In February 2003, we made an investment in a company by the name of Garden Fresh Restaurants for our American Value Fund. Based in San Diego California, Garden Fresh operates 95 salad-buffet style restaurants in the southern and mid-western United States under the name Souplantation and Sweet Tomatoes. The restaurants offer soups, salads, freshly baked breads and desserts, and cater to diners looking for a healthy alternative to traditional fast food.

We purchased Garden Fresh at around $10 per share. At this price, Garden Fresh was trading at a 29% discount to its book value of $13.92 and approximately 10 times its 2002 earnings of $0.96 per share. Garden Fresh went public in 1995 and despite increasing the number of restaurants since then from 30 to 95, it did not generate very much earnings growth. Earnings per share grew from $.72 in 1995 to $.96 in 2002, an annual growth rate of only 4%. As result, Garden Fresh stock became what is known as an orphan. An orphan stock is one that fails to attract the excitement of the investment community and is usually accompanied by little or no analyst coverage. More importantly, however, is that stocks that become orphaned usually become undervalued as well.

Historically, orphaned restaurant stocks tend to play out in one of two ways. The first possibility is that the company manages to increase its sales per restaurant and begins to generate earnings growth. This creates interest in the stock as analysts resume coverage and, as a result, the share price usually moves up. The other possibility is that sales remain stagnant, interest in the company dissipates further, and the shares become even more undervalued. At this point, management decides that there is little benefit to being a public entity and the company is either sold or taken private. This is what happened to Garden Fresh.

Last Tuesday, on September 30th 2003 we were pleased to hear that Fairmount Capital, a private equity firm which specializes in buying restaurants, had agreed to purchase Garden Fresh for $16.35 a share. This price represents a 49% premium over the previous days closing price of $10.98. Our target on the stock had originally been $15 so we decided to avoid the deal risk and sold our shares for just under $16 netting a return to ABC unit holders of 60%.

ABC Funds
October 3, 2003