian White Bean Salad Three Bean Marinade Salad
Jalapeno Potato Salad
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Tortellini Salad Tuna Tarragon Salad
Tortellini Salad with Basil Turkey Chutney Pasta Salad
Tumbleweed Tortellini Salad Zesty Tortellini
BEVERAGES. At the end of the salad bar, the Company offers an assortment of
beverages, including fresh juices, milk, soft drinks, sparkling waters,
lemonades, and in certain locations, beer and wine. Refills of soft drinks,
coffee and tea are provided at no extra cost.
SOUP BAR. The soup bar contains a selection of five to six soups made fresh
daily, featuring three regular offerings of chicken noodle soup, clam chowder
and chili. The Company seeks to offer only the highest quality soups. In making
one of its most popular dishes, chicken noodle soup, the Company cooks its own
chicken broilers, selecting only the white meat for use in the soup and using
some of the remaining portion to create a natural broth. The Company offers
additional soups that are selected from the Company's soup recipes, including
the following:
Albondigas Buenas Soup Shrimp Bisque
Chesapeake Corn Chowder Spicy 4-Bean Minestrone
Chunky Potato Cheese Soup Split Pea Soup with Ham
Cream of Broccoli Soup Sweet Tomato Onion Soup
Cream of Mushroom Soup Texas Red Chili
Green Chile Stew Turkey Cassoulet
Irish Potato Leek Soup Turkey Noodle Soup
Navy Bean Soup Turkey Vegetable Soup
New England Clam Chowder with Bacon Vegetable Beef Stew
Posole Vegetable Medley Soup
Santa Fe Black Bean Chile Vegetarian Harvest Soup
PASTA BAR. At the pasta bar, guests can select from three hot pasta dishes
that are made fresh every 20-30 minutes. Pasta is prepared exhibition style to
order at the pasta station and served in individual servings to ensure that
both the pasta and the sauce remain hot. The Company's pasta sauce recipes
include the following:
Bruschetta Garden Vegetable with Meatballs
Chipotle Chicken with Cilantro Italian Vegetable Beef
Creamy Bruschetta Jalapeno Salsa
Creamy Pesto with Sundried Tomatoes Nutty Mushroom
Fettucine Alfredo Smoked Salmon & Dill
Garden Vegetable with Italian Sausage Vegetarian Marinara with Basil
BAKED GOODS. Each day, the bakery bar offers three different muffins, two
varieties of fresh dough pizza focaccias and a variety of freshly baked breads.
In addition, the Company offers baked potatoes and assorted toppings. All
muffins and other baked goods are baked on site and replenished frequently to
ensure warmth and freshness. The Company's recipes include the following:
Apple Cinnamon Bran Muffin Chocolate Brownie Muffin
Apple Raisin Muffin Chocolate Chip Mandarin Muffin
Apricot Nut Muffin Chocolate Chip Muffin
Banana Nut Muffin Cranberry Orange Bran Muffin
Buttermilk Corn Bread Fruit Medley Bran Muffin
Carrot Pineapple Muffin with Oat Bran Garlic Parmesan Focaccia Muffin
Cherry Nut Muffin Georgia Peach Poppyseed Muffin
Chile Corn Muffin Indian Grain Bread
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Lemon Muffin Roasted Potato Focaccia
Mandarin Almond Muffin with Oat Bran Strawberry Buttermilk Muffin
Nutty Peanut Butter Muffin Sourdough Bread
Peanut Butter Chocolate Chip Muffin Tomatillo Focaccia
Pizza Focaccia Wild Maine Blueberry Muffin
Pumpkin Raisin Muffin Zucchini Nut Muffin
DESSERTS. Each restaurant offers several varieties of fresh fruit and other
dessert items. The most popular dessert offering is frozen yogurt. At the
yogurt bar, guests have the choice of two varieties of frozen yogurt and
assorted toppings (such as cookie crumbs, granola, sprinkles, peanuts and
chocolate sauce).
RESTAURANT OPERATIONS
COST MANAGEMENT FOCUS. The Company is committed to cost management without
degrading either quality of food or service. To accomplish this, the Company
has developed a proprietary management information system which, in conjunction
with several other cost related programs, allows the Company to provide a cost
structure that the Company believes is superior to any casual or buffet style
restaurant.
COMPUTER INFORMATION SYSTEM. The core component of the Company's cost
management program is the Company's computer information system. The Company
has developed a proprietary computer accounting and management information
system that is fully integrated throughout the Company, including in each
restaurant. The Company believes that, as compared to off-the-shelf software
applications, this system provides significantly greater access to restaurant
operating data and a much shorter management reaction time. The system is used
as a critical planning tool by corporate and restaurant managers in four
primary areas: production, labor, food cost and financial and accounting
controls. The system generates forecasts of estimated guest volumes and other
predictive data, which assist restaurant managers in developing automated
production reports that detail the daily quantity and timing of batch
production of various menu offerings and food preparation requirements. The
computerized system also acts as a scheduling tool for the general managers,
producing automated daily labor reports outlining the restaurant's staffing
needs based on changing trends and guest volume forecasts. Corporate
management, through daily information updates, has complete access to
restaurant data and can react quickly to changing trends. The Company can
quickly analyze the cost of its menu and make corporate-wide menu adjustments
to minimize the impact of shifting food prices and food waste. Weekly
computer-generated profit and loss statements and monthly accounting
department-generated profit and loss statements are reviewed at the corporate,
regional and restaurant management levels.
FOOD PURCHASING. Most food items are contracted on a centralized basis in an
effort to achieve uniform quality, adequate supplies and competitive prices.
The Company's food purchasing programs are designed to assist the Company in
minimizing food costs through vendor discounts based upon volume purchases. In
order to minimize price fluctuations, to the extent practical, the Company
enters into fixed price supply contracts that typically have terms of two
months to one year and generally do not have minimum purchase requirements.
Although contracted directly by the Company, all produce and groceries are
delivered to the Company's regional distributors, who in turn deliver the
produce and groceries to the individual restaurants and central kitchen
restaurants approximately three to five times a week. At each restaurant, the
production assistant manager is responsible for ensuring that all deliveries
meet the Company's guidelines regarding freshness and quality.
CENTRAL KITCHENS. In seventeen geographic areas, the Company uses central
kitchens located in existing restaurants to prepare certain menu offerings on a
more efficient scale using the identical food preparation processes as the
restaurants. Each central kitchen generally services between two and seven
restaurants. Items prepared in the central kitchen are delivered daily to the
Company's local restaurants. The Company believes that, where economically
feasible, the use of central kitchens assists the Company in providing
consistently high quality, great tasting food, enhances the freshness of certain
menu offerings and allows the restaurant managers to devote more time and
attention to guests without significant additional operating costs.
FOOD PREPARATION AND QUALITY CONTROL. The Company is committed to using fresh
produce and high quality groceries in its menu offerings. The kitchen and
central kitchen staffs prepare food items from scratch daily. Menu offerings
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are closely monitored on the food bars and frequently replenished to assure
constant food freshness. Items that are highly sensitive to freshness, such as
tossed salads, muffins, pizza focaccias, and prepared pastas are made on-site
in small batches throughout the day in order to maintain high levels of
freshness and great taste. The Company has developed a wide assortment of
recipes that are used in each restaurant and central kitchen in an effort to
achieve consistently high quality. The Company's food development effort
focuses on the creation of new recipes within existing food product categories.
The Company's computer system assists the restaurant managers in monitoring
quality control without raising costs by providing a detailed analysis of the
raw materials used in the creation of each finished product.
CUSTOMER SERVICE. One of the Company's fundamental strategies is to develop a
strong core of loyal, high frequency guests, in part by providing a level of
customer service not typically associated with a buffet. The Company seeks to
attract and retain friendly, customer-oriented employees. Employees are present
at the food bars and in the dining room to replenish food offerings, answer
questions and assist guests in serving themselves. The Company devotes
substantial attention and resources to maintaining cleanliness and fresh
presentation of the salad and other food bars in order to enhance the visual
appeal of the menu offerings.
The Company actively solicits guest input through the use of comment cards
and other survey instruments. The Company and management attempt to respond in
writing or verbally to all guest suggestions and complaints. Restaurant
managers evaluate their respective restaurants approximately four times per day
for compliance with Company standards. In addition, the Company conducts
in-house market research through exit interviews and guest focus groups on an
ongoing basis in order to be responsive to changes in guest tastes and
expectations. Each restaurant receives independent evaluations of product
quality, cleanliness and service from secret shoppers approximately twice a
month, as well as a technical shop once a month to ensure strict adherence to
the Company's standards for food quality, service and cleanliness. The results
of these independent evaluations are taken into consideration in determining
each restaurant manager's monthly bonus.
RESTAURANT MANAGEMENT. The Company seeks to attract and retain friendly,
guest-oriented employees for its restaurant management positions. Upon joining
the Company and before assuming management responsibility, each restaurant
management employee completes the Company's basic management skills program in
a training restaurant. The Company also certifies restaurant management
employees for participation in ongoing management training programs that focus
on leadership, team building, technical skills, harassment, performance
reviews, interviewing and other management skills.
General managers are responsible for managing their respective restaurants
and reporting to the director of operations. Most directors of operations are
responsible for four to eight restaurants. The management staff of a typical
Souplantation/Sweet Tomatoes restaurant consists of one general manager, one
production manager, one service manager, one assistant manager and several
other key employees. The Company recruits most of its management outside the
Company, the majority of whom have prior restaurant management experience. Most
of the Company's general managers have been promoted from internal management
positions. The general manager of each restaurant is principally responsible
for the day-to-day operation and profitability of the restaurant. The Company
grants monthly bonuses to restaurant managers based on restaurant financial
performance and quality, service and cleanliness scores. As an additional
incentive, General Managers are eligible for stock options.
MARKETING AND PROMOTION
The Company's marketing efforts seek to develop loyal guests for repeat
business, attract new guests and create awareness of existing and new
restaurants. Because the Company believes strong execution is the most
effective form of marketing, it has developed a "zero-defect" program in its
restaurants on certain popular food offerings in an effort to provide
consistently high quality products. The "zero-defect" program establishes highly
detailed procedures describing the precise methods under which these certain
popular food offerings are prepared, presented and replenished.
A significant portion of the Company's external marketing effort consists of
attracting new guests through the use of freestanding inserts ("FSIs"). FSIs
contain descriptive information regarding the restaurants, as well in
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some cases, discount coupons. FSIs are distributed by direct mail and through
newspapers. In addition, the Company has a "Business-to-Business" program under
which it mails discount cards to local businesses for distribution to their
employees. The discount cards entitle the employees to a certain price discount
on each repeat visit during a specified period.
In markets in which the Company has sufficient penetration, the Company uses
radio advertising to stimulate demand. Radio advertising is only used where
the return on investment of the radio campaign is sufficient to justify the
cost. In fiscal 1999, the Company used radio advertising in its San Diego,
Tampa Bay and Phoenix markets. The Company does not currently utilize
television advertising but is considering it in markets where appropriate.
In addition, the restaurants periodically co-sponsor fund-raising events in
the restaurants for local charitable and other community organizations. For
each new restaurant, the Company conducts a pre-opening awareness program
beginning approximately two to three weeks prior to, and ending four to six
weeks after, the opening of the restaurant. The program typically includes
special promotions, site signs and sponsorship of a fund-raising event for a
local charity to establish ties to local community leaders and increase
awareness of the new restaurant, and pre-opening trial operations, to which the
family and friends of new employees are invited.
In fiscal 1999, marketing and promotion expenses constituted approximately
2.0% of net sales.
RESTAURANT FACILITIES
DESIGN. Each Souplantation/Sweet Tomatoes restaurant generally has a similar
appearance. The Company currently uses a standardized design in constructing
restaurants, with modifications for each particular site. The design and layout
of the restaurants are intended to emphasize the fresh, great tasting salads
and other complementary menu offerings and promote a casual, comfortable and
inviting atmosphere. The centerpiece of the restaurants are the two
approximately 55-foot long salad bars located near the entrance of the
restaurants. An aisle between the two salad bars allows employees easy access
for replenishment of fresh food items, preparation of specialty tossed salads
and ongoing clean-up without disturbing guests. The remainder of the menu
offerings are presented in a scatter bar format designed to accommodate a high
volume of traffic while providing guests with unlimited and convenient access
to the food items. The dining area, which seats approximately 220 guests,
provides a warm, comfortable atmosphere that creates a relaxed dining
environment similar to many casual family restaurants. The Company's existing
restaurants average approximately 7,400 square feet (including the dining area,
kitchen and food preparation and storage areas), with new restaurants based on
the Company's latest prototype average approximately 7,240 square feet and 240
seats. Certain of the Company's restaurants provide limited outdoor seating.
LOCATION. The following is a list of the Company's current salad buffet
restaurants and their locations by region:
Month Opened Approximate
Square
Footage(1)
REGION: SOUTHERN CALIFORNIA(2)
Kearny Mesa (San Diego)............. October 1999 8,500
Del Mar (San Diego)................. September 1993 6,760
Laguna Niguel....................... July 1993 6,800
Rancho Bernardo (San Diego)......... January 1993 6,760
San Bernardino...................... May 1992 6,500
Fountain Valley..................... January 1990 7,500(3)
Brentwood (Los Angeles)............. January 1990 6,580
Beverly (Los Angeles)............... September 1989 8,100
Alhambra............................ September 1989 7,500
Marina del Rey...................... June 1989 8,490
Costa Mesa.......................... May 1989 10,140
Rancho Cucamonga.................... April 1989 7,630
Brea................................ October 1988 7,630
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Month Opened Approximate
Square
Footage(1)
Arcadia............................. October 1988 7,500
Torrance............................ July 1988 8,080
Mira Mesa (San Diego)............... February 1988 8,210
Pasadena............................ November 1987 7,940
Carlsbad............................ July 1987 8,210
Lakewood............................ July 1987 8,210
Garden Grove........................ December 1986 8,210
Tustin.............................. August 1986 7,470
La Mesa............................. February 1986 8,420(3)
Point Loma (San Diego).............. January 1982 7,000
Mission Gorge (San Diego)........... March 1978 7,570
REGION: NORTHERN CALIFORNIA
N. Fresno Street (Fresno)........... October 1993 6,760
Fremont............................. February 1993 6,860
Shaw Avenue (Fresno)................ September 1990 6,760
Sunnyvale........................... May 1990 7,500
Pleasanton.......................... March 1990 7,910
REGION: FLORIDA
Jacksonville........................ November 1999 7,240
Orlando I........................... October 1999 6,472
Orlando II.......................... October 1999 7,696
Orange Park (Jacksonville).......... March 1999 7,240(3)
Coral Springs....................... December 1997 7,240
Fort Lauderdale..................... September 1997 7,960
Hollywood........................... August 1997 8,000(3)
Altamonte Springs (Orlando)......... February 1997 8,740(3)
Fort Myers.......................... January 1997 7,240
Sarasota............................ July 1996 8,500(3)
Plantation.......................... April 1996 8,030
Brandon (Tampa)..................... August 1995 8,110
Tampa............................... July 1995 8,500
Carrollwood (Tampa)................. June 1993 7,020
Largo (Tampa)....................... September 1992 6,800
Palm Harbor (Tampa)................. January 1990 8,000(3)
REGION: ARIZONA
Tucson II........................... November 1996 6,960
Ahwatukee (Phoenix)................. July 1996 6,960
Peoria (Phoenix).................... June 1996 6,460
Phoenix............................. May 1996 6,940
Tucson I............................ May 1996 7,420(3)
Tempe (Phoenix)..................... February 1995 6,320
Scottsdale (Phoenix)................ February 1994 9,000(3)
REGION: NEW MEXICO
Cottonwood Mall (Albuquerque) ..... October 1996 6,300
San Mateo Avenue (Albuquerque)...... September 1996 7,240(3)
REGION: UTAH
Centennial (Salt Lake City)......... November 1997 7,450
Overlook (Salt Lake City)........... September 1997 9,000(3)
REGION: COLORADO
Littleton (Denver).................. September 1999 7,696
Westminster (Denver)................ August 1999 8,900(3)
Aurora (Denver)..................... July 1999 7,000
11
Month Opened Approximate
Square
Footage(1)
REGION: NORTH CAROLINA
Raleigh............................. March 1999 8,081(3)
REGION: NEVADA
Henderson........................... July 1999 6,918
Las Vegas........................... February 1998 7,240(3)
REGION: GEORGIA
Alpharetta.......................... June 14, 1999 7,240
Perimeter (Atlanta)................. September 1998 8,900(3)
Gwinnett (Atlanta).................. August 1998 7,240
Barrett (Atlanta)................... July 1998 7,240
REGION: TEXAS
Houston II.......................... March 1999 7,240
Brogden (Houston)................... August 1998 8,900(3)
REGION: PACIFIC NORTHWEST
Clackamas (Oregon).................. August 1999 8,081
Beaverton (Oregon).................. December 1998 7,240
Vancouver (Washington).............. July 1998 8,000(3)
The restaurants listed below are under development and have lease or purchase
contracts signed:
Estimated Fiscal Approximate
Quarter Opening Square Footage(1)
REGION: FLORIDA
Pembroke Pines...................... Q2 2000 7,740
Boca Raton.......................... Q3 2000 10,409(3)
REGION: MISSOURI
Kansas City......................... Q2 2000 8,900(3)
Overland Park....................... Q3 2000 7,296
REGION: TEXAS
Stafford............................ Q2 2000 7,696
Woodlands........................... Q4 2000 7,696
REGION: PACIFIC NORTHWEST
Tigard.............................. Q3 2000 7,000
REGION: COLORADO
Park Meadows (Denver)............... Q2 2000 9,000
REGION: NORTH CAROLINA
Cary................................ Q3 2000 7,500
REGION: CALIFORNIA
Temecula............................ Q4 2000 7,240
Camarillo........................... Q3 2000 7,240
San Jose............................ Q4 2000 12,000(3)
Pleasant Hills...................... Q4 2000 8,400
(1) Excludes outdoor patio space, but includes dining area, kitchen and food
preparation and storage areas.
(2) Does not include a mini-restaurant located in Los Angeles, California,
which opened in fiscal 1996.
(3) Includes central kitchen.
12
The following Ladles restaurant locations are open or under development and
have lease contracts signed:
Estimated/Actual Approximate
Fiscal Quarter Square
Opening Footage(1)
REGION: CALIFORNIA
Encinitas (San Diego)............ July 1999 1,200
Poway (San Diego)................ Q2 2000 1,215
Mission Valley (San Diego)....... Q3 2000 2,000
SITE SELECTION AND CONSTRUCTION
The Company's site selection strategy is to open economically viable
restaurants that achieve an appropriate balance between lunch and dinner guest
volumes in each of its target markets. The Company considers the location of
each restaurant to be critical to its long-term success and management devotes
significant effort to the investigation and evaluation of potential sites. The
site selection process focuses on regional and trade area demographics,
population density, household income and education levels, day-time traffic
patterns, as well as specific site characteristics such as visibility,
accessibility, traffic volume and the availability of adequate parking.
The Company also reviews potential competition and customer activity at
other restaurants operating in the area. To date, the Company has located a
majority of its restaurants in strip shopping centers and neighborhood shopping
centers located near business districts.
The Company generally engages outside general contractors for the required
construction or build-out of restaurant sites and expects to continue this
practice for the foreseeable future. The Company's experience to date has been
that obtaining construction permits has taken from two to nine months. The
interior build-out of in-line restaurants and the construction of freestanding
restaurants generally takes approximately four months and five months,
respectively.
The Company may experience delays in opening new restaurants or may not be
able to open new restaurants as a result of a variety of factors including the
Company's ability to locate suitable restaurant sites, construct new
restaurants in a timely manner and obtain additional funds. See "Business
Risks-Expansion Risks."
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-price, 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 which have been in
existence longer than the Company, have a more established market presence and
have substantially greater financial, marketing and other resources than the
Company, which may give them certain competitive advantages. In addition, the
restaurant industry has few non-economic barriers to entry. Therefore, there
can be no assurance that third parties will not be able to successfully imitate
and implement the Company's concept. The Company has encountered intense
competition for restaurant sites, and in many cases has had difficulty buying or
leasing desirable sites on terms that are acceptable to the Company. In many
cases, the Company's competitors are willing and able to pay more than the
Company for sites. The Company expects these difficulties in obtaining desirable
sites to continue for the foreseeable future.
13
GOVERNMENT REGULATION
The Company's business is subject to and affected by various federal, state
and local laws. Each restaurant must comply with state, county and municipal
licensing and regulation requirements relating to health, safety, sanitation,
building construction and fire prevention. In addition, the Company is required
to comply with the alcohol licensing requirements of the federal government,
states and municipalities where its restaurants are located. Typically,
licenses must be renewed annually and may be revoked or suspended for cause at
any time. Alcoholic beverage control regulations relate to numerous aspects of
the daily operations of the Company's restaurants, including minimum age of
guests and employees, hours of operation, advertising, wholesale purchasing,
inventory control and handling, storage and dispensing of alcoholic beverages.
Failure to comply with federal, state or local regulations could cause the
Company's licenses to be revoked or force it to terminate the sale of alcoholic
beverages at one or more of its restaurants. Difficulties in obtaining or
failure to obtain required licenses or approvals could delay or prevent the
development of additional restaurants. The Company has not experienced
significant difficulties in obtaining licenses and approvals to date, however,
beer and wine licenses are not always available to the Company as a result of
the location of certain of its restaurants.
The Company is subject to state "dram-shop" laws and regulations, which
generally provide that a person injured by an intoxicated person may seek to
recover damages from an establishment that wrongfully served alcoholic
beverages to such person. While the Company carries liquor liability coverage
as part of its existing comprehensive general liability insurance, there can be
no assurance that it will not be subject to a judgment in excess of such
insurance coverage or that it will be able to obtain or continue to maintain
such insurance coverage at reasonable costs, or at all.
The Company's restaurants are subject to federal and state laws governing
wages, working conditions, citizenship requirements and overtime. Congress and
various states (including California) passed proposals that imposed increases
in state or federal minimum wages in 1996, 1997 and 1998. There is no assurance
that the Company will be able to continue to pass such increased costs on to
its guests. The Company is subject to the Americans with Disabilities Act of
1990, which requires certain accommodations to the Company's restaurant designs
to allow access for people with disabilities. In addition, the Company is
subject to the regulations of the Immigration and Naturalization Service
("INS"). Given the location of many of the Company's restaurants, even if the
Company's operation of those restaurants is in strict compliance with INS
requirements, the Company's employees may not all meet federal citizenship or
residency requirements, which could lead to disruptions in its work force.
Additionally, legislative proposals are currently under consideration by
Congress and state legislators to require employers to pay for health insurance
for all employees. See "Business Risks-Cost Sensitivity."
INSURANCE
The Company carries property, liability, business interruption, crime,
employee benefits, earthquake, directors and officers liability and workers'
compensation insurance policies. However, there can be no assurance that the
Company's insurance coverage will be adequate or that insurance will continue to
be available to the Company at reasonable rates, if at all. In the event
coverage is inadequate or becomes unavailable, the Company could be materially
adversely affected.
TRADE NAMES AND SERVICE MARKS
The Company and its predecessor have used the trademarks and service marks
Souplantation since 1978 and Sweet Tomatoes since 1990. The Souplantation
trademark is used in the Southern California market, while the Sweet Tomatoes
trademark is used in the Northern California, Florida, Arizona, New Mexico,
Utah, Nevada, Washington, Georgia, Colorado, Oregon, North Carolina and Texas
markets. The Company registered both Souplantation and Sweet Tomatoes
trademarks, as well as the Garden Fresh Restaurant Corp. trademark, with the
United States Patent and Trademark Office. The Company has also used the
trademark and service mark Ladles, A Soup and Salad Takery since July 1999 in
the California market. The Company has applied for a federal registration.
14
PROPERTY
The Company currently leases 48 and owns 25 open restaurant sites, including
one mini-restaurant and one Ladles site. The majority of the Company's leases
provides for minimum annual rentals and contains percentage-of-sales rent
provisions against which the minimum rent is applied. A significant majority of
the leases also provide for periodic escalation of minimum annual rent based
upon increases in the Consumer Price Index. Typically, the Company's leases
are 20 years in length with two 10-year extension options. Restaurants leased
by the Company are generally leased under "triple net" leases that require the
Company to pay real estate taxes, insurance and maintenance expenses. The
Company's executive offices, a test kitchen and a training facility are located
in an approximately 11,000 square foot leased facility near one of the
Company's restaurants in San Diego, California under a lease expiring in July
2002.
EMPLOYEES
As of September 30, 1999, the Company had approximately 4,600 employees
including 4,200 hourly restaurant employees (of whom 3,500 were part-time
employees), 320 full-time restaurant management employees and 62 full-time
corporate management and staff employees and 7 part-time corporate employees.
None of the Company's employees are represented by a labor union. The Company
believes that its relationship with its employees is good.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers and directors of the Company as of September 30, 1999
are as follows:
Name Age Position
Michael P. Mack.................. 48 Chairman of the Board, President and
Chief Executive Officer
David W. Qualls.................. 54 Executive Vice President-Finance and Real
Estate, Chief Financial Officer and
Secretary
R. Gregory Keller................ 51 Senior Vice President of Operations
Kenneth J. Keane................. 45 Vice President Human Resource
Michael P. Mack co-founded the Company in 1983 and was the President and
Chief Operating Officer from the Company's inception until April 1991 and the
Chief Executive Officer from September 1990 to April 1991. Mr. Mack assumed
the role of Chairman of the Board of Directors in December 1997. Mr. Mack has
also been a director of the Company since its inception. Since February 1994,
Mr. Mack has been the Company's President and Chief Executive Officer. From
April 1991 to February 1994, Mr. Mack served as the President of MPM
Management, Inc., a consulting firm. Prior to joining the Company, from 1977 to
1983, Mr. Mack worked for Bain & Company, a management consulting firm, where
he specialized in the development and implementation of business strategies.
Mr. Mack received a B.A. from Brown University and a M.B.A. from Harvard
University.
David W. Qualls joined the Company in November 1985 as Chief Financial
Officer and Secretary. Since 1990, Mr. Qualls has also served as the Company's
Executive Vice President in charge of Finance and Real Estate. From 1982 to
1985, Mr. Qualls served as Vice President of Finance and Administration and
Chief Financial Officer of Diatek, Inc., a medical electronics company. Mr.
Qualls received a B.A. from California State University at Fresno and a M.B.A.
from the University of Virginia.
R. Gregory Keller joined the Company in June 1991 as Vice President of
Operations. From January 1991 to June 1991 prior to joining the Company, Mr.
Keller served as a consultant to the Company. From June 1990 to January 1991,
Mr. Keller served as an independent consultant. From June 1971 to June 1990,
Mr. Keller served as a divisional Vice President of Operations of Paragon,
Inc., a restaurant company, where he managed operations for 33 restaurants.
Mr. Keller received a B.S. from Northern Illinois University.
15
Kenneth J. Keane is currently Vice President of Human Resources. Mr. Keane
joined the Company in 1986 as a restaurant manager. During his employment with
the Company he has served as Director of Operations, Director of Training and
since 1996, Executive Director of Human Resources. Prior to joining the
company, Mr. Keane worked in restaurant management for ten years. Mr. Keane
received a certificate in Human Resources from San Diego State University in
1996.
ITEM 2. PROPERTIES
The Company currently operates 71 salad buffet restaurants in California,
Florida, Arizona, New Mexico, Utah, Nevada, Texas, Washington, North Carolina,
Georgia, Colorado and Oregon. Four restaurants have opened in fiscal 2000, ten
restaurants were opened in fiscal 1999, eight restaurants were opened in fiscal
1998, seven restaurants were opened in fiscal 1997 and seven restaurants in
fiscal 1996. Additionally one mini restaurant was opened in fiscal 1996. The
Company currently leases the sites for most of its restaurants, mixed between
stand-alone sites and in-line locations. The Company operates 57 freestanding
restaurants and 14 restaurants located within larger buildings. The Company
owns ten properties located in Florida, one in Arizona, two in New Mexico, one
in Utah, one in Washington, one in Oregon, two in Colorado, one in North
Carolina, two in Texas, one in Las Vegas, three in Georgia, one in Kansas and
one in Missouri. Current restaurant ground and building leases vary as to
rental provisions, expiration dates and renewal options. The majority of the
leases provides for minimum annual rentals and contains percentage-of-sales rent
provisions against which the minimum rental is applied. A significant majority
of the leases also provides for periodic escalation of minimum annual rentals
based upon increases in the Consumer Price Index. Typically, the Company's
leases are 20 years in length with two 10-year extension options. Restaurants
leased by the Company are typically leased under "triple net" leases that
require the Company to pay real estate taxes, insurance and maintenance
expenses. In the future the Company expects to continue to both lease and
purchase its sites. The Company's executive offices, a test kitchen and a
training facility are located in an approximately 11,000 square foot leased
facility near one of the Company's restaurants in San Diego, California under a
lease expiring in July 2002.
In January 1995, the Company opened an experimental "Souplantation To Go!"
mini-restaurant next to one of its restaurants located in San Diego. The
mini-restaurant was a limited menu, quick-service concept that closed in June
1995. In fiscal 1996, the Company also opened a mini-restaurant in a hospital
business complex located in Los Angeles. The Company is still evaluating the
mini-restaurant concept and there can be no assurance that further expansion of
this concept will occur or that the mini-restaurants will be successful.
In July 1999, the Company opened Ladles, A Soup and Salad Takery, a new
take-out concept targeted for the on-the-go families and busy professionals.
The first Ladles is located in a community in San Diego, California. The
Company plans to open three additional Ladles restaurants in the San Diego
region during fiscal 2000. The Company is still evaluating the take-out concept
and there can be no assurance that it will be successful.
ITEM 3. 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. 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. The Company also is 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
or results of operations. Nevertheless, an existing or future lawsuit or claim
could result in an adverse decision against the Company that could adversely
affect the Company or its business. See "Business Risks - Legal Matters".
16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 1999.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Garden Fresh Restaurant Corp. Common Stock (Symbol: LTUS) is traded over
the counter via Nasdaq National Market. As of September 30, 1999, 5,629,405
shares were owned by 233 shareholders of record. The following is a summary of
market activity for the fiscal years 1998 and 1999.
1998 High Low
- ---- ---- ---
First Quarter $15 1/4 $12 1/4
Second Quarter 18 11/16 14 1/2
Third Quarter 21 1/8 16 3/4
Fourth Quarter 18 1/4 13 1/4
1999 High Low
- ---- ---- ---
First Quarter $17 1/4 $11
Second Quarter 15 11/16 14 1/16
Third Quarter 19 1/8 14 1/4
Fourth Quarter 20 3/8 15 5/16
Garden Fresh Restaurant Corp. completed its initial public offering (IPO) on
May 16, 1995 at a price of $9.00 per share.
In May 1998, the Company completed a secondary public offering at a price of
$17.19 per share.
To date, the Company has not paid any cash dividends. The Company intends
to retain future earnings for use in its business and does not anticipate
paying cash dividends in the foreseeable future.
17
ITEM 6. SELECTED FINANCIAL DATA
Year Ended September 30,
1995 1996 1997 1998 1999
(in thousands, except per share and operating data)
STATEMENT OF OPERATIONS DATA:
Net sales......................... $61,320 $71,373 $90,252 $110,049 $131,944
Costs and expenses:
Cost of sales................... 16,721 19,318 23,497 28,605 33,840
Restaurant operating expenses:
Labor......................... 17,425 19,870 26,130 32,526 39,995
Occupancy and other........... 15,473 16,981 20,836 24,290 27,312
General and administrative
expenses............... 4,098 5,142 5,672 6,781 8,214
Depreciation and amortization... 3,604 4,518 6,147 7,267 9,441
------ ------ ------ ------ -------
Total costs and expenses...... 57,321 65,829 82,282 99,469 118,802
------ ------ ------ ------ -------
Operating income.................. 3,999 5,544 7,970 10,580 13,142
Interest income................... 221 142 106 227 111
Interest expense.................. (1,313) (671) (1,579) (1,958) (1,618)
Other expenses, net............... (210) (66) (62) (111) (183)
------ ------ ------ ------ -------
Income before income taxes
and extraordinary item........ 2,697 4,949 6,435 8,738 11,452
Benefit (provision) for
income taxes (1).............. 1,646 (1,945) (2,548) (3,420) (4,548)
------ ------ ------ ------ ------
Income before extraordinary
item.......................... 4,343 3,004 3,887 5,318 6,904
Extraordinary item - early
extinguishment of debt (2).... (518) - - - -
------ ------ ------ ------ ------
Net income........................ 3,825 3,004 3,887 5,318 6,904
------ ------ ------ ------ ------
Stock dividend (3)................ (8,298) - - - -
------ ------ ------ ------ ------
Net income (loss) available to
common stockholders........... $(4,473) $ 3,004 $ 3,887 $ 5,318 $ 6,904
------ ------ ------ ------ ------
Net income (loss) per share
available to common
stockholders
Basic......................... $(2.47) $0.73 $0.93 $ 1.12 $ 1.24
------ ------ ------ ------ ------
Diluted....................... $(2.47) $0.72 $0.88 $ 1.04 $ 1.18
------ ------ ------ ------ ------
Shares used in computing net
income (loss) per share
Basic.......................... 1,810 4,103 4,192 4,734 5,574
Diluted........................ 1,810 4,176 4,402 5,089 5,867
SELECTED OPERATING DATA:
Percentage change in comparable
restaurant sales (4)........... 2.0% 2.5% 4.7% 7.5% 3.7%
Average price per guest (5)....... $6.56 $6.57 $6.75 $6.94 $7.01
Average sales for salad buffet
restaurants open for full
period (in thousands).......... $1,835 $1,902 $1,985 $2,098 $2,156
Number of salad buffet restaurants
open for full period........... 32 35 42 49 57
Number of salad buffet restaurants
open at end of period.......... 35 42 49 57 67
18
Year Ended September 30,
1995 1996 1997 1998 1999
(Dollars in thousands)
BALANCE SHEET DATA:
Working capital (deficit)........ $292 $(6,677) $(7,776) $(7,071) $(11,300)
Total assets..................... 36,709 48,062 62,409 84,932 114,618
Long-term debt, including current
portion........................ 4,017 9,934 17,421 14,866 34,198
Shareholders' equity............. 25,800 29,257 34,168 59,247 66,849
(1) Fiscal 1995 results include a benefit related to recognition of deferred
tax assets of $2,173.
(2) Represents a charge for previously unamortized issue costs, debt discount,
and prepayment penalty, net of $192 income tax benefit.
(3) Reflects preferential stock dividend of approximately 922 shares of Common
Stock to the holders of the Company's Series B, Series C and Series D
Preferred Stock, which occurred upon completion of the Company's initial
public offering.
(4) Comparable restaurant sales are computed on a monthly basis and then
aggregated to determine comparable restaurant sales on a quarterly or
annual basis. A restaurant is included in this computation after it has
been open for 15 full calendar months. As a result, a restaurant may be
included in this computation for only a portion of a given quarter or
year.
(5) Average price per guest is derived from the Company's net sales, which
reflects discounts and coupons.
- -------------------------
OPERATING RESULTS
The following table sets forth the percentage of net sales of certain items
included in the Company's statements of operations for the periods indicated.
Year ended September 30,
1997 1998 1999
STATEMENT OF OPERATIONS DATA:
Net Sales.............................. 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales........................ 26.0 26.0 25.6
Restaurant operating expenses:
Labor.............................. 29.0 29.5 30.3
Occupancy and other................ 23.1 22.1 20.7
General and administrative
expenses........................... 6.3 6.2 6.2
Depreciation and amortization
expenses........................... 6.8 6.6 7.2
---- ---- ----
Total costs and expenses......... 91.2 90.4 90.0
---- ---- ----
Operating income....................... 8.8 9.6 10.0
Interest income........................ .1 .2 0.0
Interest expense....................... (1.7) (1.8) (1.2)
Other expense, net..................... (0.1) (0.1) (0.1)
---- ---- ----
Income before income taxes
and extraordinary item.............. 7.1 7.9 8.7
Benefit (provision) for income
taxes............................... (2.8) (3.1) (3.5)
---- ---- ----
Net income (loss) available
to common shareholders.............. 4.3% 4.8% 5.2%
===========================
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE STATEMENTS CONTAINED IN THIS FORM 10-K 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," "ATTEMPTS," AND "SEEKS" ARE FORWARD LOOKING STATEMENTS.
THESE FORWARD LOOKING STATEMENTS, INCLUDING STATEMENTS REGARDING THE COMPANY'S
EXPANSION EFFORTS AND PLANS TO OPEN NEW RESTAURANTS, ARE BASED ON INFORMATION
AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE COMPANY ASSUMES NO
OBLIGATION TO UPDATE ANY SUCH FORWARD LOOKING STATEMENT. IT IS IMPORTANT TO
NOTE THAT THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE IN
SUCH FORWARD LOOKING STATEMENTS. AMONG THE FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY ARE THE FACTORS SET FORTH UNDER THE HEADING
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - 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.
The following should be read in conjunction with the "Selected Financial
Data" and the Company's financial statements and related notes thereto.
GENERAL
The Company has grown from 2 restaurants in 1984 to 67 salad buffet
restaurants as of September 30, 1999. Of the 67 restaurants, 23 are located in
Southern California using the name Souplantation and the balance are located in
Northern California (5), Florida (13), Arizona (7), New Mexico (2), Utah (2),
Nevada (2), Washington (1), Georgia (4), Texas (2), North Carolina (1), Oregon
(2) and Colorado (3) using the name Sweet Tomatoes. The Company's existing
restaurants average approximately 7,400 square feet, however, newer restaurants
are based on the Company's latest 7,240 sq. ft prototype. The Company currently
leases the sites for most of its restaurants, mixed between in-line locations
and stand-alone sites, although the Company purchases sites when necessary to
acquire desirable locations.
Net sales reflect discounts and coupons. Cost of sales consists primarily of
food and beverage costs. Food costs can vary significantly depending upon
pricing and availability of produce and grocery items. The Company attempts to
minimize cost fluctuations for some of its foods by entering into two month to
one year fixed price supply contracts with no minimum purchase requirements.
Restaurant operating expenses include all restaurant-level operating costs, the
significant components of which are direct and indirect labor expenses
(including benefits), advertising expenses, occupancy costs and maintenance and
utility expenses. Occupancy and other operating costs include rent, real estate
taxes and insurance. Certain elements of the Company's restaurant operating
expenses and, in particular, occupancy costs, are relatively fixed. However, a
significant majority of the Company's leases provide for periodic escalation of
minimum annual rentals based upon increases in the Consumer Price Index.
Occupancy costs, as well as depreciation and amortization expenses, will vary
between restaurants depending on whether a restaurant site is leased or owned.
See "Business Risks-Cost Sensitivity" and "Business Risks-Reliance on Key
Suppliers and Distributors."
Restaurant pre-opening costs incurred in connection with opening new
restaurant locations, including hiring, training and legal costs, are currently
amortized over one year commencing with the opening of the restaurant.
Pre-opening costs averaged approximately $214,000 for the ten restaurants
opened in the twelve month period ended September 30, 1999. See "-New
Accounting Standard."
FISCAL 1999 VERSUS FISCAL 1998
NET SALES. Net sales for the fiscal year ended September 30, 1999 increased
19.9% to $131.9 million from $110.0 million for the comparable 1998 period.
This was due primarily to a 3.7% increase in comparable restaurant sales which
resulted from an increase in guest volume of 3.4% and .3% resulted from an
increase in average meal price and the addition of ten new stores that opened
in fiscal 1999. Net sales includes $.1 million
20
from the new Ladles restaurant which opened in July 1999.
COST OF SALES. Cost of sales increased 18.2% to $33.8 million for the fiscal
year ended September 30, 1999 from $28.6 million for the comparable 1998
period. This increase was due to an increase in guest volume. As a percentage
of net sales, cost of sales decreased to 25.6% from 26.0% for the comparable
1998 period, due to leveraged purchasing price variances across all regions.
LABOR. Labor expense for the fiscal year ended September 30, 1999 increased
23.1% to $40.0 million from $32.5 million for the comparable 1998 period. This
increase was due primarily to an increase in the minimum wage in California,
the opening of ten restaurants, which require higher labor utilization during
the first ninety days, and increased staffing requirements resulting from the
increase in guest volume. As a percentage of net sales, labor expense for the
fiscal year ended September 30, 1999 increased to 30.3% from 29.5% in the
comparable 1998 period, primarily due to increased employee hourly wage rates.
OCCUPANCY AND OTHER. Occupancy and other operating costs for the fiscal year
ended September 30, 1999 increased 12.3% to $27.3 million from $24.3 million
for the comparable 1998 period. Occupancy and other operating costs as a
percentage of net sales decreased to 20.7% from 23.1% for the comparable 1998
period. This was primarily due to an increase in 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 fiscal year ended September 30, 1999 increased 20.6% to $8.2 million from
$6.8 million for the comparable 1998 period. 4.5% of this increase was due to
personnel costs of and 16.1% of this cost was due to costs associated with
supporting stores in new regions. As a percentage of net sales, general and
administrative expenses were 6.2%, which approximated the comparable 1998
period.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the fiscal
year ended September 30, 1999 increased 28.8% to $9.4 million from $7.3 million
for the comparable 1998 period. Depreciation increased 18.1% due primarily to
the additional restaurants open for the entire year, more restaurants owned
versus leased and the ten new restaurants opened since the comparable 1998
period. The 10.7% increase in amortization expense was due to the increase in
the number of months of amortization expense in fiscal 1999 due to stores open
in fiscal 1998 and 1999. Depreciation and amortization as a percentage of net
sales increased to 7.2%, from 6.6% for the comparable 1998 period due to the
depreciation and amortization associated with the opening of ten restaurants
during the 1998 and 1999 period.
INTEREST INCOME. Interest income for the fiscal year ended September 30, 1999
decreased 51% to $111,000 from $227,000 for the comparable 1998 period.
Interest income decreased due to less cash on hand during the 1999 year.
INTEREST EXPENSE. Interest expense for the fiscal year ended September 30,
1999 decreased 20% to $1.6 million from $2.0 million for the comparable 1998
period. Interest expense decreased due primarily to an increase in interest
capitalized of $.4 million related to construction of new restaurants in fiscal
1999.
FISCAL 1998 VERSUS FISCAL 1997
NET SALES. Net sales for the fiscal year ended September 30, 1998 increased
21.8% to $110.0 million from $90.3 million for the comparable 1997 period.
This was due primarily to a 7.5% increase in comparable restaurant sales which
resulted from an increase in guest volume of 5.2% and in average meal price of
2.3% and the addition of eight new stores that opened in fiscal 1998.
COST OF SALES. Cost of sales increased 21.7% to $28.6 million for the fiscal
year ended September 30, 1998 from $23.5 million for the comparable 1997
period. As a percentage of net sales, cost of sales was 26.0% which
approximates the comparable 1997 period.
21
LABOR. Labor expense for the fiscal year ended September 30, 1998 increased
24.5% to $32.5 million from $26.1 million for the comparable 1997 period. This
increase was due primarily to an increase in the minimum wage and associated
benefits based on wages. The remainder of the increase was due to increased
staffing requirements resulting from the increase in guest volume during the
period. As a percentage of net sales, labor expense for the fiscal year ended
September 30, 1998 increased to 29.5% from 29.0% in the comparable 1997 period.
OCCUPANCY AND OTHER. Occupancy and other operating costs for the fiscal year
ended September 30, 1998 increased 16.8% to $24.3 million from $20.8 million
for the comparable 1997 period. Occupancy and other operating costs as a
percentage of net sales decreased to 22.1% from 23.1% for the comparable 1997
period. This was due primarily to lower occupancy cost in the newer regions.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for
the fiscal year ended September 30, 1998 increased 19.3% to $6.8 million from
$5.7 million for the comparable 1997 period. This was due primarily to the
increased personnel and relocation costs associated with opening stores in new
regions. As a percentage of net sales, general and administrative expenses
decreased to 6.2% from 6.3% for the comparable 1997 period.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the fiscal
year ended September 30, 1998 increased 19.7% to $7.3 million from $6.1 million
for the comparable 1997 period. This increase was due primarily to depreciation
and amortization for the new restaurants opened since the comparable 1997
period. Depreciation and amortization as a percentage of net sales decreased
to 6.5%, from 6.7% for the comparable 1997 period due to high sales volume.
INTEREST INCOME. Interest income for the fiscal year ended September 30, 1998
increased 114.2% to $227,000 from $106,000 for the comparable 1997 period.
Interest income increased due primarily to higher cash balances associated with
the sale of the Company's common stock during the 1998 fiscal year.
INTEREST EXPENSE. Interest expense for the fiscal year ended September 30,
1998 increased 23.5% to $2.1 million from $1.7 million for the comparable 1997
period. Interest expense increased due primarily to interest associated with
borrowing on the line of credit during the year.
QUARTERLY RESULTS AND SEASONALITY
The following table sets forth certain unaudited quarterly results and the
percentage that certain items in the Company's statements of operations bear to
net sales for the four quarters of fiscal 1998 and 1999. The Company believes
that this unaudited quarterly information includes all adjustments, consisting
only of normal recurring adjustments and accruals, necessary for a fair
presentation of the information shown. The operating results for any quarter
are not necessarily indicative of results for any future period.
Fiscal 1998 Fiscal 1999
------------------------------------- -------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
(Dollars in thousands)
STATEMENT OF
OPERATIONS DATA:
Net Sales............. $23,903 $27,836 $28,030 $30,280 $28,448 $32,900 $34,055 $36,541
Operating income...... 1,387 2,752 3,197 3,244 1,806 3,445 3,866 4,025
Net income............ 586 1,318 1,650 1,764 841 1,841 2,055 2,167
AS A PERCENTAGE
OF NET SALES:
Operating income...... 5.8% 9.9% 11.4% 10.7% 6.3% 10.5% 11.4% 11.0%
Net income............ 2.5 4.7 5.9 5.8 3.0 5.6 6.0 5.9
SELECTED OPERATING DATA:
Number of salad buffet
restaurants open at
end of period......... 51 52 52 57 58 61 62 67
Percentage change in
comparable restaurant
sales (1)............. 9.8% 5.8% 7.0% 7.9% 5.3% 5.3% 3.0% 1.6%
(1) Comparable restaurant sales are computed on a monthly basis and then
aggregated to determine comparable restaurant sales on a quarterly or
annual basis. A restaurant is included in this computation after it has
been open for 15 full calendar months. As a result, a restaurant may be
included in this computation for only a portion of a given quarter or year.
22
The Company's restaurants experience seasonal influences, as a
disproportionate amount of the Company's net income is realized during the
second, third and fourth fiscal quarters due to higher average sales and lower
average costs. Quarterly results have fluctuated and are expected to continue
to fluctuate as a result of a number of factors, including the timing of new
restaurant openings, and are not necessarily indicative of the results that may
be achieved for a full fiscal year.
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 sale
of Common Stock. The Company does not have significant receivables or
inventory, and receives trade credit based upon negotiated terms when
purchasing food and supplies. For the year ended September 30, 1999, the
Company generated $18.1 million in cash flow from operating activities,
received $24.9 million from bank debt and equipment financing offset by
payments of $5.6 million, and received $1.9 million from the sale of the
Company's Common Stock pursuant to stock options and the Company's Employee
Stock Purchase Plan and offset by the payment of $1.9 million for repurchase of
the Company's Common Stock.
As of September 30, 1999, the Company had available $5 million of the $10
million bank line of credit. Such credit line bears interest at the bank's
reference rate plus 0.75%, which totaled 9.0% per annum as of September 30,
1999. The credit agreement will expire on November 1, 1999 and contains various
financial covenants and restrictions, including restrictions on the Company's
ability to pay dividends or to effect mergers or acquisitions without the
bank's approval. Borrowings under the line of credit are collateralized by
equipment and other assets. In connection with the development of new
restaurants, the Company has over time obtained mortgage and equipment
financing from approximately nine lenders, each of which has financed multiple
loans. The outstanding balance of each loan generally is between $100,000 and
$1.8 million. The loans have varying maturity rates extending through August
2004, interest rates generally ranging from 7.52% through 10.25% with an
average interest rate of 8.99% per annum, and in certain cases, pre-payment
penalties of one to two percent. As of September 30, 1999, the outstanding
balances on such loans aggregated approximately $29.2 million.
The Company's principal capital requirement has been and will continue to be
funding the development of restaurants. For year ended September 30, 1999,
capital expenditures totaled $36.5 million, $30.7 million of which funded the
development of new restaurants. The remaining capital expenditures primarily
funded replacements and new additions at existing restaurants. In addition to
budgeted capital expenditures for fiscal 2000 of $31.9 million for new
restaurant openings the Company budgeted $2.4 million in expenditures for
fiscal 2000 for capital improvements at existing sites. See "Business-Unit
Economics."
The Company believes that (i) internally generated funds, (ii) available
borrowings under the bank credit line ,(iii) funds that it will be able to
borrow pursuant to secured credit facilities consistent with its past practices
and (iv) sale lease back of some of it's owned properties will be sufficient to
meet the Company's cash requirements through at least the end of fiscal 2000.
If these sources of financing are insufficient to satisfy the Company's
liquidity requirements, the Company may be required to sell additional equity
or debt securities or obtain additional credit facilities. There is no
assurance that financing will be available to the Company on favorable terms,
or at all.
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,
23
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 has addressed and will continue
to address the year 2000 issue, including efforts relating to IT systems and
embedded chip equipment used within 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 were
upgraded during the third calendar quarter of 1999. Remaining operating
systems were completed during the fourth calendar quarter of 1999. The Company
has completed its review of embedded chip equipment and believes it is year
2000 compliant. The Company believes that its systems and software are year
2000 ready.
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 limited information and no assurance of the year 2000 readiness of
third parties.
The Company has 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 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 has implemented and will continue to monitor the changes
that have been made to address the year 2000 issue for IT Systems and embedded
chip equipment used within the Company. The Company presently believes that,
with modifications that have been made 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 were not sufficient, 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 based on 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.
24
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.
IMPACT OF INFLATION
The primary inflationary factors affecting the Company's operations include
food and beverage and labor costs. The Company does not believe that inflation
has materially affected earnings during the past four years. Substantial
increases in costs and expenses, particularly food, supplies, labor and
operating expenses, could have a significant impact on the Company's operating
results to the extent that such increases cannot be passed along to guests.
NEW ACCOUNTING STANDARD
In April 1998, the Accounting Standards Executive Committee issued Statement
of Position (SOP) 98-5, "Reporting on the Costs of Start-up Activities." This
SOP requires that the costs of start-up activities, which 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 September
30, 1999 balance were $2.0 million, net. The Company will adopt SOP 98-5
effective October 1, 1999. Upon adoption effective October 1, 1999, 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.
25
BUSINESS RISKS
IN ADDITION TO OTHER INFORMATION IN THIS FORM 10-K, 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, 1998 and 1999, the Company experienced an increase of 4.7%,
7.5% and 3.7% respectively, in comparable restaurant sales. The Company's
newer restaurants have not historically experienced significant increases in
guest volume following their initial opening period. In addition, the Company
does not believe it has significant latitude to achieve comparable restaurant
sales growth through price increases. As a result, the Company does not believe
that recent comparable restaurant sales 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 may be modest. See "Selected
Financial Data."
EXPANSION RISKS
The Company opened seven salad buffet restaurants in fiscal 1997, eight in
fiscal 1998 and ten in fiscal 1999. The Company currently intends to open
twenty restaurants in fiscal 2000. The Company may experience difficulty in
opening twice the number of restaurants opened in fiscal 1999, including but
not limited to hiring qualified restaurant managers and the added burden on the
administrative staff. 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,
qualified managers, negotiate acceptable leases 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. In addition,
since its inception, the Company has closed three non-performing restaurants.
Given the number of restaurants in current operation and the Company's
projected expansion rate, there can be no assurances that the Company will not
close restaurants in the future. Any closure could result in a significant
write-off of assets, which could adversely effect the Company's business,
financial condition and results of operations.
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 up-front capital than leased restaurants. As a result, an increase in the
percentage of owned restaurant openings as compared to historical practice
would increase the capital required to meet the Company's growth plans. There
can be no assurance that the Company will successfully expand into new regions
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. See "-Restaurant Industry and Competition," "Business-Expansion
Strategy" and "Business- Competition."
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-price, 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
26
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 which have been in existence longer than the
Company, have a more established market presence and have substantially greater
financial, marketing and other resources than the Company, which may give them
certain competitive advantages. In addition, the restaurant industry has few
non-economic barriers to entry. Therefore, there can be no assurance that third
parties will not be able to successfully imitate and implement the Company's
concept. The Company has encountered intense competition for restaurant sites,
and in many cases has had difficulty buying or leasing desirable sites on terms
that are acceptable to the Company. In many cases, the Company's competitors are
willing and able to pay more than the Company for sites. The Company expects
these difficulties in obtaining desirable sites to continue for the foreseeable
future.
COST SENSITIVITY
The Company's profitability is highly sensitive to increases in food, labor
and other operating costs. The Company's dependence on frequent deliveries of
fresh produce and groceries subjects it to the risk that shortages or
interruptions in supply caused by adverse weather or other conditions could
materially adversely affect the availability, quality and cost of ingredients.
In addition, unfavorable trends or developments concerning factors such as
inflation, food, labor and employee benefit costs (including increases in
hourly wage and minimum unemployment tax rates), rent increases resulting from
the rent escalation provisions in the Company's leases, and the availability of
experienced management and hourly employees may also adversely affect the
Company. The Company believes recent relatively favorable inflation rates and
part-time labor supplies in its principal market area have contributed to
relatively stable food and labor costs in recent years. However, there can be
no assurance that these conditions will continue or that the Company will have
the ability to control costs in the future. See "- Reliance on Key Suppliers
and Distributors," and "Business."
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. See "Business-Restaurant
Operations-Restaurant Management" and "Business- Restaurant Operations-Customer
Service."
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company's business experiences seasonal fluctuations as a
disproportionate amount of the Company's net income is generally realized in
the second, third and fourth fiscal quarters due to higher average sales and
lower average costs. Quarterly results have fluctuated 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. See "Quarterly Results
and Seasonality."
27
GEOGRAPHIC CONCENTRATION IN CALIFORNIA AND FLORIDA; RESTAURANT BASE
Twenty-eight of the Company's 71 existing salad buffet restaurants are
located in California and fifteen 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,
such as hurricanes which have occurred annually in recent years in Florida, or
other acts of God that 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 new restaurant could have a more significant effect on the
Company's result of operations than would be the case in a company with a
larger number of restaurants. See "Business-Restaurant Facilities" and
"Business-Expansion Strategy."
RELIANCE ON KEY SUPPLIERS AND DISTRIBUTORS
The Company utilizes sole source suppliers for certain produce and grocery
items. In addition, in order to minimize price fluctuations, the Company enters
into fixed price supply contracts that typically have terms of two months to
one year and generally do not have minimum purchase requirements. However, in
the event that the Company's suppliers are unable to make the required
deliveries due to shortages or interruptions caused by adverse weather or other
conditions or are relieved of their contract obligations due to an invocation
of an act of God provision, the Company would need to renegotiate these
contracts or purchase such products and groceries elsewhere. There can be no
assurance that the Company's produce and grocery costs would not as a result be
higher, and such higher costs could have a material adverse effect on the
Company's business, financial conditions and results of operations. The
Company has several local produce distributors that are governed by one program
and two main grocery distributors. All produce and groceries purchased by the
Company are channeled from the growers and other suppliers to the Company's
restaurants and restaurant commissaries through these distributors. In the
event that any of these distributors were to cease distribution on behalf of
the Company, the Company would be required to make alternate arrangements for
produce and grocery distribution. There can be no assurance that the Company's
distribution expense would not be greater under such alternate arrangements.
See "-Cost Sensitivity" and "Business-Restaurant Operations."
LEGAL MATTERS
The Company is from time to time the subject of complaints, threat letters
or litigation from guests alleging illness, injury or other food quality,
health or operational concerns. 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. The Company is party to various legal actions relating to former
employees. In the opinion of management, after reviewing the information which
is currently available with respect to these matters, and consulting with the
Company's counsel, any liability which may ultimately be incurred will not
materially affect the financial position or results of operations of the
Company. See "Legal Proceedings."
GOVERNMENT REGULATION
The Company's business is subject to and affected by various federal, state
and local laws. Each restaurant must comply with state, county and municipal
licensing and regulation requirements relating to health, safety, sanitation,
building construction and fire prevention. In addition, the Company is required
to comply with the alcohol licensing requirements of the federal government,
states and municipalities where its restaurants are located. Typically,
licenses must be renewed annually and may be revoked or suspended for cause at
any time. Alcoholic beverage control regulations relate to numerous aspects of
the daily operations of the Company's restaurants, including minimum age of
guests and employees, hours of operation, advertising, wholesale purchasing,
inventory control and handling, storage and dispensing of alcoholic beverages.
Failure to comply with
28
federal, state or local regulations could cause the Company's licenses to be
revoked or force it to terminate the sale of alcoholic beverages at one or more
of its restaurants. Difficulties in obtaining or failure to obtain required
licenses or approvals could delay or prevent the development of additional
restaurants. The Company has not experienced significant difficulties in
obtaining licenses and approvals to date; however, beer and wine licenses are
not always available to the Company as a result of the location of certain of
its restaurants.
The Company is subject to state "dram-shop" laws and regulations, which
generally provide that a person injured by an intoxicated person may seek to
recover damages from an establishment that wrongfully served alcoholic
beverages to such person. While the Company carries liquor liability coverage
as part of its existing comprehensive general liability insurance, there can be
no assurance that it will not be subject to a judgment in excess of such
insurance coverage or that it will be able to obtain or continue to maintain
such insurance coverage at reasonable costs, or at all.
The Company's restaurants are subject to federal and state laws governing
wages, working conditions, citizenship requirements and overtime. Congress and
various states (including California) passed proposals that imposed increases
in state or federal minimum wages in 1996, 1997 and 1998. There is no assurance
that the Company will be able to continue to pass increased costs on to its
guests. The Company is subject to the Americans with Disabilities Act of 1990,
which requires certain accommodations to the Company's restaurant designs to
allow access for people with disabilities. In addition, the Company is subject
to the regulations of the Immigration and Naturalization Service ("INS").
Given the location of many of the Company's restaurants, even if the Company's
operation of those restaurants is in strict compliance with INS requirements,
the Company's employees may not all meet federal citizenship or residency
requirements, which could lead to disruptions in its work force. Additionally,
legislative proposals are currently under consideration by Congress and state
legislators to require employers to pay for health insurance for all employees.
ANTI-TAKEOVER MEASURES
Certain provisions of the Company's Restated Certificate of Incorporation
and Bylaws could have the effect of making it more difficult for a third party
to acquire, or of discouraging a third party from attempting to acquire,
control of the Company. Such provisions could limit the price that investors
might be willing to pay in the future for shares of the Company's Common Stock.
Certain of these provisions allow the Company to issue Preferred Stock with
rights senior to those of the Common Stock without any further vote or action
by the stockholders, eliminate the right of stockholders to act by written
consent and impose various procedural and other requirements that could make it
more difficult for stockholders to effect certain corporate actions. The
issuance of Preferred Stock could decrease the amount of earnings and assets
available for distribution to the holders of Common Stock and could adversely
affect the rights and powers, including voting rights, of the holders of the
Common Stock. In certain circumstances, such issuance could have the effect of
decreasing the market price of the Common Stock.
VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock has fluctuated since the
initial public offering of the Common Stock in May 1995. Quarterly operating
results of the Company and other restaurant companies, 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. See "Market for
Company's Common Equity and Related Stockholder Matters."
29
ITEM 7A. 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. As of September 30, 1999, the Company had $5.0 million in debt
outstanding under the credit facility. Based on a hypothetical 50 basis point
adverse change in prime rates, net interest expense would increase by
approximately $250,000 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 September 30, 1999.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements as of September 30, 1999 and 1998, and
for each of the three fiscal years in the period ended September 30, 1999 and
the reports of independent accountants, are included in this report as listed
in the index on page 38 of this report - Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On February 19, 1999, the Board of Directors of the Company dismissed
PricewaterhouseCoopers LLP as the independent accountants for the Company. The
reports of PricewaterhouseCoopers LLP on the Company's financial statements as
of and for the years ended September 30, 1998 and 1997 contained no adverse
opinion or disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principle.
The Company filed Form 8-K on February 26, 1999 to replace
PricewaterhouseCoopers LLP as its independent accountants.
The Company filed Form 8-K on March 5, 1999 to engage KPMG LLP as its new
independent accountants.
On April 20, 1999 the Stockholders ratified the appointment of KPMG LLP as
the Company's independent accountants.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information relating to directors of the Company is incorporated by
reference from the Company's Proxy Statement filed in connection with the
Company's Annual Meeting of Stockholders to be held March 7, 2000 as set forth
under the caption "Election of Directors." Information relating to the
executive officers of the Company is set forth in Part I, Item 1 of this Report
under the caption "Executive Officers of the Company."
ITEM 11. EXECUTIVE COMPENSATION AND OTHER MATTERS
The information relating to executive compensation is incorporated by
reference to the Proxy Statement under the caption "Executive Compensation and
Other Matters."
30
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information relating to ownership of equity securities of the Company by
certain beneficial owners and management is incorporated by reference to the
Proxy Statement under the caption "General Information --- Stock Ownership of
Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related transactions
is incorporated by reference to the Proxy Statement under the caption "Certain
Transactions."
31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
Page Number
(1) Report of Independent Accountants - KPMG LLP.................... F-1
Report of Independent Accountants - PricewaterhouseCoopers LLP.. F-2
Balance Sheets at September 30, 1998 and 1999................... F-3
Statement of Operations for the Years Ended
September 30, 1997, 1998 and 1999............................. F-4
Statement of Cash Flows for the Years Ended
September 30, 1997, 1998 and 1999............................. F-5
Statement of Shareholder's Equity for the
Years Ended September 30, 1997, 1998 and 1999................. F-6
Notes to the Financial Statements............................... F-7
Other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes
thereto.
(2) Exhibits. The Exhibits listed in the accompanying Exhibit Index are
filed or incorporated by reference as part of this Report.
(b) REPORTS ON FORM 8-K. The registrant did not file any Reports on Form
8-K during the fourth quarter of fiscal 1999.
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: December 29, 1999
GARDEN FRESH RESTAURANT CORP.
By: /s/ Michael P. Mack
----------------------
Michael P. Mack
Chief Executive Officer
President
Pursuant to the requirements of the Securities Exchange Act of 1934, the
following persons in the capacities indicated have signed this Report below on
December 29, 1999.
/s/ Michael P. Mack Chairman of the Board
--------------- Chief Executive Officer
Michael P. Mack President and Director
/s/ David W. Qualls Chief Financial Officer and Chief Accounting Officer
---------------
David W. Qualls
/s/ Edgar F. Berner Director
---------------
Edgar F. Berner
/s/ Robert A. Gunst Director
---------------
Robert A. Gunst
/s/ Michael M. Minchin, Jr. Director
---------------
Michael M. Minchin, Jr.
/s/ John M. Robbins, Jr. Director
---------------
John M. Robbins, Jr.
33
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.
23.1 Consent of Independent Accountants
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.
****** Incorporated by reference from the Exhibits with corresponding numbers
filed with the Company's Form S-8 (No 333-93359) filed December 22, 1999.