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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(Mark One)

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



For quarterly period ended December 31, 2003



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | -----------------------------------------------------------------------------------------



For the transition period fromto.



Commission file number 0-25886



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GARDEN FRESH RESTAURANT CORP.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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)



Registrants telephone number, including area code:  (858)
675-1600



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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 ̈



Indicate by a check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange
Act).    Yes ̈No  x



The number of shares of Common Stock, $.01 par value, outstanding as of
February 2, 2004 was 5,836,893. There are no other classes of common stock.



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GARDEN FRESH RESTAURANT CORP.



FORM
10-Q



INDEX



|                              |  |                                                                                             |  |     
|----------------------------- |  | ------------------------------------------------------------------------------------------- |  | ----
|                              |  |                                                                                             |  | PAGE
|PART I: FINANCIAL INFORMATION |  |                                                                                            
|                              |  |                                                                                            
|Item 1:                       |  | Unaudited Financial Statements                                                              |  |     
|                              |  |                                                                                            
|                              |  | Balance Sheets as of September 30, 2003 and December 31, 2003                               |  | 3   
|                              |  |                                                                                            
|                              |  | Statements of Operations for the three months ended December 31, 2002 and December 31, 2003 |  | 4   
|                              |  |                                                                                            
|                              |  | Statements of Cash Flows for the three months ended December 31, 2002 and December 31, 2003 |  | 5   
|                              |  |                                                                                            
|                              |  | Notes to Unaudited Financial Statements                                                     |  | 6   
|                              |  |                                                                                            
|Item 2:                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations       |  | 10  
|                              |  |                                                                                            
|Item 3:                       |  | Quantitative and Qualitative Disclosures About Market Risk                                  |  | 24  
|                              |  |                                                                                            
|Item 4:                       |  | Controls and Procedures                                                                     |  | 24  
|                              | 
|PART II:
OTHER INFORMATION    |  |                                                                                            
|                              |  |                                                                                            
|Item 1:                       |  | Legal Proceedings                                                                           |  | 25  
|                              |  |                                                                                            
|Item 2:                       |  | Changes in Securities and Use of Proceeds                                                   |  | 25  
|                              |  |                                                                                            
|Item 3:                       |  | Defaults Upon Senior Securities                                                             |  | 25  
|                              |  |                                                                                            
|Item 4:                       |  | Submission of Matters to a Vote of Security Holders                                         |  | 25  
|                              |  |                                                                                            
|Item 5:                       |  | Other Information                                                                           |  | 25  
|                              |  |                                                                                            
|Item 6:                       |  | Exhibits and Reports on Form 8-K                                                            |  | 26  



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GARDEN FRESH RESTAURANT CORP.



BALANCE SHEETS

(Dollars in thousands, except par value and share amounts)



|                                                                                                                                                                                                                                                          |  |                   |         |                  |   |        
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | ---------------- | - | -------
|                                                                                                                                                                                                                                                          |  | September 30,2003 |         | December 31,2003
|                                                                                                                                                                                                                                                          |  |                   |         | (unaudited)     
|ASSETS                                                                                                                                                                                                                                                    |  |                   |         |                  |   |        
|Current assets:                                                                                                                                                                                                                                           |  |                   |         |                  |   |        
|Cash and cash equivalents                                                                                                                                                                                                                                 |  | $                 | 11,057  |                  | $ | 11,072 
|Inventories                                                                                                                                                                                                                                               |  |                   | 9,670   |                  |   | 9,866  
|Other current assets                                                                                                                                                                                                                                      |  |                   | 3,601   |                  |   | 3,601  
|                                                                                                                                                                                                                                                          |  |                   |         |                  |   |        
|Total current assets                                                                                                                                                                                                                                      |  |                   | 24,328  |                  |   | 24,539 
|Property and equipment, net                                                                                                                                                                                                                               |  |                   | 125,700 |                  |   | 122,233
|Intangible and other assets                                                                                                                                                                                                                               |  |                   | 2,465   |                  |   | 2,719  
|                                                                                                                                                                                                                                                          |  |                   |         |                  |   |        
|TOTAL ASSETS                                                                                                                                                                                                                                              |  | $                 | 152,493 |                  | $ | 149,491
|                                                                                                                                                                                                                                                          |  |                   |         |                  |   |        
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                                                                                      |  |                   |         |                  |   |        
|Current liabilities:                                                                                                                                                                                                                                      |  |                   |         |                  |   |        
|Accounts payable                                                                                                                                                                                                                                          |  | $                 | 4,243   |                  | $ | 3,911  
|Current portion of long-term debt                                                                                                                                                                                                                         |  |                   | 17,606  |                  |   | 17,649 
|Accrued liabilities                                                                                                                                                                                                                                       |  |                   | 13,088  |                  |   | 12,527 
|                                                                                                                                                                                                                                                          |  |                   |         |                  |   |        
|Total current liabilities                                                                                                                                                                                                                                 |  |                   | 34,937  |                  |   | 34,087 
|Deferred income taxes                                                                                                                                                                                                                                     |  |                   | 8,567   |                  |   | 8,567  
|Long-term debt, net of current portion                                                                                                                                                                                                                    |  |                   | 21,219  |                  |   | 18,866 
|Other liabilities                                                                                                                                                                                                                                         |  |                   | 3,786   |                  |   | 4,083  
|Shareholders equity:                                                                                                                                                                                                                                     |  |                   |         |                  |   |        
|Preferred stock, $.001 par value; 2,500,000 shares authorized at September 30, 2003 and December 31, 2003 of which 120,000 shares are
designated as Series A Preferred Stock; 0 shares issued and outstanding at September 30, 2003 and December 31, 2003 |  |                   |        |                  |   |       
|Common stock, $.01 par value; 12,000,000 shares authorized at September 30, 2003 and December 31, 2003; 5,824,023 and 5,836,726 issued and
outstanding at September 30, 2003 and December 31, 2003, respectively                                          |  |                   | 58      |                  |   | 58     
|Additional paid-in capital                                                                                                                                                                                                                                |  |                   | 60,890  |                  |   | 60,998 
|Retained earnings                                                                                                                                                                                                                                         |  |                   | 23,036  |                  |   | 22,832 
|                                                                                                                                                                                                                                                          |  |                   |         |                  |   |        
|Total shareholders equity                                                                                                                                                                                                                                |  |                   | 83,984  |                  |   | 83,888 
|                                                                                                                                                                                                                                                          |  |                   |         |                  |   |        
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                                                                                |  | $                 | 152,493 |                  | $ | 149,491
|                                                                                                                                                                                                                                                          |  |                   |         |                  |   |        
|                                                                                                                                                                                                                                                          |  |                  
|Commitments and contingencies                                                                                                                                                                                                                             |  |                   |         |                  |   |        



See notes to unaudited
financial statements.



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GARDEN FRESH RESTAURANT CORP.



STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)



|                                                                    |  |                                 |        |   |      |   |        |  
|------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ---- | - | ------ | -
|                                                                    |  | Three Months Ended December 31, |       
|                                                                    |  | 2002                            |        |   | 2003 |  
|Net sales                                                           |  | $                               | 49,685 |   |      | $ | 52,078 |  
|                                                                    |  |                                 |        |   |      |   |        |  
|Costs and expenses:                                                 |  |                                 |        |   |      |   |        |  
|Costs of sales                                                      |  |                                 | 12,341 |   |      |   | 12,858 |  
|Restaurant operating expenses:                                      |  |                                 |        |   |      |   |        |  
|Labor                                                               |  |                                 | 16,105 |   |      |   | 17,032 |  
|Occupancy and other expenses                                        |  |                                 | 12,721 |   |      |   | 13,993 |  
|General and administrative expenses                                 |  |                                 | 3,566  |   |      |   | 3,434  |  
|Restaurant opening costs                                            |  |                                 | 55     |   |      |   |       |  
|Depreciation and amortization expenses                              |  |                                 | 3,505  |   |      |   | 3,722  |  
|Merger costs                                                        |  |                                 |       |   |      |   | 431    |  
|                                                                    |  |                                 |        |   |      |   |        |  
|Total costs and expenses                                            |  |                                 | 48,293 |   |      |   | 51,470 |  
|                                                                    |  |                                 |        |   |      |   |        |  
|Operating income                                                    |  |                                 | 1,392  |   |      |   | 608    |  
|                                                                    |  |                                 |        |   |      |   |        |  
|Other income (expense):                                             |  |                                 |        |   |      |   |        |  
|Interest income                                                     |  |                                 | 14     |   |      |   | 17     |  
|Interest expense                                                    |  |                                 | (970   | ) |      |   | (873   | )
|Other income (expense), net                                         |  |                                 | (86    | ) |      |   | (135   | )
|                                                                    |  |                                 |        |   |      |   |        |  
|Total other expense, net                                            |  |                                 | (1,042 | ) |      |   | (991   | )
|                                                                    |  |                                 |        |   |      |   |        |  
|Income (loss) before benefit (provision) for income taxes           |  |                                 | 350    |   |      |   | (383   | )
|Benefit (provision) for income taxes                                |  |                                 | (144   | ) |      |   | 179    |  
|                                                                    |  |                                 |        |   |      |   |        |  
|Net income (loss)                                                   |  | $                               | 206    |   |      | $ | (204   | )
|                                                                    |  |                                 |        |   |      |   |        |  
|Basic net income (loss) per common share                            |  | $                               | 0.04   |   |      | $ | (0.03  | )
|                                                                    |  |                                 |        |   |      |   |        |  
|Shares used in computing basic net income (loss) per common share   |  |                                 | 5,754  |   |      |   | 5,834  |  
|                                                                    |  |                                 |        |   |      |   |        |  
|Diluted net income (loss) per common share                          |  | $                               | 0.03   |   |      | $ | (0.03  | )
|                                                                    |  |                                 |        |   |      |   |        |  
|Shares used in computing diluted net income (loss) per common share |  |                                 | 5,931  |   |      |   | 5,834  |  
|                                                                    |  |                                 |        |   |      |   |        |  





See accompanying notes to unaudited financial statements.



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GARDEN FRESH RESTAURANT CORP.



STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                                            |  |                                |        |   |      |   |        |  
|------------------------------------------------------------------------------------------- |  | ------------------------------ | ------ | - | ---- | - | ------ | -
|                                                                                            |  | Three Months EndedDecember 31, |       
|                                                                                            |  | 2002                           |        |   | 2003 |  
|Cash flows from operating activities:                                                       |  |                                |        |   |      |   |        |  
|Net income (loss)                                                                           |  | $                              | 206    |   |      | $ | (204   | )
|Adjustments to reconcile net income (loss) to net cash provided by operating activities:    |  |                                |        |   |      |   |        |  
|Depreciation and amortization                                                               |  |                                | 3,505  |   |      |   | 3,722  |  
|Loss on disposal of property and equipment                                                  |  |                                | 85     |   |      |   | 143    |  
|Provision for deferred income taxes                                                         |  |                                | 315    |   |      |   |       |  
|Tax benefit from exercise of common stock options                                           |  |                                | 51     |   |      |   | 2      |  
|Amortization of deferred gain on sale-leaseback of properties                               |  |                                | (15    | ) |      |   | (9     | )
|Changes in operating assets and liabilities:                                                |  |                                |        |   |      |   |        |  
|Inventories                                                                                 |  |                                | (509   | ) |      |   | (196   | )
|Other current assets                                                                        |  |                                | (1,117 | ) |      |   |       |  
|Intangible and other assets                                                                 |  |                                | (28    | ) |      |   | (259   | )
|Accounts payable                                                                            |  |                                | (686   | ) |      |   | 202    |  
|Accrued liabilities                                                                         |  |                                | (503   | ) |      |   | (561   | )
|Other liabilities                                                                           |  |                                | 160    |   |      |   | 306    |  
|                                                                                            |  |                                |        |   |      |   |        |  
|Net cash provided by operating activities                                                   |  |                                | 1,464  |   |      |   | 3,146  |  
|                                                                                            |  |                                |        |   |      |   |        |  
|Cash flows from investing activities:                                                       |  |                                |        |   |      |   |        |  
|Acquisition of property and equipment:                                                      |  |                                |        |   |      |   |        |  
|New restaurant development                                                                  |  |                                | (2,260 | ) |      |   |       |  
|Existing restaurant additions and other capital improvements                                |  |                                | (1,136 | ) |      |   | (393   | )
|Decrease in construction costs included in accounts payable                                 |  |                                | (555   | ) |      |   | (534   | )
|Proceeds from sale-leaseback transaction                                                    |  |                                | 3,097  |   |      |   |       |  
|                                                                                            |  |                                |        |   |      |   |        |  
|Net cash used in investing activities                                                       |  |                                | (854   | ) |      |   | (927   | )
|                                                                                            |  |                                |        |   |      |   |        |  
|Cash flows from financing activities:                                                       |  |                                |        |   |      |   |        |  
|Repayment of long-term debt                                                                 |  |                                | (3,257 | ) |      |   | (2,310 | )
|Proceeds from issuance of common stock                                                      |  |                                | 265    |   |      |   | 106    |  
|                                                                                            |  |                                |        |   |      |   |        |  
|Net cash used in financing activities                                                       |  |                                | (2,992 | ) |      |   | (2,204 | )
|                                                                                            |  |                                |        |   |      |   |        |  
|Net increase (decrease) in cash and cash equivalents                                        |  |                                | (2,382 | ) |      |   | 15     |  
|Cash and cash equivalents at beginning of period                                            |  |                                | 5,294  |   |      |   | 11,057 |  
|                                                                                            |  |                                |        |   |      |   |        |  
|Cash and cash equivalents at end of period                                                  |  | $                              | 2,912  |   |      | $ | 11,072 |  
|                                                                                            |  |                                |        |   |      |   |        |  
|Supplemental disclosure of noncash transaction                                             |  |                                |        |   |      |   |        |  
|Property and equipment asset purchases included in accounts payable and accrued liabilities |  | $                              | 1,204  |   |      | $ | 433    |  
|                                                                                            |  |                                |        |   |      |   |        |  



See accompanying notes
to unaudited financial statements.



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GARDEN FRESH RESTAURANT CORP.



NOTES TO UNAUDITED FINANCIAL STATEMENTS



1.BASIS OF PRESENTATION



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, 2003 included in the Companys Form 10-K as filed with the Securities and Exchange Commission.



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.



2.STOCK BASED COMPENSATION



At December 31, 2003, the Company had two stock-based employee compensation plans, which consist of employee stock option grants and the employee stock
purchase plan. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employeesand related interpretations. No compensation expense has been recognized for
employee stock option grants, which are fixed in nature, as the options have been granted at the fair value of the common stock. No compensation expense has been recognized for the employee stock purchase plan. Had the Company applied the fair value
provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, expense for the Companys stockbased compensation awards and employee stock purchase plan shares issued during the three months ended December 31, 2002
and 2003 would have been determined based on the fair value of the awards at the grant dates, and the Companys net income (loss) and net income (loss) per common share would have been reduced to the pro forma amounts indicated below:



(In thousands, except per share amounts)



|                                                                                                                                    |  |              |      |   |      |   |       |  
|----------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ---- | - | ---- | - | ----- | -
|                                                                                                                                    |  | December 31, |     
|                                                                                                                                    |  | 2002         |      |   | 2003 |  
|Net income (loss), as reported                                                                                                      |  | $            | 206  |   |      | $ | (204  | )
|Less: stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |              | (229 | ) |      |   | (131  | )
|                                                                                                                                    |  |              |      |   |      |   |       |  
|Pro forma net loss                                                                                                                  |  | $            | (23  | ) |      | $ | (335  | )
|                                                                                                                                    |  |              |      |   |      |   |       |  
|Net income (loss) per common share:                                                                                                 |  |              |      |   |      |   |       |  
|Basic:                                                                                                                              |  |              |      |   |      |   |       |  
|As reported                                                                                                                         |  | $            | 0.04 |   |      | $ | (0.03 | )
|                                                                                                                                    |  |              |      |   |      |   |       |  
|Pro forma                                                                                                                           |  | $            | 0.00 |   |      | $ | (0.06 | )
|                                                                                                                                    |  |              |      |   |      |   |       |  
|Diluted:                                                                                                                            |  |              |      |   |      |   |       |  
|As reported                                                                                                                         |  | $            | 0.03 |   |      | $ | (0.03 | )
|                                                                                                                                    |  |              |      |   |      |   |       |  
|Pro forma                                                                                                                           |  | $            | 0.00 |   |      | $ | (0.06 | )
|                                                                                                                                    |  |              |      |   |      |   |       |  



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GARDEN FRESH RESTAURANT CORP.



NOTES TO UNAUDITED FINANCIAL STATEMENTS(Continued)



The fair value of each option grant is estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted-average assumptions for grants in fiscal 2003 and 2004: dividend yield of 0.0%, expected volatility of 115.73%, risk-free interest of 3.07%, and expected lives of 5.0 years for each year. The fair value of
the employees purchase rights pursuant to the employee stock option purchase plan is estimated using the Black-Scholes model with the following assumptions for fiscal 2003 and 2004: dividend yield of 0.0%, expected volatility of 27.86%,
risk-free interest of 1.32%, and expected lives of 6 months for each year.



3.NET INCOME (LOSS) PER COMMON SHARE



Basic net income (loss) per common share is computed based on the weighted average number of common shares outstanding during the period. Diluted net
income (loss) 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 177,000 and 0 shares for the three month periods ended December 31, 2002 and 2003, respectively, were used to calculate diluted net income (loss) per common share. There were no
reconciling items in calculating the numerator for basic and diluted net income (loss) per common share for either of the periods presented. Shares related to stock options of 670,000 and 1,389,000 for the three month periods ended December 31, 2002
and 2003, respectively, were excluded from the calculation of diluted net income (loss) per common share, as the effect of their inclusion would be anti-dilutive.



4.SALE-LEASE BACK TRANSACTIONS



During the three months ended December 31, 2002, the Company completed a
sale-leaseback transaction whereby the Company sold and leased back the land and building for one restaurant site. The Company received net proceeds of $3.1 million from the transaction and recorded a deferred gain of $152,000. The gain is being
amortized over the lease term of 20 years. The related lease is being accounted for as an operating lease. There were no sale lease-back transactions during the quarter ended December 31, 2003.



5.CREDIT AGREEMENTS



On November 1, 2002, the Company entered into a line of credit agreement
(Credit Agreement) with a bank. The agreement provides for borrowings up to $6 million under a revolving credit agreement, which includes the $2 million of potential drawings under the letter of credit. The proceeds shall be used to finance the
establishment of restaurants and to finance the Companys working capital requirements, and the letter of credit shall be used as a guarantee in relation to the Companys insurance agreement with its carrier. Outstanding borrowings for
working capital purposes shall not at any time exceed $2.0 million. Borrowings are secured by certain equipment and fixtures of the Company. The outstanding principal balance on this line of credit will carry interest at either the prime rate or
LIBOR plus 2% with interest payable at the beginning of each month for the line of credit, and a fee of 1.25% will be charged on the face amount of the letter of credit issued. The Companys Credit Agreement contains various financial covenants
and restrictions. In November 2003, the Credit Agreement was amended to extend the expiration to April 30, 2004. The letter of credit will expire on April 1, 2004. During the third quarter of fiscal year 2003, a letter of credit in the amount of
$1,702,000 was issued to the Companys insurance carrier. As of December 31, 2003, there were no outstanding balances under this agreement and there have been no amounts drawn on the letter of credit, and the Company is in compliance with the
financial covenants and restrictions.



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GARDEN FRESH RESTAURANT CORP.



NOTES TO UNAUDITED FINANCIAL STATEMENTS(Continued)



6.MERGER COSTS



For the quarter ended December 31, 2003, the Company incurred costs of
$431,000 relating to the merger. These costs are comprised primarily of the legal and accounting services, and other related transaction costs related to the pending merger agreement discussed in note 7.



7.COMMITMENTS AND CONTINGENCIES



The Company is subject to payments under specific
contractual obligations and commitments and to various contracts that contain minimum purchase obligations for the purchase of tangible goods. As of December 31, 2003, our non-cancelable commitments under these agreements for fiscal year 2004 is
$1,967,000 and in fiscal year 2005 is $558,000. In addition, the Company has a guarantee associated with sub-leased property for the location formally occupied by its Slurp! restaurant. In the event of non-performance under the arrangement, the
Company would be required to fulfill the lease obligation, which would be $43,000 for fiscal year 2004, and $2,000 for fiscal year 2005. As of December 31, 2003, the Company believes that the likelihood of non-performance is remote.



The Company has commitments for employment agreements with specific executive
officers that provide for, upon termination of these employees without cause, severance equal to one half of the then current annual salary of the terminated employee along with certain other benefits. Additionally, in the event of a termination
without cause following a change of control, the employment agreements provide for severance equal to two years of base salary plus two years of bonus. In the event any such severance payment becomes necessary, the amount of such payment will be
based upon the current salary and bonus.



On September 29,
2003, the Company entered into an Agreement and Plan of Merger with GF Holdings, Inc. (GF Holdings), a Delaware corporation, and GFR Acquisition Company (Merger Subsidiary), a Delaware corporation and wholly-owned subsidiary
of GF Holdings, pursuant to which Merger Subsidiary is to merge with and into Garden Fresh, with Garden Fresh being the surviving corporation (the merger) and becoming a wholly-owned subsidiary of GF Holdings. The merger agreement was
amended and restated as filed with the SEC on February 2, 2004 (the merger agreement). Any references to the merger or a pending merger in this report refer to the transaction contemplated by the merger agreement.
In the merger, each issued and outstanding share of the Companys common stock, par value $0.01 per share, is to be canceled and converted automatically into the right to receive $16.35 per share in cash. The merger remains subject to customary
closing conditions, including the approval of the merger by the Companys shareholders. In addition, the merger agreement includes a financing condition so that financing to close the merger is a condition to the closing obligations of both
Garden Fresh and GF Holdings. The Company expects to hold a special meeting of stockholders to vote on the merger agreement in the second fiscal quarter of 2004. There can be no assurance, however, that the merger will be completed. If the merger
agreement is terminated under specific circumstances as set forth in the merger agreement, the Company will be liable to pay GF Holdings a fee of $4.1 million.



As a result of the proposed merger discussed above, on October 2, 2003, a purported stockholder class action lawsuit was filed in the San Diego
Superior Court against the Company, its directors and 25 unnamed Doe defendants entitled Allan Aites v. Garden Fresh Restaurant Corp., et al., Case No. GIC818850. The suit alleges that the individual defendants breached their fiduciary
duty to the Companys stockholders in connection with the merger by advancing their individual interests at the expense of the Companys stockholders. The complaint also alleges that the individual defendants failed to properly value the
Company, ignored conflicts of interest in connection with the merger and failed to engage in arms length negotiations in the merger. The complaint seeks: (i) a declaration that the original merger agreement was entered into in breach of the
defendants fiduciary duties; (ii) an injunction against the defendants preventing them from consummating the



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GARDEN FRESH RESTAURANT CORP.



NOTES TO UNAUDITED FINANCIAL STATEMENTS(Continued)



merger unless a procedure or process is adopted to obtain the highest possible price for the stockholders; (iii) disclosure of fourth quarter financial
information; (iv) rescission of the merger agreement; (v) such other equitable relief as the court deems appropriate; and (vi) an award of attorneys fees, among other relief. The Company believes that this lawsuit is without merit and intends
to defend against it vigorously. A hearing on the defendants demurrer and application to have the complaint dismissed has been scheduled by the Court for February 6, 2004. The claims have not progressed sufficiently for the Company to estimate
a range of possible exposure, if any.



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.



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##### Table of Contents

GARDEN FRESH RESTAURANT CORP.



|ITEM 2: | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------



INTRODUCTION



The statements contained in this Form 10-Q that are not purely historical are forward looking statements, including statements regarding the
Companys expectations, hopes, beliefs, intentions or strategies regarding the future. Statements which use words such as expects, will, may, could, anticipates, believes,
intends, attempts, and seeks are forward looking statements. These forward looking statements, including statements regarding (i) efficiencies and food costs, (ii) managements ability in determining and
using estimates and judgments used in the preparation of the financial statements, (iii) the Companys ability to make capital improvements to existing restaurants, (iv) the expenses and performance of the restaurants, (v) the expenses
associated with increased insurance premiums, (vi) the expected increase of occupancy and other costs, (vii) the anticipation of an increase to the provisional income tax rate, (viii) the need to obtain additional financing, (ix) future
restaurant sales, (x) the Companys expectations regarding increased competition and its ability to compete against other companies, (xi) strategic marketing programs and effects of such programs, (xii) the sufficiency of the Companys
sources of cash to meet its requirements, (xiii) the result of litigation and its impact on the Company, (xvii) the impact of new accounting standards, and (xiv) the ability to complete the pending merger transaction referred to in this report, the
timing of events related thereto and the additional costs to be incurred related to this transaction, 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.



There is intense competition in the quick
casual service restaurant industry with respect to market share, restaurant locations, labor, menu and product development. The Company competes primarily on the basis of quality and value of the food products offered, quality of service, price,
dining experience, restaurant location and the ambiance of the facilities against individually owned restaurants as well as other national and regional chains, some of which have significantly greater financial resources and market penetration. The
Companys results of operations depend upon the effectiveness of its strategies as compared to its competitors, and can be adversely affected by aggressive competition from numerous and varied competitors in all areas of business,
including new product introductions, promotions and discounting. In addition, restaurant sales can be affected by factors, including but not limited to, economic and political conditions, demographic changes, consumer preferences, tastes and
spending patterns, perceptions about the health and safety of food products and severe weather conditions. It is important to note that the Companys actual results could differ materially from expectations. 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. The Companys plans to increase
operational efficiency could be affected by escalating costs of both utilities and fuel, as well as increased labor costs. The Companys results of operations can also be adversely affected by increasing occupancy and insurance cost, labor
costs, interest rates, inflation, recession and other factors over which the Company has no control. Other factors that may cause actual results to differ materially from expectations include changes in accounting standards, policies and practices;
new legislation and governmental regulation; potential variances between estimated and actual liabilities, including litigation costs; and the possibility of unforeseen events affecting the industry in general. There can be no assurance as to when,
if ever, these trends can or will be reversed or that earnings will not be materially affected.



This discussion of uncertainties is not exhaustive. Additional risk factors associated with our business are detailed in our most recent Annual Report
on Form 10-K filed with the SEC.



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##### Table of Contents

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, the Company has identified the following significant judgments and estimates used by
management in the preparation of the Companys unaudited financial statements. The preparation of the Companys financial statements in conformity with accounting principles generally accepted in the United States of America requires
management to make estimates and judgments that affect the Companys reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, management evaluates its
estimates, including those related to impairment of long-lived assets, accruals for workers compensation and general liability insurance claims, and contingencies and litigation. These estimates are based on the information that is currently
available to management and on various other assumptions that management believes to be reasonable under the circumstances. Actual results could vary from those estimates under different assumptions or conditions.



Management believes that the following are the more significant judgments and
estimates used in the preparation of the Companys unaudited financial statements:



| |  | The Company periodically assesses the impairment of long-lived assets to be held for use whenever events or changes in circumstances indicate the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held for use is based on expectations of future undiscounted cash flows from the related operations, and when circumstances dictate, the Company adjusts the asset to the extent the carrying value
exceeds the fair value of the asset. Judgments made by the Company related to the expected useful lives of long-lived assets and its ability to realize undiscounted cash flows in excess of the carrying amounts of such assets are affected by factors
such as the ongoing maintenance and improvements of the assets, changes in economic conditions, and changes in operating performance. As the Company assesses the ongoing expected cash flows and carrying amounts of our long-lived assets, these
factors could cause the Company to realize a material impairment charge, which would result in decreased results of operations, and potentially decrease the carrying value of these assets.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Company maintains an accrual for workers compensation and general liability claims which are recorded in the accrued liabilities section of the balance sheets. The Company
determines the adequacy of these accruals by evaluating (1) information periodically provided by its carrier regarding the Companys historical experience and trends relating to insurance claims and payments, and (2) industry experience and
trends related to insurance claims and payments. The Company also consults with its carrier regarding the carriers expectation of future trends to determine necessary accruals. If such information indicates that the accruals are overstated or
understated, the Company will adjust the assumptions utilized in its methodologies and reduce or provide for additional accruals as appropriate. An increase or decrease to the workers compensation or general liability claims would affect the
Companys results of operations by increasing or decreasing the Companys employee benefits expense. An increase or decrease to the general liability claims accrual would affect the Companys results of operations by increasing or
decreasing the Companys occupancy and other expense.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Company is subject to various claims and legal actions in the ordinary course of business. Some of these matters include landlord disputes, professional
liability, employee-related matters, and investigations by governmental agencies regarding employment practices. During the quarter the Company has settled and paid the dispute previously outstanding with a landlord relating to common area
maintenance charges as well as the claim from a former employee relating to employee matters. On October 2, 2003, a purported stockholder class action lawsuit relating to the merger was filed against the Company and other defendants. The claims have
not progressed sufficiently for the Company to estimate a range of possible exposure, if any, and accordingly, the Company has not recorded a liability for its estimated losses under this dispute. The Company is not aware of any additional pending
or
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| | 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 or should the Company be able to estimate the range of possible exposure for the stockholder class action lawsuit, it will re-evaluate the probability of an adverse outcome and provide new or additional accruals for such contingencies
as necessary.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Financial Highlights



The most significant events that occurred during the quarter that affected
financial results were as follows:



| |  | Increase in Net Sales - Net sales for the first quarter, based on 97 salad buffet restaurants in operation at December 31, 2003, increased 4.8% to $52.1 million from $49.7
million in the same period in fiscal 2003, when the company operated 95 restaurants. Same store sales for the quarter increased 3.3% over the same period in fiscal 2003, when there were 95 restaurants in the same store sales base, and were driven
entirely by increased guest counts during the quarter. Management attributes this increase in same store sales to the marketing programs in effect and to the overall improvement in the economy during the quarter.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Increase in Restaurant Operating Expenses  Restaurant operating expenses in total and as a percent of sales during the first quarter were higher than the same period
last year principally due to the two additional stores that were opened during the second quarter of 2003 and increased costs associated with increased marketing costs for programs implemented during the quarter.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Merger Costs  During the quarter, the Company incurred $0.4 million in costs relating to the pending merger for legal and accounting services as well as other
transaction related costs.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Increase in Effective Tax Rate For the first quarter of fiscal 2004, the provisional income tax rate as a percentage of income (loss) before taxes increased 5.6
percentage points to 46.7% from 41.1% for the comparable period in fiscal 2003 as a result of higher apportionment of taxable earnings to states such as California and Illinois that have greater marginal income tax rates, and a larger amount of
permanent differences between GAAP (Generally Accepted Accounting Principles) and taxable income associated with the merger costs, which are non-deductible for tax purposes.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

QUARTERLY RESULTS



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



(Unaudited)



|                                                          |  |                                |   |  |       |   
|--------------------------------------------------------- |  | ------------------------------ | - |  | ----- | --
|                                                          |  | Three months endedDecember 31, |  
|                                                          |  | 2002                           |   |  | 2003  |   
|Statement of Operations Data:                             |  |                                |   |  |       |   
|Net sales                                                 |  | 100.0                          | % |  | 100.0 | % 
|                                                          |  |                                |   |  |       |   
|Costs and expenses:                                       |  |                                |   |  |       |   
|Costs of sales                                            |  | 24.8                           |   |  | 24.7  |   
|Restaurant operating expenses:                            |  |                                |   |  |       |   
|Labor                                                     |  | 32.4                           |   |  | 32.7  |   
|Occupancy and other expenses                              |  | 25.6                           |   |  | 26.9  |   
|General and administrative expenses                       |  | 7.2                            |   |  | 6.6   |   
|Restaurant opening costs                                  |  | 0.1                            |   |  |      |   
|Depreciation and amortization expenses                    |  | 7.1                            |   |  | 7.1   |   
|Merger costs                                              |  |                               |   |  | 0.8   |   
|                                                          |  |                                |   |  |       |   
|Total costs and expenses                                  |  | 97.2                           |   |  | 98.8  |   
|                                                          |  |                                |   |  |       |   
|Operating income                                          |  | 2.8                            |   |  | 1.2   |   
|Interest income                                           |  |                               |   |  |      |   
|Interest expense                                          |  | (1.9                           | ) |  | (1.7  | ) 
|Other income (expense), net                               |  | (0.2                           | ) |  | (0.2  | ) 
|                                                          |  |                                |   |  |       |   
|Income (loss) before benefit (provision) for income taxes |  | 0.7                            |   |  | (0.7  | ) 
|Benefit (provision) for income taxes                      |  | (0.3                           | ) |  | 0.3   |   
|                                                          |  |                                |   |  |       |   
|Net income (loss)                                         |  | 0.4                            | % |  | (0.4  | )%
|                                                          |  |                                |   |  |       |   



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##### Table of Contents

RESULTS OF OPERATIONS



Three Months Ended December 31, 2002 Compared to Three Months Ended December 31, 2003



Net Sales. Net sales for the first quarter of fiscal 2004 increased
4.8% to $52.1 million from $49.7 million for the comparable 2003 period primarily due to the two additional restaurants that were opened during the second quarter of fiscal 2003 and to an increase in comparable restaurant sales of 3.3% driven
entirely by increased guest counts. See Business RisksCertain Operating Results and Considerations.



Costs of Sales. Costs of sales for the first quarter of fiscal 2004 increased 4.9% to $12.9 million from $12.3 million for the comparable 2003
period as a result of increased sales. As a percentage of net sales, costs of sales decreased 0.1 percentage points to 24.7% from 24.8% since the comparable 2003 period due to the utilization of a two-week menu across the Company during the first
quarter of fiscal year 2004, which resulted in efficiencies and reduced costs achieved through standardization, as well as additional vendor rebates received during the quarter for larger volume discounts. There is no guarantee that the Company will
continue to achieve efficiencies and lower food cost from its efforts to standardize its menu or that it will not introduce higher cost promotional items in the future, which would result in an increase in costs of sales as a percentage of sales.
See Business RisksCertain Operating Results and Considerations.



Labor Expense. Labor expense for the first quarter of fiscal 2004 increased 5.6% to $17.0 million from $16.1 million for the comparable 2003 period due primarily to the addition of two new restaurants and a
stand-alone kitchen facility during the second quarter of fiscal 2003. As a percentage of net sales, labor increased 0.3 percentage points to 32.7% from 32.4% since the comparable 2003 period due to higher wage rates across markets, increased health
and workers compensation insurance premiums for restaurant employees due to escalating rate pressures from the insurance industry, and increased costs for employee benefits, partially offset by efficiencies achieved by programs put in place to
better utilize crew labor hours and reduce the number of managers in each restaurant. The Company expects health and workers compensation insurance premiums to continue to increase, especially in California, its largest employment base,
resulting in increased employee benefits expense. See Business Risks  Minimum Wage.



Occupancy and Other Expenses. Occupancy and other expenses increased 10.2% for the first quarter of fiscal 2004 to $14.0 million from $12.7 million
for the comparable 2003 period. Occupancy and other expenses as a percentage of net sales increased 1.3 percentage points to 26.9% from 25.6% for the comparable 2003 period. The increase as a percentage of net sales is the result of an increase in
marketing expense related to promotions in effect during the first quarter of fiscal 2004, increases in rent due to the two additional stores and the stand-alone central kitchen facility that were opened since the prior period and base rent from
Consumer Price Index (CPI) escalations for leased sites. In addition, part of the increase can be attributed to higher utility costs and increased liability and property insurance costs as a result of increased rate pressure throughout the insurance
industry. The Company anticipates occupancy and other expenses to increase as it continues to experience rising insurance premiums, increasing rent expense resulting from CPI escalation clauses under operating leases and higher repair and
maintenance expenses relating to its aging restaurant base. Should the Company undertake additional sale-leasebacks of existing sites it would incur increased base rent related to new leases at those sites but experience a decrease in depreciation
expense related to the sale of those assets.See Business Risks  Planned Marketing Expenditures and Business Risks  Other Operating Expenditures.



General and Administrative Expenses.General and administrative
expenses decreased 5.6% for the first quarter of fiscal 2004 to $3.4 million from $3.6 million for the comparable 2003 period. As a percentage of net sales, general and administrative expenses decreased 0.6 percentage points to 6.6% from 7.2% since
the comparable 2003 period. The Company incurred lower expenditures in the areas of professional services, training, and travel, all of which were higher during the first quarter of fiscal year 2003 to support the two new stores and one stand-alone
kitchen facility that were opened in January 2003.



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##### Table of Contents

Restaurant Opening Costs. There were no restaurant opening costs incurred for the first quarter of
fiscal 2004, as there were no new restaurants opened during the period, and no new restaurants planned to open for the remainder of fiscal year 2004. In the same period of the prior year, restaurant opening costs were $55,000 related to the two
stores and stand-alone central kitchen facility that were opened in January 2003.



Depreciation and Amortization. Depreciation and amortization for the first quarter of fiscal 2004 increased 5.7% to $3.7 million from $3.5 million for the comparable 2003 period. Depreciation and amortization
as a percentage of net sales remained consistent at 7.1% of sales. This increase in the amount of depreciation is the result of additional expense related to the opening of two new restaurants and the stand-alone kitchen facility since the
comparable 2003 period.



Merger Costs.The Company
incurred costs of $431,000 related to the merger activities that occurred during the first quarter of fiscal 2004. These costs include fees paid for legal and accounting services and other transaction related costs. These expenses are expected to
continue until the merger transaction is completed. The total amount of these costs is not determinable at this time.



Interest Income. Interest income for the first quarter of fiscal 2004 increased 21% to $17,000 from $14,000 for the comparable 2003 period as a
result of increased investing activity compared to the same period in the prior year.



Interest Expense. Interest expense for the first quarter of fiscal 2004 decreased 10% to $0.9 million from $1.0 million for the comparable 2003 period as a result of both lower interest rates and a reduction in
debt balances since the comparable period in the prior fiscal year.



Other Expense, net. Other expense, net for the first quarter of fiscal 2004 was $135,000 compared to $86,000 for the comparable 2003 period. The additional expense for the 2004 period is due to increased asset disposals during the
first quarter of fiscal 2004 compared to the same period in fiscal 2003.



Provision for Income Taxes.For the first quarter of fiscal 2004, the provisional income tax rate as a percentage of income (loss) before taxes increased 5.6 percentage points to 46.7% from 41.1% for the
comparable period in fiscal 2003 as a result of higher apportionment of taxable earnings to states such as California and Illinois that have greater marginal income tax rates, and a larger amount of permanent differences between GAAP (Generally
Accepted Accounting Principles) and taxable income associated with the merger costs, which are non-deductible for tax purposes. The Company anticipates that it will continue to experience the effects of apportionment on its taxable earnings should
it continue to expand into or continue to concentrate within states with greater marginal income tax rates.



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##### Table of Contents

LIQUIDITY AND CAPITAL RESOURCES



The Companys principal capital requirement has been both for 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 the sale of Company stock. Cash
and cash equivalents have remained consistent at $11.1 million at December 31, 2003 and at the beginning of the fiscal year.



Capital expenditures totaled $0.9 million during the first three months of fiscal 2004 and $3.9 million for the comparable period in fiscal 2003. For the
first three months of fiscal 2004, the Company paid $0.9 million (including the decrease in accrued construction costs included in accounts payable and accrued liabilities) for capital improvements at existing restaurants. The Company currently does
not have plans to open any restaurants in fiscal 2004. During the first three months of fiscal 2003, the Company made capital expenditures of $2.8 million (including the decrease in construction costs included in accounts payable and accrued
liabilities) for construction of two new restaurants and a stand-alone kitchen facility, which opened during the second quarter of fiscal 2003, and $1.1 million for capital improvements at existing sites. 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 three months of fiscal 2004, the Company generated $3.1
million in cash flows from operating activities, and received $0.1 million from the sale of the Companys Common Stock pursuant to stock option plans and the Companys Employee Stock Purchase Plan. In addition, the Company made repayments
of $2.3 million towards its long-term debt obligations during the three months ended December 31, 2003.



The Companys current assets increased $0.2 million to $24.5 million at December 31, 2003 from $24.3 million at September 30, 2003 primarily due to
the increases in cash and cash equivalents, and inventories. The Companys current liabilities decreased $0.9 million to $34.1 million at December 31, 2003 from $35.0 million at September 30, 2003 primarily due to a decrease in accrued
liabilities and accounts payable, offset by an increase in the current portion of long-term debt. The Company and the restaurant industry in general maintain insignificant receivables and vendors grant trade credit for purchasing food and supplies.
Inventories have increased $196,000 from September 30, 2003 in order to support the two new stores and stand-alone kitchen facility opened in second quarter of fiscal year 2003. The Company also continues to invest in the business through the
refurbishment of existing restaurants, which are reflected as long-term assets and not as part of working capital. There can be no assurance that these trends will be indicative of future performance.



As of December 31, 2003, the Company operated 97 restaurants. The Company
currently owns the land or land and buildings for 24 restaurants, including the land for two sites related to future openings. The Company did not open any restaurants during the three months ended December 31, 2003, and has no plans for future
restaurant openings for the remaining part of fiscal year 2004. As a result, the Company did not incur any expenses related to restaurant openings for the first quarter of 2004. The Company incurred restaurant opening costs of $55,000 during the
three months ended December 31, 2002 related to the opening of two new restaurants and one stand-alone kitchen facility that opened during January 2003. See Business Risks  Expansion Risks.



The Company requires capital principally to grow the business through new
restaurant construction, as well as to maintain, improve and refurbish existing restaurants, and for general operating purposes. In addition to funds generated from operations, the Company may need to obtain external financing in the form of a
sale-lease back of owned properties and long-term debt financing to complete its long-term plans for expansion of new restaurants and improvements to existing restaurants and meet principal payments on its existing loans. 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 cease improvements to existing restaurants. Additionally, should the Companys results of operations decrease it may
not have the ability to pay its debt of $36.5 million outstanding



16



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##### Table of Contents

at December 31, 2003. Based upon current levels of operations and anticipated growth in fiscal year 2005, the Company expects that cash flows from
operations, combined with other financing alternatives available, will be sufficient to meet debt service, capital expenditures and working capital requirements for the foreseeable future. See Business Risks  Capital
Requirements.



The Company is subject to a number of
covenants under various debt instruments, including limitations on additional borrowings, acquisitions, capital expenditures, lease commitments and dividend payments, as well as requirements to maintain certain financial ratios, cash flows and net
worth. As of December 31, 2003, the Company was in compliance with all such covenants.



If the merger agreement is terminated under specific circumstances as set forth in the merger agreement, the Company will be liable to pay GF Holdings a fee of $4.1 million.



Total debt outstanding decreased $2.3 million to $36.5 million, including the
line of credit balance, at December 31, 2003 from $38.8 million at the beginning of the fiscal year. The Company is also subject to payments under specific contractual obligations and commitments. A summary of those contractual obligations and
commercial commitments as of December 31, 2003 is as follows:



|                                   |  |                                                                                   |        |            |   |            |  |            |        |       |   |        |  |   |        
|---------------------------------- |  | --------------------------------------------------------------------------------- | ------ | ---------- | - | ---------- |  | ---------- | ------ | ----- | - | ------ |  | - | -------
|                                   |  | Payments due by period as of December 31, 2003 (In thousands)                    
|Contractual obligations            |  | Less than 1 year                                                                  |        | 1  3years |   | 3  5years |  | Thereafter |        | Total
|Long-term debt                     |  | $                                                                                 | 17,649 |            | $ | 17,876     |  | $          | 990    |       | $ |       |  | $ | 36,515 
|Operating leases                   |  |                                                                                   | 14,089 |            |   | 25,433     |  |            | 22,345 |       |   | 85,737 |  |   | 147,604
|Minimum purchase obligations(1)    |  |                                                                                   | 1,967  |            |   | 558        |  |            |       |       |   |       |  |   | 2,525  
|                                   |  |                                                                                   |        |            |   |            |  |            |        |       |   |        |  |   |        
|Total cash contractual obligations |  | $                                                                                 | 33,705 |            | $ | 43,867     |  | $          | 23,335 |       | $ | 85,737 |  | $ | 186,644
|                                   |  |                                                                                   |        |            |   |            |  |            |        |       |   |        |  |   |        
|                                   | 
|                                   |  | Amount of commitment expiration per period as of December 31, 2003 (In thousands)
|Commercial commitments             |  | Less than 1 year                                                                  |        | 1  3years |   | 3  5years |  | Thereafter |        | Total
|Guarantee(2)                       |  | $                                                                                 | 43     |            | $ | 2          |  | $          |       |       | $ |       |  | $ | 45     
|Letter of credit(3)                |  |                                                                                   | 1,702  |            |   |           |  |            |       |       |   |       |  |   | 1,702  
|                                   |  |                                                                                   |        |            |   |            |  |            |        |       |   |        |  |   |        
|Total commercial commitments       |  | $                                                                                 | 1,745  |            | $ | 2          |  | $          |       |       | $ |       |  | $ | 1,747  
|                                   |  |                                                                                   |        |            |   |            |  |            |        |       |   |        |  |   |        

---

|(1) | Consists of procurement contracts with minimum purchase obligations related to tangible goods.
|--- | ----------------------------------------------------------------------------------------------

|(2) | Consists solely of guarantee associated with sub-leased property. The Company is not aware of any non-performance under the sub-lease arrangement that would result in our having to
perform in accordance with the terms of the guarantee and accordingly, has not recorded a liability related to this guarantee. In the event of non-performance under the arrangement, the Company would be required to fulfill the lease obligation.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Letter of credit agreement is a security for the performance under the Companys insurance agreement with its carrier. The agreement will remain in effect until the carrier
deems the policy has no remaining liability. The carrier can draw on the letter of credit in the event of non-renewal by the bank or if the Company fails to reimburse the carrier up to an amount equal to the carriers claim for reimbursement.
The letter of credit agreement with the bank is for an amount not to exceed $1,702,000 and expires on April 1, 2004, however is deemed to be automatically extended without amendment for one year after the expiration date. As of December 31, 2003,
there have been no amounts drawn on the letter of credit. As part of establishing the letter of credit, the Company paid a fee of $19,500 in fiscal year 2003.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Company is not aware of any other factors, which are reasonably likely to affect its liquidity, other than those
discussed above and disclosed as business risks and risk factors disclosed in the Companys Form 10-K



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##### Table of Contents

filed with the SEC. While the Company has noted that certain operating expenses, including insurance and occupancy costs, are rising and the economy has
slowed down, the Company believes that there are sufficient funds available from operations, the existing credit facility and the sale lease-back of restaurant properties to accommodate the Companys future operations.



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, operating expenses, and fuel costs 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 April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149 (SFAS No. 149), Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS No. 133. In particular, this Statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative and when a derivative contains a financing
component that warrants special reporting in the statement of cash flows. The Company adopted SFAS No. 149 in the first quarter of fiscal year 2004. Adoption did not have a material impact on the Companys financial statements.



In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150 (SFAS 150), Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. This Statement establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were
previously classified as equity. This Statement is effective for the Company for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after September 15,
2003. The Company adopted SFAS No. 150 and it did not have a material impact on the Companys financial statements.



In January 2003, the FASB issued FASB Interpretation No. 46 (FIN No. 46), Consolidation of Variable Interest Entities, an interpretation of ARB No.
51. FIN No. 46 requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. Variable interest entities that effectively
disperse risk will not be consolidated unless a single party holds an interest or combination of interests that effectively recombines risks that were previously dispersed. FIN No. 46 also requires enhanced disclosure requirements related to
variable interest entities. FIN No. 46, as amended, applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the
first fiscal year or interim period ending after December 15, 2003 to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company does not believe that the adoption of this
accounting pronouncement has had or will have a material impact on our financial statements.



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BUSINESS RISKS



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



Certain Operating Results and Considerations



The Company does not believe it has significant latitude to achieve comparable restaurant sales growth through price and/or
guest count increases, and, as a result, the Company does not believe that recent comparable restaurant sales are indicative of future increases. 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.



Expansion Risks



The
Company opened ten salad buffet restaurants in fiscal 1999, seventeen in fiscal 2000, ten in fiscal 2001 (opening nine new restaurants and re-opening one existing restaurant), two restaurants in fiscal 2002 and two restaurants in fiscal 2003. The
Company currently does not have any specific plans to open any restaurants in fiscal 2004. The Companys ability to achieve its expansion plans during fiscal 2005 and beyond 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.



Since its inception, the Company has closed three non-performing buffet restaurants, one mini restaurant, two Ladles restaurants and one SLURP! restaurant
due to poor operating performance. Given the number of restaurants in current operation, 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
levels 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 upfront 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 operational 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 Business RisksRestaurant Industry and 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-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



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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.



Multi-unit food service businesses such as the Companys can also be
materially and adversely affected by publicity resulting from poor food quality, illness, injury or other health concerns with respect to the nutritional value of certain food. To minimize the risk of food-borne illness, the Company has implemented
sanitation audits through its Food Management System for managing food safety and quality. Nevertheless, the risk of food-borne illness cannot be completely eliminated. Any outbreak of such illness attributed to Company restaurants in particular, or
within the food service industry in general, could have a material adverse effect on our financial condition and results of operations.



Capital Requirements



In addition to funds generated from operations, the Company may need to obtain external financing in the form of sale-lease back of owned properties and
long-term debt financing to sufficiently finance improvements to existing restaurants for the remainder of fiscal year 2004 and beyond and to meet principal payments on its existing loans. 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, or entirely suspend, the development of new restaurants at its desired pace and to make improvements to existing restaurants.
Additionally, should the Companys results of operations decrease it may not have the ability to pay its debt of $36.5 million outstanding at December 31, 2003.



Cost Sensitivity



The Companys profitability is highly sensitive to increases in food, labor, insurance costs 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, increasing food, labor, employee benefit costs (including increases in hourly wage and minimum unemployment tax rates  See Business
RisksMinimum Wage), rent increases resulting from the CPI rent escalation provisions in the Companys leases, escalating insurance costs for health benefits, general liability, property and workers compensation coverage,
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, both insurance and energy costs have increased at much higher than historical rates in the Companys core market, California, and other regions. Should these cots continue to
increase, the food and labor costs will unfavorably impact the results of operations. However, 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



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profitability. The Company could be impacted by increasing wage costs in any of its markets where the minimum 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 Marketing Expenditures



The Company has incurred increased marketing expenditures during the
first three months of fiscal 2004 as an attempt to increase guest counts. A significant portion of the Companys external marketing effort consists of attracting guests through the use of freestanding inserts (FSIs), print media,
and radio advertising as a means to increase market awareness. In addition, the restaurants often cosponsor fundraising events in the restaurants for local charitable and other community organizations. There can be no assurance that the
marketing and promotion strategies discussed herein will be successful or benefit the Company by increasing guest counts or achieving higher net sales in the future.



Other Operating Expenditures



As the facilities for the Companys existing restaurant base continue to age, the Company expects to experience
increased repair and maintenance expenditures related to those existing stores. Such increases may affect store profitability. Further, the Company has experienced and expects to continue to experience higher property insurance costs as a result of
increased rate pressure throughout the insurance industry. There can be no assurance that the increases in repair and maintenance expense and increased property insurance expense will not continue to impact the Companys profitability or its
ability to control costs in the future.



During the quarter
ended December 31, 2002, the Company converted one location to leased from owned as part of a plan to reduce debt. There were no such conversions during the quarter ended December 31, 2003. 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.



Importance of Key Employees



The success of the Company and its individual restaurants depends upon the
Companys ability to attract and retain highly motivated, well-qualified restaurant operations and other management personnel. The Company faces significant competition in the recruitment of qualified employees.



Seasonality and Quarterly Fluctuations



The Companys business experiences seasonal fluctuations, as a
disproportionate amount of the Companys net income is generally realized in the second and third 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



Forty of the Companys 97 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 and insurance 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



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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 conditions 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 restaurant central kitchens 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.



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.



Legal Matters



On September 29, 2003, the Company entered into a merger agreement pursuant
to which Merger Subsidiary will merge with and into the Company, with the Company being the surviving corporation and becoming a wholly-owned subsidiary of GF Holdings. On October 2, 2003, a purported stockholder class action lawsuit was filed in
the San Diego Superior Court against the Company, its directors and 25 unnamed Doe defendants entitled Allan Aites v. Garden Fresh Restaurant Corp., et al., Case No. GIC818850. The suit alleges that the individual defendants breached
their fiduciary duty to the Companys stockholders in connection with the merger by advancing their individual interests at the expense of the Companys stockholders. The complaint also alleges that the individual defendants failed to
properly value the Company, ignored conflicts of interest in connection with the merger and failed to engage in arms length negotiations in the merger. The complaint seeks: (i) a declaration that the original merger agreement was entered into
in breach of the defendants fiduciary duties; (ii) an injunction against the defendants preventing them from consummating the merger unless a procedure or process is adopted to obtain the highest possible price for the stockholders; (iii)
disclosure of fourth quarter financial information; (iv) rescission of the merger agreement; (v) such other equitable relief as the court deems



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appropriate; and (vi) an award of attorneys fees, among other relief. A hearing on the defendants demurrer and application to have the complaint
dismissed has been scheduled by the Court for February 6, 2004. The Company believes that this lawsuit is without merit and intends to defend against it vigorously.



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.



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. 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 and the other fourteen states in which the Company operates) passed proposals that imposed increases in state or federal minimum wages in 1996, 1997, 1998, 2000, 2001,
2002, and 2003. 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 and similar legislation has been passed in California that may go
into effect in 2006.



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.



Certain Risks Associated with the Merger



On September 29, 2003, the Company entered into a merger agreement, pursuant to which Merger Subsidiary will merge with and into Garden Fresh, with Garden Fresh being the surviving corporation and becoming a
wholly-owned subsidiary of GF Holdings. In the merger, each issued and outstanding share of the Companys common stock, par value $0.01 per share, will be canceled and converted automatically into the right to receive $16.35 per share in cash.
The merger remains subject to customary closing conditions, including the approval of the merger by the Companys shareholders. In addition, the merger agreement includes a financing



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condition so that financing to close the merger is a condition to the closing obligations of both Garden Fresh and GF Holdings. The Company expects to hold a
special meeting of stockholders to vote on the merger agreement in the second fiscal quarter of 2004. There can be no assurance, however, that the merger will be completed.



Since the announcement of the pending merger, the trading in the Companys stock has been influenced by the market
expectations about the closing of the merger. If the merger fails to close or is delayed, that may have a material adverse impact on the business of the Company and market price for the Companys stock.



If the merger agreement is terminated under specific circumstances as set
forth by the merger agreement, the Company will be liable to pay GF Holdings a fee of $4.1 million.



|ITEM 3: | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------



On November 1, 2002, the Company entered into a line of credit agreement (Credit Agreement) with Wells Fargo Bank. This credit agreement provides for
borrowings up to $6 million under a revolving credit agreement that will bear interest at either the prime rate or LIBOR plus 2% with interest payable at the beginning of each month. In November 2003, the Credit Agreement was amended to extend the
maturity date until April 30, 2004. At December 31, 2003 there was no outstanding balance under this agreement and there have been no amounts drawn against the letter of credit during the quarter ended December 31, 2003. Should the Company draw from
this line of credit or draw against the letter of credit, changes in short-term interest rates could affect the Companys line of credit interest rate, increasing interest expense and likewise decreasing earnings and cash flow. 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 majority of the Companys outstanding long-term debt balance at December 31, 2003 of $36.5 million is financed through loans from lending institutions with fixed interest rates. As such, the Company does not
believe that changes in short-term interest rates would have a material impact on interest expense related to these loans or significantly decrease results of operations or cash flow. However, if the Company chose to refinance any amounts due in
fiscal year 2004, the Company may be subject to changes in short-term rate fluctuations, which may decrease or increase results of operations and cash flow.



The Company did not have any foreign currency or other market risk or any derivative financial instruments at December 31, 2003.



|ITEM 4: | CONTROLS AND PROCEDURES
|------- | -----------------------



Under the supervision and with the participation of management, including our principal executive and principal financial officers we evaluated the
effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our principal executive officer and principal
financial officer concluded that the Companys disclosure controls and procedures were effective as of the end of the period covered by this quarterly report. There were no changes in internal control over financial reporting that would require
additional disclosure under Regulation S-K 308(c).



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PART II  OTHER INFORMATION



Item 1. Legal Proceedings



On
September 29, 2003, the Company entered into an Agreement and Plan of Merger with GF Holdings, Inc., a Delaware corporation, and GFR Acquisition Company, a Delaware corporation and wholly-owned subsidiary of GF Holdings, pursuant to which Merger
Subsidiary will merge with and into the Company, with the Company being the surviving corporation and becoming a wholly-owned subsidiary of GF Holdings. On October 2, 2003, a purported stockholder class action lawsuit was filed in the San Diego
Superior Court against the Company, its directors and 25 unnamed Doe defendants entitled Allan Aites v. Garden Fresh Restaurant Corp., et al., Case No. GIC818850. The suit alleges that the individual defendants breached their fiduciary
duty to the Companys stockholders in connection with the merger by advancing their individual interests at the expense of the Companys stockholders. The complaint also alleges that the individual defendants failed to properly value the
Company, ignored conflicts of interest in connection with the merger and failed to engage in arms length negotiations in the merger. The complaint seeks: (i) a declaration that the original merger agreement was entered into in breach of the
defendants fiduciary duties; (ii) an injunction against the defendants preventing them from consummating the merger unless a procedure or process is adopted to obtain the highest possible price for the stockholders; (iii) disclosure of fourth
quarter financial information; (iv) rescission of the merger agreement; (v) such other equitable relief as the court deems appropriate; and (vi) an award of attorneys fees, among other relief. A hearing on the defendants demurrer and
application to have the complaint dismissed has been scheduled by the Court for February 6, 2004. The Company believes that this lawsuit is without merit and intends to defend against it vigorously.



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 Managements Discussion and Analysis of Financial Condition and Results of Operations and Business Risks-Legal Matters.



|                                                            |  |               
|----------------------------------------------------------- |  | --------------
|                                                            | 
|Item 2. Changes in Securities and Use of Proceeds           |  | Not Applicable
|                                                            | 
|Item 3. Defaults Upon Senior Securities                     |  | Not Applicable
|                                                            | 
|Item 4. Submission of Matters to a Vote of Security Holders |  | Not Applicable
|                                                            | 
|Item 5. Other Information                                   |  | Not Applicable



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Item 6. Exhibits and Reports on Form 8-K



Exhibits:



The Exhibits
required by Item 6(a) of the report are listed in the Exhibit Index on page 30 herewith.



Reports on Form 8-K:



A report on Form 8-K was filed by the Company on October 1, 2003 relating to the issuance of a press release entitled Garden Fresh Restaurant Corp.
to Merge with an Affiliate of Fairmont Capital, Inc. Garden Fresh Stockholders to Receive $16.35 Per Share in the Merger described therein and the filing of the Agreement and Plan of Merger dated September 29, 2003, by and among Garden Fresh
Restaurant Corp., GF Holdings, Inc. and GFR Acquisition Company.



A report on Form 8-K was filed by the Company on November 25, 2003 furnishing a press release entitled Garden Fresh Reports Fiscal 2003 Fourth Quarter and Year End Results described therein.



A report on Form 8-K was filed by the Company on November 25, 2003 relating
to the issuance of a press release entitled Garden Fresh Restaurant Corp. Provides Update on Status of Pending $16.35 per Share Merger with an Affiliate of Fairmont Capital, Inc. described therein and the filing of the Amendment to
Agreement and Plan of Merger dated as of November 21, 2003, by and among Garden Fresh Restaurant Corp., GF Holdings, Inc. and GFR Acquisition Company.



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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.



|                 |  |                                                                     
|---------------- |  | --------------------------------------------------------------------
|DATED:           |  | GARDEN FRESH RESTAURANT CORP.                                       
|February 5, 2004 |  | (Registrant)                                                        
|                 | 
|                 |  | /s/    MICHAEL P.
MACK                                              
|                 |  | Michael P. Mack                                                     
|                 |  | Chief Executive Officer/President (Principal Executive Officer)     
|                 | 
|                 |  | /s/    DAVID W.
QUALLS                                              
|                 |  | David W. Qualls                                                     
|                 |  | Chief Financial Officer (Principal Accounting and Financial Officer)



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EXHIBIT INDEX



|              |  |                                                                                                                                                                                
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                    
|              | 
|2.1           |  | Amended and Restated Agreement and Plan of Merger dated as of September 29, 2003, by and among Garden Fresh Restaurant Corp., GF Holdings, Inc. and GFR Acquisition Company.(1)
|              | 
|3.1           |  | Restated Certificate of Incorporation of Garden Fresh Restaurant Corp.(2)                                                                                                      
|              | 
|3.2           |  | Certificate of Designation, Preferences and Right of the Terms of the Series A Preferred Stock, as filed with the Delaware Secretary of State on February 23, 2001.(3)         
|              | 
|3.3           |  | Bylaws of Garden Fresh Restaurant Corp., as amended.(4)                                                                                                                        
|              | 
|4.1           |  | Rights Agreement between the Company and Equiserve Trust Company, N.A., dates as of February 15, 2001.(3)                                                                      
|              | 
|10.16B        |  | Amended Wells Fargo Bank Revolving Line of Credit Note, dated November 25, 2003                                                                                                
|              | 
|31.1          |  | Section 302 Certification of Chief Executive Officer                                                                                                                           
|              | 
|31.2          |  | Section 302 Certification of Chief Financial Officer                                                                                                                           
|              | 
|32.1          |  | Section 906 Certification of Chief Executive Officer.                                                                                                                          
|              | 
|32.2          |  | Section 906 Certification of Chief Financial Officer.                                                                                                                          

---

|(1) | Incorporated by reference from the Exhibits with corresponding numbers filed with the Companys Form 8-K filed with the SEC on February 2, 2004.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | 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.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Incorporated by reference from the Companys Form 8-K filed with the SEC on February 15, 2001.
|--- | ----------------------------------------------------------------------------------------------

|(4) | Incorporated by reference from 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, and Amendment No. 3 to Form S-1 filed on May 15, 1995..
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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