---




UNITED STATES SECURITIES AND
EXCHANGE COMMISSION


Washington, D.C. 20549





---




FORM 10-Q





(Mark One)





|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
|- |  | ------------------------------------------------------------------------------




For quarterly period ended June 30, 2002





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





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GARDEN FRESH RESTAURANT CORP.


(Exact name of registrant as specified in its charter)





Delaware

33-0028786(State or other jurisdiction of incorporation or organization)

(I.R.S. Employee Identification No.)





15822 Bernardo Center Drive, Suite A, San Diego, CA 92127


(Address of principal executive
offices)                        (Zip Code)





(858) 675-1600


(Registrants telephone number, including area code)





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17180 Bernardo Center Drive, San Diego, CA 92128


(Address of former executive
offices)                (Zip Code)





Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90


days.     Yes   x      No  ̈





The number of shares of Common Stock, $.01 par value, outstanding as of July 26, 2002 was 5,732,822. There are no other classes of common
stock.





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GARDEN FRESH RESTAURANT CORP.


FORM 10-Q





INDEX





PAGEPart I

FINANCIAL INFORMATIONItem 1:

Unaudited Financial StatementsBalance Sheets at September 30, 2001 and June 30, 2002

3Statements of Operations for the three and nine months ended June 30, 2001 and June 30, 2002

4Statements of Cash Flows for the nine months ended June 30, 2001 and June 30, 2002

5Notes to Unaudited Financial Statements

6Item 2:

Managements Discussion and Analysis of Financial Condition and Results of Operations

8Item 3:

Quantitative and Qualitative Disclosures About Market Risk

21Part II

OTHER INFORMATIONItem 1:

Legal Proceedings

22Item 2:

Changes in Securities

22Item 3:

Defaults Upon Senior Securities

22Item 4:

Submission of Matters to a Vote of Security Holders

22Item 5:

Other Information

22Item 6:

Exhibits and Reports on Form 8-K

22




2




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GARDEN FRESH RESTAURANT CORP.





BALANCE SHEETS


(Dollars in thousands, except per share amounts)





September 30, 2001

June 30, 2002(Unaudited)ASSETSCash and cash equivalents

$
165

$
9,032Inventories


8,185


9,013Other current assets


4,030


3,277Total current assets


12,380


21,322Property and equipment, net


143,588


130,977Intangible and other assets


1,928


2,210TOTAL ASSETS

$
157,896

$
154,509LIABILITIES AND SHAREHOLDERS EQUITYAccounts payable

$
7,862

$
4,048Revolving line of credit


9,150


Current portion of long-term debt


10,296


14,660Accrued liabilities


10,216


10,560Total current liabilities


37,524


29,268Deferred income taxes


5,149


7,547Long-term debt, net of current portion


37,807


35,679Other liabilities


3,236


3,459Shareholders equity:Preferred stock, $.001 par value; 120,000 shares authorized at September 30, 2001 and June 30, 2002, respectively; 0
issued and outstanding at September 30, 2001 and June 30, 2002, respectively





Common stock, $.01 par value; 12,000,000 shares authorized at September 30, 2001 and June 30, 2002, respectively;
5,675,826 and 5,732,822 issued and outstanding at September 30, 2001 and June 30, 2002, respectively


57


57Additional paid-in capital


59,665


60,096Retained earnings


14,458


18,403Total shareholders equity


74,180


78,556TOTAL LIABILITIES AND SHAREHOLDERS EQUITY

$
157,896

$
154,509








See notes to unaudited financial
statements.




3




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GARDEN FRESH RESTAURANT CORP.


STATEMENTS OF OPERATIONS


(In thousands, except per share amounts)


(Unaudited)





Three months ended


Nine months endedJune 30,


June 30,2001


2002


2001


2002Net sales

$
52,103


$
55,713


$
146,784


$
159,540Costs and expenses:Costs of sales


12,907



13,526



36,348



39,154Restaurant operating expenses:Labor


16,676



17,465



47,675



50,927Occupancy and other expenses


12,332



13,115



34,635



38,807General and administrative expenses


3,213



3,237



9,755



9,860Restaurant opening costs


305



25



1,432



331Depreciation and amortization


3,241



3,423



9,170



10,171Total costs and expenses


48,674



50,791



139,015



149,250Operating income


3,429



4,922



7,769



10,290Other income (expense):Interest income


37



22



147



55Interest expense


(1,299
)


(1,138
)


(3,643
)


(3,470
)Other income (expense), net


(103
)


(19
)


1,066



(275
)Income before provision for income taxes


2,064



3,787



5,339



6,600Provision for income taxes


(805
)


(1,544
)


(2,101
)


(2,655
)Net income

$
1,259


$
2,243


$
3,238


$
3,945Basic net income per common share

$
0.22


$
0.39


$
0.57


$
0.69Shares used in computing basic net income per common share


5,676



5,718



5,668



5,698Diluted net income per common share

$
0.22


$
0.38


$
0.57


$
0.68Shares used in computing diluted net income per common share


5,695



5,975



5,683



5,797














See notes to unaudited financial statements




4




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GARDEN FRESH RESTAURANT CORP.


STATEMENTS OF CASH FLOWS


(Dollars in thousands)


(Unaudited)





Nine months endedJune 30, 2001


June 30, 2002Cash flows from operating activities:Net income

$
3,238


$
3,945Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization


9,170



10,171Loss on disposal of property and equipment


243



353Provision for deferred income taxes


1,886



2,398Amortization of deferred gain on sale-leaseback of properties


(26
)


(37
)Changes in operating assets and liabilities:Inventories


(1,031
)


(828
)Other current assets


(3,733
)


753Intangible and other assets


(304
)


(305
)Accounts payable


498



(3,109
)Accrued liabilities


2,727



330Other liabilities


99



1Net cash provided by operating activities


12,767



13,672Cash flows from investing activities:Acquisitions of property and equipment:New restaurant development


(20,826
)


(2,780
)Existing restaurant additions and other capital improvements


(6,517
)


(4,287
)Decrease in construction costs included in accounts payable


(1,458
)


(805
)Proceeds from sale-leaseback transactions


9,985



9,550Net cash provided by (used in) investing activities


(18,816
)


1,678Cash flows from financing activities:Repayments under line of credit


(3,500
)


(450
)Proceeds from long-term debt


17,441



7,719Repayment of short-term loan






(5,700
)Repayment of long-term debt


(8,060
)


(8,483
)Net proceeds from issuance of common stock


155



431Net cash provided by (used in) financing activities


6,036



(6,483
)Net increase (decrease) in cash and cash equivalents


(13
)


8,867Cash and cash equivalents at beginning of period


2,058



165Cash and cash equivalents at end of period

$
2,045


$
9,032Supplemental disclosure of noncash investing and financing transactions:Property and equipment asset purchases in accounts payable

$
993


$
100Replacement of line of credit with short-term debt





$
8,700








See notes to unaudited financial
statements.




5




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GARDEN FRESH RESTAURANT CORP.


NOTES TO UNAUDITED FINANCIAL STATEMENTS





|1. |  | UNAUDITED FINANCIAL STATEMENTS
|-- |  | ------------------------------




The accompanying financial statements have been prepared by Garden Fresh Restaurant Corp. (the Company) without audit and reflect all adjustments, consisting of normal recurring
adjustments, which are, in the opinion of management, necessary for a fair statement of financial position and the results of operations for the interim periods. The statements have been prepared in accordance with the regulations of the Securities
and Exchange Commission and do not necessarily include certain information and footnote disclosures necessary to present the statements in accordance with accounting principles generally accepted in the United States of America. For further
information, refer to the financial statements and notes thereto for the fiscal year ended September 30, 2001 included in the Companys Form 10-K as filed with the Securities and Exchange Commission.





|2. |  | NET INCOME PER COMMON SHARE
|-- |  | ---------------------------




Basic net income per common share is computed based on the weighted average number of common shares outstanding during the period. Diluted net income per common share is computed based on the weighted
average number of common shares and dilutive potential common shares, which includes options under the Companys stock option plans computed using the treasury stock method and common shares expected to be issued under the Companys
Employee Stock Purchase Plan.





Potential issuances of common stock of 19,000 and 257,000 shares
for the three month periods ended June 30, 2001 and 2002, respectively, and 15,000 and 99,000 shares for the nine month periods ended June 30, 2001 and 2002, respectively, were used to calculate diluted net income per common share. There were no
reconciling items in calculating the numerator for basic and diluted net income per common share for either of the periods presented. Shares related to stock options of 1,074,000 and 354,000 for the three month periods ended June 30, 2001 and 2002,
respectively, and 944,000 and 430,000 shares for the nine month periods ended June 30, 2001 and 2002, respectively, were excluded from the calculation of diluted net income per common share, as the effect of their inclusion would be anti-dilutive.





|3. |  | SETTLEMENT OF INSURANCE CLAIM
|-- |  | -----------------------------




The Company recorded other income of $1,284,000 during the first quarter of fiscal 2001 related to the settlement of an insurance claim for the loss of assets in a fire at the Companys Point Loma
restaurant in December 1999.





|4. |  | PREPARATION OF FINANCIAL STATEMENTS
|-- |  | -----------------------------------




The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.





|5. |  | SALE LEASE-BACK TRANSACTIONS
|-- |  | ----------------------------




During the quarter ended December 31, 2001, the Company entered into two sale-leaseback transactions whereby the Company sold and leased back the land and building for two separate restaurant sites.
The Company received net proceeds of $4.9 million for the two transactions and recorded deferred gains of $131,000. The gains are being amortized over the respective lease terms of 20 years. The related leases are being accounted for as operating
leases. There were no sale lease-back transactions during the quarter ended March 31, 2002.




6




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GARDEN FRESH RESTAURANT CORP.





NOTES TO UNAUDITED FINANCIAL STATEMENTS(Continued)




During the quarter ended June 30, 2002, the Company entered into two sale-leaseback
transactions whereby the Company sold and leased back the land and building for two separate restaurant sites. The Company received net proceeds of $4.6 million for the two transactions and recorded deferred gains of $154,000. The gains are being
amortized over the respective lease terms of 20 years. The related leases are being accounted for as operating leases.





|6.    NEW |  | CREDIT AGREEMENT
|--------- |  | ----------------




During the quarter ended December 31, 2001, the Company made repayments of $0.5 million towards its line of credit and converted the remaining balance of $8.7 million to a new credit agreement with the
bank consisting of two term loans in the amount of $6.0 million due December 31, 2002, and $2.7 million which became due June 30, 2002. The new term loans bear interest at either the prime rate or LIBOR plus 2.0%, and prime rate or LIBOR plus 2.5%,
respectively, and are collateralized by equipment and other assets of the Company. As of March 31, 2002, the Company repaid the entire remaining balance of the $2.7 million term loan. During the third quarter of fiscal 2002, the Company made
repayments totaling $3.0 million towards the $6.0 million note. According to the terms of the agreement, the Company is required to repay the remaining unpaid balance of $3.0 million under this agreement during the first quarter of fiscal 2003.




7




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GARDEN FRESH RESTAURANT CORP.





STATEMENT OF OPERATING DATA





ITEM 2:    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS


INTRODUCTION





The statements contained in this Form 10-Q that are not
purely historical are forward looking statements, including statements regarding the Companys expectations, hopes, beliefs, intentions or strategies regarding the future. Statements which use words such as expects,
will, may, could, anticipates, believes, intends, attempts, and seeks are forward looking statements. These forward looking statements, including
statements regarding the Companys (i) plans to open new restaurants, (ii) plans to increase operational efficiency and improve labor utilization, (iii) budgeted capital expenditures for new restaurant openings and improvements at existing
sites, (iv) increased efficiencies resulting from its new accounting software program, (v) need to obtain additional financing, (vi) future restaurant sales, (vii) ability to compete against other companies, and (viii) strategic marketing programs
and effects of such programs are all based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward looking statements. 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, while the Companys plans to increase operational efficiency could be affected by difficulties in assimilating new accounting software as well as escalating costs of both
utilities and fuel, as well as increased labor costs for the distribution center.





CRITICAL ACCOUNTING POLICIES





In response to the SECs Release Numbers 33-8050 Cautionary Advice Regarding Disclosure About Critical Accounting
Policies and 33-8056, Commission Statement about Managements Discussion and Analysis of Financial Condition and Results of Operations, we have identified the following critical accounting policies that affect the more
significant judgments and estimates used in the preparation of our unaudited financial statements. The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires us to
make estimates and judgments that affect our reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to
impairment of long-lived assets, accruals for workers compensation insurance, and contingencies and litigation. These estimates are based on the information that is currently available to us and on various other assumptions that we believe to be
reasonable under the circumstances. Actual results could vary from those estimates under different assumptions or conditions.





We believe that the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our unaudited financial statements:





| |  |  | The Company periodically assesses the impairment of long-lived assets to be held for use based on expectations of future undiscounted cash flows from the
related operations, and when circumstances dictate, adjusts the asset to the extent the carrying value exceeds the fair value of the asset. In September 2001, the Company determined that it would close its Slurp! restaurant and its remaining Ladles
restaurants due to poor operating performance. The Company recorded an accrual of $204,000 at September 30, 2001, representing the present value of the estimated net future lease payments associated with the planned closures of these restaurants. Of
this amount, $80,000 was recorded as accrued liabilities and $124,000 was recorded as other long-term liabilities. Cash payments in the
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



8




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amount of $77,000 were made during the first nine months of fiscal 2002 to reduce the liabilities. Should the Company incur unexpected additional expenses related to the exit of the leases
related to these locations, additional accruals may be required.





| |  |  | The Company maintains an accrual for workers compensation and general liability insurance which is recorded in the accrued liabilities section of our balance
sheets. We determine the adequacy of this accrual by evaluating periodically our historical experience and trends and industry experience and trends related to insurance claims and payments. If such information indicates that our accruals are
overstated or understated, we will adjust the assumptions utilized in our methodologies and reduce or provide for additional accruals as appropriate. An increase or decrease to this accrual would result in an increase or decrease to the
Companys employee benefits expense, respectively, which would affect the Companys results of operations.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | The Company is subject to various claims and legal actions in the ordinary course of business. Some of these matters include professional liability,
employee-related matters, and investigations by governmental agencies regarding our employment practices. The Company is not currently aware of any such pending or threatened litigation that it believes is reasonably likely to have a material
adverse effect on its results of operations. Should the Company become aware of such claims it will evaluate the probability of an adverse outcome and provide accruals for such contingencies as necessary.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




QUARTERLY RESULTS





The following table sets forth
the percentage of net sales certain items included in the Companys statement of operations for the periods indicated. (Unaudited)





Three Months Ended


Nine Months EndedJune 30, 2001


June 30, 2002


June 30, 2001


June 30, 2002Net sales

100.0
%

100.0
%

100.0
%

100.0
%Costs and expenses:Costs of sales

24.8
%

24.3
%

24.8
%

24.5
%Restaurant operating expenses:Labor

32.0
%

31.3
%

32.5
%

31.9
%Occupancy and other expenses

23.7
%

23.5
%

23.6
%

24.3
%General and administrative expenses

6.2
%

5.9
%

6.6
%

6.2
%Restaurant opening costs

0.6
%

0.0
%

1.0
%

0.2
%Depreciation and amortization

6.2
%

6.2
%

6.2
%

6.4
%Total costs and expenses

93.5
%

91.2
%

94.7
%

93.5
%Operating income

6.5
%

8.8
%

5.3
%

6.5
%Interest income

0.1
%

0.0
%

0.1
%

0.0
%Interest expense

(2.5)
%

(2.0)
%

(2.5)
%

(2.2)
%Other income (expenses), net

(0.2)
%

(0.0)
%

0.7
%

(0.2)
%Income before income taxes

3.9
%

6.8
%

3.6
%

4.1
%Provision for income taxes

(1.5)
%

(2.8)
%

(1.4)
%

(1.7)
%Net income

2.4
%

4.0
%

2.2
%

2.4
%




9




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RESULTS OF OPERATIONS





Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001





Net
Sales.    Net sales for the three months ended June 30, 2002 increased 6.9% to $55.7 million from $52.1 million for the comparable 2001 period. This increase was primarily due to the opening of four restaurants since the
comparable 2001 period and the increase in comparable restaurant sales of 2.9%. The same store sales increase is due to increased same store guest counts of 0.3% combined with a 2.6% increase in same store average meal price since the comparable
2001 period. See Business RisksCertain Operating Results and Considerations.





Costs of
Sales.    Costs of sales for the three months ended June 30, 2002 increased 4.7% to $13.5 million from $12.9 million for the comparable 2001 period. This increase was due to the addition of four restaurants opened since the
comparable 2001 period. As a percentage of net sales, cost of sales decreased 0.5 percentage points to 24.3% from 24.8% since the comparable 2001 period. The decrease as a percentage of net sales is the result of higher net sales and efficiencies
achieved through the utilization of the East Coast distribution center resulting in lower food costs. See Business RisksReliance on Key Suppliers and Distributors.





Labor Expense.    Labor expense for the three months ended June 30, 2002 increased 4.8% to $17.5 million from $16.7 million for the comparable
2001 period. This increase was due primarily to an increase in the minimum wage in California and the addition of four restaurants opened since the comparable 2001 period. As a percentage of net sales, the labor expense decreased 0.7 percentage
points to 31.3% from 32.0% since the comparable 2001 period as a result of higher net sales since the third quarter of fiscal 2001 and to programs put in place to better utilize crew labor hours and reduce the number of managers in each store. See
Business RisksMinimum Wage.





Occupancy and Other
Expenses.    Occupancy and other expenses for the three months ended June 30, 2002 increased 6.5% to $13.1 million from $12.3 million for the comparable 2001 period. This increase is due primarily to the opening of four
new restaurants since the third quarter of fiscal 2001. Occupancy and other expenses as a percentage of net sales decreased 0.2 percentage points to 23.5% from 23.7% for the comparable 2001 period. The decrease as a percentage of net sales is the
result of higher net sales since the third quarter of fiscal 2001 and to reduced spending as a result of programs put in place to better manage other operating expenditures, but was partially offset by higher property insurance costs as a result of
increased rate pressure throughout the insurance industry, increases in base rent associated with sale-leasebacks, and repair and maintenance costs for aging restaurants. The Company anticipates occupancy and other expenses will continue to increase
as it continues to experience escalating insurance costs. Further, the Company anticipates that it will experience higher repair and maintenance expense related to its aging restaurant base. Such expenses will be partially offset by decreased
depreciation expense related to the older assets reaching the end of their useful lives. Should the Company undertake additional sale-leasebacks of existing sites it would incur increases in base rent related to new leases at those sites. See
Business RisksPlanned Operating Expenditures.





General and Administrative
Expenses.    General and administrative expenses remained consistent at $3.2 million for the three month periods ending June 30, 2002 and 2001. As a percentage of net sales, general and administrative expenses decreased
0.3 percentage points to 5.9% from 6.2% for the comparable 2001 period. The decrease as a percentage of net sales is the result of higher net sales which were attributable to increases in same store sales and as a result of programs put in place to
better manage general and administrative expenditures.





Restaurant Opening
Costs.    Restaurant opening costs for the three months ended June 30, 2002 decreased 91.8% to $25,000 from $305,000 for the comparable 2001 period. Restaurant opening costs as a percentage of net sales were less than 0.1%
for the quarter ended June 30, 2002 compared to 0.6% for the comparable 2001




10




---

period. The decrease is consistent with the Companys reduction in restaurant opening activity for the quarter ended June 30, 2002 compared to the quarter ended June 30, 2001 (no new
restaurants were opened during the 2002 period compared to the opening of three new restaurants during the 2001 period).





Depreciation and Amortization.    Depreciation and amortization for the three months ended June 30, 2002 increased 6.3% to $3.4 million from $3.2 million for the comparable 2001 period. Depreciation and
amortization as a percentage of net sales remained consistent at 6.2% for the three-month periods ended June 30, 2002 and 2001. The increase in expense is the result of the opening of four new restaurants since the third quarter of fiscal 2001 and
to depreciation expense related to the new accounting software package, partially offset by decreased depreciation expense associated with the sale-leaseback of five restaurant locations since the comparable 2001 period.





Interest Income.    Interest income for the three months ended June 30, 2002 decreased 40.5% to $22,000 from
$37,000 for the comparable 2001 period as a result of lower interest rates combined with decreased investing activity of available cash.





Interest Expense.    Interest expense for the three months ended June 30, 2002 and 2001 decreased 15.4% to $1.1 million from $1.3 million for the comparable 2001 period as a result of lower
interest rates and to the reduction in debt balances since the same period in the prior fiscal year.





Other
Income (Expense), net.    Other income (expense), net for the three months ended June 30, 2002 decreased 81.6% to ($19,000) from ($103,000) for the comparable 2001 period as a result of fewer write-offs of aging equipment
during the three months ended June 30, 2002 compared to the same period in fiscal 2001.





Provision for Income
Taxes.    Income tax expense for the three months ended June 30, 2002 increased 87.5% to $1.5 million compared to $0.8 million for the comparable 2001 period. This increase is primarily due to increased taxable earnings
during the 2002 period combined with an increase in the Companys effective income tax rate during the same period. The Companys effective tax rate for the three months ended June 30, 2002 increased 1.8 percentage points to 40.8% from
39.0% for the quarter ended June 30, 2001 as a result of higher apportionment of taxable earnings to states such as California and Illinois that have greater marginal income tax rates. The Company anticipates that it will continue to experience the
effects of apportionment on its taxable earnings should its growth plans result in the expansion of its operations into states with greater marginal income tax rates.





Nine Months Ended June 30, 2002 Compared to Nine Months Ended June 30, 2001





Net Sales.    Net sales for the nine months ended June 30, 2002 increased 8.7% to $159.5 million from $146.8 million for the comparable 2001 period. This increase was primarily due to the opening
of four restaurants since the comparable 2001 period and the increase in comparable restaurant sales of 2.0%. The same store sales increase is due to an increase in same store average meal price of 1.5% combined with increased same store guest
counts of 0.5% versus the comparable 2001 period.See Business RisksCertain Operating Results and Considerations.





Costs of Sales.    Costs of sales for the nine months ended June 30, 2002 increased 8.0% to $39.2 million from $36.3 million for the comparable 2001 period. This increase was due to the addition
of four restaurants since the comparable 2001 period. As a percentage of net sales, costs of sales decreased 0.3 percentage points to 24.5% from 24.8% since the comparable 2001 period as a result of higher net sales and efficiencies achieved
through the utilization of the East Coast distribution center during the second quarter of fiscal 2002, partially offset by unfavorable purchase price variances associated with higher than planned prices with our former supplier during the first
quarter of fiscal 2002. See Business RisksReliance on Key Suppliers and Distributors.




11




---




Labor Expense.    Labor expense for the nine months
ended June 30, 2002 increased 6.7% to $50.9 million from $47.7 million for the comparable 2001 period. This increase was due primarily to an increase in the minimum wage in California and the addition of four restaurants opened since the comparable
2001 period. As a percentage of net sales, labor expense decreased 0.6 percentage points to 31.9% from 32.5% in the comparable 2001 as a result of higher net sales and to programs put in place to better utilize crew labor hours and reduce the number
of managers in each restaurant. See Business RisksMinimum Wage.





Occupancy and Other
Expenses.    Occupancy and other expenses for the nine months ended June 30, 2002 increased 12.1% to $38.8 million from $34.6 million for the comparable 2001 period. This increase is due primarily to increased costs
associated with the opening of four new restaurants since the third quarter of fiscal 2001. Occupancy and other expenses as a percentage of net sales increased 0.7 percentage points to 24.3% from 23.6% for the comparable 2001 period. This was due
primarily to higher utility costs predominantly in California, higher property insurance costs as a result of increased rate pressure throughout the insurance industry, increases in base rent associated with sale-leasebacks, and repair and
maintenance costs for aging restaurants. The Company anticipates occupancy and other expenses will continue to increase as it continues to experience escalating insurance costs. Further, the Company anticipates that it will experience higher repair
and maintenance expense related to its aging restaurant base. Such expenses will be offset by decreased depreciation expense related to the older assets reaching the end of their useful lives. Should the Company undertake additional sale-leasebacks
of existing sites it would incur increases in base rent related to new leases at those sites. See Business RisksPlanned Operating Expenditures.





General and Administrative Expenses.    General and administrative expenses for the nine months ended June 30, 2002 increased 1.0% to $9.9
million from $9.8 million for the comparable 2001 period. As a percentage of net sales, general and administrative expenses decreased 0.4 percentage points to 6.2% from 6.6% for the comparable 2001 period. The decrease as a percentage of net sales
resulted from higher net sales which were attributable to increases in comparable store sales and reduced spending as a result of programs put in place to better manage general and administrative expenditures.





Restaurant Opening Costs.    Restaurant opening costs for the nine months ended June 30, 2002 decreased 78.6%
to $0.3 million from $1.4 million for the comparable 2001 period. Restaurant opening costs as a percentage of net sales decreased 0.8 percentage points to 0.2% from 1.0% for the comparable 2001 period. These decreases are the result of fewer new
restaurant openings during the fiscal 2002 period compared to the same period in fiscal 2001. Two restaurants were opened during the first nine months of fiscal 2002 compared to seven new restaurants and one kitchen facility opened and one existing
restaurant re-opened during the first nine months of fiscal 2001.





Depreciation and
Amortization.    Depreciation and amortization for the nine months ended June 30, 2002 increased 10.9% to $10.2 million from $9.2 million for the same period in fiscal 2001. Depreciation and amortization as a percentage of
net sales increased 0.2 percentage points to 6.4% from 6.2% for the comparable period in 2001. These increases were due to additional depreciation for the four new restaurants opened since the comparable 2001 period, partially offset by
decreased depreciation expense associated with the sale-leaseback of five restaurant locations since the comparable 2001 period.





Interest Income.    Interest income for the nine months ended June 30, 2002 decreased 62.6% to $55,000 from $147,000 for the comparable 2001 period as a result of lower interest rates combined with
decreased investing activity of available cash.





Interest Expense.    Interest expense
for the nine months ended June 30, 2002 decreased 2.8% to $3.5 million from $3.6 for the comparable 2001 period as a result of lower interest rates and to the reduction in debt balances since the same period in the prior fiscal year.




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Other Income (Expense), net.    Other income
(expense), net for the nine months ended June 30, 2002 was ($0.3 million) compared to $1.1 million for the comparable 2001 period. This decrease resulted primarily from the insurance settlement related to the loss of assets in a fire at a restaurant
in San Diego, California that was recorded during the first quarter of fiscal 2001.





Provision for
Income Taxes.    Income tax expense for the nine months ended June 30, 2002 was $2.7 million compared to $2.1 million for the comparable 2001 period. This increase is primarily due to increased taxable earnings during
the 2002 period combined with an increase in the Companys effective income tax rate during the same period. The Companys effective tax rate for the nine months ended June 30, 2002 increased 0.8 percentage points to 40.2% from 39.4% for
the comparable period in fiscal 2001 as a result of higher apportionment of taxable earnings to states such as California and Illinois that have greater marginal income tax rates. The Company anticipates that it will continue to experience the
effects of apportionment on its taxable earnings should its growth plans result in the expansion of its operations into states with greater marginal income tax rates.





LIQUIDITY AND CAPITAL RESOURCES





The Companys
principal capital requirement has been for both funding the development of new restaurants and improving existing restaurants. The Company finances its cash requirements principally from cash flows from operating activities, bank debt, mortgage
financing, equipment lease financing, sale-lease back of owned properties and sale of Company stock. The Company does not have significant receivables and receives trade credit based upon negotiated terms when purchasing food and supplies.





Capital expenditures totaled $7.9 million during the first nine months of fiscal 2002 and $28.8 million for the
comparable period in fiscal 2001. During the first nine months of fiscal 2002, the Company made capital expenditures of $3.2 million for the opening of two new restaurants and the construction of future additional restaurants and $0.4 million for a
future stand-alone kitchen facility (including the decrease in construction costs included in accounts payable) and $4.3 million for capital improvements at existing sites. For the first nine months of fiscal 2001, the Company paid $22.3 million for
the opening of seven new restaurants and the re-opening of one existing restaurant (including the decrease in construction costs included in accounts payable), and paid $6.5 million for capital improvements at existing restaurants. The cash
investment to open a new restaurant excludes restaurant opening costs and 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.





During the first nine months of fiscal 2002, the Company obtained $13.7 million in cash flows from
operating activities, obtained $7.7 million from long-term equipment and mortgage financing, and received proceeds from sale-lease back transactions of $9.6 million. For the first nine months of fiscal 2002, the Company made repayments of
$8.5 million towards its long-term debt obligations. In addition, during the first quarter of fiscal 2002, the Company made repayments of $0.5 million towards its line of credit and converted the remaining balance of $8.7 million into a
new short-term credit agreement with the bank consisting of two term loans in the amounts of $6.0 million and $2.7 million, due December 31, 2002 and June 30 2002, respectively. As of June 30, 2002 the Company repaid the entire balance of the
$2.7 million term loan and repaid $3.0 million towards the $6.0 million note. The Company is required to repay the remaining unpaid balance of $3.0 million by December 31, 2002.





The Companys original capital budget for fiscal 2002 totaled $17.4 million for the completion of four new restaurants and the development of the new corporate office
($9.8 million), capital improvements for existing facilities ($5.8 million) and the development of a stand-alone kitchen facility ($1.8 million). During the first nine months of fiscal 2002, the Company reduced the number of stores it plans to open
from four to two, reducing the capital budget for new store openings and the development of the new corporate office by $4.0 million to $5.8 million. For the one remaining quarter of fiscal 2002 the Company has a residual budget for capital




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expenditures in the amount of $2.6 million related to new store openings and the development of the new corporate office, $1.4 million for the development of the kitchen facility, and $1.5
million for capital improvements at existing sites. The development of the new corporate office was in process as of June 30, 2002 and was completed during July 2002. The Company currently does not have plans to open any additional restaurants
in fiscal 2002. See Business RisksExpansion Risks.





In addition to funds generated from
operations, the Company will need to obtain external financing in the form of sale-lease back of owned properties and long-term debt financing to complete its plans for expansion through new restaurants and improvements to existing restaurants for
fiscal year 2003 and beyond. There can be no assurance that such funds will be available when needed and should the Company not be able to obtain such financing it may be forced to severely curtail the development of new restaurants at its desired
pace or at all and to make improvements to existing restaurants. Additionally, should the Companys results of operations decrease it may not have the ability to pay the current portion of its debt of $14.7 million, which includes the $3.0
million note balance which is due under the short term credit agreement with the bank at the end of Q1, fiscal 2003. See Business RisksCapital Requirements.





As of June 30, 2002, the Company operated 95 restaurants. The Company currently owns the land or land and buildings for 27 restaurants, including the land for certain sites
the Company expects to open during the balance of fiscal 2002 and 2003. During the first nine months of fiscal 2002, the Company opened one owned site, one leased site, one leased warehouse facility and completed sale-lease backs for four sites.





The restaurant opening costs incurred during the first nine months of fiscal 2002 for the opening of two new
restaurants, one warehouse facility and the construction of future additional restaurants during the nine month period ending June 30, 2002 was $0.3 million. For restaurant sites planned to open in fiscal 2002 and 2003 the Company has signed three
leases, and purchased three sites. See Business RisksExpansion Risks.





IMPACT OF INFLATION





The primary inflationary factors affecting the Companys operations include food and beverage and labor costs. Minimum
wage increases have affected earnings during the current fiscal year. Substantial increases in costs and expenses, particularly food, supplies, labor, utilities, 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.





OTHER





The Company is not a party to off-balance sheet arrangements, does not engage in trading activities involving non-exchange traded
contracts, and is not a party to any transaction with persons or activities that derive benefits from their non-independent relationships with the Company.





NEW ACCOUNTING STANDARDS





In July 2001, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards No. 141 (SFAS No. 141), Business Combinations, and Statement No. 142 (SFAS  No. 142), Goodwill and Other Intangible Assets. SFAS No. 141 supersedes
APB Opinion No. 16, Business Combinations and SFAS No. 38, Accounting for Preacquisition Contingencies of Purchased Enterprises and eliminates pooling-of-interests accounting prospectively. SFAS No. 141 was adopted on July 1,
2001. SFAS  No. 142 supersedes APB Opinion No. 17, Intangible Assets and changes the accounting for goodwill from an amortization method to an impairment-only approach. Under SFAS No. 142, goodwill will be tested annually and
whenever events or circumstances occur indicating that goodwill might be impaired. The provisions of SFAS No. 142 are required to be applied starting with fiscal years beginning after December 15, 2001. Upon adoption of SFAS No. 142, amortization of
goodwill recorded for business combinations consummated prior to July 1, 2001 will cease, and intangible assets acquired prior to July 1, 2001 that do not meet the criteria for recognition




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under SFAS No. 141 will be reclassified to goodwill. The adoption of SFAS No. 141 did not have an impact on the Companys financial position or results of operations. The Company will adopt
SFAS No. 142 on October 1, 2003. At this time, the Company does not anticipate that the adoption of SFAS No. 142 will have a material effect on the Companys financial statements.





In August 2001, the FASB issued Statement of Financial Accounting Standards No. 143 (SFAS No. 143), Accounting for Asset Retirement Obligations, which addresses
financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and for the associated asset retirement costs. The standard applies to tangible long-lived assets that have a legal obligation associated
with their retirement that results from the acquisition, construction or development or normal use of the asset. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it
is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the remaining life of the asset. The
liability is accreted at the end of each period through charges to operating expense. The provisions of SFAS No. 143 are required to be applied during the quarter ending December 31, 2003. To accomplish this, the Company must identify all legal
obligations for asset retirement obligations, if any, and determine the fair value of these obligations on the date of adoption. The determination of fair value is complex and will require the Company to gather market information and develop cash
flow models. Additionally, the Company will be required to develop processes to track and monitor these obligations. At this time, the Company does not anticipate that the adoption of SFAS No. 143 will have a material effect on the Companys
financial statements.





In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144 (SFAS
No. 144), Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS No. 144 supersedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, it retains many of the fundamental provisions of SFAS No. 121, including the recognition and measurement of the impairment of long-lived
assets to be held and used, and the measurement of long-lived assets to be disposed of by sale. SFAS No. 144 also supersedes the accounting and reporting provisions of Accounting Principles Board Opinion No. 30 (APB No. 30), Reporting the
Results of OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. However, it retains the
requirement in APB No. 30 to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale.
SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. At this time, the Company does not anticipate that the adoption of SFAS No. 144 will have a material effect on the Companys financial statements.





In April 2002 the FASB issued Statement of Financial Accounting Standards No. 145 (SFAS No. 145), Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. This statement updates, clarifies and simplifies existing accounting pronouncements including: rescinding SFAS No. 4, which required all gains and
losses from extinguishments of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect and amending SFAS No. 13 to require that certain lease modifications that have economic effects similar to
sale lease-back transactions be accounted for in the same manner as sale lease-back transactions. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002 with early adoption of the provisions related to the rescission of SFAS No. 4
encouraged. The Company does not anticipate that the adoption of SFAS No. 145 will have a material effect on the Companys financial statements.





BUSINESS RISKS





The Companys business is subject to a number of risks. A
comprehensive summary of such risks can be found in the Companys Form 10-K. In addition to other information in this Form 10-Q, shareholders and prospective investors should consider carefully the following factors in evaluating the Company
and its business.




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Certain Operating Results and Considerations





In fiscal 2000 and 2001, the Company experienced an increase of 3.1% and 3.3%, respectively, in comparable restaurant sales. In the first
nine months of fiscal 2001 and 2002, the Companys comparable restaurant sales increased 4.0% and 2.0% respectively. The Companys restaurants have not historically experienced significant increases in guest volume following their initial
opening period (15 months) due to the fact that most sites open immediately at average or greater than average guest volume. As a result, the Company does not believe that recent comparable restaurant sales are indicative of future trends in
comparable restaurant sales. The Company believes that it may from time to time in the future experience declines in comparable restaurant sales, and that any future increases in comparable restaurant sales would be modest.





Expansion Risks





The Company opened seventeen restaurants in fiscal 2000, ten in fiscal 2001 (opening nine new restaurants and re-opening one existing restaurant), and has opened two restaurants to date in fiscal 2002, both in an existing
region in Southern California. The Company currently does not have plans to open any additional restaurants in fiscal 2002. For fiscal 2003 the Company plans to open three restaurants in existing regions. The Companys ability to achieve its
expansion plans will depend on a variety of factors, many of which may be beyond the Companys control, including the Companys ability to locate suitable restaurant sites, negotiate acceptable lease or purchase terms, obtain required
governmental approvals, construct new restaurants in a timely manner, attract, train and retain qualified and experienced personnel and management, operate its restaurants profitably and obtain additional capital, as well as general economic
conditions and the degree of competition in the particular region of expansion. The Company has experienced, and expects to continue to experience, delays in restaurant openings from time to time.





Since its inception the Company has closed three non-performing restaurants, one mini restaurant, two Ladles, A Soup and Salad
Takery locations, and its Slurp! The Soup Experience location due to poor operating performance. The first Ladles location was closed during the first quarter of fiscal 2001 and the second was closed during the first quarter of
fiscal 2002. The Slurp! restaurant was closed during the second quarter of fiscal 2002. The Company recorded an accrual of $204,000 at September 30, 2001, representing the present value of the estimated net future lease payments associated with the
planned closures of these restaurants. Of this amount, $80,000 was recorded as accrued liabilities and $124,000 was recorded as other long-term liabilities. Cash payments in the amount of $77,000 were made during the first nine months of fiscal 2002
to reduce the liabilities. Subsequent to June 30, 2002 the Company negotiated a sub-lease for the Slurp! location which will remain in effect until the Company is able to exit the lease according to the original terms. The new tenant will pay all
rents and related charges under the lease as stated in the original lease agreement.





Given the number of
restaurants in current operation and the Companys projected expansion rate there can be no assurances that the Company will not close restaurants in the future. Any closure could result in a significant write-off of assets, which could
adversely affect the Companys business, financial condition and results of operations.





The Company incurs
substantial costs in opening a new restaurant and, in the Companys experience, new restaurants experience fluctuating operational expenses for some time after opening. In the Companys experience, operational expenses tend to stabilize
over a period of three to fifteen months after a store opens. Owned restaurants generally require significantly more up-front capital than leased restaurants, as a result of which an increase in the percentage of owned restaurant openings as
compared to historical practice would increase the overall capital required to meet the Companys growth plans. There can be no assurance that the Company will successfully expand or that the Companys existing or new restaurants will be
profitable. The Company has encountered intense competition for restaurant sites, and in many cases has had difficulty buying or leasing desirable sites on terms that are acceptable to the Company. In many cases, the Companys competitors are
willing and able to pay more than the Company for sites. The Company expects these difficulties in obtaining desirable sites to continue for the foreseeable future.




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Restaurant Industry and Competition





The restaurant industry is highly competitive. Key competitive factors in the industry include the quality and value of the food products
offered, quality of service, price, dining experience, restaurant location and the ambiance of the facilities. The Companys primary competitors include mid-priced, full-service casual dining restaurants, as well as traditional self-service
buffet and other soup and salad restaurants and healthful and nutrition-oriented restaurants. The Company competes with national and regional chains, as well as individually owned restaurants. The number of buffet and casual restaurants with
operations generally similar to the Companys has grown substantially in the last several years and the Company believes competition among buffet-style and casual restaurants has increased and will continue to increase as the Companys
competitors expand operations in various geographic areas. Such increased competition could increase the Companys operating costs or adversely affect its revenues. The Company believes it competes favorably in the industry, although many of
the Companys competitors have been in existence longer than the Company, have more established market presence and have substantially greater financial, marketing and other resources than the Company, which may give them certain competitive
advantages. In addition, the restaurant industry has few non-economic barriers to entry. Therefore, there can be no assurance that third parties will not be able to successfully imitate and implement the Companys concept. The Company has
encountered intense competition for restaurant sites, and in many cases has had difficulty buying or leasing desirable sites on terms that are acceptable to the Company. In many cases, the Companys competitors are willing and able to pay more
than the Company for sites. The Company expects these difficulties in obtaining desirable sites to continue for the foreseeable future.





Capital Requirements





In addition to funds generated from operations, the Company
will need to obtain external financing in the form of sale-lease back of owned properties and long-term debt financing to complete its plans for expansion through new restaurants and improvements to existing restaurants for fiscal year 2003 and
beyond. There can be no assurance that such funds will be available when needed and should the Company not be able to obtain such financing it may be forced to severely curtail the development of new restaurants at its desired pace or at all and to
make improvements to existing restaurants. Additionally, should the Companys results of operations decrease it may not have the ability to pay the current portion of its debt of $14.7 million, which includes the remaining $3.0 million note
balance which is due under the short term credit agreement with the bank at the end of Q1, fiscal 2003.





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See Business RisksMinimum Wage), rent increases resulting from the rent escalation provisions in the Companys leases, escalating insurance costs for general liability, property and workers compensation
coverage, and the availability of experienced management and hourly employees may also adversely affect the Company. There can be no assurance to what extent that these conditions will continue or that the Company will have the ability to control
costs in the future. See Business RisksReliance on Key Suppliers and Distributors.





Minimum Wage





The Company has experienced increases in its labor expenses due to increases
in the federal minimum wage rate and in the California minimum wage rate. These increases have resulted in a decrease in the Companys profitability. The Company could be impacted by increasing wage costs in any of its markets where the minimum




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wage rate is increased. The Company is exploring strategic ideas on how to better manage labor utilization in order to minimize any potential impact from increasing wage costs. There can be no
assurance that the Company will be able to manage and absorb these increases in wage costs in the future.





Planned Operating Expenditures





The Company has incurred planned marketing expenditures
during the first three quarters of fiscal 2002 in order to implement strategic marketing programs designed to benefit the Company in subsequent quarters. Expenditures related to these programs include advertising production costs, media expenses,
and research. There can be no assurance these programs will be successful and will benefit the Company by increasing guest counts and revenues in the future. The Company continues to incur marketing expenditures related to the development of future
promotional programs designed to enhance the Companys position in the marketplace. In addition, the Company is expanding the scope of its local store marketing programs. There can be no assurance these programs will be successful and will
benefit the Company by increasing guest counts and revenues in the future.





Since the period ended June 30, 2001,
the Company has converted five locations to leased from owned as part of a plan to reduce debt. Such conversions result in an increase in store rent expense (partially offset by a decrease in building depreciation expense) for the converted
location. Should the Company continue to convert owned locations to leased locations, store rent expense will continue to increase as a result.





The Company continues to experience increased energy costs related to increased utility expenses predominantly in California. Further, the Company may continue to experience increased insurance costs
and higher repair and maintenance expenditures in its existing stores. Such increases may affect store profitability. There can be no assurance that the increases in utilities and repair and maintenance will not continue to impact the Companys
ability to control costs in the future.





Importance of Key Employees





The Company is heavily dependent upon the services of its officers and key management personnel involved in restaurant operations,
purchasing, expansion and administration. In particular, the Company is dependent upon the management and leadership of its four executive officers, Michael P. Mack, David W. Qualls, R. Gregory Keller and Kenneth J. Keane. The loss of any of these
four individuals could have a material adverse effect on the Companys business, financial condition and results of operations. The success of the Company and its individual restaurants depends upon the Companys ability to attract and
retain highly motivated, well-qualified restaurant operations and other management personnel. The Company faces significant competition in the recruitment of qualified employees.





Computer 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 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




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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.





The Company began implementing a new software package for the production of formal accounting
reports during the second quarter of fiscal 2001 and completed the system conversion and began live transaction processing during the third quarter of fiscal 2002. The Company intends to gain efficiencies in both its inventory tracking and financial
reporting processes through use of the new system. However, there can be no assurance that the Company will be able to become proficient with the new software such that it will have a positive financial impact on the results of operations.





Seasonality and Quarterly Fluctuations





The Companys business experiences seasonal fluctuations, as a disproportionate amount of the Company net income is generally realized in the second, third and
fourth fiscal quarters due to higher average sales and lower average costs. Quarterly results have been and are expected to continue to fluctuate as a result of a number of factors, including the timing of new restaurant openings. As a result of
these factors, net sales and net income on a quarterly basis may fluctuate and are not necessarily indicative of the results that may be achieved for a full fiscal year.





Geographic Concentration: Restaurant Base





Thirty-eight of the Companys 95 existing restaurants are located in California, and eighteen are located in Florida. Accordingly, the Company is susceptible to fluctuations in its business caused by adverse economic or other
conditions in these regions, including natural disasters or other acts of God. In addition, in California, higher utility costs will continue to affect the Companys profitability in this region. As a result of the Companys continued
concentration in California and Florida, adverse economic or other conditions in either state could have a material adverse effect on the Companys business. The Companys significant investment in, and long-term commitment to, each of its
restaurant sites limits its ability to respond quickly or effectively to changes in local competitive conditions or other changes that could affect the Companys operations. In addition, the Company has a small number of restaurants relative to
some of its competitors. Consequently, a decline in the profitability of an existing restaurant or the introduction of an unsuccessful concept could have a more significant effect on the Companys result of operations than would be the case in
a company with a larger number of restaurants.





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 condition and results of operations. The Company has several local produce distributors and also distributes other grocery items through its own distribution system out of one warehouse on the West Coast and one on
the East Coast. All produce and groceries purchased by the Company are channeled from the growers and other suppliers to the Companys warehouses, restaurants and central kitchen facilities 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. There can be no assurance that the Companys distribution expense would not be greater under such
alternate arrangements. See Business RisksCost Sensitivity.




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Volatility of Stock Price





The market price of the Companys common stock has fluctuated since the initial public offering of its common stock in May 1995.
Quarterly operating results of the Company and other restaurant companies, daily transactional volume, changes in general conditions in the economy, the financial markets or the restaurant industry, natural disasters or other developments affecting
the Company or its competitors could cause the market price of the common stock to fluctuate substantially. In addition, in recent years the stock market has experienced extreme price and volume fluctuations. This volatility has had a significant
effect on the market price of securities issued by many companies for reasons unrelated to the operating performance of these companies.




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ITEM 3:     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Market risks relating to the Companys operations result primarily from changes in short-term interest rates as the Companys short term credit agreement which consists of a term loan in the amount of $6.0 million due
December 31, 2002. The term loan bears interest at either the prime rate or LIBOR plus 2.0%. As of June 30, 2002, the Company had $3.0 million in debt outstanding under the term loan. Based on a hypothetical 50 basis point adverse change in prime
rates, net interest expense would increase by approximately $15,000 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 June 30, 2002.




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PART IIOTHER INFORMATION





ITEM 1.    LEGAL PROCEEDINGSNot ApplicableITEM 2.    CHANGES IN SECURITIESNot ApplicableITEM 3.    DEFAULTS UPON SENIOR SECURITIESNot ApplicableITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSNot ApplicableITEM 5.    OTHER INFORMATIONNot ApplicableITEM 6.    EXHIBITS AND REPORTS ON FORM 8-KExhibits:The Exhibits required by Item 6(a) of the report are listed in the Exhibit Index on page 23 herewith.Reports on Form 8-K:No reports on Form 8-K have been filed by the Company during the fiscal quarter ended June 30, 2002.




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SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto
duly authorized.





GARDEN FRESH RESTAURANT CORP. (Registrant)Dated:    August 9, 2002



/s/    MICHAEL P.
MACKMichael P. Mack Chief Executive Officer/President (Principal Executive
Officer)


/s/    DAVID W.
QUALLSDavid W. Qualls Chief Financial Officer (Principal Accounting and Financial
Officer)




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EXHIBIT INDEX





Exhibit Number

Description3.1*

Restated Certificate of Incorporation of Garden Fresh Restaurant Corp.3.1******

Certificate of Designation, Preferences and Rights of the Terms of the Series A Preferred Stock, as filed with the
Delaware Secretary of State on February 23, 2001.3.2**

Bylaws of Garden Fresh Restaurant Corp., as amended.4.1******

Rights Agreement between the Company and Equiserve Trust Company, N. A., dates as of February 15, 2001.10.1**

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 Agreement10.6A

Employees Subject to Employment Agreements10.7***

Wells Fargo Bank Revolving Line of Credit Note10.8****

The Companys 1998 Stock Option Plan (subsequently amended to increase the share reserve to
550,000)10.9****

The Companys Variable Deferred Compensation Plan for Executives10.9A****

Amendment to the Companys Variable Deferred Compensation Plan for Executives10.14*****

Indemnification Agreement between the Company and David Qualls, Greg Keller, and Michael Mack dated April 28,
1998.10.15*******

Office Lease between the Company and Pacific Holding Company, dated September 14, 2001.10.16*******

Wells Fargo Bank Credit Agreement, dated December 3, 200199.1

Certification of Chief Executive Officer99.2

Certification of Chief Financial Officer


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|* |  | Incorporated by reference from Exhibit 3.1 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 on May 15, 1995, Exhibit 10.2 is incorporated by reference from Exhibits 10.2 and 10.2A, Exhibit
10.3 is incorporated by reference from Exhibits 10.3 and 10.3A and Exhibit 10.5 is incorporated by reference from Exhibit 10.5 and 10.5A.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|*** |  | Incorporated by reference from the Exhibits with corresponding numbers filed with the Companys Form 10-Q filed with the SEC on February 13, 1998.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------

|**** |  | Incorporated by reference from the Exhibits with corresponding numbers filed with the Companys Form 10-Q filed with the SEC on April 28, 1998, as amended
by Amendment No. 1 to Form 10-Q filed on April 28, 1998, Amendment No. 2 for Form 10-K filed on August 13, 1999, and Amendment No. 3 for Form 10-Q filed on December 29, 1999.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|***** |  | Incorporated by reference from the Exhibits with corresponding numbers filed with the Companys Form S-1 (No. 33-51267) filed with the SEC on April 29,
1998.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|****** |  | Incorporated by reference from the Companys Form 8-K filed with the SEC on February 15, 2001.
|------ |  | ----------------------------------------------------------------------------------------------

|******* |  | Incorporated by reference from the Companys Form 10-K filed with the SEC on December 27, 2001.
|------- |  | -----------------------------------------------------------------------------------------------



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