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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarter ended September 8, 1996
-----------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________.
Commission file number 0-20792
FRESH CHOICE, INC.
------------------
(Exact name of registrant as specified in its charter)
DELAWARE 77-0130849
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(State or other jurisdiction of (I.R.S. Employee
incorporation or organization) Identification No.)
2901 TASMAN DRIVE - SUITE 109, SANTA CLARA, CALIFORNIA 95054
------------------------------------------------------------
(Address of principal executives offices) (Zip Code)
Registrant's telephone number, including area code: (408) 986-8661
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- --------------------------------------------------------------------------------
Former name, former address and former fiscal year.
If changed since last report.
Indicate by check 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.
X Yes No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. _____ Yes _____No
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares of Common Stock, $.001 par value, outstanding as of October
6, 1996 was 5,647,273.
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FRESH CHOICE, INC.
INDEX
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets at September 8, 1996
and December 31, 1995................................................ 3
Condensed Consolidated Statements of Operations for the Twelve and
Thirty-six Weeks ended September 8, 1996 and September 3, 1995 ...... 4
Condensed Consolidated Statements of Cash Flow for the Thirty-six
Weeks ended September 8, 1996 and September 3, 1995.................. 5
Notes to Unaudited Condensed Consolidated Financial Statements....... 6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 10
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings................................................ 21
Item 2 - Changes in Securities............................................ 21
Item 3 - Defaults Upon Senior Securities.................................. 21
Item 4 - Submission of Matters to a Vote of Security Holders.............. 21
Item 5 - Other Information................................................ 21
Item 6 - Exhibits and Reports on Form 8-K................................. 21
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PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FRESH CHOICE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
September 8, December 31,
1996 1995
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,935 $ 1,294
Receivables 255 207
Inventories 447 465
Pre-opening costs 41 117
Refundable income taxes 44 1,602
Prepaid expenses and other current assets 788 686
-------- --------
Total current assets 3,510 4,371
PROPERTY AND EQUIPMENT, net 30,400 31,983
LEASE ACQUISITION COSTS, net 579 630
DEPOSITS AND OTHER ASSETS 287 322
-------- --------
TOTAL $ 34,776 $ 37,306
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,006 $ 2,909
Accrued salaries and wages 1,631 1,121
Sales tax payable 705 627
Other accrued expenses 2,355 2,954
Restructuring reserve 3,369 5,266
Current portion of capital lease obligations 155 406
-------- --------
Total current liabilities 11,221 13,283
CAPITAL LEASE OBLIGATIONS 2 89
OTHER LONG TERM LIABILITIES 1,301 1,643
-------- --------
Total liabilities 12,524 15,015
-------- --------
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value; 250,000 shares authorized;
none outstanding
Common stock, $.001 par value; 7.5 million shares authorized;
shares outstanding: 1996-5,646,319; 1995-5,582,449 42,022 41,619
Accumulated deficit (19,770) (19,328)
-------- --------
Total stockholders' equity 22,252 22,291
-------- --------
TOTAL $ 34,776 $ 37,306
======== ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
3
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FRESH CHOICE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Twelve Weeks Ended Thirty-six Weeks Ended
---------------------------- ----------------------------
September 8, September 3, September 8, September 3,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $ 18,644 $ 21,660 $ 55,498 $ 57,769
COST AND EXPENSES:
Cost of sales 5,040 5,878 15,143 15,746
Restaurant operating expenses:
Labor 5,784 6,528 17,621 18,708
Occupancy and other 5,207 6,442 15,738 18,294
Depreciation and amortization 758 1,390 2,347 4,017
General and administrative expenses 1,459 1,733 4,890 5,758
-------- -------- -------- --------
Total costs and expenses 18,248 21,971 55,739 62,523
-------- -------- -------- --------
OPERATING INCOME (LOSS) 396 (311) (241) (4,754)
-------- -------- -------- --------
Interest income -- 1 1 53
Interest expense (67) (49) (202) (140)
-------- -------- -------- --------
Interest income (expense), net (67) (48) (201) (87)
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES 329 (359) (442) (4,841)
Provision for (benefit from) income taxes -- (131) -- (1,767)
-------- -------- -------- --------
NET INCOME (LOSS) $ 329 $ (228) $ (442) $ (3,074)
======== ======== ======== ========
Net income (loss) per common share $ 0.06 $ (0.04) $ (0.08) $ (0.56)
======== ======== ======== ========
Shares used in computing per share amounts 5,664 5,509 5,619 5,493
======== ======== ======== ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
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FRESH CHOICE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Thirty-six Weeks Ended
---------------------------
September 8, September 3,
1996 1995
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (442) $ (3074)
Adjustments to reconcile net loss to
net cash provided by operations:
Depreciation and amortization 2,510 4,225
Issuance of common stock for consulting services 325 --
Premium amortization on short-term investments -- 26
Loss on sale of short-term investments -- 46
Loss on disposal of property 73 210
Deferred rent (284) (304)
Deferred income taxes -- (446)
Changes in operating assets and liabilities:
Receivables (48) (30)
Inventories 8 36
Pre-opening costs (58) (498)
Prepaid expenses and other current assets (102) (1,215)
Income taxes payable (refundable) 1,558 (263)
Accounts payable 97 806
Accrued salaries and wages 510 317
Other accrued expenses (521) 1,590
Restructuring reserve (1,274) --
------- -------
Net cash provided by operating activities 2,352 1,426
------- -------
INVESTING ACTIVITIES:
Capital expenditures (1,323) (7,491)
Proceeds from sale of short-term investments -- 4,652
Deposits and other assets (127) 690
------- -------
Net cash used in investing activities (1,450) (2,149)
------- -------
FINANCING ACTIVITIES:
Common stock sales 78 158
Other note payable - borrowings (repayments) (1) 120
Notes payable and line of credit - borrowings 1,701 4,405
Notes payable and line of credit - repayments (1,701) (4,405)
Capital lease obligations - repayments (338) (284)
------- -------
Net cash used in financing activities (261) (6)
------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 641 (729)
CASH AND CASH EQUIVALENTS:
Beginning of period 1,294 1,542
------- -------
End of period $ 1,935 $ 813
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 46 $ 140
Cash paid during the period for income taxes $ -- $ 38
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Income tax benefit from employee stock option transactions $ -- $ 15
Decrease in unrealized loss on investments, net of tax effect of $32 $ -- $ (53)
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
5
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FRESH CHOICE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Twelve and Thirty-six Weeks Ended September 8, 1996 and September 3,
1995
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements have been
prepared by the Company without audit and reflect all adjustments, consisting of
normal recurring adjustments and accruals, which are, in the opinion of
management, necessary to 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, but
omit certain information and footnote disclosures necessary to present the
statements in accordance with generally accepted accounting principles. For
further information, refer to the financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995.
2. EARNINGS PER SHARE
Net income (loss) per common and equivalent share is based on the
weighted average number of common and dilutive common equivalent shares
outstanding during the period. Common share equivalents, which are common stock
options and warrants assumed converted using the treasury stock method, have
been excluded from the earnings per share computation for the twelve weeks ended
September 3, 1995 and the thirty-six weeks ended September 8, 1996 and September
3, 1995 as they would be anti-dilutive.
3. RESTRUCTURING RESERVE
In December 1995, after a thorough analysis of the sales potential and
operating economics of every Fresh Choice restaurant, the Company finalized and
announced a restructuring plan to help restore profitability. The plan included
closing as many as ten of the Company's restaurants (of which seven restaurants
were included in the reserve for closures) and a partial write-down of assets to
estimated fair value for thirteen other restaurants.
The Company recorded a $23,932,000 restructuring charge in connection
with the plan which consisted of three parts: (1) an $18,671,000 non-cash
impairment charge of which $8,318,000 related to a write-down of assets to fair
market value at seven restaurants identified for closure and $10,353,000 related
to a write-down to fair market value at 13 other restaurants, (2) a $4,655,000
charge for estimated cash costs associated with restaurant closures and
settlement of lease obligations, and (3) a $606,000 charge for other costs, both
cash and non-cash, primarily for consulting and other professional services
rendered in connection with the Company's restructuring.
The Company has closed eight restaurants to date: three restaurants at
the end of 1995, one in the first quarter of 1996, two in the second quarter of
1996, and two in the third quarter of 1996. The first five of the eight closed
restaurants were included in the 1995 reserve for closures. For four of these
closed restaurants, the Company negotiated cash payments to landlords to settle
the lease obligations and for the fifth restaurant the Company assumed a
contingent liability in connection with a sublease agreement. This contingent
liability decreases over a four-year period provided the sublessee is in
compliance with the terms of the sublease.
The last three of the eight closed restaurants were not included in the
1995 reserve for closures although two of the restaurants were included in the
1995 asset impairment reserve. One restaurant closed in the second quarter was
included in the 1995 asset impairment reserve, and its remaining net assets were
charged to operations at the time the restaurant closed. This restaurant did not
require a cash settlement with
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the landlord. Of the two restaurants closed in the third quarter of 1996, one
was included in the 1995 asset impairment reserve, and the Company provided an
asset impairment charge in the third quarter of 1996 for the other restaurant.
The Company is currently negotiating lease settlements with both landlords.
During the third quarter of 1996, the Company recorded a $1,618,000
restructuring charge which consisted of (1) a $650,000 non-cash asset impairment
charge for one restaurant closed in the third quarter and (2) a $968,000 charge
for estimated cash costs associated with restaurant closures and settlement of
lease obligations for both restaurants closed during the quarter.
During the third quarter of 1996, the Company also reversed $1,618,000
of the 1995 restructuring reserve of which $1,062,000 of the reversal related
primarily to lower cash payments for restaurant closures and settlement of lease
obligations on the five closed restaurants included in the reserve for closures.
The balance of the reversal, or $556,000, was a reversal of the reserve for the
non-cash write-down of restaurant assets to estimated fair value and other
related costs. The Company attributes the 1995 reserve reversal primarily to
lower than expected cash payments to settle lease obligations resulting from an
improved real estate market which enabled landlords to locate new tenants for
the closed locations.
The following table sets forth the Company's 1995 and 1996
restructuring reserves and their respective balances at December 31, 1995 and
September 8, 1996:
<TABLE>
<CAPTION>
Provided/
(dollars in thousands) 1995 Utilized Balance, (Reversed) Utilized Reclassified Balance
Restructure in Dec. 31, to date to date to date Sept. 8,
Reserve 1995 1995 1996 1996 1996 1996
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1995 Restructuring Reserve:
Restaurant closures:
Non-cash write-down of restaurant assets to
estimated fair value and other related costs $ 8,318 $ (8,010) $ 308 $ (230) $ -- $ -- $ 78
Estimated cash costs associated with restaurant
closures and settlement of lease obligations 4,655 (205) 4,450 (1,011) (1,107) -- 2,332
Impaired restaurants:
Non-cash write-down of restaurant assets to
estimated fair value and other related costs 10,353 (10,027) 326 (326) -- -- --
Other costs, primarily consulting and professional
services related to the restructuring plan:
Cash costs 106 (80) 26 (51) (109) 134 --
Non-cash costs 500 (344) 156 -- (22) (134) --
-----------------------------------------------------------------------------
1995 Restructuring Reserve Balance 23,932 (18,666) 5,266 (1,618) (1,238) -- 2,410
-----------------------------------------------------------------------------
1996 Restructuring Reserve:
Restaurant closures:
Non-cash write-down of restaurant assets to
estimated fair value and other related costs -- -- -- 650 (622) -- 28
Estimated cash costs associated with restaurant
closures and settlement of lease obligations -- -- -- 968 (37) -- 931
-----------------------------------------------------------------------------
1996 Restructuring Reserve Balance -- -- -- 1,618 (659) -- 959
-----------------------------------------------------------------------------
Total Restructuring Reserve Balance $ 23,932 $(18,666) $ 5,266 $ -- $ (1,897) $ -- $ 3,369
=============================================================================
</TABLE>
Of the eight restaurants closed by the Company to date, two restaurants
were in Dallas, Texas; one restaurant was in Federal Way, Washington; and one
restaurant each was in San Francisco, Menlo Park, Los Angeles, Palm Desert and
Fresno, California.
The Company reviews the cash flow of each restaurant throughout any
given reporting period, and may perform an impairment review of its investment
in property and equipment at any given restaurant during a reporting period
based on the restaurant's cash flow performance. At least annually, the Company
7
<PAGE> 8
conducts an impairment review of its investment in property and equipment for
all of its restaurants on an individual restaurant basis.
The Company plans to complete these restaurant closures under its
restructuring plan by the end of 1996 and believes the reserve balance at
September 8, 1996 is adequate to cover the remaining estimated costs to be
incurred under the plan.
4. INCOME TAXES
The Company recorded no tax benefit from its operating loss during the
thirty-six weeks ended September 8, 1996. The Company reported operating losses
in the six consecutive quarters ending with the first quarter of 1996 and
started reporting operating profits in the second and third quarters of 1996. In
1995, the Company recorded a full valuation allowance against its net deferred
tax assets which consisted primarily of the tax benefit related to operating
loss carryforwards and non-deductible restructuring asset write-downs and
restructuring expense accruals. The Company will continue to provide a valuation
allowance for its deferred tax assets until it becomes more likely than not, in
management's assessment, that the Company's deferred tax assets will be
realized.
5. PREFERRED STOCK PURCHASE
On September 13, 1996, in accordance with the terms of the April 26,
1996 preferred stock purchase agreement (the "Agreement") and upon approval of
the stockholders at the Company's annual meeting, the Company sold 1,187,906
shares of its Series B non-voting preferred stock to Crescent Real Estate
Equities Limited Partnership ("Crescent") for $4.63 per share, or approximately
$5,500,000, in a private offering. The Company plans to use the proceeds to
build new restaurants, remodel existing restaurants, upgrade its information
systems and increase working capital. Under the terms of the Agreement, Crescent
also has an option to purchase up to 593,953 shares of Series C non-voting
convertible preferred stock at a price of $6.00 per share during a period of
three years.
The Series B non-voting preferred stock is convertible, at the holders'
option, into Series A voting convertible preferred stock on a one-for-one basis,
and the Series A voting preferred stock, Series B non-voting preferred stock and
Series C non-voting preferred stock are convertible, at the holders' option,
into Common Stock on a one-for-one basis. The Series A preferred stock entitles
its holders to vote with Common stockholders on all matters submitted to a vote
of stockholders. In addition, when and if issued, the holders of a majority of
the outstanding Series A preferred stock will have a separate right to approve
certain corporate actions. In the event of a failure by the Company to achieve
earnings targets (before interest, taxes, depreciation, and amortization) of at
least $1,500,000 in 1996, $3,500,000 in 1997 and $5,500,000 in 1998 (subject to
adjustment under certain circumstances by the Company's Board of Directors), the
Series A preferred stockholders could elect a majority of the Company's Board of
Directors. Upon achievement of certain per-share market price tests, the Company
may force a mandatory conversion of the Series A preferred stock to Common
Stock. All shares of Series A, Series B and Series C preferred stock are senior
to the Company's Common Stock with respect to dividends and with respect to
distributions on liquidation.
In connection with the Agreement, the Company also has granted to
Crescent registration rights with respect to the Common Stock issuable upon
conversion of the Series A, Series B and Series C preferred stock.
8
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6. COMMON STOCK
In April 1996, the Company issued to outside consultants 50,000 shares
of its common stock as payment for accrued consulting services. These shares
were recorded at their fair value of $6.50 per share on the date the Board of
Directors approved the issuance of the shares.
9
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is intended to highlight significant changes
in the Company's financial position and results of operations for the twelve and
thirty-six weeks ended September 8, 1996 as compared to the twelve and
thirty-six weeks ended September 3, 1995. The interim Financial Statements and
this Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the Consolidated Financial
Statements and Notes thereto for the fiscal year ended December 31, 1995 and the
related Management's Discussion and Analysis of Financial Condition and Results
of Operations, both of which are contained in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995.
This Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including statements about the Company's ability to implement and the
effectiveness of its previously-announced restructuring plan; fluctuations in
quarterly results; the ability of Fresh Choice to obtain funds to pursue its
future plans; future profitability; customer receptiveness to new products and
the new prototype restaurant; competitive pressures in the food-service
marketplace; the changing tastes of consumers; the effect of general economic
conditions; and the Company's ability to secure and retain services of
experienced personnel. Actual results could differ materially from those
described in the forward-looking statements as a result of the risk factors set
forth herein.
Liquidity and Capital Resources
The Company's primary capital requirement has been for the expansion of
its restaurant operations which the Company has traditionally financed with
funds from equity offerings, cash flow from operations, landlord allowances and
short-term bank debt. The Company does not have significant receivables or
inventory and receives trade credit based upon negotiated terms in purchasing
food and supplies.
Although the Company's continued growth depends to a significant degree
on its ability to open new restaurants and to operate such restaurants
profitably, the Company suspended its expansion plans during 1995, reviewed the
operating performance of all of its restaurants, and identified those
restaurants which did not meet its expectations for operating performance. At
the end of 1995, after a thorough analysis of the sales potential and operating
economics of every restaurant in the chain, the Company announced a major
restructuring plan which called for closing as many as ten of the Company's
restaurants (of which seven restaurants were included in the reserve for
closures) and a partial write-down of assets to estimated fair value in thirteen
other restaurants.
The Company recorded a $23,932,000 restructuring charge in connection
with the plan which consisted of three parts: (1) an $18,671,000 non-cash
impairment charge of which $8,318,000 related to a write-down of assets to fair
market value at seven restaurants identified for closure and $10,353,000 related
to a write-down to fair market value at 13 other restaurants, (2) a $4,655,000
charge for estimated cash costs associated with restaurant closures and
settlement of lease obligations, and (3) a $606,000 charge for other costs, both
cash and non-cash, primarily for consulting and other professional services
rendered in connection with the Company's restructuring.
The Company has closed eight restaurants to date: three restaurants at
the end of 1995, one in the first quarter of 1996, two in the second quarter of
1996, and two in the third quarter of 1996. The first five of the eight closed
restaurants were included in the 1995 reserve for closures. For four of these
closed restaurants, the Company negotiated cash payments to landlords to settle
the lease obligations and for the fifth restaurant the Company assumed a
contingent liability in connection with a sublease agreement. This
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<PAGE> 11
contingent liability decreases over a four-year period provided the sublessee is
in compliance with the terms of the sublease.
The last three of the eight closed restaurants were not included in the
1995 reserve for closures although two of the restaurants were included in the
1995 asset impairment reserve. One restaurant closed in the second quarter was
included in the 1995 asset impairment reserve, and its remaining net assets were
charged to operations at the time the restaurant closed. This restaurant did not
require a cash settlement with the landlord. Of the two restaurants closed in
the third quarter of 1996, one was included in the 1995 asset impairment
reserve, and the Company provided an asset impairment charge in the third
quarter of 1996 for the other restaurant. The Company is currently negotiating
lease settlements with both landlords.
During the third quarter of 1996, the Company recorded a $1,618,000
restructuring charge which consisted of (1) a $650,000 non-cash asset impairment
charge for one restaurant closed in the third quarter and (2) a $968,000 charge
for estimated cash costs associated with restaurant closures and settlement of
lease obligations for both restaurants closed during the quarter.
During the third quarter of 1996, the Company also reversed $1,618,000
of the 1995 restructuring reserve of which $1,062,000 of the reversal related
primarily to lower cash payments for restaurant closures and settlement of lease
obligations on the five closed restaurants included in the reserve for closures.
The balance of the reversal, or $556,000, was a reversal of the reserve for the
non-cash write-down of restaurant assets to estimated fair value and other
related costs. The Company attributes the 1995 reserve reversal primarily to
lower than expected cash payments to settle lease obligations resulting from an
improved real estate market which enabled landlords to locate new tenants for
the closed locations.
The Company reviews the cash flow of each restaurant throughout any
given reporting period, and may perform an impairment review of its investment
in property and equipment at any given restaurant during a reporting period
based on the restaurant's cash flow performance. At least annually, the Company
conducts an impairment review of its investment in property and equipment for
all of its restaurants on an individual restaurant basis.
The Company estimated it would incur cash costs of $4.8 million in
connection with restaurant closures and the related lease settlements of which
$3.8 million related to the 1995 reserve for closures and $1.0 million related
to the 1996 reserve for closures. To date, the Company has incurred cash costs
of approximately $1.5 million, disbursing $0.3 million during fiscal 1995 and
$1.2 million during the thirty-six weeks ended September 8, 1996. The Company
plans to complete these restaurant closures under its restructuring plan by the
end of 1996, and believes the restructuring reserve balance at September 8, 1996
is adequate to cover the remaining estimated costs to be incurred under the
plan.
Of the eight restaurants closed by the Company to date, two restaurants
were in Dallas, Texas; one restaurant was in Federal Way, Washington; and one
restaurant each was in San Francisco, Menlo Park, Los Angeles, Palm Desert and
Fresno, California.
The Company intends to resume its restaurant expansion, assuming its
financial performance improves. The Company's ability to implement an expansion
strategy will depend upon a variety of factors, including the success of its
restructuring plan in restoring profitability and its ability to obtain funds.
See "Business Risks - Expansion". The Company believes its operating cash
requirements and near-term capital requirements for closing two additional
restaurants can be met through existing cash balances, cash provided by
operations and its available bank line of credit that expires November 1996.
On September 13, 1996, in accordance with the terms of the April 26,
1996 preferred stock purchase agreement (the "Agreement") and upon approval of
the stockholders at the Company's annual
11
<PAGE> 12
meeting, the Company sold 1,187,906 shares of its Series B non-voting preferred
stock to Crescent Real Estate Equities Limited Partnership ("Crescent") for
$4.63 per share, or approximately $5,500,000, in a private offering. The Company
plans to use the proceeds to build new restaurants, remodel existing
restaurants, upgrade its information systems and increase working capital. Under
the terms of the Agreement, Crescent also has an option to purchase up to
593,953 shares of Series C non-voting convertible preferred stock at a price of
$6.00 per share during a period of three years.
The Series B non-voting preferred stock is convertible, at the holders'
option, into Series A voting convertible preferred stock on a one-for-one basis,
and the Series A voting preferred stock, Series B non-voting preferred stock and
Series C non-voting preferred stock are convertible, at the holders' option,
into Common Stock on a one-for-one basis. The Series A preferred stock entitles
its holders to vote with Common stockholders on all matters submitted to a vote
of stockholders. In addition, when and if issued, the holders of a majority of
the outstanding Series A preferred stock will have a separate right to approve
certain corporate actions. In the event of a failure by the Company to achieve
earnings targets (before interest, taxes, depreciation, and amortization) of at
least $1,500,000 in 1996, $3,500,000 in 1997 and $5,500,000 in 1998 (subject to
adjustment under certain circumstances by the Company's Board of Directors), the
Series A preferred stockholders could elect a majority of the Company's Board of
Directors. Upon achievement of certain per-share market price tests, the Company
may force a mandatory conversion of the Series A preferred stock to Common
Stock. All shares of Series A, Series B and Series C preferred stock are senior
to the Company's Common Stock with respect to dividends and with respect to
distributions on liquidation.
In connection with the Agreement, the Company also has granted to
Crescent registration rights with respect to the Common Stock issuable upon
conversion of the Series A, Series B and Series C preferred stock.
The Company may continue to seek additional debt or equity financing to
provide greater flexibility toward improving its operating performance and
resuming expansion.
For the thirty-six weeks ended September 8, 1996 and September 3, 1995,
the Company invested $1.3 million and $7.5 million, respectively, in property
and equipment. In 1996, approximately half of the investment consisted primarily
of spending on the new prototype restaurant opened in the second quarter of
1996. The Company funded this investment through bank debt and cash flow from
operations. In 1995, the investment included spending on seven new restaurants
opened in 1995, of which two were opened in the first quarter of 1995, four in
the second quarter of 1995, and one in the third quarter of 1995. The Company
funded this investment through the sale of short-term investments, bank debt and
cash flow from operations.
During the thirty-six weeks ended September 8, 1996 and September 3,
1995, operating activities provided $2.4 million and $1.4 million of cash,
respectively. The Company typically has realized a seasonal increase in
restaurant sales and restaurant operating income beginning in its second quarter
and continuing through its third fiscal quarter, followed by a decline in
restaurant sales and restaurant operating income in its fourth and first fiscal
quarters.
At September 8, 1996, the Company had no borrowings under its $5
million bank line of credit that expires in November 1996. Borrowings under the
line bear interest at the prime rate (8.25% on September 8, 1996) plus 2%. The
initial $2 million available under the line is collateralized by the Company's
personal property, and subsequent advances, if any, will be collateralized by
executed leasehold interests in certain Company restaurants. The line of credit
agreement requires the Company to achieve minimum sales, cash flow and fixed
charge coverage, limits the Company's capital spending, debt to tangible net
worth ratio and debt to cash flow ratio, and prohibits the payment of dividends.
The Company was in compliance with these covenants as of September 8, 1996. The
Company is in discussions to renew the line of credit with the bank.
12
<PAGE> 13
Total long-term debt outstanding as of September 8, 1996 was $0.1
million, a decrease of $0.3 million from December 31, 1995. The long-term debt
consists of a $0.1 million note for site construction costs which is included
in other long-term liabilities on the balance sheet.
Impact of Inflation
The Company has not experienced a significant overall impact from
inflation.
Business Risks
Certain characteristics and dynamics of the Company's business and of
financial markets in general create risks to the Company's long-term success and
to predictable quarterly results. These risks include:
Recent Operating Losses. The Company's profitability began to decline
in the second half of 1994. In the fourth quarter of 1994, the Company reported
its first operating loss and reported additional operating losses in each
subsequent quarter ending with the first quarter of 1996. The Company reported
operating profits in the second and third quarters of 1996.
Beginning late in the third quarter of fiscal 1994, the Company began
reporting significant comparable real store sales declines. Comparable real
store sales continued to decline in each quarter of 1995 compared to the
respective quarters in the prior year, although the magnitude of these declines
lessened in the third and fourth quarters of 1995. In the second and third
quarters of 1996, the magnitude of the declines in comparable real store sales
increased. The Company reported a 0.3% decline in comparable real store sales in
the first quarter of 1996. Following the introduction of a one-price system and
termination of discount programs, the Company reported an 8.6% and 17.0% decline
in comparable real store sales in the second and third quarters of 1996,
respectively. There can be no assurance that comparable real store sales will
improve or that the Company will return to long-term profitability.
Expansion. The Company has experienced substantial growth in recent
years, having opened 14 restaurants in 1993, 15 restaurants in 1994, and seven
in 1995. In 1995, the Company suspended its expansion plans, reviewed the
operating performance of all of its restaurants, and identified certain
restaurants which did not meet its expectations for operating performance. As a
result, in December 1995 the Company announced a restructuring plan to close as
many as ten restaurants. The Company has closed eight restaurants to date,
including three at the end of 1995, one in the first quarter of 1996, two in the
second quarter of 1996 and two in the third quarter of 1996. The Company has
identified two additional restaurants for closure in 1996. The Company has
opened one restaurant to date in 1996, which is a new store model with a reduced
cash investment, more efficient operating layout and a warmer ambiance which the
Company intends to use as a prototype for any future expansion, as well as for
future remodeling of existing stores. The Company believes its growth depends to
a significant degree on its ability to open new restaurants and to operate such
restaurants profitably. While the Company intends to resume its expansion,
assuming its financial performance improves, there can be no assurance as to
when or whether the Company will resume its expansion. The Company's ability to
implement successfully its expansion strategy will depend upon a variety of
factors, including the selection and availability of affordable sites, the
selection and availability of capital to finance restaurant expansion and
equipment costs, the ability to hire and train qualified management and
personnel, the ability to control food and other operating costs, and other
factors, many of which are beyond the Company's control.
13
<PAGE> 14
On a long-term basis, the Company intends to continue to increase its
presence in California and to expand its operations in additional markets
outside of California, assuming its financial performance improves. The
Company's expansion plans may include entering new geographic regions in which
the Company has no previous operating experience. There can be no assurance that
the Fresh Choice concept will be successful in regions outside of California,
where tastes and restaurant preferences may be different. The Company opened
five restaurants in Texas, three restaurants in the state of Washington and
three restaurants in the Washington, D.C. metropolitan area during fiscal years
1993, 1994 and 1995. Of the eight restaurants closed by the Company to date, two
were in Texas, one was in the state of Washington, and five were in California.
Geographic Concentration. As of September 8, 1996, 43 of the Company's
51 restaurants are located in California, primarily in the San Francisco Bay
Area. Accordingly, the Company is susceptible to fluctuations in its business
caused by adverse economic conditions in this region. In addition, net sales at
certain of the Company's restaurants have been adversely affected when a new
Company restaurant has been opened in relatively close geographic proximity, and
such pressure may continue to depress annual comparable real store sales. The
Company expects additional sales pressure may be experienced at the individual
restaurants as it continues to expand within existing market areas. There can be
no assurance that such continued expansion within existing or future geographic
markets will not adversely affect the individual financial performance of
Company restaurants in such markets or the Company's overall results of
operations. In addition, given the Company's present geographic concentration in
Northern California, adverse weather conditions in the region or negative
publicity relating to an individual Company restaurant could have a more
pronounced adverse effect on net sales than if the Company's restaurants were
more broadly dispersed.
Volatility of Stock Price. The market price of the Company's common
stock has fluctuated substantially since the initial public offering of the
common stock in December 1992. 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 Company's common stock to fluctuate substantially. In addition, in
recent years the stock market has experienced extreme price and volume
fluctuations. This volatility has had significant effect on the market prices of
securities issued by many companies, including the Company, for reasons
sometimes unrelated to the operating performance of these companies. Any
shortfall in the Company's net sales or earnings from levels expected by
securities analysts could have an immediate and significant adverse effect on
the trading price of the Company's common stock in any given period.
Additionally, such shortfalls may not become apparent until late in the fiscal
quarter, which could result in an even more immediate and significant adverse
effect on the trading price of the Company's common stock.
Seasonality and Quarterly Fluctuations. The Company's restaurants have
typically experienced seasonal fluctuations, as a disproportionate amount of net
sales and net income are generally realized in the second and third fiscal
quarters. In addition, the Company's quarterly results of operations have been
and may continue to be materially impacted by the timing of new restaurant
openings or planned restaurant closings. The fourth quarter normally includes 16
weeks of operations as compared with 12 weeks for each of the three prior
quarters. However, in 1995, the fourth quarter included 17 weeks to accommodate
the Company's fiscal year-end date, the last Sunday in December, which fell on
December 31, 1995. As a result of these factors, net sales and net income in the
fourth quarter are not comparable to results in each of the first three fiscal
quarters, and net sales and net income can be expected to decline in the first
quarter of each fiscal year in comparison to the fourth quarter of the prior
fiscal year. Comparable real store sales, which have been negative in the nine
quarters beginning in the third quarter of 1994, may continue to be negative.
14
<PAGE> 15
Dependence on Key Personnel. The success of the Company depends on the
efforts of key management personnel. The Company's success will depend on its
ability to motivate and retain its key employees and to attract qualified
personnel, particularly general managers, for its restaurants. In 1995, several
senior corporate office employees left the Company. The Company is constantly
assessing its management needs and has hired personnel to fill those positions
which it believes are necessary to provide continuity of direction for the
Company and to execute the Company's business plan. There can be no assurance
that these new employees will be able to perform effectively, or that
significant management turnover will not continue in the future.
Restaurant Industry. The restaurant industry is affected by changes in
consumer tastes, as well as national, regional and local economic conditions and
demographic trends. The performance of individual restaurants, including the
Company's restaurants, may be affected by factors such as traffic patterns,
demographic considerations, and the type, number and location of competing
restaurants. In addition, factors such as inflation, increased food, labor and
employee benefit costs, and the availability of experienced management and
hourly employees may also adversely affect the restaurant industry in general
and the Company's restaurants in particular. Restaurant operating costs are
affected by increases in the minimum hourly wage, unemployment tax rates, and
various federal, state and local governmental regulations, including those
relating to the sale of food and alcoholic beverages. There can be no assurance
that the restaurant industry in general, and the Company in particular, will be
successful.
Competition. The Company's restaurants compete with the rapidly growing
mid-price, full-service casual dining segment; with traditional self-service
buffet, soup, and salad restaurants; and, increasingly, with quick-service
outlets. The Company's competitors include national and regional chains, as well
as local owner-operated restaurants. Key competitive factors in the industry are
the quality and value of the food products offered, quality and speed of
service, price, dining experience, restaurant location and the ambiance of
facilities. The Company believes that it competes favorably with respect to
these factors, although many of the Company's competitors have been in existence
longer than the Company, have a more established market presence, and have
substantially greater financial, marketing and other resources than the Company,
which may give them certain competitive advantages. The Company believes that
its ability to compete effectively will continue to depend in large measure upon
its ability to offer a diverse selection of high-quality, fresh food products
with an attractive price-value relationship.
Ability to Obtain Additional Financing. The Company intends to resume
restaurant expansion, assuming its financial performance improves. The
Company's ability to implement an expansion strategy will depend upon a variety
of factors, including the success of its restructuring plan in restoring
profitability and its ability to obtain funds. The Company believes its
near-term capital requirements for closing up to two additional restaurants can
be met through its existing cash balances, cash provided by operations and its
available bank line of credit which expires in November 1996 as well as through
the recently completed private offering with Crescent Real Estate Equities
Limited Partnership ("Crescent"), from which it received funds of approximately
$5,500,000. The Company is also in discussions to renew the line of credit with
the bank. However, the Company may seek additional financing to provide greater
flexibility toward improving its operating performance. There can be no
assurance that the Company will be able to obtain additional financing when
needed on acceptable terms or at all.
15
<PAGE> 16
Results of Operations
The following table sets forth items in the Company's statement of
operations as a percentage of sales and certain operating data for the periods
indicated:
<TABLE>
<CAPTION>
(Dollars in thousands) Twelve Weeks Ended Thirty-six Weeks Ended
------------------------------------- -------------------------------------
(Unaudited) September 8, 1996 September 3, 1995 September 8, 1996 September 3, 1995
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET SALES $18,644 100.0 % $21,660 100.0 % $55,498 100.0 % $57,769 100.0 %
COST AND EXPENSES:
Cost of sales 5,040 27.0 % 5,878 27.1 % 15,143 27.3 % 15,746 27.3 %
Restaurant operating expenses:
Labor 5,784 31.0 % 6,528 30.1 % 17,621 31.8 % 18,708 32.3 %
Occupancy and other 5,207 27.9 % 6,442 29.8 % 15,738 28.4 % 18,294 31.6 %
Depreciation and amortization 758 4.1 % 1,390 6.4 % 2,347 4.2 % 4,017 7.0 %
General and administrative expenses 1,459 7.9 % 1,733 8.0 % 4,890 8.7 % 5,758 10.0 %
--------------- --------------- --------------- ---------------
Total costs and expenses 18,248 97.9 % 21,971 101.4 % 55,739 100.4 % 62,523 108.2 %
--------------- --------------- --------------- ---------------
OPERATING INCOME (LOSS) 396 2.1 % (311) (1.4)% (241) (0.4)% (4,754) (8.2)%
--------------- --------------- --------------- ---------------
Interest income -- -- % 1 0.0 % 1 0.0 % 53 0.1 %
Interest expense (67) (0.3)% (49) (0.3)% (202) (0.4)% (140) (0.3)%
--------------- --------------- --------------- ---------------
Interest income (expense), net (67) (0.3)% (48) (0.3)% (201) (0.4)% (87) (0.2)%
--------------- --------------- --------------- ---------------
INCOME (LOSS) BEFORE INCOME TAXES 329 1.8 % (359) (1.7)% (442) (0.8)% (4,841) (8.4)%
Provision for (benefit from) income taxes -- -- % (131) (0.6)% -- -- % (1,767) (3.1)%
--------------- --------------- --------------- ---------------
NET INCOME (LOSS) $ 329 1.8 % $ (228) (1.1)% $ (442) (0.8)% $(3,074) (5.3)%
=============== =============== =============== ================
Number of restaurants:
Open at beginning of period 53 57 55 51
Open at end of period 51 58 51 58
</TABLE>
The following table presents the components of average operating income
on a per restaurant basis, based on the average number of restaurants open
during the year:
<TABLE>
<CAPTION>
(Dollars in thousands) Twelve Weeks Ended Thirty-six Weeks Ended
------------------------------------- --------------------------------------
(Unaudited) September 8, 1996 September 3, 1995 September 8, 1996 September 3, 1995
----------------- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET SALES $353.4 100.0% $374.8 100.0 % $1,034.2 100.0 % $1,050.5 100.0 %
COST AND EXPENSES:
Cost of sales 95.5 27.0% 101.7 27.1 % 282.2 27.3 % 286.3 27.3 %
Restaurant operating expenses:
Labor 109.6 31.0% 112.9 30.1 % 328.4 31.8 % 340.2 32.3 %
Occupancy and other 98.7 27.9% 111.5 29.8 % 293.3 28.4 % 332.7 31.6 %
Depreciation and amortization 14.4 4.1% 24.0 6.4 % 43.7 4.2 % 73.0 7.0 %
General and administrative expenses 27.7 7.9% 30.0 8.0 % 91.1 8.7 % 104.7 10.0 %
-------------- -------------- ---------------- ----------------
Total costs and expenses $345.9 97.9% $380.1 101.4 % $1,038.7 100.4 % $1,136.9 108.2 %
-------------- -------------- ---------------- ----------------
OPERATING INCOME (LOSS) $ 7.5 2.1% $ (5.3) (1.4)% $ (4.5) (0.4)% $ (86.4) (8.2)%
============== ============== ================ ================
Average restaurants open during the period 52.75 57.80 53.66 54.99
</TABLE>
16
<PAGE> 17
Results of Operations: Twelve Weeks Ended September 8, 1996
Compared to Twelve Weeks Ended September 3, 1995
Net Sales. Net sales for the third quarter ended September 8, 1996 were
$18.6 million, a decrease of $3.1 million, or 13.9%, from sales of $21.7 million
for same twelve weeks ended September 3, 1995. The primary components of the net
decrease in sales were:
<TABLE>
<S> <C>
The absence of sales from eight closed restaurants.
(Three restaurants were closed at the end of fiscal 1995,
one was closed in the first quarter of 1996, two were closed
in the second quarter of 1996 and two were closed in the
third quarter of 1996) ................................... $(1.5) million
Incremental sales from two restaurants opened since the
beginning of the third quarter of 1995.
(One restaurant was opened in the third quarter of 1995 and
one was opened in the second quarter of 1996) ............ $ 0.3 million
Decline in sales for the remaining 49 restaurants opened
prior to the third quarter of 1995........................ $(1.8) million
</TABLE>
Comparable real store sales, which include only sales for restaurants
open at least 18 months, declined 17.0% during the third quarter of 1996 versus
the same period in the prior year. The Company introduced a one-price system at
the end of the first quarter of 1996, replacing its former two-tier pricing
structure, and terminated certain discount programs during the second quarter.
As a result, the customer's average meal check increased to $6.78 during the
third quarter of 1996 compared to $6.21 during the third quarter of 1995. The
Company believes that as a result of the termination of certain discount
programs, it has continued to lose a portion of its price-sensitive customer
segment. Net sales per restaurant averaged $353,000 in 1996 and $375,000 in
1995, a decline of 5.9%.
Costs and Expenses. Cost of sales (food and beverage costs) was 27.0%
in the third quarter of 1996 and remained almost even as a percentage of net
sales compared to 27.1% in the third quarter of 1995. The Company's new
one-price system introduced at the end of the first quarter of 1996 and
termination of certain discount programs during the second quarter of 1996
produced a higher average customer check that was adequate to cover
the higher food costs from the Company's roll-out of a major food program begun
in the first quarter. The Company's new food program, developed with a food
consulting firm that emphasized market research and consumer trends in
developing new menu items, introduced new recipes and upgraded existing recipe
favorites.
Restaurant operating expenses decreased as a percentage of net sales to
58.9% in the third quarter of 1996 from 59.9% for the third quarter of 1995.
Tighter management controls and cost reduction programs produced substantial
reductions in variable operating costs with the exception of labor costs. Labor
costs increased almost a full percentage point of sales compared to last year's
third quarter. Year-to-date labor costs of 31.8% of sales continue to be lower
as a percentage of sales than the 32.3% of sales during the same period last
year. To a lesser extent, restaurant operating expenses decreased as a
percentage of sales due to the absence of fixed costs on eight low-volume
restaurants closed to date in connection with the Company's restructuring plan
and the absence of non-recurring costs in the third quarter last year related to
the Company's curtailment of expansion.
Depreciation and amortization decreased $0.6 million in the third
quarter of 1996 compared to the third quarter of 1995 and also decreased as a
percentage of net sales to 4.1% in the third quarter of 1996 compared to 6.4% in
the third quarter of 1995. The Company's curtailment of restaurant expansion in
1995 resulted in a $0.3 million reduction in restaurant start-up cost
amortization in the third quarter of 1996 compared to the same period in 1995.
The write-down of assets to estimated fair value in connection with
17
<PAGE> 18
the Company's restructuring plan in late 1995 contributed to a $0.3 million
reduction in restaurant depreciation expense in the third quarter of 1996
compared to the third quarter of 1995.
General and administrative expenses were $1.5 million for third quarter
of 1996, a decrease of $0.2 million compared to expenses of $1.7 million for the
third quarter of 1995. In the third quarter of 1995, the Company recorded a non-
recurring $0.2 million charge for executive severance payments related to the
Company's change in management.
Interest Income. The Company had no material interest income and no
invested cash balances during the third quarter of 1996 or during the third
quarter of 1995.
Interest Expense. Interest expense was $67,000 in the third quarter of
1996 compared to $49,000 in the third quarter of 1995. Interest expense consists
primarily of interest on line of credit borrowings and capital lease
obligations.
Income Taxes. The Company recorded no provision for income taxes on its
operating profit in the third quarter of 1996. The Company incurred operating
losses in six consecutive quarters ending with the first quarter of 1996 and
reported small operating profits in the second and third quarters of 1996. In
late 1995, the Company recorded a full valuation allowance against its net
deferred tax assets consisting primarily of the tax benefit related to operating
loss carryforwards and non-deductible restructuring asset write-downs and
restructuring expense accruals. The Company will continue to provide a valuation
allowance for its deferred tax assets until it becomes more likely than not, in
management's assessment, that the Company's deferred tax assets will be
realized.
18
<PAGE> 19
Results of Operations: Thirty-six Weeks Ended September 8, 1996
Compared to Thirty-six Weeks Ended September 3, 1995
Net Sales. Net sales for thirty-six weeks ended September 8, 1996 were
$55.5 million, a decrease of $2.3 million, or 4.0%, compared to sales of $57.8
million for the thirty-six weeks ended September 3, 1995. The significant
components of the net decrease in sales were:
<TABLE>
<S> <C>
The absence of sales from eight closed restaurants.
(Three restaurants were closed at the end of fiscal 1995,
one was closed in the first quarter of 1996, two were
closed in the second quarter of 1996 and two were closed
in the third quarter of 1996) .......................... $(2.7) million
Incremental sales from eight restaurants opened since the
beginning of fiscal 1995 less incremental sales from one
of these new restaurants which was closed in the third
quarter of 1996.
(Two restaurants were opened in the first quarter of 1995,
four restaurants were opened in the second quarter of 1995
(of which one was closed in the third quarter of 1996), one
restaurant was opened in the third quarter of 1995 and one
in the second quarter of 1996).......................... $ 2.3 million
Decline in sales for the remaining 44 restaurants opened
prior to 1995 .......................................... $(1.9) million
</TABLE>
Comparable real store sales, which include only sales for restaurants
open at least 18 months, declined 9.5% during the first three quarters of 1996
versus the same period in the prior year. In the first, second and third
quarters of 1996, comparable real store sales declined 0.3%, 8.6% and 17.0%,
respectively. At the end of the first quarter of 1996, the Company introduced a
one-price system, replacing its former two-tier pricing structure, and, during
the second quarter, the Company terminated certain discount programs. As a
result, the customer's average meal check increased to $6.57 during the first
three quarters of 1996 from $6.20 during the first three quarters of 1995. The
Company believes it lost a portion of its price-sensitive customer segment
during the second and third quarters of 1996. Net sales per restaurant averaged
$1,034,000 in 1996 and $1,051,000 in 1995, a decline of 1.6%.
Costs and Expenses. Cost of sales (food and beverage costs) was 27.3%
of net sales for both the thirty-six weeks ended September 8, 1996 and the
thirty-six weeks ended September 3, 1995. In the first quarter of 1996, the
Company launched the roll-out of a major, higher-cost food program that
introduced new recipes and upgraded existing recipe favorites and that resulted
in an increase in food and beverage costs per customer. Just before the end of
the first quarter, the Company followed the roll-out of its new food program
with a new one-price system and, during the second quarter, the Company
terminated certain discount programs. These actions resulted in a higher average
customer check in the second and third quarters that was adequate to cover the
higher food costs.
Restaurant operating expenses decreased as a percentage of net sales to
60.2% in the thirty-six weeks ended September 8, 1996 compared to 63.9% in the
thirty-six weeks ended September 3, 1995. Tighter management controls and cost
reduction programs produced substantial reductions in variable operating costs
including labor costs which were half a percentage point of sales lower than the
same period last year. The relationship of restaurant operating costs to net
sales also improved as a result of the absence of non-recurring charges in the
first thirty-six weeks of 1995 related to the Company's curtailment of
restaurant expansion and, to a lesser extent, the absence of fixed costs on
eight low-volume restaurants closed to date in connection with the Company's
restructuring plan.
Depreciation and amortization decreased $1.7 million in the thirty-six
weeks ended September 8, 1996 compared to the first thirty-six weeks of 1995 and
also decreased as a percentage of net sales to 4.2% in the current period
compared to 7.0% in the same period of 1995. The Company's curtailment of
restaurant expansion in 1995 resulted in a $0.9 million reduction in restaurant
start-up cost amortization in the thirty-six
19
<PAGE> 20
weeks ended September 8, 1996 compared to the same period in 1995. The
write-down of assets to estimated fair value in connection with the Company's
restructuring plan in 1995 contributed to a $0.8 million reduction in restaurant
depreciation expense in the thirty-six weeks ended September 8, 1996 compared to
the thirty-six weeks ended September 3, 1995.
General and administrative expenses were $4.9 million for the
thirty-six weeks ended September 8, 1996, a decrease of $0.9 million compared to
expenses of $5.8 million for the first thirty-six weeks of 1995. In 1995, the
Company had non-recurring charges of $0.7 million for executive and corporate
employee severance payments related to the Company's change in management and
curtailment of its restaurant expansion. Effective cost controls in the current
year accounted for the balance of the decrease in expense.
Interest Income. The Company had no material interest income and no
invested cash balances during the thirty-six weeks ended September 8, 1996.
During the thirty-six weeks ended September 3, 1995, the Company sold its final
invested balances from its December 1992 initial public offering and its July
1993 secondary offering to finance the construction of the seven restaurants
opened in 1995 and recorded interest income of $53,000 on its investments.
Interest Expense. Interest expense was $202,000 in the thirty-six weeks
ended September 8, 1996 compared to $140,000 in the thirty-six weeks ended
September 3, 1995. Interest expense consists primarily of interest on line of
credit borrowings and capital lease obligations.
Income Taxes. The Company recorded no tax benefit on its operating loss
in the thirty-six weeks ended September 8, 1996. The Company has incurred
operating losses in six consecutive quarters ending with the first quarter of
1996 followed by small operating profits in the second and third quarters of
1996. In 1995, the Company recorded a full valuation allowance against its net
deferred tax assets consisting primarily of the tax benefit related to operating
loss carryforwards and non-deductible restructuring asset write-downs and
restructuring expense accruals. The Company will continue to provide a valuation
allowance for its deferred tax assets until it becomes more likely than not, in
management's assessment, that the Company's deferred tax assets will be
realized.
20
<PAGE> 21
PART II. OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
On January 9, 1995, a class action lawsuit was filed in the United
States District Court for the Northern District of California, San Jose
division, naming the Company, certain of its directors, and current and former
officers as defendants. The lawsuit alleged that the defendants misrepresented
or failed to disclose material facts about the Company's operations and
financial results, which the plaintiffs contend resulted in an artificial
inflation of the price of the Company's stock. The suit was purportedly brought
on behalf of a class of purchasers of the Company's stock during the period from
July 15, 1993 to December 15, 1994. On March 20, 1995 the plaintiffs filed an
amended complaint, which added as defendants the co-lead underwriters of the
Company's initial and secondary public offerings and three securities analysts
employed by the underwriters. The amended complaint also expanded the alleged
class period to include purchasers of the Company's stock during the period from
December 8, 1992 to February 9, 1995. On December 7, 1995, the Court dismissed
the amended complaint, with leave for further amendment. Plaintiffs filed a
Second Amended Complaint on February 27, 1996. This complaint alleges that Fresh
Choice and certain of its current and former officers and directors
misrepresented or failed to disclose material facts about the Company's
operations and financial results during the period from February 15, 1994
through February 9, 1995, in violation of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934. The Company filed a motion to dismiss this
lawsuit on March 29, 1996. No hearing on the Company's motion has yet been set.
The Company has reviewed the allegations in the lawsuit, believes them to be
without merit, and is defending itself vigorously. The Company does not believe
that the lawsuit will result in a material impact on its financial position or
operations.
ITEM 2 - CHANGES IN SECURITIES 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.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The exhibits listed in the accompanying index to Form 10-Q
Exhibits are filed or incorporated by reference as part of this report.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the
quarter ended September 8, 1996
21
<PAGE> 22
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.
FRESH CHOICE, INC.
(Registrant)
/S/ Charles A. Lynch
--------------------------------------------
Charles A. Lynch
Chairman of the Board and Director
(Principal Executive Officer)
/S/ David A. Anderson
--------------------------------------------
David A. Anderson
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: October 23, 1996
22
<PAGE> 23
INDEX TO FORM 10-Q EXHIBITS
EXHIBIT
NO. DESCRIPTION
- --------------------------------------------------------------------------------
3.1 Restated Certificate of Incorporation of Fresh Choice, Inc.
3.2 (8) Amended By-Laws of Fresh Choice, Inc. dated April 11, 1996
3.3 Certificate of Amendment of Restated Certificate of
Incorporation of Fresh Choice, Inc.
3.4 Certificate of Designation of Series A Voting Participating
Convertible Preferred Stock of Fresh Choice, Inc.
3.5 Certificate of Designation of Series B Non-Voting
Participating Convertible Preferred Stock of Fresh Choice,
Inc.
3.6 Certificate of Designation of Series C Non-Voting
Participating Convertible Preferred Stock of Fresh Choice,
Inc.
4.1 Registration Rights Agreement dated September 13, 1996
between Fresh Choice, Inc. and Crescent Real Estate Equities
Limited Partnership
10.1 (1) Form of Indemnity Agreement for directors and officers
10.2 (2) (3) Second Amended and Restated 1988 Stock Option Plan
10.3 (2) (3) 1992 Employee Stock Purchase Plan
10.4 (1) Series A Preferred Stock Purchase Agreement dated August 10,
1988
10.5 (1) Series B Preferred Stock Purchase Agreement dated July 21,
1989
10.6 (1) Series C Preferred Stock Purchase Agreement dated January
15, 1990
10.7 (1) Master Lease and Warrant Agreement with Equitec Leasing
Company and Warrant dated January 18, 1990
10.8 (8) Preferred Stock Purchase Agreement with Crescent Real Estate
Equities Limited Partnership dated April 26, 1996
10.9 (1) Series D Preferred Stock Purchase Agreement dated April 17,
1991
10.10 (5) Amendment No. 1 dated September 3, 1993 to the Business Loan
Agreement dated September 3, 1993.
10.11 (5) Amendment No. 2 dated November 15, 1993 to the Business Loan
Agreement dated September 3, 1993.
10.12 (1) Amendment dated December 1, 1992 to Preferred Stock Purchase
Agreements
10.13 (4) Business Loan Agreement dated September 3, 1993 with Bank of
America National Trust and Savings Association
10.14 (5) Amendment No. 4 dated March 31, 1995 to the Business Loan
Agreement dated September 3, 1993
10.15 (5) Amendment No. 3 dated April 27, 1994 to the Business Loan
Agreement dated September 3, 1993
10.16 (6) Loan and Security Agreement dated December 20, 1995 with
Silicon Valley Bank
10.17 (6) Third Party Security agreement dated December 20, 1995
between Silicon Valley Bank and Moffett Design Corporation
23
<PAGE> 24
INDEX TO FORM 10-Q EXHIBITS continued
EXHIBIT
NO. DESCRIPTION
- --------------------------------------------------------------------------------
10.18 (6) Warrant to Purchase up to 75,000 Shares of the Company's
Common Stock issued to Silicon Valley Bank on December 20,
1995
10.19 (6) Common Stock Purchase Warrant to Purchase 100,000 Shares of
the Company's Common Stock issued to Bain & Company, dated
December 15, 1995
10.20 (6)(3) Employment Offer Letter to Robert Ferngren dated
November 9, 1995
10.21 (9)(3) Amendment dated July 29, 1996 to Employment Offer Letter
to Robert Ferngren
10.22 (3) Severance Agreement with Charles A. Lynch dated July 18,
1996
10.23 (3) Severance Agreement with David Anderson dated July 18, 1996
10.24 (3) Severance Agreement with Tim G. O'Shea dated July 18, 1996
10.25 (3) Severance Agreement with Joan M. Miller dated July 18, 1996
11.1 Computation of Net Loss per Share
27 (7) Financial Data Schedule
- ---------------
(1) Incorporated by reference from the Exhibits with corresponding numbers
filed with the Company's Registration Statement on Form S-1 (No.
33-53904) filed October 29, 1992, as amended by Amendment No. 1 to Form
S-1 (No. 33-53904) filed December 7, 1992, except that Exhibit 3.1 is
incorporated by reference from Exhibit 3.1C and Exhibit 3.2 is
incorporated by reference from Exhibit 3.2B.
(2) Incorporated by reference from the Exhibits with corresponding numbers
filed with the Company's Quarterly Report on Form 10-Q for the quarter
ended September 4, 1994.
(3) Agreements or compensatory plans covering executive officers and
directors of Fresh Choice, Inc.
(4) Incorporated by reference from the Company's Annual Report on Form 10-K
for the period ended December 26, 1993.
(5) Incorporated by reference from the Exhibits with corresponding numbers
filed with the Company's Quarterly Report on Form 10-Q for the quarter
ended March 19, 1995.
(6) Incorporated by reference from the Exhibits with corresponding numbers
filed with the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
(7) Included in EDGAR filing only.
(8) Incorporated by reference from the Exhibits with corresponding numbers
filed with the Company's Quarterly Report on Form 10-Q for the quarter
ended March 24, 1996.
(9) Incorporated by reference from the Exhibits with corresponding numbers
filed with the Company's Quarterly Report on Form 10-Q for the quarter
ended June 16, 1996.
24
<PAGE> 1
EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
FRESH CHOICE, INC.
(Pursuant to Section 245 of General Corporation Law of the State of Delaware)
Fresh Choice, Inc., a corporation organized and existing under the
General Corporation Law of the State of Delaware, which was originally
incorporated in Delaware under the name Fresh Choice Delaware Corporation on
October, 15, 1992, (the "Corporation") certifies as follows:
1. The Corporation's Restated Certificate of Incorporation was
duly adopted by the Board of Directors at a regular meeting in accordance with
Section 245 of the Corporation Law.
2. The Corporation's Restated Certificate of Incorporation
only restates and integrates and does not further amend the provisions of the
Corporation's Certificate of Incorporation as theretofore amended or
supplemented, and there is no discrepancy between those provisions and the
provisions of the Restated Certificate.
3. The Corporation's Certificate of Incorporation is restated
to read in full as follows:
FIRST: The name of the Corporation is Fresh Choice, Inc.
SECOND: The address of the registered office of the
Corporation in the State of Delaware is Incorporating
Services, Ltd., 15 East North Street, in the City of
Dover, County of Kent. The name of the registered
agent at that address is Incorporating Services, Ltd.
THIRD: The purpose of the Corporation is to engage in any
lawful act or activity for which a corporation may be
organized under the General Corporation Law of
Delaware.
FOURTH:
A. The total number of shares of all classes of stock
which the Corporation shall have authority to issue
is Seven Million Seven Hundred Fifty Thousand
(7,750,000), which consists of 7,500,000 shares of
Common Stock with par value of $.001 per share and
250,000 shares of Preferred Stock with par value of
$.001 per share.
1
<PAGE> 2
B. The Board of Directors is authorized, subject to any
limitations prescribed by law, to provide for the
issuance of shares of Preferred Stock in series and,
by filing a certificate pursuant to the applicable
law of the State of Delaware, to establish from time
to time the number of shares to be included in each
such series, and to fix the designation, powers,
preferences and rights of the shares of each such
series and any qualifications, limitations or
restrictions thereon. The number of authorized shares
of Preferred Stock may be increased or decreased (but
not below the number of shares thereof then
outstanding) by the affirmative vote of the holders
of a majority of the Common Stock without a vote of
the holders of the Preferred Stock, or of any series
thereof, unless a vote of any such holders is
required pursuant to the certificate or certificates
establishing the series of Preferred Stock.
FIFTH: The following provisions are inserted for the
management of the business and the conduct of the
affairs of the Corporation, and for further
definition, limitation and regulation of the powers
of the Corporation and of its directors and
stockholders:
A. The business and affairs of the Corporation shall be
managed by or under the direction of the Board of
Directors. In addition to the powers and authority
expressly conferred upon them by statute or by this
Certificate of Incorporation or the By-Laws of the
Corporation, the directors are hereby empowered to
exercise all such powers and do all such acts and
things as may be exercised or done by the
Corporation.
B. The directors of the Corporation need not be elected
by written ballot unless the By-Laws so provide.
C. After the closing date of the first sale of the
Corporation's Common Stock pursuant to a firmly
underwritten registered public offering (the "IPO"),
any action required or permitted to be taken by the
stockholders of the Corporation must be effected at a
duly called annual or special meeting of stockholders
of the Corporation and may not be effected by any
consent in writing by such stockholders. Prior to
such sale, unless otherwise provided by law, any
action which may otherwise be taken at any meeting of
the stockholders may be taken without a meeting and
without prior notice, if a written consent describing
such actions is signed by the holders of outstanding
shares having not less than the minimum number of
votes which would be necessary to authorize or take
such action at a meeting at which all shares entitled
to vote thereon were present and voted.
2
<PAGE> 3
D. Special meetings of stockholders of the Corporation
may be called only (1) by the Board of Directors
pursuant to a resolution adopted by a majority of the
total number of authorized directors (whether or not
there exist any vacancies in previously authorized
directorships at the time any such resolution is
presented to the Board for adoption) or (2) by the
holders of not less than ten percent (10%) of all of
the shares entitled to cast votes at the meeting.
SIXTH:
A. The number of directors shall initially be six (6)
and, thereafter, shall be fixed from time to time
exclusively by the Board of Directors pursuant to a
resolution adopted by a majority of the total number
of authorized directors (whether or not there exist
any vacancies in previously authorized directorships
at the time any such resolution is presented to the
Board for adoption). After the closing date of the
IPO, the directors shall be divided into three
classes, as nearly equal in number as reasonably
possible, with the term of office of the first class
to expire at the first annual meeting of the
stockholders following the IPO; the term of office of
the second class to expire at the second annual
meeting of stockholders held following the IPO; the
term of office of the third class to expire at the
third annual meeting of stockholders following the
IPO; and thereafter for each such term to expire at
each third succeeding annual meeting of stockholders
after such election. Subject to the rights of the
holders of any series of Preferred Stock then
outstanding, a vacancy resulting from the removal of
a director by the stockholders as provided in Article
SIXTH, Section C below may be filled at a special
meeting of the stockholders held for that purpose.
All directors shall hold office until the expiration
of the term for which elected, and until their
respective successors are elected, except in the case
of the death, resignation, or removal of any
director.
B. Subject to the rights of the holders of any series of
Preferred Stock then outstanding, newly created
directorships resulting from any increase in the
authorized number of directors or any vacancies in
the Board of Directors resulting from death,
resignation or other cause (other than removal from
office by a vote of the stockholders) may be filled
only by a majority vote of the directors then in
office, though less than a quorum, and directors so
chosen shall hold office for a term expiring at the
next annual meeting of stockholders at which the term
of office of the class to which they have been
elected expires, and until their respective
successors are elected, except in the case of the
death, resignation, or removal of any director. No
3
<PAGE> 4
decrease in the number of directors constituting the
Board of Directors shall shorten the term of any
incumbent director.
C. Subject to the rights of the holders of any series of
Preferred Stock then outstanding, any directors, or
the entire Board of Directors, may be removed from
office at any time, with or without cause, but only
by the affirmative vote of the holders of at least a
majority of the voting power of all of the then
outstanding shares of capital stock of the
Corporation entitled to vote generally in the
election of directors, voting together as a single
class. Vacancies in the Board of Directors resulting
from such removal may be filled by a majority of the
directors then in office, though less than a quorum,
or by the stockholders as provided in Article SIXTH,
Section A above. Directors so chosen shall hold
office for a term expiring at the next annual meeting
of stockholders at which the term of office of the
class to which they have been elected expires, and
until their respective successors are elected, except
in the case of the death, resignation, or removal of
any director.
SEVENTH: The Board of Directors is expressly empowered to
adopt, amend or repeal By-Laws of the Corporation.
Any adoption, amendment or repeal of By-Laws of the
Corporation by the Board of Directors shall require
the approval of a majority of the total number of
authorized directors (whether or not there exist any
vacancies in previously authorized directorships at
the time any resolution providing for adoption,
amendment or repeal is presented to the Board). The
stockholders shall also have power to adopt, amend or
repeal the By-Laws of the Corporation. Any adoption,
amendment or repeal of By-Laws of the Corporation by
the stockholders shall require, in addition to any
vote of the holders of any class or series of stock
of the Corporation required by law or by this
Certificate of Incorporation, the affirmative vote of
the holders of at least sixty-six and two-thirds
percent (66-2/3%) of the voting power of all of the
then outstanding shares of the capital stock of the
Corporation entitled to vote generally in the
election of directors, voting together as a single
class.
EIGHTH: A director of the Corporation shall not be personally
liable to the Corporation or its stockholders for
monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of
the director's duty of loyalty to the Corporation or
its stockholders, (ii) for acts or omissions not in
good faith or which involved intentional misconduct
or a knowing violation of law, (iii) under Section
174 of the Delaware General Corporation Law, or (iv)
for any transaction from which the director derived
an improper personal benefit.
4
<PAGE> 5
If the Delaware General Corporation Law is hereafter
amended to authorize the further elimination or
limitation of the liability of a director, then the
liability of a director of the Corporation shall be
eliminated or limited to the fullest extent permitted
by the Delaware General Corporation Law, as so
amended.
Any repeal or modification of the foregoing
provisions of this Article EIGHTH by the stockholders
of the Corporation shall not adversely affect any
right or protection of a director of the Corporation
existing at the time of such repeal or modification.
NINTH: The Corporation reserves the right to amend or repeal
any provision contained in this Certificate of
Incorporation in the manner prescribed by the laws of
the State of Delaware and all rights conferred upon
stockholders are granted subject to this reservation;
provided, however, that, notwithstanding any other
provision of this Certificate of Incorporation or any
provision of law which might otherwise permit a
lesser vote or no vote, but in addition to any vote
of the holders of any class or series of the stock of
this Corporation required by law or by this
Certificate of Incorporation, the affirmative vote of
the holders of at least 66-2/3% of the voting power
of all of the then outstanding shares of the capital
stock of the Corporation entitled to vote generally
in the election of directors, voting together as a
single class, shall be required to amend or repeal
this Article NINTH, Article FIFTH, Article SIXTH,
Article SEVENTH or Article EIGHTH.
IN WITNESS WHEREOF, the Corporation has caused this Restated
Certificate to be signed and attested by its duly authorized officers on this
11th day of June, 1993.
FRESH CHOICE, INC.
By: /s/ Martin T. Culver
------------------------------
Martin T. Culver, President
ATTEST:
/s/ Brad Wells
- ------------------------
Brad Wells, Secretary
<PAGE> 1
EXHIBIT 3.3
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
FRESH CHOICE, INC.
Fresh Choice, Inc., a Delaware corporation (the "Corporation"), hereby
certifies:
1. That the Corporation's Board of Directors has duly adopted
resolutions that provide that Article FOURTH of the Restated Certificate of
Incorporation be amended to read in full as follows:
FOURTH:
A. The total number of shares of all classes of stock
which the Corporation shall have authority to issue
is Eighteen Million Five Hundred Thousand
(18,500,000), which consists of 15,000,000 shares of
Common Stock with par value of $.001 per share and
3,500,000 shares of Preferred Stock with par value of
$.001 per share.
B. The Board of Directors is authorized, subject to any
limitations prescribed by law, to provide for the
issuance of shares of Preferred Stock in series and,
by filing a certificate pursuant to the applicable
law of the State of Delaware, to establish from time
to time the number of shares to be included in each
such series, and to fix the designation, powers,
preferences and rights of the shares of each such
series and any qualifications, limitations or
restrictions thereon. The number of authorized shares
of Preferred Stock may be increased or decreased (but
not below the number of shares thereof then
outstanding) by the affirmative vote of the holders
of a majority of the Common Stock without a vote of
the holders of the Preferred Stock, or of any series
thereof, unless a vote of any such holders is
required pursuant to the certificate or certificates
establishing the series of Preferred Stock.
<PAGE> 2
2. That the proposed amendment has been duly adopted in accordance with
the provisions of Section 242 of the General Corporation law of the State of
Delaware.
The Corporation has caused this Certificate of Amendment of Restated
Certificate of Incorporation to be signed by David A. Anderson, its Chief
Financial Officer, this 13th day of September 1996.
FRESH CHOICE, INC.
By: /s/ David A. Anderson
---------------------------
David A. Anderson
Chief Financial Officer
<PAGE> 1
EXHIBIT 3.4
CERTIFICATE OF DESIGNATION
OF
SERIES A VOTING PARTICIPATING CONVERTIBLE PREFERRED STOCK
OF
FRESH CHOICE, INC.
Fresh Choice, Inc., a Delaware corporation, DOES HEREBY CERTIFY:
That, pursuant to authority conferred upon the Board of Directors of
said corporation by virtue of its Certificate of Incorporation as amended and in
accordance with Section 151 of the General Corporation Law of the State of
Delaware, said Board of Directors has duly adopted a resolution providing for
the issuance of a series of Preferred Stock, par value $0.001 per share,
designated as Series A Voting Participating Convertible Preferred Stock, which
resolution reads as follows:
"BE IT RESOLVED, that the Board of Directors (the "Board of Directors")
of Fresh Choice, Inc., a Delaware corporation (the "Corporation"), hereby
authorizes the issuance of a series of Preferred Stock and fixes its
designation, powers, preferences and relative, participating, optional or other
special rights, and qualifications, limitations and restrictions thereof, as
follows:
SECTION 1. DESIGNATION. The distinctive serial designation of said
series shall be "Series A Voting Participating Convertible Preferred Stock"
(hereinafter called "Series A"). Each share of Series A shall be identical in
all respects with all other shares of Series A except as to the dates from and
after which dividends thereon shall be cumulative.
SECTION 2. NUMBER OF SHARES. The number of shares in Series A shall
initially be 1,187,906, which number may from time to time be increased or
decreased (but not below the total number thereof then outstanding and reserved
for issuance) by the Board of Directors. Shares of Series A that are redeemed,
purchased or otherwise acquired by the Corporation or converted into Common
Stock shall be cancelled and shall revert to authorized but unissued shares of
Preferred Stock undesignated as to series.
SECTION 3. DIVIDENDS. So long as any share of Series A remains
outstanding, the holders of shares of Series A shall be entitled to participate,
on an "as converted" basis, in and to receive, when, as and if declared by the
Board of Directors of the Corporation, but only out of funds legally available
therefore, any and all cash dividends and other distributions paid or made with
respect to any junior stock. So long as any share of Series A remains
outstanding, no dividend whatever shall be paid or declared and no distribution
shall be made on any junior stock, unless, contemporaneously therewith, a
dividend or other distribution on the shares of the Series A then outstanding
shall have been declared and set apart for payment as hereinafter provided. All
dividends and other distributions paid or made by the Corporation at any time as
any share of the Series A remains outstanding shall be paid or distributed among
the holders of the Common Stock and the Series A in proportion to the shares of
Common Stock then held by
<PAGE> 2
the holders of the Common Stock and the shares of Common Stock which the holders
of the Series A then have the right to acquire upon conversion of the shares of
Series A then held by them.
In addition to the foregoing, in the event of any liquidation,
dissolution or winding up of the affairs of the Corporation (a "Liquidation")
following the occurrence of an Event of Non-Compliance, and continuing through
and including the date on which any such Liquidation occurs, the holders of the
Series A shall be entitled to receive, when, as and if declared by the Board of
Directors of the Corporation, but only out of funds legally available therefore,
cumulative preferential cash dividends at the annual rate of $0.56 per share,
and no more, calculated from the first date of the occurrence of an Event of
Non-Compliance, and payable pursuant to Section 4 hereof. So long as any share
of Series A remains outstanding, no dividend whatever shall be paid or declared
and no distribution shall be made on any junior stock, and no shares of junior
stock shall be purchased, redeemed or otherwise acquired for consideration by
the Corporation, directly or indirectly, unless all accrued dividends on all
outstanding shares of Series A shall have been paid. For the sole purpose of
this paragraph, any merger, consolidation or sale of substantially all the
assets of the Corporation shall be deemed to be a Liquidation for the purposes
of such rights to cumulative preferential dividends, and shall be paid prior to
the consummation of any such transaction.
SECTION 4. LIQUIDATION RIGHTS. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Corporation, then, after payment in full of all amounts, if any, owing to the
holders of the Corporation's Series B Non-Voting Participating Convertible
Preferred Stock (hereinafter called "Series B") and Series C Non-Voting
Participating Convertible Preferred Stock (hereinafter called "Series C"), but
before any distribution or payment shall be made to the holders of any junior
stock, the holders of shares of Series A shall be entitled to be paid in full an
amount equal to $4.63 per share, together with all accrued dividends to such
distribution or payment date whether or not earned or declared. After payment in
full of all amounts owing to the holders of shares of Series A as herein
provided, the remaining assets of the Corporation, if any, may be distributed by
the Corporation as provided in Section 281 of the General Corporation Law of the
State of Delaware or other controlling provision of applicable law, and the
holders of shares of Series A shall have no right to participate in any such
distributions.
SECTION 5. CONVERSION RIGHTS. The holders of shares of Series A shall
have conversion rights as follows (the "Conversion Rights"):
(a) RIGHT TO CONVERT. Each share of Series A shall be
convertible, at the option of the holder thereof, at any time after the
date of issuance of such share at the office of the Corporation or any
transfer agent for such stock, into such number of fully paid and
nonassessable shares of Common Stock of the Corporation as is
determined by
2
<PAGE> 3
dividing $4.63 by the Current Conversion Price applicable to such
share, determined as hereinafter provided, in effect on the date the
certificate is surrendered for conversion. The price at which shares of
Common Stock shall be deliverable upon conversion of shares of the
Series A (the "Stated Conversion Price") shall initially be $4.63 per
share of Common Stock. The Stated Conversion Price shall be adjusted
from and after the date of filing this Certificate (the "Original
Filing Date") as hereinafter provided. The Stated Conversion Price at
any time in effect or, in the case of any such adjustment, such Stated
Conversion Price as most recently so adjusted, is herein called the
"Current Conversion Price."
(b) MANDATORY CONVERSION. At the option of the Corporation,
each share of Series A shall be converted into shares of Common Stock
at the Current Conversion Price then in effect at any time after both
the following conditions shall have been satisfied: (i) either (A) the
average Closing Prices (as hereinafter defined) for the Common Stock
during any 120-day consecutive Trading Day (as hereinafter defined)
period beginning on the first anniversary following the filing of this
Certificate shall equal or exceed $15.00 per share (as adjusted for any
stock dividends, combinations or splits with respect to such shares),
or (B) the Corporation shall have consummated the sale of originally
issued shares of Common Stock equal to or greater than 25% of the total
number of shares outstanding immediately preceding the date of such
original issuance (calculated on a fully diluted basis) at a price per
share (prior to underwriters' discounts and expenses) of Common Stock
equal to or greater than $15.00 (as adjusted for any stock dividends,
combinations or splits with respect to such shares) pursuant to a firm
commitment, underwritten public offering registered pursuant to the
provisions of the Securities Act of 1933, as amended, other than a
registration relating solely to a transaction under Rule 145 under such
Act (or any successor thereto) or to an employee benefit plan of the
Corporation; and (ii) the shares of the Common Stock issuable upon
conversion of the Series A shall have been registered for resale in the
open market without restriction by any holder of the Series A who
receives Common Stock pursuant to this mandatory conversion provision
pursuant to an effective shelf registration statement under the
Securities Act of 1933, as amended, and the Corporation shall have
agreed to keep such registration effective until the holder of the
Series A receiving Common Stock pursuant to this mandatory conversion
provision shall be free to resell such Common Stock in the open market
without restrictions. The Corporation may exercise its option by
delivering to the holders of the Series A and the transfer agent for
the Series A a certificate from the Corporation's independent certified
public accountants certifying compliance with both of the conditions
set forth above. As used herein, the term "Closing Price" on any day
shall mean the reported last sale price per share of Common Stock
regular way on such day or, in case no such sale takes place on such
day, the average of the reported closing bid and asked prices regular
way, in each case on the New York Stock Exchange, or, if the Common
Stock is not listed or admitted to trading
3
<PAGE> 4
on such exchange, on the American Stock Exchange, or, if the Common
Stock is not listed or admitted to trading on such Exchange, on The
Nasdaq Stock Market, or if the Common Stock is not listed or admitted
to trade thereon, on the principal national securities exchange on
which the Common Stock is listed or admitted to trading, or, if the
Common Stock is not listed or admitted to trading on any national
securities exchange or market, the average of the closing bid and asked
prices in the over-the-counter market as reported by the National
Association of Securities Dealers, or, if not so reported, as reported
by the National Quotation Bureau, Incorporated, or any successor
thereof, or, if not so reported, the average of the closing bid and
asked prices as furnished by any member of that National Association of
Securities Dealers, Inc. selected from time to time by the Corporation
for that purpose; and the term "Trading Day" shall mean a day on which
the principal national securities exchange or market on which the
Common Stock is listed or admitted to trading is open for the
transaction of business or, if the Common Stock is not listed or
admitted to trading on any national securities exchange, a Monday,
Tuesday, Wednesday, Thursday or Friday on which banking institutions in
the Borough of Manhattan, The City of New York, are not authorized or
obligated by law or executive order to close.
(c) MECHANICS OF CONVERSION. Before any holder of Series A
shall be entitled to convert the same into shares of Common Stock, such
holder shall surrender the certificate or certificates therefor, duly
endorsed, at the office of the Corporation or of any transfer agent for
such stock, and shall give written notice to the Corporation at such
office that such holder elects to convert the same and shall state
therein the name or names in which such holder wishes the certificate
or certificates for shares of Common Stock to be issued. The
Corporation shall, as soon as practicable thereafter, issue and deliver
at such office to such holder of Series A, a certificate or
certificates for the number of shares of Common Stock to which such
holder shall be entitled as aforesaid. Such conversion shall be deemed
to have been made immediately prior to the close of business on the
date of surrender of the shares of Series A to be converted, and the
person or persons entitled to receive the shares of Common Stock
issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of Common Stock on such date.
(d) ADJUSTMENTS TO CURRENT CONVERSION PRICE FOR STOCK
DIVIDENDS AND FOR COMBINATIONS OR SUBDIVISIONS OF COMMON STOCK. In the
event that the Corporation at any time or from time to time after the
Original Filing Date shall declare or pay, without consideration, any
dividend on the Common Stock payable in Common Stock or in any right to
acquire Common Stock for no consideration, or shall effect a
subdivision of the outstanding shares of Common Stock into a greater
number of shares of Common Stock (by stock split, reclassification or
otherwise than by payment of a dividend in Common Stock or in any right
to acquire Common Stock), or in the event the outstanding shares
4
<PAGE> 5
of Common Stock shall be combined or consolidated, by reclassification
or otherwise, into a lesser number of shares of Common Stock, then the
Current Conversion Price in effect immediately prior to such event
shall, concurrently with the effectiveness of such event, be
proportionately decreased or increased, as appropriate. In the event
that the Corporation shall declare or pay, without consideration, any
dividend on the Common Stock payable in any right to acquire Common
Stock for no consideration, then the Corporation shall be deemed to
have made a dividend payable in Common Stock in an amount of shares
equal to the maximum number of shares issuable upon exercise of such
rights to acquire Common Stock.
(e) ADJUSTMENTS FOR RECLASSIFICATION AND REORGANIZATION. If at
any time after the Original Filing Date the Common Stock issuable upon
conversion of the Series A shall be changed into the same or a
different number of shares of any other class or classes of stock,
whether by capital reorganization, reclassification or otherwise, the
Current Conversion Price then in effect shall, concurrently with the
effectiveness of such reorganization or reclassification, be
proportionately adjusted so that the Series A shall be convertible
into, in lieu of the number of shares of Common Stock which the holders
would otherwise have been entitled to receive, a number of shares of
such other class or classes of stock equivalent to the number of shares
of Common Stock that would have been subject to receipt by the holders
upon conversion of the Series A immediately before that change.
(f) REORGANIZATIONS, MERGERS, CONSOLIDATIONS OR SALES OF
ASSETS. If at any time or from time to time after the Original Filing
Date there is a capital reorganization or reclassification of the
capital stock of the Corporation (other than a recapitalization,
subdivision, combination, reclassification, exchange or substitution of
shares provided for elsewhere in this Section 5) or a merger,
consolidation or sale of all or substantially all of the assets of the
Corporation, as a part of and as a condition to such capital
reorganization or reclassification, merger, consolidation or sale of
assets provision shall be made so that the holders of the Series A
shall thereafter be entitled to receive upon conversion of the Series A
the number of shares of stock or other securities or property of the
Corporation to which a holder of the number of shares of Common Stock
deliverable upon conversion of the Series A would have been entitled on
such capital reorganization or reclassification, merger, consolidation
or sale of assets, subject to adjustment in respect of such stock or
securities by the terms thereof. In any such case, appropriate
adjustment shall be made in the application of the provisions of this
Section 5 with respect to the rights of the holders of Series A after
the capital reorganization, merger, consolidation or sale of assets to
the end that the provisions of this Section 5 (including adjustment of
the Current Conversion Price then in effect and the number of shares
issuable upon conversion of the Series A) shall be applicable after
that event and be as nearly equivalent as practicable.
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(g) NO IMPAIRMENT. From and after the Original Filing Date,
the Corporation will not, by amendment of its Certificate of
Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms to be observed or performed hereunder
by the Corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 5, and in the taking
of all such action as may be necessary or appropriate in order to
protect the Conversion Rights of the holders of the Series A against
impairment.
(h) CERTIFICATES AS TO ADJUSTMENTS. Upon the occurrence of
each adjustment or readjustment of any Current Conversion Price
pursuant to this Section 5, the Corporation at its expense shall
promptly compute such adjustment or readjustment in accordance with the
terms hereof and prepare and furnish to each holder of Series A and
Series B Non-Voting Participating Convertible Preferred Stock
(hereinafter called "Series B") a certificate executed by the
Corporation's President or Chief Financial Officer setting forth such
adjustment or readjustment and showing in detail the facts upon which
such adjustment or readjustment is based. The Corporation shall, upon
the written request at any time of any holder of Series A or Series B,
furnish or cause to be furnished to such holder a like certificate
setting forth (i) such adjustments and readjustments, (ii) the Current
Conversion Price for such series of Preferred Stock at the time in
effect, and (iii) the number of shares of Common Stock and the amount,
if any, of other property which at the time would be received upon the
conversion of the Series A.
(i) NOTICES OF RECORD DATE. In the event that the Corporation
shall propose at any time after the Original Filing Date: (i) to
declare any dividend or distribution upon its Common Stock, whether in
cash, property, stock or other securities, whether or not a regular
cash dividend and whether or not out of earnings or earned surplus;
(ii) to offer for subscription pro rata to the holders of any class or
series of its stock any additional shares of stock of any class or
series or other, rights; (iii) to effect any reclassification or
recapitalization of its Common Stock outstanding involving a change in
the Common Stock; or (iv) to merge or consolidate with or into any
other corporation, or sell, lease or convey all or substantially all of
its assets, or to liquidate, dissolve or wind up; then, in connection
with each such event, the Corporation shall send to the holders of
Series A and Series B:
(i) at least twenty (20) days' prior written notice
of the date on which a record shall be taken for such
dividend, distribution or subscription rights (and specifying
the date on which the holders of Common Stock shall be
entitled thereto) or for determining rights to vote, if any,
in respect of the matters referred to in (iii) and (iv) above;
and
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<PAGE> 7
(ii) in the case of the matters referred to in (iii)
and (iv) above, at least twenty (20) days' prior written
notice of the date when the same shall take place (and
specifying the date on which the holders of Common Stock shall
be entitled to exchange their Common Stock for securities or
other property deliverable upon the occurrence of such event).
(j) ISSUE TAXES. The Corporation shall pay any and all issue
and other taxes that may be payable in respect of any issue or delivery
of shares of Common Stock on conversion of Series A pursuant hereto;
provided, however, that the Corporation shall not be obligated to pay
any transfer taxes resulting from any transfer requested by any holder
in connection with any such conversion.
(k) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The
Corporation shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock, solely for the purpose
of effecting the conversion of the shares of the Series A, such number
of its shares of Common Stock as shall from time to time be sufficient
to effect the conversion of all outstanding shares of the Series A; and
if at any time the number of authorized but unissued shares of Common
Stock shall not be sufficient to effect the conversion of all then
outstanding shares of the Series A, the Corporation will take such
corporate action as may, in the opinion of its counsel, be necessary to
increase its authorized but unissued shares of Common Stock to such
number of shares as shall be sufficient for such purpose, including,
without limitation, engaging in best efforts to obtain the requisite
stockholder approval of any necessary amendment to this Certificate.
(l) FRACTIONAL SHARES. No fractional share shall be issued
upon the conversion of any share or shares of Series A. All shares of
Common Stock (including fractions thereof) issuable upon conversion of
more than one share of Series A by a holder thereof shall be aggregated
for purposes of determining whether the conversion would result in the
issuance of any fractional share. If, after the aforementioned
aggregation, the conversion would result in the issuance of a fraction
of a share of Common Stock, the Corporation shall, in lieu of issuing
any fractional share, pay the holder otherwise entitled to such
fraction a sum in cash equal to the fair market value of such fraction
on the date of conversion (as determined in good faith by the Board of
Directors).
(m) NOTICES. Any notice required by the provisions of this
Section 5 to be given to the holders of shares of Series A and Series B
shall be deemed given if deposited in the United States mail, postage
prepaid, or if sent by facsimile or delivered personally by hand or
nationally recognized courier and addressed to each holder of record at
such holder's address or facsimile number appearing in the records of
the Corporation.
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<PAGE> 8
(n) MEANING OF "COMMON STOCK". For the purpose of this Section
5, the term "Common Stock" shall include any stock of any class or
series of the Corporation which has no preference or priority in the
payment of dividends or in the distribution of assets in the event of
any voluntary or involuntary liquidation, dissolution or winding up of
the Corporation which is not subject to redemption by the Corporation.
However, shares issuable upon conversion of shares of Series A shall
include only shares of the class designated as Common Stock as of the
original date of issuance of shares of Series A or shares of the
Corporation of any classes or series resulting from any
reclassification or reclassifications thereof and which have no
preference or priority in the payment of dividends or in the
distribution of assets in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation and which are
not subject to redemption by the Corporation, provided that if at any
time there shall be more than one such resulting class or series, the
shares of each such class and series then so issuable shall be
substantially in the proportion which the total number of shares of
such class and series resulting from all such reclassifications bears
to the total number of shares of all such classes and series resulting
from all such reclassifications.
(o) POSTPONEMENT OF ADJUSTMENTS; CALCULATIONS. Any adjustment
in the conversion price otherwise required by this Section 5 to be made
may be postponed if such adjustment (plus any other adjustments
postponed pursuant to this paragraph 5(o) and not theretofore made)
would not require an increase or decrease of more than 1% in such
price. All calculations hereunder shall be made to the nearest cent or
to the nearest 1/100th of a share, as the case may be.
(p) TAX ADJUSTMENTS. The Board of Directors may make such
adjustments in the conversion price, in addition to those required by
this Section 5, as shall be determined by the Board of Directors to be
advisable in order to avoid taxation so far as practicable of any
dividend of stock or stock rights or any event treated as such for
Federal income tax purposes to the recipients. The Board of Directors
shall have the power to resolve any ambiguity or correct any error in
this Section 5, and its action in so doing shall be final and
conclusive.
(q) ADJUSTMENTS APPLICABLE TO NEW SECURITIES. In the event
that any time, as a result of an adjustment made pursuant to the
provisions hereof, the holder of any shares of Series A thereafter
surrendered for conversion shall become entitled to receive any shares
of capital stock of the Corporation other than Common Stock, thereafter
the number of such other shares so receivable upon conversion of such
shares of Series A shall be subject to adjustment from time to time in
a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Common Stock contained in Section 5 with
respect to the Common Stock shall apply on like terms to any such other
shares.
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<PAGE> 9
(r) ACCOUNTANTS' CERTIFICATE. The certificate of any
independent firm of public accountants of recognized standing selected
by the Board of Directors shall be presumptive evidence of the
correctness of any computation made under this Section 5.
SECTION 6. VOTING RIGHTS. The holders of shares of Series A shall not
have any voting rights except as set forth below or as otherwise from time to
time required by law.
The holders of Series A shall be entitled to vote, voting together with
the holders of Common Stock as a single class, on all matters submitted to a
vote of, or approval by, the Corporation's stockholders. Each holder of Series A
shall be entitled to the number of votes equal to the number of shares of Common
Stock into which the shares of Series A held by such holder are, at the time of
any vote or approval, then convertible (in each case, rounded up to the next
whole share).
At any time when the Requisite Shares shall be outstanding, in addition
to any other vote or consent of stockholders required by law or by the
Certificate of Incorporation, the consent of the holders of at least a majority
of the shares of Series A at the time outstanding, voting together as a single
class, given in person or by proxy, either in writing without a meeting or by
vote at any meeting called for the purpose, shall be necessary for authorizing,
effecting or validating any of the following actions; provided, however, if
there are members of the Corporation's Board of Directors who have been elected
to hold such office by the holders of the Series A, or appointed to hold such
office, pursuant to, or in accordance with, the provisions hereof, then the
approval of the holders of the Series A shall be necessary only for authorizing,
effecting or validating any of the following actions which have not been
approved by each of such members:
(i) Any amendment, alteration or repeal of any of the
provisions of the Certificate of Incorporation, or of the
Bylaws, of the Corporation affecting in any manner whatsoever
meetings of stockholders, special meetings, meeting notices,
quorums, size of board, vacancies on the board, or provisions
relating to the amendment of the Certificate of Incorporation
or Bylaws;
(ii) The authorization or creation of, or the
increase in the authorized number of, any shares of any class
or series or any security convertible into shares of any class
or series ranking prior or senior to, or pari passu or on a
parity with, the shares of Series A in the distribution of
assets on any liquidation, dissolution, or winding up of the
Corporation or in the payment of dividends or otherwise, or
any increase or decrease (but not below the number of shares
thereof then outstanding) in the authorized number of shares
of Series A;
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<PAGE> 10
(iii) The merger or consolidation of the Corporation
with or into any other corporation or other entity, or the
sale of all or substantially all of the assets of the
Corporation, or any other business combination (as such term
is defined in Section 203 of the Delaware General Corporation
Law;
(iv) Any increase in the number of Directors
constituting the whole Board of Directors of the Corporation
to more than seven;
(v) Any "fundamental change" transaction, including,
without limitation, any transaction or other event pursuant to
which the Corporation would change its principal business
activity or add additional business activities or other lines
of business;
(vi) Material deviations from annual operating or
capital budgets;
(vii) Material changes in the operating strategy of
the Corporation;
(viii) Any acquisition or repurchase of any security
of the Corporation except as permitted or required by any
employee benefit plan of the Corporation duly authorized and
approved by the Corporation's stockholders prior to its
implementation by the Corporation;
(ix) Any incurrence of, or the entering into any
contract or agreement to alter or amend the instruments
governing, any indebtedness for borrowed money or capital
leases (including liens and leases) in an aggregate amount
greater than $5,000,000; or
(x) The creation of or investment in any subsidiary
of the Corporation.
So long as the Requisite Shares and any shares of Series A are
outstanding, if and whenever an Event of Non-Compliance shall occur, and for so
long as any Event of Non-Compliance shall be continuing, the number of Directors
then constituting the whole Board of Directors shall be automatically increased
to create such number of vacancies as are necessary so that such vacancies
constitute a majority of the whole Board of Directors, and the holders of shares
of Series A at the time outstanding, in addition to any other vote or consent of
stockholders required by law or by the Certificate of Incorporation, voting
separately as a single class, given in person or by proxy, either in writing
without a meeting or by vote at any meeting called for the purpose,voting
separately as a class, shall be entitled to elect the additional directors
necessary to fill such newly created vacancies. Whenever all Events of
Non-Compliance shall have been cured or waived, then the right of the holders of
the shares of Series A to elect such additional directors shall cease (but
subject always to the same provisions for the vesting of such voting
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<PAGE> 11
rights in the case of any similar future occurrences), and the terms of office
of all persons elected as Directors by the holders of the shares of Series A
shall forthwith terminate and the number of Directors constituting the whole
Board of Directors shall be reduced accordingly.
At any time after any additional voting power shall have been so vested
in the holders of shares of Series A, the Secretary of the Corporation may, and
upon the written request of any holder of shares of Series A (addressed to the
Secretary at the principal office of the Corporation) shall, call a special
meeting of the holders of the shares of Series A for the election of the
Directors to be elected by them as herein provided, such call to be made by
notice similar to that provided in the Bylaws for a special meeting of the
stockholders or as required by law. If any such special meeting required to be
called as above provided shall not be called by the Secretary within 20 days
after receipt of any such request, then any holder of shares of Series A may
call such meeting, upon the notice above provided, and for that purpose shall
have access to the stock books of the Corporation. The Directors elected at any
such special meeting shall hold office until the next annual meeting of the
stockholders if such office shall not have previously terminated as above
provided. In case any vacancy shall occur among the Directors elected by the
holders of the shares of Series A, a successor shall be elected by the Board of
Directors to serve until the next annual meeting of the stockholders upon the
nomination of the then remaining Directors elected by the holders of the shares
of Series A or the successor of such remaining Directors. Any Directors who
shall have been elected by the holders of Series A or by any Directors so
elected may be removed during the aforesaid term of office, either with or
without cause, by, and only by, the affirmative vote of the holders of a
majority of the shares of the Series A, voting separately as a single class,
given either at a special meeting of such stockholders duly called for that
purpose or pursuant to a written consent of stockholders, and any vacancy
thereby created may be filled by the holders of Series A represented at such
meeting or pursuant to such written consent. If the holders of shares of Series
A become entitled under the foregoing provisions to elect or participate in the
election of Directors, such entitlement shall not affect the right of such
holders to vote as stated in the first paragraph of this Section 6.
SECTION 7. COVENANTS; "EVENT OF NON-COMPLIANCE" DEFINED. For so long as
the Requisite Shares shall be outstanding, the Corporation shall do each of the
following:
(a) PROFITABILITY. The Corporation's consolidated net income
before all amounts properly recorded for interest, taxes, depreciation
and amortization ("EBITDA"), in each case, as set forth in the audited
financial statements of the Corporation for the fiscal years indicated,
shall be, (i) for fiscal year 1996, $1,500,000; (ii) for fiscal year
1997, $3,500,000; and (iii) for fiscal year 1998, $5,500,000. As used
herein, the term "EBITDA Period" means each fiscal year of the
Corporation ending in December 1996, December 1997, and December 1998;
and the term "EBITDA Target" for any EBITDA Period means the dollar
amount of EBITDA required to be earned by the Corporation for each such
EBITDA Period as set forth in the preceding sentence, or as
subsequently
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<PAGE> 12
modified as hereinafter provided. If the Board of Directors of the
Corporation shall unanimously and specifically authorize and approve
any act or activity of the Corporation the result of which will be to
reduce the Corporation's EBITDA for any EBITDA Period, and such
reduction in the EBITDA is unanimously and specifically authorized and
approved by the Board of Directors, the EBITDA Target or Targets, as
the case may be, shall be deemed to be automatically reduced to the
dollar amount equal to the amount calculated by multiplying the
Corporation's new, revised budgeted EBITDA by a fraction the numerator
of which is the original EBITDA Target specified for the applicable
EBITDA Period in the first sentence of this paragraph and the
denominator of which is the originally budgeted EBITDA for such EBITDA
Period as such originally budgeted EBITDA is set forth in the Business
Plan of the Corporation as of April 26, 1996.
(b) MATTERS REQUIRING NOTICE. The Corporation shall notify the
holders of the Series A (i) ten days prior to the taking of any action
to reduce any EBITDA Target, and (ii) promptly upon acquiring knowledge
of the occurrence of any Event of Non-Compliance.
(c) "EVENT OF NON-COMPLIANCE" DEFINED. As used herein, an
"Event of Non-Compliance" means (i) the breach of or violation by the
Corporation of any covenant of the Corporation set forth in paragraphs
(a) and (b) of this Section 7, and such violation is not cured or
waived within 30 days, or (ii) either a monetary default or a material
non-monetary default, or both, under any material bond, note or other
evidence of indebtedness of the Corporation or under any indenture or
other instrument under which any such evidence if indebtedness has been
issued or by which it is governed and the expiration of the applicable
period of grace, if any, specified in such evidence of indebtedness;
provided, however, that, if such default under such evidence of
indebtedness, indenture or other instrument shall be cured by the
Corporation, or be waived by the holders of such indebtedness, in each
case as may be permitted by such evidence of indebtedness, indenture or
other instrument, the Event of Non-Compliance hereunder by reason of
such default shall be deemed likewise to have been thereupon cured or
waived. In the event the Corporation's EBITDA for any EBITDA Period
shall be an amount less than the EBITDA Target for such EBITDA Period,
but shall be an amount equal to or greater than the product obtained by
multiplying (i) the EBITDA Target for such EBITDA Period by (ii) .95
(the EBITDA Target less such amount being hereinafter called the
"Shortfall"), then, in such event, the failure of the Corporation to
earn an amount equal to or greater than the EBITDA Target for such
EBITDA Period shall be deemed to have been cured if, for the first
quarter of the Corporation's fiscal year next following the EBITDA
Period during which the Corporation shall fail to have earned the
EBITDA Target, the Corporation shall have earned the sum of (x) the
Shortfall, plus (y) the First Quarter Projected EBITDA (as hereinafter
defined). As used herein, the term "First Quarter Projected EBITDA"
shall mean either (i) the amount determined by
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multiplying the Corporation's budgeted EBITDA for the applicable
quarter by a fraction the numerator of which is the EBITDA Target for
the EBITDA Period in which the quarter falls and the denominator of
which is the Corporation's budgeted EBITDA for such EBITDA Period, or
(ii) if the Corporation's budgeted EBITDA for the applicable quarter
shall be a loss, then the Corporation's budgeted loss for such quarter,
whichever of (i) or (ii) is less. For the purposes hereof, the
references to budgeted amounts refer to the budgets of the Corporation
duly approved by the Corporation's Board of Directors in the ordinary
course of business and consistent with past practice.
SECTION 8. REDUCTION IN VALUE OR SECURITY. The Corporation shall not in
any manner, whether by amendment of the Certificate of Incorporation (including,
without limitation, any Certificate of Designations), merger, reorganization,
recapitalization, consolidation, sale of assets, sale of stock, tender offer,
dissolution or otherwise, take any action, or permit any action to be taken,
solely or primarily for the purpose of increasing the value of any class of
stock of the Corporation if the effect of such action is to reduce the value or
security of the Series A.
SECTION 9. DEFINITIONS. As used herein with respect to Series A, the
following terms shall have the following meanings:
(a) The term "accrued dividends," with respect to any share of
any class or series, shall mean an amount computed at the annual
dividend rate for the class or series of which the particular share is
a part, from the date on which dividends on such share became
cumulative to and including the date to which such dividends are to be
accrued, less the aggregate amount of all dividends theretofore paid
thereon.
(b) The term "business day" shall mean each Monday, Tuesday,
Wednesday, Thursday or Friday on which banking institutions in the
Borough of Manhattan, The City of New York, are not authorized or
obligated by law or executive order to close.
(c) The term "junior stock" shall mean the Common Stock and
any other series of Preferred Stock of the Corporation, or any other
class or series of the capital stock of the Corporation, authorized or
issued after the date on which this Certificate is filed other than the
Series B Non-Voting Participating Convertible Preferred Stock of the
Corporation and the Series C Non-Voting Participating Convertible
Preferred Stock of the Corporation, which Series B Non-Voting
Participating Convertible Preferred Stock and Series C Non-Voting
Participating Convertible Preferred Stock are senior to, and have
preference and priority in the payment of dividends and in the
distribution of assets on any liquidation, dissolution or winding up of
the Corporation over, the Series A.
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(d) The term "person" shall mean any individual, corporation,
partnership, joint venture, joint stock association, business trust and
other business entity, trust, unincorporated organization, governmental
agency or authority or any other form of entity.
(e) The term "Requisite Shares" means the greater of (i)
593,953 shares of the Series A, Series B and Series C, taken together,
or (ii) 50% of the total shares of the Series A, Series B and Series C
issued on or after the date of filing this Certificate.
(f) The term "subsidiary" shall mean, as to a particular
parent corporation, any person of which 50% or more of the indicia of
equity rights is at the time directly or indirectly owned by such
parent corporation or by one or more persons controlled by, controlling
or under common control with such parent corporation.
SECTION 10. OTHER RIGHTS. The shares of Series A shall not have any
powers, preferences or relative, participating, optional or other special
rights, or qualifications, limitations or restrictions thereof, other than as
set forth herein.
IN WITNESS WHEREOF, Fresh Choice, Inc. has caused this Certificate to
be signed by Robert Ferngren, its President, this 13th day of September, 1996.
Fresh Choice, Inc.
By /s/ Robert Ferngren
--------------------------
Robert Ferngren, President
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EXHIBIT 3.5
CERTIFICATE OF DESIGNATION
OF
SERIES B NON-VOTING PARTICIPATING CONVERTIBLE PREFERRED STOCK
OF
FRESH CHOICE, INC.
Fresh Choice, Inc., a Delaware corporation, DOES HEREBY CERTIFY:
That, pursuant to authority conferred upon the Board of Directors of
said corporation by virtue of its Certificate of Incorporation as amended and in
accordance with Section 151 of the General Corporation Law of the State of
Delaware, said Board of Directors has duly adopted a resolution providing for
the issuance of a series of Preferred Stock, par value $0.001 per share,
designated as Series B Non-Voting Participating Convertible Preferred Stock,
which resolution reads as follows:
"BE IT RESOLVED, that the Board of Directors (the "Board of Directors")
of Fresh Choice, Inc., a Delaware corporation (the "Corporation"), hereby
authorizes the issuance of a series of Preferred Stock and fixes its
designation, powers, preferences and relative, participating, optional or other
special rights, and qualifications, limitations and restrictions thereof, as
follows:
SECTION 1. DESIGNATION. The distinctive serial designation of said
series shall be "Series B Non-Voting Participating Convertible Preferred Stock"
(hereinafter called "Series B"). Each share of Series B shall be identical in
all respects with all other shares of Series B except as to the dates from and
after which dividends thereon shall be cumulative.
SECTION 2. NUMBER OF SHARES. The number of shares in Series B shall
initially be 1,187,906, which number may from time to time be increased or
decreased (but not below the total number thereof then outstanding and reserved
for issuance) by the Board of Directors. Shares of Series B that are redeemed,
purchased or otherwise acquired by the Corporation or converted into Common
Stock shall be cancelled and shall revert to authorized but unissued shares of
Preferred Stock undesignated as to series.
SECTION 3. DIVIDENDS. So long as any share of Series B remains
outstanding, the holders of shares of Series B shall be entitled to participate,
on an "as converted" basis, in and to receive, when, as and if declared by the
Board of Directors of the Corporation, but only out of funds legally available
therefore, any and all cash dividends and other distributions paid or made with
respect to any junior stock. So long as any share of Series B remains
outstanding, no dividend whatever shall be paid or declared and no distribution
shall be made on any junior stock, unless, contemporaneously therewith, a
dividend or other distribution on the shares of the Series B then outstanding
shall have been declared and set apart for payment as hereinafter provided. All
dividends and other distributions paid or made by the Corporation at any time as
any share of the Series B remains outstanding shall be paid or distributed among
the holders of the Common Stock and the Series B in proportion to the shares of
Common Stock then held by
<PAGE> 2
the holders of the Common Stock and the shares of Common Stock which the holders
of the Series B then have the right to acquire upon conversion of the shares of
Series B then held by them.
In addition to the foregoing, in the event of any liquidation,
dissolution or winding up of the affairs of the Corporation (a "Liquidation")
following the occurrence of an Event of Non-Compliance, and continuing through
and including the date on which any such Liquidation occurs, the holders of the
Series B shall be entitled to receive, when, as and if declared by the Board of
Directors of the Corporation, but only out of funds legally available therefore,
cumulative preferential cash dividends at the annual rate of $0.56 per share,
and no more, calculated from the first date of the occurrence of an Event of
Non-Compliance, and payable pursuant to Section 4 hereof. So long as any share
of Series B remains outstanding, no dividend whatever shall be paid or declared
and no distribution shall be made on any junior stock, and no shares of junior
stock shall be purchased, redeemed or otherwise acquired for consideration by
the Corporation, directly or indirectly, unless all accrued dividends on all
outstanding shares of Series B shall have been paid. For the sole purpose of
this paragraph, any merger, consolidation or sale of substantially all the
assets of the Corporation shall be deemed to be a Liquidation for the purposes
of such rights to cumulative preferential dividends, and shall be paid prior to
the consummation of any such transaction.
SECTION 4. LIQUIDATION RIGHTS. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Corporation, then, after payment in full of all amounts, if any, owing to the
holders of the Corporation's Series C Non-Voting Participating Convertible
Preferred Stock, but before any distribution or payment shall be made to the
holders of any junior stock, the holders of shares of Series B shall be entitled
to be paid in full an amount equal to $4.63 per share, together with all accrued
dividends to such distribution or payment date whether or not earned or
declared. After payment in full of all amounts owing to the holders of shares of
Series B as herein provided, the remaining assets of the Corporation, if any,
may be distributed by the Corporation as provided in Section 281 of the General
Corporation Law of the State of Delaware or other controlling provision of
applicable law, and the holders of shares of Series B shall have no right to
participate in any such distributions.
SECTION 5. CONVERSION RIGHTS. The holders of shares of Series B shall
have conversion rights as follows (the "Conversion Rights"):
(a) RIGHT TO CONVERT. Each share of Series B shall be
convertible at the office of the Corporation or any transfer agent for
such stock, at the option of the holder thereof, into either (i) at any
time after the date of issuance of such share through and including the
date on which the Series A shall have become mandatorily convertible
one fully paid and nonassessable share of Series A Voting Participating
Convertible Preferred Stock
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(hereinafter called "Series A") of the Corporation or (ii) at any time
after the date of issuance of such share such number of fully paid and
nonassessable shares of Common Stock of the Corporation as is
determined by dividing $4.63 by the Current Conversion Price applicable
to such share, determined as hereinafter provided, in effect on the
date the certificate representing such share is surrendered for
conversion. The price at which shares of Common Stock shall be
deliverable upon conversion of shares of the Series B (the "Stated
Conversion Price") shall initially be $4.63 per share of Common Stock.
The Stated Conversion Price shall be adjusted from and after the
Original Issue Date as hereinafter provided. The Stated Conversion
Price at any time in effect or, in the case of any such adjustment,
such Stated Conversion Price as most recently so adjusted, is herein
called the "Current Conversion Price."
(b) MECHANICS OF CONVERSION. Before any holder of Series B
shall be entitled to convert the same into shares of Series A or Common
Stock, as the case may be, such holder shall surrender the certificate
or certificates therefor, duly endorsed, at the office of the
Corporation or of any transfer agent for such stock, and shall give
written notice to the Corporation at such office that such holder
elects to convert the same and shall state therein the name or names in
which such holder wishes the certificate or certificates for shares of
Series A or Common Stock, as the case may be, to be issued. The
Corporation shall, as soon as practicable thereafter, issue and deliver
at such office to such holder of Series B, a certificate or
certificates for the number of shares of Series A or Common Stock, as
the case may be, to which such holder shall be entitled as aforesaid.
Such conversion shall be deemed to have been made immediately prior to
the close of business on the date of surrender of the shares of Series
B to be converted, and the person or persons entitled to receive the
shares of Series A or Common Stock, as the case may be, issuable upon
such conversion shall be treated for all purposes as the record holder
or holders of such shares of Series A or Common Stock, as the case may
be, on such date.
(c) ADJUSTMENTS TO CURRENT CONVERSION PRICE FOR STOCK
DIVIDENDS AND FOR COMBINATIONS OR SUBDIVISIONS OF COMMON STOCK. In the
event that the Corporation at any time or from time to time after the
Original Issue Date shall declare or pay, without consideration, any
dividend on the Common Stock payable in Common Stock or in any right to
acquire Common Stock for no consideration, or shall effect a
subdivision of the outstanding shares of Common Stock into a greater
number of shares of Common Stock (by stock split, reclassification or
otherwise than by payment of a dividend in Common Stock or in any right
to acquire Common Stock), or in the event the outstanding shares of
Common Stock shall be combined or consolidated, by reclassification or
otherwise, into a lesser number of shares of Common Stock, then the
Current Conversion Price in effect immediately prior to such event
shall, concurrently with the effectiveness of such event, be
proportionately decreased or increased, as appropriate. In the event
that the
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<PAGE> 4
Corporation shall declare or pay, without consideration, any dividend
on the Common Stock payable in any right to acquire Common Stock for no
consideration, then the Corporation shall be deemed to have made a
dividend payable in Common Stock in an amount of shares equal to the
maximum number of shares issuable upon exercise of such rights to
acquire Common Stock.
(d) ADJUSTMENTS FOR RECLASSIFICATION AND REORGANIZATION. If at
any time after the Original Issue Date the Common Stock issuable upon
conversion of the Series B shall be changed into the same or a
different number of shares of any other class or classes of stock,
whether by capital reorganization, reclassification or otherwise, the
Current Conversion Price then in effect shall, concurrently with the
effectiveness of such reorganization or reclassification, be
proportionately adjusted so that the Series B shall be convertible
into, in lieu of the number of shares of Common Stock which the holders
would otherwise have been entitled to receive, a number of shares of
such other class or classes of stock equivalent to the number of shares
of Common Stock that would have been subject to receipt by the holders
upon conversion of the Series B immediately before that change.
(e) REORGANIZATIONS, MERGERS, CONSOLIDATIONS OR SALES OF
ASSETS. If at any time or from time to time after the Original Issue
Date there is a capital reorganization or reclassification of the
capital stock of the Corporation (other than a recapitalization,
subdivision, combination, reclassification, exchange or substitution of
shares provided for elsewhere in this Section 5) or a merger,
consolidation or sale of all or substantially all of the assets of the
Corporation, as a part of and as a condition to such capital
reorganization or reclassification, merger, consolidation or sale of
assets provision shall be made so that the holders of the Series B
shall thereafter be entitled to receive upon conversion of the Series B
the number of shares of stock or other securities or property of the
Corporation to which a holder of the number of shares of Common Stock
deliverable upon conversion of the Series B would have been entitled on
such capital reorganization or reclassification, merger, consolidation
or sale of assets, subject to adjustment in respect of such stock or
securities by the terms thereof. In any such case, appropriate
adjustment shall be made in the application of the provisions of this
Section 5 with respect to the rights of the holders of Series B after
the capital reorganization or reclassification, merger, consolidation
or sale of assets to the end that the provisions of this Section
5(including adjustment of the Current Conversion Price then in effect
and the number of shares issuable upon conversion of the Series B)
shall be applicable after that event and be as nearly equivalent as
practicable.
(f) NO IMPAIRMENT. The Corporation will not, by amendment of
its Certificate of Incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale
of securities or any other voluntary action,
4
<PAGE> 5
avoid or seek to avoid the observance or performance of any of the
terms to be observed or performed hereunder by the Corporation, but
will at all times in good faith assist in the carrying out of all the
provisions of this Section 5 and in the taking of all such action as
may be necessary or appropriate in order to protect the Conversion
Rights of the holders of the Series B against impairment.
(g) CERTIFICATES AS TO ADJUSTMENTS. Upon the occurrence of
each adjustment or readjustment of any Current Conversion Price
pursuant to this Section 5, the Corporation at its expense shall
promptly compute such adjustment or readjustment in accordance with the
terms hereof and prepare and furnish to each holder of Series B a
certificate executed by the Corporation's President or Chief Financial
Officer setting forth such adjustment or readjustment and showing in
detail the facts upon which such adjustment or readjustment is based.
The Corporation shall, upon the written request at any time of any
holder of Series B, furnish or cause to be furnished to such holder a
like certificate setting forth (i) such adjustments and readjustments,
(ii) the Current Conversion Price for such series of Preferred Stock at
the time in effect, and (iii) the number of shares of Common Stock and
the amount, if any, of other property which at the time would be
received upon the conversion of the Series B.
(h) NOTICES OF RECORD DATE. In the event that the Corporation
shall propose at any time after the Original Issue Date: (i) to declare
any dividend or distribution upon its Common Stock, whether in cash,
property, stock or other securities, whether or not a regular cash
dividend and whether or not out of earnings or earned surplus; (ii) to
offer for subscription pro rata to the holders of any class or series
of its stock any additional shares of stock of any class or series or
other, rights; (iii) to effect any reclassification or recapitalization
of its Common Stock outstanding involving a change in the Common Stock;
or (iv) to merge or consolidate with or into any other corporation, or
sell, lease or convey all or substantially all of its assets, or to
liquidate, dissolve or wind up; then, in connection with each such
event, the Corporation shall send to the holders of Series B:
(i) at least twenty (20) days' prior written notice
of the date on which a record shall be taken for such
dividend, distribution or subscription rights (and specifying
the date on which the holders of Common Stock shall be
entitled thereto) or for determining rights to vote, if any,
in respect of the matters referred to in (iii) and (iv) above;
and
(ii) in the case of the matters referred to in (iii)
and (iv) above, at least twenty (20) days' prior written
notice of the date when the same shall take place (and
specifying the date on which the holders of Common Stock shall
be entitled to exchange their Common Stock for securities or
other property deliverable upon the occurrence of such event).
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<PAGE> 6
(i) ISSUE TAXES. The Corporation shall pay any and all issue
and other taxes that may be payable in respect of any issue or delivery
of shares of Series A or Common Stock, as the case may be, on
conversion of Series B pursuant hereto; provided, however, that the
Corporation shall not be obligated to pay any transfer taxes resulting
from any transfer requested by any holder in connection with any such
conversion.
(j) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The
Corporation shall at all times reserve and keep available out of its
authorized but unissued shares of Series A and Common Stock, solely for
the purpose of effecting the conversion of the shares of the Series B,
such number of its shares of Series A and Common Stock as shall from
time to time be sufficient to effect the conversion of all outstanding
shares of the Series B; and if at any time the number of authorized but
unissued shares of Series A or Common Stock shall not be sufficient to
effect the conversion of all then outstanding shares of the Series B,
the Corporation will take such corporate action as may, in the opinion
of its counsel, be necessary to increase its authorized but unissued
shares of Series A or Common Stock, as the case may be, to such number
of shares as shall be sufficient for such purpose, including, without
limitation, engaging in best efforts to obtain the requisite
stockholder approval of any necessary amendment to the Certificate of
Incorporation of the Corporation.
(k) FRACTIONAL SHARES. No fractional share shall be issued
upon the conversion of any share or shares of Series B. All shares of
Series A or Common Stock (including fractions thereof) issuable upon
conversion of more than one share of Series B by a holder thereof shall
be aggregated for purposes of determining whether the conversion would
result in the issuance of any fractional share. If, after the
aforementioned aggregation, the conversion would result in the issuance
of a fraction of a share of Series A or Common Stock, the Corporation
shall, in lieu of issuing any fractional share, pay the holder
otherwise entitled to such fraction a sum in cash equal to the fair
market value of such fraction on the date of conversion (as determined
in good faith by the Board of Directors).
(l) NOTICES. Any notice required by the provisions of this
Section 5 to be given to the holders of shares of Series B shall be
deemed given if deposited in the United States mail, postage prepaid,
or if sent by facsimile or delivered personally by hand or nationally
recognized courier and addressed to each holder of record at such
holder's address or facsimile number appearing in the records of the
Corporation.
(m) MEANING OF "COMMON STOCK". For the purpose of this Section
5, the term "Common Stock" shall include any stock of any class or
series of the Corporation which has no preference or priority in the
payment of dividends or in the distribution of assets in the event of
any voluntary or involuntary liquidation, dissolution or winding up
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<PAGE> 7
of the Corporation which is not subject to redemption by the
Corporation. However, shares issuable upon conversion of shares of
Series B shall include only shares of the class designated as Common
Stock as of the original date of issuance of shares of Series B or
shares of the Corporation of any classes or series resulting from any
reclassification or reclassifications thereof and which have no
preference or priority in the payment of dividends or in the
distribution of assets in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation and which are
not subject to redemption by the Corporation, provided that if at any
time there shall be more than one such resulting class or series, the
shares of each such class and series then so issuable shall be
substantially in the proportion which the total number of shares of
such class and series resulting from all such reclassifications bears
to the total number of shares of all such classes and series resulting
from all such reclassifications.
(n) POSTPONEMENT OF ADJUSTMENTS; CALCULATIONS. Any adjustment
in the conversion price otherwise required by this Section 5 to be made
may be postponed if such adjustment (plus any other adjustments
postponed pursuant to this paragraph 5(n) and not theretofore made)
would not require an increase or decrease of more than 1% in such
price. All calculations hereunder shall be made to the nearest cent or
to the nearest 1/100th of a share, as the case may be.
(o) TAX ADJUSTMENTS. The Board of Directors may make such
adjustments in the conversion price, in addition to those required by
this Section 5, as shall be determined by the Board of Directors to be
advisable in order to avoid taxation so far as practicable of any
dividend of stock or stock rights or any event treated as such for
Federal income tax purposes to the recipients. The Board of Directors
shall have the power to resolve any ambiguity or correct any error in
this Section 5, and its action in so doing shall be final and
conclusive.
(p) ADJUSTMENTS APPLICABLE TO NEW SECURITIES. In the event
that any time, as a result of an adjustment made pursuant to the
provisions hereof, the holder of any shares of Series B thereafter
surrendered for conversion shall become entitled to receive any shares
of capital stock of the Corporation other than Series A or Common
Stock, thereafter the number of such other shares so receivable upon
conversion of such shares of Series B shall be subject to adjustment
from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Common Stock
contained in Section 5 with respect to the Common Stock shall apply on
like terms to any such other shares.
(q) ACCOUNTANTS' CERTIFICATE. The certificate of any
independent firm of public accountants of recognized standing selected
by the Board of Directors shall be presumptive evidence of the
correctness of any computation made under this Section 5.
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<PAGE> 8
(r) REIT SAVINGS CLAUSE. The Conversion Rights with respect to
the Series B shall not exist to the extent that immediately after the
conversion of such shares of Series B into Series A or Common Stock,
Crescent Real Estate Equities, Inc., a Maryland corporation (together
with its successors, "Crescent"), would be treated as owning more than
10 percent of the outstanding voting securities of the Corporation for
purposes of Section 856(c)(5) of the Internal Revenue Code of 1986, as
amended (the "Code"). Any request by any holder of the Series B to
exercise such holder's Conversion Rights must be accompanied by an
opinion of counsel, which counsel and the form, scope and substance of
such opinion must be satisfactory to Crescent in its sole and absolute
discretion, stating that any proposed exercise of any holder's
Conversion Rights will not cause Crescent to be treated as owning more
than 10 percent of the outstanding voting securities of the Corporation
for purposes of Section 856(c)(5) of the Code. Any exercise or
purported exercise of any Conversion Rights in violation of this
Section 5(r) shall be void ab initio.
SECTION 6. VOTING RIGHTS. The holders of shares of Series B shall not
have any voting rights except as from time to time required by law.
SECTION 7. COVENANTS; "EVENT OF NON-COMPLIANCE" DEFINED. For so long as
the Requisite Shares shall be outstanding, the Corporation shall do each of the
following:
(a) PROFITABILITY. The Corporation's consolidated net income
before all amounts properly recorded for interest, taxes, depreciation
and amortization ("EBITDA"), in each case, as set forth in the audited
financial statements of the Corporation for the fiscal years indicated,
shall be, (i) for fiscal year 1996, $1,500,000; (ii) for fiscal year
1997, $3,500,000; and (iii) for fiscal year 1998, $5,500,000. As used
herein, the term "EBITDA Period" means each fiscal year of the
Corporation ending in December 1996, December 1997, and December 1998;
and the term "EBITDA Target" for any EBITDA Period means the dollar
amount of EBITDA required to be earned by the Corporation for each such
EBITDA Period as set forth in the preceding sentence, or as
subsequently modified as hereinafter provided. If the Board of
Directors of the Corporation shall unanimously and specifically
authorize and approve any act or activity of the Corporation the result
of which will be to reduce the Corporation's EBITDA for any EBITDA
Period, and such reduction in the EBITDA is unanimously and
specifically authorized and approved by the Board of Directors, the
EBITDA Target or Targets, as the case may be, shall be deemed to be
automatically reduced to the dollar amount equal to the amount
calculated by multiplying the Corporation's new, revised budgeted
EBITDA by a fraction the numerator of which is the original EBITDA
Target specified for the applicable EBITDA Period in the first sentence
of this paragraph and the denominator of which is the originally
budgeted EBITDA for such EBITDA Period as such originally budgeted
EBITDA is set forth in the Business Plan of the Corporation as of April
26, 1996.
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<PAGE> 9
(b) MATTERS REQUIRING NOTICE. The Corporation shall notify the
holders of the Series B (i) ten days prior to the taking of any action
to reduce any EBITDA Target, and (ii) promptly upon acquiring knowledge
of the occurrence of any Event of Non-Compliance.
(c) "EVENT OF NON-COMPLIANCE" DEFINED. As used herein, an
"Event of Non-Compliance" means (i) the breach of or violation by the
Corporation of any covenant of the Corporation set forth in paragraphs
(a) and (b) of this Section 7, and such violation is not cured or
waived within 30 days, or (ii) the default under any material bond,
note or other evidence of indebtedness of the Corporation or under any
indenture or other instrument under which any such evidence if
indebtedness has been issued or by which it is governed and the
expiration of the applicable period of grace, if any, specified in such
evidence of indebtedness; provide, however, that, if such default under
such evidence of indebtedness, indenture or other instrument shall be
cured by the Corporation, or be waived by the holders of such
indebtedness, in each case as may be permitted by such evidence of
indebtedness, indenture or other instrument, the Event of
Non-Compliance hereunder by reason of such default shall be deemed
likewise to have been thereupon cured or waived. In the event the
Corporation's EBITDA for any EBITDA Period shall be an amount less than
the EBITDA Target for such EBITDA Period, but shall be an amount equal
to or greater than the product obtained by multiplying (i) the EBITDA
Target for such EBITDA Period by (ii) .95 (the EBITDA Target less such
amount being hereinafter called the "Shortfall"), then, in such event,
the failure of the Corporation to earn an amount equal to or greater
than the EBITDA Target for such EBITDA Period shall be deemed to have
been cured if, for the first quarter of the Corporation's fiscal year
next following the EBITDA Period during which the Corporation shall
fail to have earned the EBITDA Target, the Corporation shall have
earned the sum of (x) the Shortfall, plus (y) the First Quarter
Projected EBITDA (as hereinafter defined). As used herein, the term
"First Quarter Projected EBITDA" shall mean either (i) the amount
determined by multiplying the Corporation's budgeted EBITDA for the
applicable quarter by a fraction the numerator of which is the EBITDA
Target for the EBITDA Period in which the quarter falls and the
denominator of which is the Corporation's budgeted EBITDA for such
EBITDA Period, or (ii) if the Corporation's budgeted EBITDA for the
applicable quarter shall be a loss, then the Corporation's budgeted
loss for such quarter, whichever of (i) or (ii) is less. For the
purposes hereof, the references to budgeted amounts refer to the
budgets of the Corporation duly approved by the Corporation's Board of
Directors in the ordinary course of business and consistent with past
practice.
SECTION 8. REDUCTION IN VALUE OR SECURITY. The Corporation shall not in
any manner, whether by amendment of the Certificate of Incorporation (including,
without limitation, any Certificate of Designations), merger, reorganization,
recapitalization, consolidation, sale of assets, sale of stock, tender offer,
dissolution or otherwise, take any action, or permit any action
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<PAGE> 10
to be taken, solely or primarily for the purpose of increasing the value of any
class of stock of the Corporation if the effect of such action is to reduce the
value or security of the Series B.
SECTION 9. DEFINITIONS. As used herein with respect to Series B, the
following terms shall have the following meanings:
(a) The term "accrued dividends," with respect to any share of
any class or series, shall mean an amount computed at the annual
dividend rate for the class or series of which the particular share is
a part, from the date on which dividends on such share became
cumulative to and including the date to which such dividends are to be
accrued, less the aggregate amount of all dividends theretofore paid
thereon.
(b) The term "business day" shall mean each Monday, Tuesday,
Wednesday, Thursday or Friday on which banking institutions in the
Borough of Manhattan, The City of New York, are not authorized or
obligated by law or executive order to close.
(c) The term "junior stock" shall mean the Common Stock and
any other series of Preferred Stock of the Corporation, or any other
class or series of the capital stock of the Corporation, authorized or
issued after the Original Issue Date other than the Series C Non-Voting
Participating Convertible Preferred Stock of the Corporation, which
Series C Non-Voting Participating Convertible Preferred Stock is senior
to, and has preference and priority in the payment of dividends and in
the distribution of assets on any liquidation, dissolution or winding
up of the Corporation over, the Series B.
(d) The term "Original Issue Date" shall mean the date on
which a share of Series B was first issued.
(e) The term "person" shall mean any individual, corporation,
partnership, joint venture, joint stock association, business trust and
other business entity, trust, unincorporated organization, governmental
agency or authority or any other form of entity.
(f) The term "Requisite Shares" means the greater of (i)
593,953 shares of the Series A, Series B and Series C, taken together,
or (ii) 50% of the total shares of the Series A, Series B and Series C
issued on or after the date of filing this Certificate.
(g) The term "subsidiary" shall mean, as to a particular
parent corporation, any person of which 50% or more of the indicia of
equity rights is at the time directly or indirectly owned by such
parent corporation or by one or more persons controlled by, controlling
or under common control with such parent corporation.
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<PAGE> 11
SECTION 10. OTHER RIGHTS. The shares of Series B shall not have any
powers, preferences or relative, participating, optional or other special
rights, or qualifications, limitations or restrictions thereof, other than as
set forth herein.
IN WITNESS WHEREOF, Fresh Choice, Inc. has caused this Certificate to
be signed by Robert Ferngren, its President, this 13th day of September, 1996.
Fresh Choice, Inc.
By /s/ Robert Ferngren
------------------------------
Robert Ferngren, President
III-11
<PAGE> 1
EXHIBIT 3.6
CERTIFICATE OF DESIGNATION
OF
SERIES C NON-VOTING PARTICIPATING CONVERTIBLE PREFERRED STOCK
OF
FRESH CHOICE, INC.
Fresh Choice, Inc., a Delaware corporation, DOES HEREBY CERTIFY:
That, pursuant to authority conferred upon the Board of Directors of
said corporation by virtue of its Certificate of Incorporation as amended and in
accordance with Section 151 of the General Corporation Law of the State of
Delaware, said Board of Directors has duly adopted a resolution providing for
the issuance of a series of Preferred Stock, par value $0.001 per share,
designated as Series C Non-Voting Participating Convertible Preferred Stock,
which resolution reads as follows:
"BE IT RESOLVED, that the Board of Directors (the "Board of Directors")
of Fresh Choice, Inc., a Delaware corporation (the "Corporation"), hereby
authorizes the issuance of a series of Preferred Stock and fixes its
designation, powers, preferences and relative, participating, optional or other
special rights, and qualifications, limitations and restrictions thereof, as
follows:
SECTION 1. DESIGNATION. The distinctive serial designation of said
series shall be "Series C Non-Voting Participating Convertible Preferred Stock"
(hereinafter called "Series C"). Each share of Series C shall be identical in
all respects with all other shares of Series C except as to the dates from and
after which dividends thereon shall be cumulative.
SECTION 2. NUMBER OF SHARES. The number of shares in Series C shall
initially be 593,953, which number may from time to time be increased or
decreased (but not below the total number thereof then outstanding and reserved
for issuance) by the Board of Directors. Shares of Series C that are redeemed,
purchased or otherwise acquired by the Corporation or converted into Common
Stock shall be cancelled and shall revert to authorized but unissued shares of
Preferred Stock undesignated as to series.
SECTION 3. DIVIDENDS. So long as any share of Series C remains
outstanding, the holders of shares of Series C shall be entitled to participate,
on an "as converted" basis, in and to receive, when, as and if declared by the
Board of Directors of the Corporation, but only out of funds legally available
therefore, any and all cash dividends and other distributions paid or made with
respect to any junior stock. So long as any share of Series C remains
outstanding, no dividend whatever shall be paid or declared and no distribution
shall be made on any junior stock, unless, contemporaneously therewith, a
dividend or other distribution on the shares of the Series C then outstanding
shall have been declared and set apart for payment as hereinafter provided. All
dividends and other distributions paid or made by the Corporation at any time as
any share of the Series C remains outstanding shall be paid or distributed among
the holders of the Common Stock and the Series C in proportion to the shares of
Common Stock then held by
<PAGE> 2
the holders of the Common Stock and the shares of Common Stock which the holders
of the Series C then have the right to acquire upon conversion of the shares of
Series C then held by them.
In addition to the foregoing, in the event of any liquidation,
dissolution or winding up of the affairs of the Corporation (a "Liquidation")
following the occurrence of an Event of Non-Compliance, and continuing through
and including the date on which any such Liquidation occurs, the holders of the
Series C shall be entitled to receive, when, as and if declared by the Board of
Directors of the Corporation, but only out of funds legally available therefore,
cumulative preferential cash dividends at the annual rate of $0.72 per share,
and no more, calculated from the first date of the occurrence of an Event of
Non-Compliance, and payable pursuant to Section 4 hereof. So long as any share
of Series C remains outstanding, no dividend whatever shall be paid or declared
and no distribution shall be made on any junior stock, and no shares of junior
stock shall be purchased, redeemed or otherwise acquired for consideration by
the Corporation, directly or indirectly, unless all accrued dividends on all
outstanding shares of Series C shall have been paid. For the sole purpose of
this paragraph, any merger, consolidation or sale of substantially all the
assets of the Corporation shall be deemed to be a Liquidation for the purposes
of such rights to cumulative preferential dividends, and shall be paid prior to
the consummation of any such transaction.
SECTION 4. LIQUIDATION RIGHTS. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Corporation, then, before any distribution or payment shall be made to the
holders of any junior stock, the holders of shares of Series C shall be entitled
to be paid in full an amount equal to $6.00 per share, together with all accrued
dividends to such distribution or payment date whether or not earned or
declared. After payment in full of all amounts owing to the holders of shares of
Series C as herein provided, the remaining assets of the Corporation, if any,
may be distributed by the Corporation as provided in Section 281 of the General
Corporation Law of the State of Delaware or other controlling provision of
applicable law, and the holders of shares of Series C shall have no right to
participate in any such distributions.
SECTION 5. CONVERSION RIGHTS. The holders of shares of Series C shall
have conversion rights as follows (the "Conversion Rights"):
(A) RIGHT TO CONVERT. Each share of Series C shall be
convertible, at the option of the holder thereof, at any time after the
date of issuance of such share at the office of the Corporation or any
transfer agent for such stock, into such number of fully paid and
nonassessable shares of Common Stock of the Corporation as is
determined by dividing $4.63 by the Current Conversion Price applicable
to such share, determined as hereinafter provided, in effect on the
date the certificate is surrendered for conversion. The price at which
shares of Common Stock shall be deliverable upon conversion of
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<PAGE> 3
shares of the Series C (the "Stated Conversion Price") shall initially
be $4.63 per share of Common Stock. The Stated Conversion Price shall
be adjusted from and after the Original Issue Date as hereinafter
provided. The Stated Conversion Price at any time in effect or, in the
case of any such adjustment, such Stated Conversion Price as most
recently so adjusted, is herein called the "Current Conversion Price."
(B) MECHANICS OF CONVERSION. Before any holder of Series C
shall be entitled to convert the same into shares of Common Stock, such
holder shall surrender the certificate or certificates therefor, duly
endorsed, at the office of the Corporation or of any transfer agent for
such stock, and shall give written notice to the Corporation at such
office that such holder elects to convert the same and shall state
therein the name or names in which such holder wishes the certificate
or certificates for shares of Common Stock to be issued. The
Corporation shall, as soon as practicable thereafter, issue and deliver
at such office to such holder of Series C, a certificate or
certificates for the number of shares of Common Stock to which such
holder shall be entitled as aforesaid. Such conversion shall be deemed
to have been made immediately prior to the close of business on the
date of surrender of the shares of Series C to be converted, and the
person or persons entitled to receive the shares of Common Stock
issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of Common Stock on such date.
(C) ADJUSTMENTS TO CURRENT CONVERSION PRICE FOR STOCK
DIVIDENDS AND FOR COMBINATIONS OR SUBDIVISIONS OF COMMON STOCK. In the
event that the Corporation at any time or from time to time after the
Original Issue Date shall declare or pay, without consideration, any
dividend on the Common Stock payable in Common Stock or in any right to
acquire Common Stock for no consideration, or shall effect a
subdivision of the outstanding shares of Common Stock into a greater
number of shares of Common Stock (by stock split, reclassification or
otherwise than by payment of a dividend in Common Stock or in any right
to acquire Common Stock), or in the event the outstanding shares of
Common Stock shall be combined or consolidated, by reclassification or
otherwise, into a lesser number of shares of Common Stock, then the
Current Conversion Price in effect immediately prior to such event
shall, concurrently with the effectiveness of such event, be
proportionately decreased or increased, as appropriate. In the event
that the Corporation shall declare or pay, without consideration, any
dividend on the Common Stock payable in any right to acquire Common
Stock for no consideration, then the Corporation shall be deemed to
have made a dividend payable in Common Stock in an amount of shares
equal to the maximum number of shares issuable upon exercise of such
rights to acquire Common Stock.
(D) ADJUSTMENTS FOR RECLASSIFICATION AND REORGANIZATION. If at
any time after the Original Issue Date the Common Stock issuable upon
conversion of the Series
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<PAGE> 4
C shall be changed into the same or a different number of shares of any
other class or classes of stock, whether by capital reorganization,
reclassification or otherwise, the Current Conversion Price then in
effect shall, concurrently with the effectiveness of such
reorganization or reclassification, be proportionately adjusted so that
the Series C shall be convertible into, in lieu of the number of shares
of Common Stock which the holders would otherwise have been entitled to
receive, a number of shares of such other class or classes of stock
equivalent to the number of shares of Common Stock that would have been
subject to receipt by the holders upon conversion of the Series C
immediately before that change.
(E) REORGANIZATIONS, MERGERS, CONSOLIDATIONS OR SALES OF
ASSETS. If at any time or from time to time after the Original Issue
Date there is a capital reorganization or reclassification of the
capital stock of the Corporation (other than a recapitalization,
subdivision, combination, reclassification, exchange or substitution of
shares provided for elsewhere in this Section 5) or a merger,
consolidation or sale of all or substantially all of the assets of the
Corporation, as a part of and as a condition to such capital
reorganization or reclassification, merger, consolidation or sale of
assets provision shall be made so that the holders of the Series C
shall thereafter be entitled to receive upon conversion of the Series C
the number of shares of stock or other securities or property of the
Corporation to which a holder of the number of shares of Common Stock
deliverable upon conversion of the Series C would have been entitled on
such capital reorganization or reclassification, merger, consolidation
or sale of assets, subject to adjustment in respect of such stock or
securities by the terms thereof. In any such case, appropriate
adjustment shall be made in the application of the provisions of this
Section 5 with respect to the rights of the holders of Series C after
the capital reorganization, merger, consolidation or sale of assets to
the end that the provisions of this Section 5 (including adjustment of
the Current Conversion Price then in effect and the number of shares
issuable upon conversion of the Series C) shall be applicable after
that event and be as nearly equivalent as practicable.
(F) NO IMPAIRMENT. The Corporation will not, by amendment of
its Certificate of Incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale
of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or
performed hereunder by the Corporation, but will at all times in good
faith assist in the carrying out of all the provisions of this Section
5 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the holders of
the Series C against impairment.
(G) CERTIFICATES AS TO ADJUSTMENTS. Upon the occurrence of
each adjustment or readjustment of any Current Conversion Price
pursuant to this Section 5, the
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<PAGE> 5
Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and
furnish to each holder of Series C a certificate executed by the
Corporation's President or Chief Financial Officer setting forth such
adjustment or readjustment and showing in detail the facts upon which
such adjustment or readjustment is based. The Corporation shall, upon
the written request at any time of any holder of Series C, furnish or
cause to be furnished to such holder a like certificate setting forth
(i) such adjustments and readjustments, (ii) the Current Conversion
Price for such series of Preferred Stock at the time in effect, and
(iii) the number of shares of Common Stock and the amount, if any, of
other property which at the time would be received upon the conversion
of the Series C.
(H) NOTICES OF RECORD DATE. In the event that the Corporation
shall propose at any time after the Original Issue Date: (i) to declare
any dividend or distribution upon its Common Stock, whether in cash,
property, stock or other securities, whether or not a regular cash
dividend and whether or not out of earnings or earned surplus; (ii) to
offer for subscription pro rata to the holders of any class or series
of its stock any additional shares of stock of any class or series or
other, rights; (iii) to effect any reclassification or recapitalization
of its Common Stock outstanding involving a change in the Common Stock;
or (iv) to merge or consolidate with or into any other corporation, or
sell, lease or convey all or substantially all of its assets, or to
liquidate, dissolve or wind up; then, in connection with each such
event, the Corporation shall send to the holders of Series C:
(i) at least twenty (20) days' prior written notice
of the date on which a record shall be taken for such
dividend, distribution or subscription rights (and specifying
the date on which the holders of Common Stock shall be
entitled thereto) or for determining rights to vote, if any,
in respect of the matters referred to in (iii) and (iv) above;
and
(ii) in the case of the matters referred to in (iii)
and (iv) above, at least twenty (20) days' prior written
notice of the date when the same shall take place (and
specifying the date on which the holders of Common Stock shall
be entitled to exchange their Common Stock for securities or
other property deliverable upon the occurrence of such event).
(I) ISSUE TAXES. The Corporation shall pay any and all issue
and other taxes that may be payable in respect of any issue or delivery
of shares of Common Stock on conversion of Series C pursuant hereto;
provided, however, that the Corporation shall not be obligated to pay
any transfer taxes resulting from any transfer requested by any holder
in connection with any such conversion.
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<PAGE> 6
(J) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The
Corporation shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock, solely for the purpose
of effecting the conversion of the shares of the Series C, such number
of its shares of Common Stock as shall from time to time be sufficient
to effect the conversion of all outstanding shares of the Series C; and
if at any time the number of authorized but unissued shares of Common
Stock shall not be sufficient to effect the conversion of all then
outstanding shares of the Series C, the Corporation will take such
corporate action as may, in the opinion of its counsel, be necessary to
increase its authorized but unissued shares of Common Stock to such
number of shares as shall be sufficient for such purpose, including,
without limitation, engaging in best efforts to obtain the requisite
stockholder approval of any necessary amendment to the Certificate of
Incorporation of the Corporation.
(K) FRACTIONAL SHARES. No fractional share shall be issued
upon the conversion of any share or shares of Series C. All shares of
Common Stock (including fractions thereof) issuable upon conversion of
more than one share of Series C by a holder thereof shall be aggregated
for purposes of determining whether the conversion would result in the
issuance of any fractional share. If, after the aforementioned
aggregation, the conversion would result in the issuance of a fraction
of a share of Common Stock, the Corporation shall, in lieu of issuing
any fractional share, pay the holder otherwise entitled to such
fraction a sum in cash equal to the fair market value of such fraction
on the date of conversion (as determined in good faith by the Board of
Directors).
(L) NOTICES. Any notice required by the provisions of this
Section 5 to be given to the holders of shares of Series C shall be
deemed given if deposited in the United States mail, postage prepaid,
or if sent by facsimile or delivered personally by hand or nationally
recognized courier and addressed to each holder of record at such
holder's address or facsimile number appearing in the records of the
Corporation.
(M) MEANING OF "COMMON STOCK". For the purpose of this Section
5, the term "Common Stock" shall include any stock of any class or
series of the Corporation which has no preference or priority in the
payment of dividends or in the distribution of assets in the event of
any voluntary or involuntary liquidation, dissolution or winding up of
the Corporation which is not subject to redemption by the Corporation.
However, shares issuable upon conversion of shares of Series C shall
include only shares of the class designated as Common Stock as of the
original date of issuance of shares of Series C or shares of the
Corporation of any classes or series resulting from any
reclassification or reclassifications thereof and which have no
preference or priority in the payment of dividends or in the
distribution of assets in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation and which are
not subject to
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<PAGE> 7
redemption by the Corporation, provided that if at any time there shall
be more than one such resulting class or series, the shares of each
such class and series then so issuable shall be substantially in the
proportion which the total number of shares of such class and series
resulting from all such reclassifications bears to the total number of
shares of all such classes and series resulting from all such
reclassifications.
(N) POSTPONEMENT OF ADJUSTMENTS; CALCULATIONS. Any adjustment
in the conversion price otherwise required by this Section 5 to be made
may be postponed if such adjustment (plus any other adjustments
postponed pursuant to this paragraph 5(n) and not theretofore made)
would not require an increase or decrease of more than 1% in such
price. All calculations hereunder shall be made to the nearest cent or
to the nearest 1/100th of a share, as the case may be.
(O) TAX ADJUSTMENTS. The Board of Directors may make such
adjustments in the conversion price, in addition to those required by
this Section 5, as shall be determined by the Board of Directors to be
advisable in order to avoid taxation so far as practicable of any
dividend of stock or stock rights or any event treated as such for
Federal income tax purposes to the recipients. The Board of Directors
shall have the power to resolve any ambiguity or correct any error in
this Section 5, and its action in so doing shall be final and
conclusive.
(P) ADJUSTMENTS APPLICABLE TO NEW SECURITIES. In the event
that any time, as a result of an adjustment made pursuant to the
provisions hereof, the holder of any shares of Series C thereafter
surrendered for conversion shall become entitled to receive any shares
of capital stock of the Corporation other than Common Stock, thereafter
the number of such other shares so receivable upon conversion of such
shares of Series C shall be subject to adjustment from time to time in
a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Common Stock contained in Section with
respect to the Common Stock shall apply on like terms to any such other
shares.
(Q) ACCOUNTANTS' CERTIFICATE. The certificate of any
independent firm of public accountants of recognized standing selected
by the Board of Directors shall be presumptive evidence of the
correctness of any computation made under this Section 5.
(R) REIT SAVINGS CLAUSE. The Conversion Rights with respect to
the Series C shall not exist to the extent that immediately after the
conversion of such shares of Series C into Common Stock, Crescent Real
Estate Equities, Inc., a Maryland corporation (together with its
successors, "Crescent"), would be treated as owning more than 10
percent of the outstanding voting securities of the Corporation for
purposes of Section 856(c)(5) of the Internal Revenue Code of 1986, as
amended (the "Code"). Any request
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<PAGE> 8
by any holder of the Series C to exercise such holder's Conversion
Rights must be accompanied by an opinion of counsel, which counsel and
the form, scope and substance of such opinion must be satisfactory to
Crescent in its sole and absolute discretion, stating that any proposed
exercise of any holder's Conversion Rights will not cause Crescent to
be treated as owning more than 10 percent of the outstanding voting
securities of the Corporation for purposes of Section 856(c)(5) of the
Code. Any exercise or purported exercise of any Conversion Rights in
violation of this Section 5(r) shall be void ab initio.
SECTION 6. VOTING RIGHTS. The holders of shares of Series C shall not
have any voting rights except as from time to time required by law.
SECTION 7. COVENANTS; "EVENT OF NON-COMPLIANCE" DEFINED. For so long as
the Requisite Shares shall be outstanding, the Corporation shall do each of the
following:
(A) PROFITABILITY. The Corporation's consolidated net income
before all amounts properly recorded for interest, taxes, depreciation
and amortization ("EBITDA"), in each case, as set forth in the audited
financial statements of the Corporation for the fiscal years indicated,
shall be, (i) for fiscal year 1996, $1,500,000; (ii) for fiscal year
1997, $3,500,000; and (iii) for fiscal year 1998, $5,500,000. As used
herein, the term "EBITDA Period" means each fiscal year of the
Corporation ending in December 1996, December 1997, and December 1998;
and the term "EBITDA Target" for any EBITDA Period means the dollar
amount of EBITDA required to be earned by the Corporation for each such
EBITDA Period as set forth in the preceding sentence, or as
subsequently modified as hereinafter provided. If the Board of
Directors of the Corporation shall unanimously and specifically
authorize and approve any act or activity of the Corporation the result
of which will be to reduce the Corporation's EBITDA for any EBITDA
Period, and such reduction in the EBITDA is unanimously and
specifically authorized and approved by the Board of Directors, the
EBITDA Target or Targets, as the case may be, shall be deemed to be
automatically reduced to the dollar amount equal to the amount
calculated by multiplying the Corporation's new, revised budgeted
EBITDA by a fraction the numerator of which is the original EBITDA
Target specified for the applicable EBITDA Period in the first sentence
of this paragraph and the denominator of which is the originally
budgeted EBITDA for such EBITDA Period as such originally budgeted
EBITDA is set forth in the Business Plan of the Corporation as of April
26, 1996.
(B) MATTERS REQUIRING NOTICE. The Corporation shall notify the
holders of the Series C (i) ten days prior to the taking of any action
to reduce any EBITDA Target, and (ii) promptly upon acquiring knowledge
of the occurrence of any Event of Non-Compliance.
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<PAGE> 9
(C) "EVENT OF NON-COMPLIANCE" DEFINED. As used herein, an
"Event of Non-Compliance" means (i) the breach of or violation by the
Corporation of any covenant of the Corporation set forth in paragraphs
(a) and (b) of this Section 7, and such violation is not cured or
waived within 30 days, or (ii) the default under any material bond,
note or other evidence of indebtedness of the Corporation or under any
indenture or other instrument under which any such evidence if
indebtedness has been issued or by which it is governed and the
expiration of the applicable period of grace, if any, specified in such
evidence of indebtedness; provide, however, that, if such default under
such evidence of indebtedness, indenture or other instrument shall be
cured by the Corporation, or be waived by the holders of such
indebtedness, in each case as may be permitted by such evidence of
indebtedness, indenture or other instrument, the Event of
Non-Compliance hereunder by reason of such default shall be deemed
likewise to have been thereupon cured or waived. In the event the
Corporation's EBITDA for any EBITDA Period shall be an amount less than
the EBITDA Target for such EBITDA Period, but shall be an amount equal
to or greater than the product obtained by multiplying (i) the EBITDA
Target for such EBITDA Period by (ii) .95 (the EBITDA Target less such
amount being hereinafter called the "Shortfall"), then, in such event,
the failure of the Corporation to earn an amount equal to or greater
than the EBITDA Target for such EBITDA Period shall be deemed to have
been cured if, for the first quarter of the Corporation's fiscal year
next following the EBITDA Period during which the Corporation shall
fail to have earned the EBITDA Target, the Corporation shall have
earned the sum of (x) the Shortfall, plus (y) the First Quarter
Projected EBITDA (as hereinafter defined). As used herein, the term
"First Quarter Projected EBITDA" shall mean either (i) the amount
determined by multiplying the Corporation's budgeted EBITDA for the
applicable quarter by a fraction the numerator of which is the EBITDA
Target for the EBITDA Period in which the quarter falls and the
denominator of which is the Corporation's budgeted EBITDA for such
EBITDA Period, or (ii) if the Corporation's budgeted EBITDA for the
applicable quarter shall be a loss, then the Corporation's budgeted
loss for such quarter, whichever of (i) or (ii) is less. For the
purposes hereof, the references to budgeted amounts refer to the
budgets of the Corporation duly approved by the Corporation's Board of
Directors in the ordinary course of business and consistent with past
practice.
SECTION 8. REDUCTION IN VALUE OR SECURITY. The Corporation shall not in
any manner, whether by amendment of the Certificate of Incorporation (including,
without limitation, any Certificate of Designations), merger, reorganization,
recapitalization, consolidation, sale of assets, sale of stock, tender offer,
dissolution or otherwise, take any action, or permit any action to be taken,
solely or primarily for the purpose of increasing the value of any class of
stock of the Corporation if the effect of such action is to reduce the value or
security of the Series C.
SECTION 9. DEFINITIONS. As used herein with respect to Series C, the
following terms shall have the following meanings:
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<PAGE> 10
(a) The term "accrued dividends," with respect to any share of
any class or series, shall mean an amount computed at the annual
dividend rate for the class or series of which the particular share is
a part, from the date on which dividends on such share became
cumulative to and including the date to which such dividends are to be
accrued, less the aggregate amount of all dividends theretofore paid
thereon.
(b) The term "business day" shall mean each Monday, Tuesday,
Wednesday, Thursday or Friday on which banking institutions in the
Borough of Manhattan, The City of New York, are not authorized or
obligated by law or executive order to close.
(c) The term "junior stock" shall mean the Common Stock, the
Series A Voting Participating Convertible Preferred Stock of the
Corporation, the Series B Non-Voting Participating Convertible
Preferred Stock of the Corporation, and any other series of Preferred
Stock of the Corporation, or any other class or series of the capital
stock of the Corporation, authorized or issued after the date on which
this Certificate is filed.
(d) The term "Original Issue Date" shall mean the date on
which a share of Series B was first issued.
(e) The term "person" shall mean any individual, corporation,
partnership, joint venture, joint stock association, business trust and
other business entity, trust, unincorporated organization, governmental
agency or authority or any other form of entity.
(f) The term "Requisite Shares" means the greater of (i)
593,953 shares of the Series A, Series B and Series C, taken together,
or (ii) 50% of the total shares of the Series A, Series B and Series C
issued on or after the date of filing this Certificate.
(g) The term "subsidiary" shall mean, as to a particular
parent corporation, any person of which 50% or more of the indicia of
equity rights is at the time directly or indirectly owned by such
parent corporation or by one or more persons controlled by, controlling
or under common control with such parent corporation.
SECTION 10. OTHER RIGHTS. The shares of Series C shall not have any
powers, preferences or relative, participating, optional or other special
rights, or qualifications, limitations or restrictions thereof, other than as
set forth herein.
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IN WITNESS WHEREOF, Fresh Choice, Inc. has caused this Certificate to
be signed by Robert Ferngren, its President, this 13th day of September, 1996.
Fresh Choice, Inc.
By /s/ Robert Ferngren
---------------------------------
Robert Ferngren, President
11
<PAGE> 1
EXHIBIT 4.1
REGISTRATION RIGHTS AGREEMENT
BY AND BETWEEN
CRESCENT REAL ESTATE EQUITIES
LIMITED PARTNERSHIP
AND
FRESH CHOICE, INC.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
ARTICLE 1
REGISTRATION RIGHTS
<S> <C> <C>
Section 1.1 Certain Definitions.................................................................. 1
Section 1.2 Demand Registration Rights........................................................... 3
Section 1.3 Company Registration................................................................. 6
Section 1.4 Expenses of Registration............................................................. 8
Section 1.5 Registration Procedures.............................................................. 9
Section 1.6 Indemnification...................................................................... 11
Section 1.7 Information by Holder................................................................ 14
Section 1.8 Limitations on Subsequent Registration Rights........................................ 14
Section 1.9 Rule 144 Reporting................................................................... 14
Section 1.10 Transfer or Assignment of Registration Rights........................................ 15
Section 1.11 "Market Stand-Off" Agreement......................................................... 15
Section 1.12 Allocation of Registration Opportunities............................................. 16
Section 1.13 Termination of Registration Rights................................................... 16
ARTICLE 2
MISCELLANEOUS
Section 2.1 Governing Law........................................................................ 17
Section 2.2 Successors and Assigns............................................................... 17
Section 2.3 Entire Agreement; Amendment; Waiver.................................................. 18
Section 2.4 Notices, Etc......................................................................... 18
Section 2.5 Delays or Omissions.................................................................. 18
Section 2.6 Rights; Separability................................................................. 18
Section 2.7 Information Confidential............................................................. 19
Section 2.8 Titles and Subtitles................................................................. 19
Section 2.9 Counterparts......................................................................... 19
</TABLE>
-i-
<PAGE> 3
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (this "Agreement") is dated as of
the 13th day of September, 1996, and is being entered into by and between
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP, a Delaware limited
partnership (the "Stockholder") and FRESH CHOICE, INC., a Delaware corporation
(the "Company").
RECITALS
This is the Registration Rights Agreement referred to in that certain
Preferred Stock Purchase Agreement (herein so called) dated as of April 26,
1996, by and between the Company and the Stockholder, and is being entered
pursuant to the provisions thereof.
NOW, THEREFORE, in consideration of the foregoing, and of the mutual
representations, warranties, covenants and agreements set forth herein and in
the Preferred Stock Purchase Agreement, and intending to be legally bound, the
paries hereto hereby agree as follows:
ARTICLE 1
REGISTRATION RIGHTS
SECTION 1.1 CERTAIN DEFINITIONS.
As used in this Agreement, the following terms shall have the
meanings set forth below:
(A) CLOSING. "Closing" shall mean the Closing under
the Preferred Stock Purchase Agreement.
(B) COMMISSION. "Commission" shall mean the
Securities and Exchange Commission or any other federal agency
at the time administering the Securities Act.
(C) EXCHANGE ACT. "Exchange Act" shall mean the
Securities Exchange Act of 1934, as amended, or any similar
successor federal statute and the rules and regulations
thereunder, all as the same shall be in effect from time to
time.
(D) HOLDER. "Holder" shall mean any holder of Shares
or Registrable Securities and any holder of Registrable
Securities to whom the registration rights conferred by this
Agreement have been transferred in compliance with Section
1.10 hereof.
<PAGE> 4
(E) INITIATING HOLDERS. "Initiating Holders" shall
mean any Holder or Holders who in the aggregate hold not less
than fifty percent (50%) of the Registrable Securities, or who
in the aggregate have the right to acquire fifty percent (50%)
of the Registrable Securities upon conversion of the Shares.
It shall not be necessary that a Holder convert the Shares
into Registrable Securities to be an "Initiating Holder."
(F) OTHER STOCKHOLDERS. "Other Stockholders" shall
mean persons other than Holders who, by virtue of agreements
with the Company, are entitled to include their securities in
certain registrations hereunder.
(G) REGISTRABLE SECURITIES. "Registrable Securities"
shall mean (i) shares of Common Stock issued or issuable
pursuant to the conversion of the Shares and (ii) any Common
Stock issued as a dividend or other distribution with respect
to or in exchange for or in replacement of the shares
referenced in (i) above; provided, however, that Registrable
Securities shall not include any shares of Common Stock which
have previously been registered or which have been sold to the
public either pursuant to a registration statement or Rule
144, or which have been sold in a private transaction in which
the transferor's rights under this Agreement are not assigned.
(H) REGISTER, REGISTERED AND REGISTRATION. The terms
"register," "registered" and "registration" shall refer to a
registration effected by preparing and filing a registration
statement in compliance with the Securities Act and applicable
rules and regulations thereunder, and the declaration or
ordering of the effectiveness of such registration statement.
(I) REGISTRATION EXPENSES. "Registration Expenses"
shall mean all expenses incurred in effecting any registration
pursuant to this Agreement, including, without limitation, all
registration, qualification, and filing fees, printing
expenses, escrow fees, fees and disbursements of counsel for
the Company, blue sky fees and expenses, and expenses of any
regular or special audits incident to or required by any such
registration, but shall not include Selling Expenses, fees and
disbursements of counsel for the Holders and the compensation
of regular employees of the Company, which shall be paid in
any event by the Company.
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(J) RULE 144. "Rule 144" shall mean Rule 144 as
promulgated by the Commission under the Securities Act, as
such Rule may be amended from time to time, or any similar
successor rule that may be promulgated by the Commission.
(K) RULE 145. "Rule 145" shall mean Rule 145 as
promulgated by the Commission under the Securities Act, as
such Rule may be amended from time to time, or any similar
successor rule that may be promulgated by the Commission.
(L) SECURITIES ACT. "Securities Act" shall mean the
Securities Act of 1933, as amended, or any similar successor
federal statute and the rules and regulations thereunder, all
as the same shall be in effect from time to time.
(M) SELLING EXPENSES. "Selling Expenses" shall mean
all underwriting discounts, selling commissions and stock
transfer taxes applicable to the sale of Registrable
Securities and fees and disbursements of counsel for any
Holder (other than the fees and disbursements of counsel
included in Registration Expenses).
(N) SHARES. "Shares" shall mean, collectively, the
Company's Series A Voting Participating Convertible Preferred
Stock, par value $0.001 per share, Series B Non-Voting
Participating Convertible Preferred Stock, par value $0.001
per share, and the Company's Series C Non-Voting Participating
Convertible Preferred Stock, par value $0.001 per share.
SECTION 1.2 DEMAND REGISTRATION RIGHTS.
(A) REQUEST FOR REGISTRATION. If the Company shall
receive from Initiating Holders at any time or from time to
time after the date hereof a written request that the Company
effect any registration with respect to all or a part of the
Registrable Securities the Company shall:
(i) promptly give written notice of the
proposed registration to all other Holders; and
(ii) as soon as practicable, use its best
efforts to effect such registration (including,
without limitation, filing post-effective amendments,
appropriate qualifications under
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<PAGE> 6
applicable blue sky or other state securities laws,
and appropriate compliance with the Securities Act)
and as would permit or facilitate the sale and
distribution of all or such portion of such
Registrable Securities as are specified in such
request, together with all or such portion of the
Registrable Securities of any Holder or Holders
joining in such request as are specified in a written
request received by the Company within twenty (20)
days after such written notice from the Company is
mailed or delivered.
The Company shall not be obligated to
effect, or to take any action to effect, any such
registration pursuant to this Section 1.2:
(A) In any particular jurisdiction
in which the Company would be required to
execute a general consent to service of
process in effecting such registration,
qualification, or compliance, unless the
Company is already subject to service in
such jurisdiction and except as may be
required by the Securities Act;
(B) After the Company has initiated
two such registrations pursuant to this
Section 1.2(a) (counting for these purposes
only registrations which have been declared
or ordered effective and pursuant to which
securities have been sold and registrations
which have been withdrawn by the Holders as
to which the Holders have not elected to
bear the Registration Expenses pursuant to
Section 1.4 hereof and would, absent such
election, have been required to bear such
expenses); or
(C) During the period starting with
the date sixty (60) days prior to the
Company's good faith estimate of the date of
filing of, and ending on a date one hundred
eighty (180) days after the effective date
of, a Company-initiated registration;
provided that the Company is actively
employing in good faith all reasonable
efforts to cause such registration statement
to become effective.
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<PAGE> 7
(B) FILING OF REGISTRATION STATEMENT. Subject to the
foregoing clauses (A) through (C), the Company shall file a
registration statement covering the Registrable Securities so
requested to be registered as soon as practicable after
receipt of the request or requests of the Initiating Holders;
provided, however, that if (i) in the good faith judgment of
the Board of Directors of the Company, such registration would
be seriously detrimental to the Company and the Board of
Directors of the Company concludes, as a result, that it is
essential to defer the filing of such registration statement
at such time, and (ii) the Company shall furnish to such
Holders a certificate signed by the President of the Company
stating that in the good faith judgment of the Board of
Directors of the Company, it would be seriously detrimental to
the Company for such registration statement to be filed in the
near future and that it is, therefore, essential to defer the
filing of such registration statement, then the Company shall
have the right to defer such filing (except as provided in
clause (C) above) for a period of not more than ninety (90)
days after receipt of the request of the Initiating Holders,
and, provided further, that the Company shall not defer its
obligation in this manner more than once in any twelve-month
period.
The registration statement filed pursuant to the
request of the Initiating Holders may, subject to the
provisions of Sections 1.2(b) and 1.12 hereof, include other
securities of the Company, with respect to which registration
rights have been granted, and may include securities of the
Company being sold for the account of the Company.
(C) UNDERWRITING. If the registration of which the
Initiating Holders give notice is for a registered public
offering involving an underwriting, the Initiating Holders
shall so advise the Company as a part of the written request
given pursuant to Section 1.2(a). In such event, the right of
any Holder to registration pursuant to Section 1.2 shall be
conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable
Securities in the underwriting (unless otherwise mutually
agreed by a majority in interest of the Initiating Holders and
such Holder with respect to such participation and inclusion)
to the extent provided herein. A Holder may elect to include in
such underwriting all or a part of the Registrable Securities
held by such Holder.
V-5
<PAGE> 8
(D) PROCEDURES. If the Company shall request
inclusion in any registration pursuant to Section 1.2 of
securities being sold for its own account, or if other persons
shall request inclusion in any registration pursuant to
Section 1.2, the Initiating Holders shall, on behalf of all
Holders, offer to include such securities in the registration,
and may condition such offer on their acceptance of the
further applicable provisions of this Article 1 (including
Section 1.2). If such registration be an underwritten
firm-commitment offering, the Company shall (together with all
Holders and other persons proposing to distribute their
securities through such underwriting) enter into an
underwriting agreement in customary form with the
representative of the underwriter or underwriters selected for
such underwriting by a majority in interest of the Initiating
Holders, which underwriters are reasonably acceptable to the
Company. Notwithstanding any other provision of this Section
1.2, if the representative of the underwriters advises the
Initiating Holders in writing that marketing factors require a
limitation on the number of shares to be underwritten, the
number of shares to be included in the underwriting or
registration shall be allocated as set forth in Section 1.12
hereof. If a person who has requested inclusion in such
registration as provided above does not agree to the terms of
any such underwriting, such person shall be excluded therefrom
by written notice from the Company, the underwriter or the
Initiating Holders. The securities so excluded shall also be
withdrawn from registration. Any Registrable Securities or
other securities excluded or withdrawn from such underwriting
shall also be withdrawn from such registration. If shares are
so withdrawn from the registration and if the number of shares
to be included in such registration was previously reduced as
a result of marketing factors pursuant to this Section 1.2(d),
then the Company shall offer to all holders who have retained
rights to include securities in the registration the right to
include additional securities in the registration in an
aggregate amount equal to the number of shares so withdrawn,
with such shares to be allocated among such holders requesting
additional inclusion in accordance with Section 1.12.
SECTION 1.3 COMPANY REGISTRATION.
(A) NOTICE OF REGISTRATION. If the Company shall, at
any time or from time to time after the date hereof, determine
to register any of its securities either for its own account
or the
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account of a security holder or holders exercising their
respective demand registration rights (other than pursuant to
Section 1.2 hereof), other than a registration relating solely
to employee benefit plans, or a registration relating to a
corporate reorganization or other transaction under Rule 145,
or a registration on any registration form that does not
permit secondary sales, the Company shall:
(i) promptly give to each Holder written
notice thereof; and
(ii) use its best efforts to include in such
registration (and any related qualification under
blue sky laws or other compliance), except as set
forth in Section 1.3(b) below, and in any
underwriting involved therein, all the Registrable
Securities specified in a written request or
requests, made by any Holder and received by the
Company within ten (10) days after the written notice
from the Company described in clause (i) above is
mailed or delivered by the Company. Such written
request may specify all or a part of a Holder's
Registrable Securities.
(B) UNDERWRITING. If the registration of which the
Company gives notice is for a registered public offering
involving an underwriting, the Company shall so advise the
Holders as a part of the written notice given pursuant to
Section 1.3(a)(i). In such event, the right of any Holder to
registration pursuant to this Section 1.3 shall be conditioned
upon such Holder's participation in such underwriting and the
inclusion of such Holder's Registrable Securities in the
underwriting to the extent provided herein. All Holders
proposing to distribute their securities through such
underwriting shall (together with the Company and the other
holders of securities of the Company with registration rights
to participate therein distributing their securities through
such underwriting) enter into an underwriting agreement in
customary form with the representative of the underwriter or
underwriters selected by the Company.
Notwithstanding any other provision of this Section
1.3, if the representative of the underwriters advises the
Company in writing that marketing factors require a limitation
on the number of shares to be underwritten, the representative
may (subject to the
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limitations set forth below) exclude all Registrable
Securities from, or limit the number of Registrable Securities
to be included in, the registration and underwriting. The
Company shall so advise all holders of securities requesting
registration, and the number of shares of securities that are
entitled to be included in the registration and underwriting
shall be allocated first to the Company for securities being
sold for its own account and thereafter as set forth in
Section 1.12. If any person does not agree to the terms of any
such underwriting, such person shall be excluded therefrom by
written notice from the Company or the underwriter. Any
Registrable Securities or other securities excluded or
withdrawn from such underwriting shall be withdrawn from such
registration.
If shares are so withdrawn from the registration or
if the number of shares of Registrable Securities to be
included in such registration was previously reduced as a
result of marketing factors, the Company shall then offer to
all persons who have retained the right to include securities
in the registration the right to include additional securities
in the registration in an aggregate amount equal to the number
of shares so withdrawn, with such shares to be allocated among
the persons requesting additional inclusion in accordance with
Section 1.12 hereof.
SECTION 1.4 EXPENSES OF REGISTRATION.
All Registration Expenses incurred in connection with any
registration, qualification or compliance pursuant to Sections 1.3 hereof, and
the first two registrations pursuant to Section 1.2 hereof and reasonable fees
of one counsel for the selling stockholders in the case of registrations
pursuant to Section 1.2 shall be borne by the Company; provided, however, that
if the Holders bear the Registration Expenses for any registration proceeding
begun pursuant to Section 1.2 and subsequently withdrawn by the Holders
registering shares therein, such registration proceeding shall not be counted as
a requested registration pursuant to Section 1.2 hereof. Furthermore, in the
event that a withdrawal by the Holders is based upon material adverse
information relating to the Company that is different from the information known
or available (upon request from the Company or otherwise) to the Holders
requesting registration at the time of their request for registration under
Section 1.2, such registration shall not be treated as a counted registration
for purposes of Section 1.2 hereof, even though the Holders do not bear the
Registration Expenses for such registration. All Selling Expenses relating to
securities so registered shall be borne by the Holders of such securities pro
rata on the basis of the number of shares of securities so registered on their
behalf, as shall any other
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expenses in connection with the registration required to be borne by the Holders
of such securities.
SECTION 1.5 REGISTRATION PROCEDURES.
In the case of each registration effected by the Company
pursuant to Article 1, the Company will keep each Holder advised in writing as
to the initiation of each registration and as to the completion thereof. At its
expense, the Company will use its best efforts to:
(A) Keep such registration effective for a period of
one hundred twenty (120) days or until the Holder or Holders
have completed the distribution described in the registration
statement relating thereto, whichever first occurs; provided,
however, that (i) such 120-day period shall be extended for a
period of time equal to the period the Holder refrains from
selling any securities included in such registration at the
request of an underwriter of Common Stock (or other
securities) of the Company; or, in the case of any
registration of Registrable Securities on Form S-3 which are
intended to be offered on a continuous or delayed basis, such
120-day period shall be extended, if necessary, to keep the
registration statement effective until all such Registrable
Securities are sold, provided that Rule 415 permits an
offering on a continuous or delayed basis, and provided
further that applicable rules under the Securities Act
governing the obligation to file a post-effective amendment
permit, in lieu of filing a post-effective amendment that (I)
includes any prospectus required by Section 10(a)(3) of the
Securities Act or (II) reflects facts or events representing a
material or fundamental change in the information set forth in
the registration statement, the incorporation by reference of
information required to be included in (I) and (II) above to
be contained in periodic reports filed pursuant to Section 13
or 15(d) of the Exchange Act in the registration statement;
(B) Prepare and file with the Commission such
amendments and supplements to such registration statement and
the prospectus used in connection with such registration
statement as may be necessary to comply with the provisions of
the Securities Act with respect to the disposition of all
securities covered by such registration statement;
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(C) Furnish such number of prospectuses and other
documents thereto, including any amendment of or supplement to
the prospectus, as a Holder from time to time may reasonably
request;
(D) Notify each seller of Registrable Securities
covered by such registration statement at any time when a
prospectus relating thereto is required to be delivered under
the Securities Act of the happening of any event as a result
of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of
a material fact or omits to state a material fact required to
be stated therein or necessary to make the statements therein
not misleading or incomplete in the light of the circumstances
then existing, and at the request of any such seller, prepare
and furnish to such seller a reasonable number of copies of a
supplement to or an amendment of such prospectus shall not
include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or
necessary to make the statements therein not misleading or
incomplete in the light of the circumstances then existing;
(E) Cause all such Registrable Securities registered
pursuant hereunder to be listed on each securities exchange or
market on which similar securities issued by the Company are
then listed or admitted to trading;
(F) Provide a transfer agent and registrar for all
Registrable Securities registered pursuant to such
registration statement and a CUSIP number for all such
Registrable Securities, in each case not later than the
effective date of such registration;
(G) Otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make
available to its security holders, as soon as reasonably
practicable, an earnings statement covering the period of at
least twelve months, but not more than eighteen months,
beginning with the first month after the effective date of the
Registration Statement, which earnings statement shall satisfy
the provisions of Section 11(a) of the Securities Act; and
(H) In connection with any underwritten offering
pursuant to a registration statement filed pursuant to
Section 1.2
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hereof, the Company will enter into an underwriting agreement
in form reasonably necessary to effect the offer and sale of
Common Stock, provided such underwriting agreement contains
customary underwriting provisions and provided further that if
the underwriter so requests the underwriting agreement will
contain customary contribution provisions.
SECTION 1.6 INDEMNIFICATION.
(A) The Company will indemnify each Holder, each of
its officers, directors and partners, legal counsel, and
accountants and each person controlling such Holder within the
meaning of Section 15 of the Securities Act, with respect to
which registration, qualification, or compliance has been
effected pursuant to this Article 1, and each underwriter, if
any, and each person who controls within the meaning of
Section 15 of the Securities Act any underwriter, against all
expenses, claims, losses, damages, and liabilities (or
actions, proceedings, or settlements in respect thereof)
arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any
prospectus, offering circular, or other document (including
any related registration statement, notification, or the like)
incident to any such registration, qualification, or
compliance, or based on any omission (or alleged omission) to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or
any violation by the Company of the Securities Act or any rule
or regulation thereunder applicable to the Company and
relating to action or inaction required of the Company in
connection with any such registration, qualification, or
compliance, and will reimburse each such Holder, each of its
officers, directors, partners, legal counsel, and accountants
and each person controlling such Holder, each such
underwriter, and each person who controls any such
underwriter, for any legal and any other expenses reasonably
incurred in connection with investigating and defending or
settling any such claim, loss, damage, liability, or action,
provided that the Company will not be liable in any such case
to the extent that any such claim, loss, damage, liability, or
expense arises out of or is based on any untrue statement or
omission based upon written information furnished to the
Company by such Holder or underwriter and stated to be
specifically for use therein. It is agreed that the indemnity
agreement contained in this Section 1.6(a) shall not apply to
amounts paid in settlement of any
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such loss, claim, damage, liability, or action if such
settlement is effected without the consent of the Company
(which consent has not been unreasonably withheld).
(B) Each Holder will, if Registrable Securities held
by such Holder are included in the securities as to which such
registration, qualification, or compliance is being effected,
indemnify the Company, each of its directors, officers,
partners, legal counsel, and accountants and each underwriter,
if any, of the Company's securities covered by such a
registration statement, each person who controls the Company
or such underwriter within the meaning of Section 15 of the
Securities Act, each other such Holder and Other Stockholder,
and each of their officers, directors, and partners, and each
person controlling such Holder or Other Stockholder, against
all claims, losses, damages and liabilities (or actions in
respect thereof) arising out of or based on any untrue
statement (or alleged untrue statement) of a material fact
contained in any such registration statement, prospectus,
offering circular, or other document, or any omission (or
alleged omission) to state therein a material fact required to
be stated therein or necessary to make the statements therein
not misleading, and will reimburse the Company and such
Holders, Other Stockholders, directors, officers, partners,
legal counsel, and accountants, persons, underwriters, or
control persons for any legal or any other expenses reasonably
incurred in connection with investigating or defending any
such claim, loss, damage, liability, or action, in each case
to the extent, but only to the extent, that such untrue
statement (or alleged untrue statement) or omission (or
alleged omission) is made in such registration statement,
prospectus, offering circular, or other document in reliance
upon and in conformity with written information furnished to
the Company by such Holder and stated to be specifically for
use therein; provided, however, that the obligations of such
Holder hereunder shall not apply to amounts paid in settlement
of my such claims, losses, damages, or liabilities (or actions
in respect thereof) if such settlement is effected without the
consent of such Holder (which consent shall not be
unreasonably withheld); and provided that in no event shall
any indemnity under this Section 1.6 exceed the gross proceeds
from the offering received by such Holder.
(C) Each party entitled to indemnification under this
Section 1.6 (the "Indemnified Party") shall give notice to the
party
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required to provide indemnification (the "Indemnifying Party")
promptly after such Indemnified Party has actual knowledge of
any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of such
claim or any litigation resulting therefrom, provided that
counsel for the Indemnifying Party, who shall conduct the
defense of such claim or any litigation resulting therefrom,
shall be approved by the Indemnified Party (whose approval
shall not unreasonably be withheld), and the Indemnified Party
may participate in such defense at such party's expense, and
provided further that the failure of any Indemnified Party to
give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Article 1, to
the extent such failure is not prejudicial. No Indemnifying
Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to
entry of any judgment or enter into any settlement that does
not include as an unconditional term thereof the giving by the
claimant or plaintiff to such Indemnified Party of a release
from all liability in respect to such claim or litigation.
Each Indemnified Party shall furnish such information
regarding itself or the claim in question as an Indemnifying
Party may reasonably request in writing and as shall be
reasonably required in connection with defense of such claim
and litigation resulting therefrom.
(D) If the indemnification provided for in this
Section 1.6 is held by a court of competent jurisdiction to be
unavailable to an Indemnified Party with respect to any loss,
liability, claim, damage, or expense referred to therein, then
the Indemnifying Party, in lieu of indemnifying such
Indemnified Party hereunder, shall contribute to the amount
paid or payable by such Indemnified Party as a result of such
loss, liability, claim, damage, or expense in such proportion
as is appropriate to reflect the relative fault of the
Indemnifying Party on the one hand and of the Indemnified
Party on the other in connection with the statements or
omissions that resulted in such loss, liability, claim,
damage, or expense as well as other relevant equitable
considerations. The relative fault of the Indemnifying Party
and of the Indemnified Party shall be determined by reference
to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission to state a
material fact relates to information supplied by the
Indemnifying Party or by the Indemnified Party and the
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parties' relative intent, knowledge, access to information,
and opportunity to correct or prevent such statement or
omission.
(E) Notwithstanding the foregoing, to the extent that
the provisions on indemnification and contribution contained
in the underwriting agreement entered into in connection with
the underwritten public offering are in conflict with the
foregoing provisions, the provisions in the underwriting
agreement shall control.
SECTION 1.7 INFORMATION BY HOLDER.
Each Holder of Registrable Securities shall furnish to the
Company such information regarding such Holder and the distribution proposed by
such Holder as the Company may reasonably request in writing and as shall be
reasonably required in connection with any registration, qualification, or
compliance referred to in this Article 1.
SECTION 1.8 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS.
From and after the date of this Agreement, the Company shall
not, without the prior written consent of a majority in interest of the Holders,
enter into any agreement with any holder or prospective holder of any securities
of the Company giving such holder or prospective holder any registration rights
the terms of which are more favorable than the registration rights granted to
the Holders hereunder.
SECTION 1.9 RULE 144 REPORTING.
With a view to making available the benefits of certain rules
and regulations of the Commission that may permit the sale of the restricted
securities to the public without registration, the Company agrees to use its
best efforts to:
(A) Make and keep public information regarding the
Company available as, those terms are understood and defined
in Rule 144, at all times from and after the date hereof;
(B) File with the Commission in a timely manner all
reports and other documents required of the Company under the
Securities Act and the Exchange Act;
(C) So long as a Holder owns any restricted
securities, furnish to the Holder forthwith upon written
request a written statement by the Company as to its
compliance with the reporting
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requirements of Rule 144, and of the Securities Act and the
Exchange Act, a copy of the most recent annual or quarterly
report of the Company, and such other reports and documents so
filed as a Holder may reasonably request in availing itself of
any rule or regulation of the Commission allowing a Holder to
sell any such securities without registration.
SECTION 1.10 TRANSFER OR ASSIGNMENT OF REGISTRATION RIGHTS.
The rights to cause the Company to register securities granted
to a Holder by the Company under this Article 1 may be transferred or assigned
by a Holder only to a transferee or assignee of not less than 250,000 shares of
Registrable Securities (as presently constituted and subject to subsequent
adjustments for stock splits, stock dividends, reverse stock splits, and the
like), provided that the Company is given written notice at the time of or
within a reasonable time after said transfer or assignment, stating the name and
address of the transferee or assignee and identifying the securities with
respect to which such registration rights are being transferred or assigned,
and, provided further, that the transferee or assignee of such rights assumes in
writing the obligations of such Holder under this Article 1.
SECTION 1.11 "MARKET STAND-OFF" AGREEMENT.
If requested by the Company and an underwriter of Common Stock
(or other securities) of the Company, a Stockholder shall not sell or otherwise
transfer or dispose of any Common Stock (or other securities) of the Company
held by such Stockholder (other than those included in the registration) during
the one hundred eighty (180) day period following the effective date of a
registration statement of the Company filed under the Securities Act, provided
that:
(A) such agreement shall only apply to the first such
registration statement of the Company, including securities to
be sold on its behalf to the public in an underwritten
offering, filed after the date hereof; and
(B) all officers and directors of the Company and
holders of at least one percent (1%) of the Company's voting
securities are bound by and have entered into similar
agreements other than holders who have purchased shares in the
public markets and are affiliates of the Company based solely
on the size of their holdings.
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The obligations described in this Section 1.11 shall not
apply to a registration relating solely to employee benefit plans on Form S-1 or
Form S-8 or similar forms that may be promulgated in the future, or a
registration relating solely to a Commission Rule 145 transaction on Form S-4 or
similar forms that may be promulgated in the future. The Company may impose
stop-transfer instructions with respect to the shares of Common Stock (or other
securities) subject to the foregoing restriction until the end of said one
hundred eighty (180) day period.
SECTION 1.12 ALLOCATION OF REGISTRATION OPPORTUNITIES.
In any circumstance in which all of the Registrable Securities
and other shares of Common Stock of the Company (including shares of Common
Stock issued or issuable upon conversion of shares of any currently unissued
series of Preferred Stock of the Company) with registration rights (the "Other
Shares") requested to be included in a registration on behalf of the Holders or
other selling stockholders cannot be so included as a result of limitations of
the aggregate number of shares of Registrable Securities and Other Shares that
may be so included, the number of shares of Registrable Securities and Other
Shares that may be so included shall be allocated among the Holders and other
selling stockholders requesting inclusion of shares pro rata on the basis of the
number of shares of Registrable Securities and Other Shares that would be held
by such Holders and other selling stockholders, assuming conversion; provided,
however, that such allocation shall not operate to reduce the aggregate number
of Registrable Securities and Other Shares to be included in such registration.
If any Holder or other selling stockholder does not request inclusion of the
maximum number of shares of Registrable Securities and Other Shares allocated to
such Holder or other stockholder pursuant to the above-described procedure, the
remaining portion of such Holder's or other stockholder's allocation shall be
reallocated among those requesting Holders and other selling stockholders whose
allocations did not satisfy their requests pro rata on the basis of the number
of shares of Registrable Securities and Other Shares which would be held by such
Holders and other selling stockholders, assuming conversion, and this procedure
shall be repeated until all of the shares of Registrable Securities and Other
Shares which may be included in the registration on behalf of the Holders and
other selling stockholders have been so allocated. The Company shall not limit
the number of Registrable Securities to be included in a registration pursuant
to this Agreement in order to include shares held by stockholders with no
registration rights or to include any shares of stock issued to employees,
officers, directors, or consultants pursuant to the Company's Second Amended and
Restated 1988 Stock Option Plan, 1992 Employee Stock Purchase Plan, or any other
compensatory plan or agreement, or, with respect to registration under Sections
1.2 hereof, in order to include in such registration securities registered
for the Company's own account.
SECTION 1.13 TERMINATION OF REGISTRATION RIGHTS.
(A) Except as set forth in subparagraph (b) below,
the right of any Holder to request registration or inclusion
in any registration pursuant to Section 1.2 or 1.3 shall
terminate on such
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date as all Registrable Securities held by such Holder may
immediately be sold by such Holder in the open market without
limitations as to the manner of such sale or the volume of
such sale and without having to file any forms or reports with
the Commission with respect to such sale under the Securities
Act.
(B) The provisions of subparagraph (a) above shall
not apply to any Holder who owns more than one percent (1%) of
the Company's outstanding stock until such time as such Holder
beneficially owns less than one percent (1%) of the
outstanding securities of the Company.
ARTICLE 2
MISCELLANEOUS
SECTION 2.1 GOVERNING LAW.
This Agreement shall be governed in all respects, including as
to validity, interpretation and effect, by the internal laws of the State of
Delaware, without giving effect to the conflict of laws rules thereof. Holder
and the Company hereby irrevocably submit to the jurisdiction of the courts of
the State of Delaware and the Federal courts of the United States of America
located in the State of Delaware, City and County of Dallas, solely in respect
of the interpretation and enforcement of the provisions of this Agreement and of
the documents referred to in this Agreement, and hereby waive, and agree not to
assert, as a defense in any action, suit or proceeding for the interpretation or
enforcement hereof or of any such document, that it is not subject thereto or
that such action, suit or proceeding may not be brought or is not maintainable
in said courts or that the venue thereof may not be appropriate or that this
Agreement or any of such document may not be enforced in or by said courts, and
the parties hereto irrevocably agree that all claims with respect to such action
or proceeding shall be heard and determined in such a Delaware State or Federal
court. Holder and the Company hereby consent to and grant any such court
jurisdiction over the person of such parties and over the subject matter of any
such dispute and agree that mailing of process or other papers in connection
with any such action or proceeding in the manner provided in Section 2.4, or in
such other manner as may be permitted by law, shall be valid and sufficient
service thereof.
SECTION 2.2 SUCCESSORS AND ASSIGNS.
Except as otherwise expressly provided herein, the provisions
hereof shall inure to the benefit of, and be binding upon, the successors,
assigns, heirs, executors and administrators of the parties hereto.
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SECTION 2.3 ENTIRE AGREEMENT; AMENDMENT; WAIVER.
This Agreement (including the Exhibits hereto) constitutes the
full and entire understanding and agreement between the parties with regard to
the subjects hereof and thereof. Neither this Agreement nor any term hereof may
be amended, waived, discharged or terminated, except by a written assignment
signed by the Company and the holders of at least fifty percent (50%) of the
Registrable Shares and any such amendment, waiver, discharge or termination
shall be binding on all the Holders, but in no event shall the obligation of any
Holder hereunder be materially increased, except upon the written consent of
such Holder.
SECTION 2.4 NOTICES, ETC.
All notices and other communications required or permitted
hereunder shall be in writing and shall be mailed by United Stan first-class
mail, postage prepaid, sent by facsimile or delivered personally by hand or
nationally recognized courier addressed (a) if to a Holder, as indicated on the
list of Holders attached hereto as Exhibit A, or at such other address as such
holder or permitted assignee shall have furnished to the Company in writing, or
(b) if to the Company, at such address or facsimile number as the Company shall
have furnished to each Holder in writing. All such notices and other written
communications shall be effective on the date of mailing, facsimile transfer or
delivery.
SECTION 2.5 DELAYS OR OMISSIONS.
No delay or omission to exercise any right, power or remedy
accruing to any Holder, upon any breach or default of the Company under this
Agreement shall impair any such right, power or remedy of such Holder nor shall
it be construed to be a waiver of any such breach or default, or an acquiescence
therein, or of or in any similar breach or default thereafter occurring; nor
shall any waiver of any single breach or default be deemed a waiver of any other
breach or default therefore or thereafter occurring. Any waiver, permit, consent
or approval of any kind or character on the part of any Holder of any breach or
default under this Agreement or any waiver on the part of any Holder of any
provisions or conditions of this Agreement must be made in writing and shall be
effective only to the extent specifically set forth in such writing. All
remedies, either under this Agreement or by law or otherwise afforded to any
Holder, shall be cumulative and not alternative.
SECTION 2.6 RIGHTS; SEPARABILITY.
Unless otherwise expressly provided herein, a Holder's rights
hereunder are several rights, not rights jointly held with any of the other
Holders. In case any provision of the Agreement shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
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SECTION 2.7 INFORMATION CONFIDENTIAL.
Each Holder acknowledges that the information received by them
pursuant hereto may be confidential and for its use only, and it will not use
such confidential information in violation of the Exchange Act or reproduce,
disclose or disseminate such information to any other person (other than its
employees or agents having a need to know the contents of such information, and
its attorneys), except in connection with the exercise of rights under this
Agreement, unless the Company has made such information available to the public
generally or such Holder is required to disclose such information by a
governmental body.
SECTION 2.8 TITLES AND SUBTITLES.
The titles of the paragraphs and subparagraphs of this
Agreement are for convenience of reference only and are not to be considered in
construing or interpreting this Agreement.
SECTION 2.9 COUNTERPARTS.
This Agreement may be executed in any number of counterparts,
each of which shall be an original, but all of which together shall constitute
one instrument.
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IN WITNESS WHEREOF, the parties hereto have executed this Registration
Rights Agreement effective as of the day and year first above written.
FRESH CHOICE, INC.
By: /s/ Robert Ferngren
----------------------------------
Title: President and CEO
STOCKHOLDER: Crescent Real Estate
Limited Partnership
By: Crescent Real Estate Equities, Ltd.
By: /s/ David M. Dean
----------------------------------
Name: David M. Dean
Title: Senior Vice President, Law
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EXHIBIT 10.22
SEVERANCE AGREEMENT
This Severance Agreement, effective July 18, 1996, is made by and between FRESH
CHOICE, INC. ("Fresh Choice") and Charles A. Lynch ("Employee").
1. Employee is currently an employee of Fresh Choice in a key
management position. Fresh Choice recognizes that the possibility of a Transfer
of Control(1) exists. Fresh Choice also recognizes that economic events beyond
its control may affect its business and operations. Fresh Choice realizes that
Employee possesses an intimate knowledge of the Company and its Board of
Directors (the "Board") believes that it is necessary to be able to retain
Employee as well as call on Employee for advice upon the occurrence of a
Transfer of Control. The Board also believes that the existence of this
Agreement will enhance the Company's ability to call on and rely upon Employee.
In consideration of Employee's continued employment with Fresh Choice, Fresh
Choice agrees to the following:
a) Severance Pay. In the event Employee's employment with Fresh Choice
is terminated due to either a Board approved layoff of the Employee or an
involuntary separation as a result of a "Transfer of Control," Fresh Choice
shall pay "Severance Pay" to the Employee beginning as of Employee's actual last
day of work (the "Separation Date") in the amount of 18 months continuation of
current/final base salary payable in equal bi-weekly installments, less
applicable state and federal taxes, through payroll (hereinafter, the "Severance
Period"). If the Employee's Separation Date does not coincide with the end of a
payroll period, then the first and last installment may be prorated to reflect
the partial pay period.
- ---------------------------
(1)Transfer of Control shall mean an Ownership Change in which the shareholders
of the Control Company before such Ownership Change do not retain, directly or
indirectly, at least a majority of the beneficial interest in the voting stock
of the Control Company.
<PAGE> 2
b) Medical and Dental Insurance Benefits. Insurance benefits will end
the last day of the month in which the Separation Date occurs. Should Employee
be eligible for and elect COBRA coverage for medical and/or dental benefits,
Fresh Choice will pay the cost of the COBRA premiums, less the amount Employee
paid as an active employee, for the applicable Severance Period. Thereafter, the
Employee is responsible for the timely payment of full cost of the COBRA premium
for the remainder of the applicable COBRA period.
It is intended by the parties hereto that the provisions of this Agreement shall
become effective as of the date of approval by the Board's Compensation
Committee and shall terminate on the sixth month anniversary of the Transfer of
Control Event.
2. Employee acknowledges that the events which shall result in
Severance Pay for the Employee pursuant to this Agreement are limited to either
a Board approved layoff of the Employee or an involuntary separation as a result
of a "Transfer of Control." The Employee shall not be eligible for Severance Pay
for all other separations of employment, including but not necessarily limited
to voluntary resignations, mutually agreeable separations, or separations for
performance issues or any other separation for cause.
3. During the Severance Period, it is understood by Fresh Choice and
Employee that Employee shall not be considered an employee of Fresh Choice and,
therefore, shall not be eligible for any other employer-provided benefits
including but not limited to vacation accrual, sick days, disability benefits,
or any other benefit program in which active employees of Fresh Choice may
participate.
4. The execution of this Severance Agreement does not constitute an
employment contract between Fresh Choice and Employee or an agreement by Fresh
Choice to continue to employ Employee. By signing this Severance Agreement,
Employee acknowledges that his employment with Fresh Choice is and continues to
be "at-will", and that such employment may be terminated at any time with or
without cause.
5. Subject to Paragraph 1 above, Employee shall be entitled to no
further compensation for any damage or injury arising out of the termination of
Employee's employment by the Company in the event of a layoff or Transfer of
Control.
6. In the event of any dispute, claim or controversy arising out of or
in any way related to this Agreement, the interpretation of this Agreement or
the alleged breach thereof, such dispute, claim or controversy shall be
submitted by the parties to binding arbitration provided by the American
Arbitration Association in Santa Clara County, California.
7. This Agreement constitutes the entire agreement of Fresh Choice and
Employee regarding Severance Pay upon separation of employment, as defined
herein, and supersedes all agreements prior to the effective date of this
Agreement, whether written or
<PAGE> 3
oral. Fresh Choice reserves the right to amend or terminate this Agreement in
whole or in part upon written notification to the Employee.
8. This Agreement shall be governed by and construed in accordance with
the laws of the State of California applicable to contracts made and to be
performed herein.
IN WITNESS WHEREOF, Fresh Choice and Employee have executed this
Agreement on 7/22/96 (date) to be effective as of the day and year first above
written.
"FRESH CHOICE": "EMPLOYEE"
- --------------- ----------
FRESH CHOICE, INC.,
a Delaware Corporation
by: /s/ Robert Ferngren /s/ Charles A. Lynch
-------------------------------- -----------------------------
Robert Ferngren Charles A. Lynch
<PAGE> 1
EXHIBIT 10.23
SEVERANCE AGREEMENT
This Severance Agreement, effective July 18, 1996, is made by and between FRESH
CHOICE, INC. ("Fresh Choice") and David Anderson ("Employee").
1. Employee is currently an employee of Fresh Choice in a key
management position. Fresh Choice recognizes that the possibility of a Transfer
of Control(1) exists. Fresh Choice also recognizes that economic events beyond
its control may affect its business and operations. Fresh Choice realizes that
Employee possesses an intimate knowledge of the Company and its Board of
Directors (the "Board") believes that it is necessary to be able to retain
Employee as well as call on Employee for advice upon the occurrence of a
Transfer of Control. The Board also believes that the existence of this
Agreement will enhance the Company's ability to call on and rely upon Employee.
In consideration of Employee's continued employment with Fresh Choice, Fresh
Choice agrees to the following:
a) Severance Pay. In the event Employee's employment with Fresh Choice
is terminated due to either a layoff, approved by the President and/or Chairman,
of the Employee or an involuntary separation as a result of a "Transfer of
Control," Fresh Choice shall pay "Severance Pay" to the Employee beginning as of
Employee's actual last day of work (the "Separation Date") in the amount of 9
months continuation of current/final base salary payable in equal bi-weekly
installments, less applicable state and federal taxes, through payroll
(hereinafter, the "Severance Period"). If the Employee's Separation Date does
not coincide with the end of a payroll period, then the first and last
installment may be prorated to reflect the partial pay period.
- -----------------------------
(1)Transfer of Control shall mean an Ownership Change in which the shareholders
of the Control Company before such Ownership Change do not retain, directly or
indirectly, at least a majority of the beneficial interest in the voting stock
of the Control Company.
<PAGE> 2
b) Medical and Dental Insurance Benefits. Insurance benefits will end
the last day of the month in which the Separation Date occurs. Should Employee
be eligible for and elect COBRA coverage for medical and/or dental benefits,
Fresh Choice will pay the cost of the COBRA premiums, less the amount Employee
paid as an active employee, for the applicable Severance Period. Thereafter, the
Employee is responsible for the timely payment of full cost of the COBRA premium
for the remainder of the applicable COBRA period.
It is intended by the parties hereto that the provisions of this Agreement shall
become effective as of the date of approval by the Board's Compensation
Committee and shall terminate on the sixth month anniversary of the Transfer of
Control Event.
2. Employee acknowledges that the events which shall result in
Severance Pay for the Employee pursuant to this Agreement are limited to either
a layoff, approved by the President and/or Chairman, of the Employee or an
involuntary separation as a result of a "Transfer of Control." The Employee
shall not be eligible for Severance Pay for all other separations of employment,
including but not necessarily limited to voluntary resignations, mutually
agreeable separations, or separations for performance issues or any other
separation for cause.
3. During the Severance Period, it is understood by Fresh Choice and
Employee that Employee shall not be considered an employee of Fresh Choice and,
therefore, shall not be eligible for any other employer-provided benefits
including but not limited to vacation accrual, sick days, disability benefits,
or any other benefit program in which active employees of Fresh Choice may
participate.
4. The execution of this Severance Agreement does not constitute an
employment contract between Fresh Choice and Employee or an agreement by Fresh
Choice to continue to employ Employee. By signing this Severance Agreement,
Employee acknowledges that his employment with Fresh Choice is and continues to
be "at-will", and that such employment may be terminated at any time with or
without cause.
5. Subject to Paragraph 1 above, Employee shall be entitled to no
further compensation for any damage or injury arising out of the termination of
Employee's employment by the Company in the event of a layoff or Transfer of
Control.
6. In the event of any dispute, claim or controversy arising out of or
in any way related to this Agreement, the interpretation of this Agreement or
the alleged breach thereof, such dispute, claim or controversy shall be
submitted by the parties to binding arbitration provided by the American
Arbitration Association in Santa Clara County, California.
7. This Agreement constitutes the entire agreement of Fresh Choice and
Employee regarding Severance Pay upon separation of employment, as defined
herein, and supersedes all agreements prior to the effective date of this
Agreement, whether written or
<PAGE> 3
oral. Fresh Choice reserves the right to amend or terminate this Agreement in
whole or in part upon written notification to the Employee.
8. This Agreement shall be governed by and construed in accordance with
the laws of the State of California applicable to contracts made and to be
performed herein.
IN WITNESS WHEREOF, Fresh Choice and Employee have executed this
Agreement on 8/1/96 (date) to be effective as of the day and year first above
written.
"FRESH CHOICE": "EMPLOYEE"
FRESH CHOICE, INC.,
a Delaware Corporation
by: /s/ Charles A. Lynch /s/ David Anderson
------------------------------ ------------------------------
Charles A. Lynch David Anderson
<PAGE> 1
EXHIBIT 10.24
SEVERANCE AGREEMENT
This Severance Agreement, effective July 18, 1996, is made by and between FRESH
CHOICE, INC. ("Fresh Choice") and Tim G. O'Shea ("Employee").
1. Employee is currently an employee of Fresh Choice in a key
management position. Fresh Choice recognizes that the possibility of a Transfer
of Control(1) exists. Fresh Choice also recognizes that economic events beyond
its control may affect its business and operations. Fresh Choice realizes that
Employee possesses an intimate knowledge of the Company and its Board of
Directors (the "Board") believes that it is necessary to be able to retain
Employee as well as call on Employee for advice upon the occurrence of a
Transfer of Control. The Board also believes that the existence of this
Agreement will enhance the Company's ability to call on and rely upon Employee.
In consideration of Employee's continued employment with Fresh Choice, Fresh
Choice agrees to the following:
a) Severance Pay. In the event Employee's employment with Fresh Choice
is terminated due to either a layoff, approved by the President and/or Chairman,
of the Employee or an involuntary separation as a result of a "Transfer of
Control," Fresh Choice shall pay "Severance Pay" to the Employee beginning as of
Employee's actual last day of work (the "Separation Date") in the amount of 9
months continuation of current/final base salary payable in equal bi-weekly
installments, less applicable state and federal taxes, through payroll
(hereinafter, the "Severance Period"). If the Employee's Separation Date does
not coincide with the end of a payroll period, then the first and last
installment may be prorated to reflect the partial pay period.
- -----------------------
(1)Transfer of Control shall mean an Ownership Change in which the shareholders
of the Control Company before such Ownership Change do not retain, directly or
indirectly, at least a majority of the beneficial interest in the voting stock
of the Control Company.
<PAGE> 2
b) Medical and Dental Insurance Benefits. Insurance benefits will end
the last day of the month in which the Separation Date occurs. Should Employee
be eligible for and elect COBRA coverage for medical and/or dental benefits,
Fresh Choice will pay the cost of the COBRA premiums, less the amount Employee
paid as an active employee, for the applicable Severance Period. Thereafter, the
Employee is responsible for the timely payment of full cost of the COBRA premium
for the remainder of the applicable COBRA period.
It is intended by the parties hereto that the provisions of this Agreement shall
become effective as of the date of approval by the Board's Compensation
Committee and shall terminate on the sixth month anniversary of the Transfer of
Control Event.
2. Employee acknowledges that the events which shall result in
Severance Pay for the Employee pursuant to this Agreement are limited to either
a layoff, approved by the President and/or Chairman, of the Employee or an
involuntary separation as a result of a "Transfer of Control." The Employee
shall not be eligible for Severance Pay for all other separations of employment,
including but not necessarily limited to voluntary resignations, mutually
agreeable separations, or separations for performance issues or any other
separation for cause.
3. During the Severance Period, it is understood by Fresh Choice and
Employee that Employee shall not be considered an employee of Fresh Choice and,
therefore, shall not be eligible for any other employer-provided benefits
including but not limited to vacation accrual, sick days, disability benefits,
or any other benefit program in which active employees of Fresh Choice may
participate.
4. The execution of this Severance Agreement does not constitute an
employment contract between Fresh Choice and Employee or an agreement by Fresh
Choice to continue to employ Employee. By signing this Severance Agreement,
Employee acknowledges that his employment with Fresh Choice is and continues to
be "at-will", and that such employment may be terminated at any time with or
without cause.
5. Subject to Paragraph 1 above, Employee shall be entitled to no
further compensation for any damage or injury arising out of the termination of
Employee's employment by the Company in the event of a layoff or Transfer of
Control.
6. In the event of any dispute, claim or controversy arising out of or
in any way related to this Agreement, the interpretation of this Agreement or
the alleged breach thereof, such dispute, claim or controversy shall be
submitted by the parties to binding arbitration provided by the American
Arbitration Association in Santa Clara County, California.
7. This Agreement constitutes the entire agreement of Fresh Choice and
Employee regarding Severance Pay upon separation of employment, as defined
herein, and supersedes all agreements prior to the effective date of this
Agreement, whether written or
<PAGE> 3
oral. Fresh Choice reserves the right to amend or terminate this Agreement in
whole or in part upon written notification to the Employee.
8. This Agreement shall be governed by and construed in accordance with
the laws of the State of California applicable to contracts made and to be
performed herein.
IN WITNESS WHEREOF, Fresh Choice and Employee have executed this
Agreement on 8/1/96 (date) to be effective as of the day and year first above
written.
"FRESH CHOICE": "EMPLOYEE"
- --------------- ----------
FRESH CHOICE, INC.,
a Delaware Corporation
by: /s/ Robert Ferngren /s/ Tim G. O'Shea
-------------------------------- -----------------------------
Robert Ferngren Tim G. OShea
<PAGE> 1
EXHIBIT 10.25
SEVERANCE AGREEMENT
This Severance Agreement, effective July 18, 1996, is made by and between FRESH
CHOICE, INC. ("Fresh Choice") and Joan M. Miller ("Employee").
1. Employee is currently an employee of Fresh Choice in a key
management position. Fresh Choice recognizes that the possibility of a Transfer
of Control(1) exists. Fresh Choice also recognizes that economic events beyond
its control may affect its business and operations. Fresh Choice realizes that
Employee possesses an intimate knowledge of the Company and its Board of
Directors (the "Board") believes that it is necessary to be able to retain
Employee as well as call on Employee for advice upon the occurrence of a
Transfer of Control. The Board also believes that the existence of this
Agreement will enhance the Company's ability to call on and rely upon Employee.
In consideration of Employee's continued employment with Fresh Choice, Fresh
Choice agrees to the following:
a) Severance Pay. In the event Employee's employment with Fresh Choice
is terminated due to either a layoff, approved by the President and/or Chairman,
of the Employee or an involuntary separation as a result of a "Transfer of
Control," Fresh Choice shall pay "Severance Pay" to the Employee beginning as of
Employee's actual last day of work (the "Separation Date") in the amount of 9
months continuation of current/final base salary payable in equal bi-weekly
installments, less applicable state and federal taxes, through payroll
(hereinafter, the "Severance Period"). If the Employee's Separation Date does
not coincide with the end of a payroll period, then the first and last
installment may be prorated to reflect the partial pay period.
- ---------------------------
(1)Transfer of Control shall mean an Ownership Change in which the shareholders
of the Control Company before such Ownership Change do not retain, directly or
indirectly, at least a majority of the beneficial interest in the voting stock
of the Control Company.
<PAGE> 2
b) Medical and Dental Insurance Benefits. Insurance benefits will end
the last day of the month in which the Separation Date occurs. Should Employee
be eligible for and elect COBRA coverage for medical and/or dental benefits,
Fresh Choice will pay the cost of the COBRA premiums, less the amount Employee
paid as an active employee, for the applicable Severance Period. Thereafter, the
Employee is responsible for the timely payment of full cost of the COBRA premium
for the remainder of the applicable COBRA period.
It is intended by the parties hereto that the provisions of this Agreement shall
become effective as of the date of approval by the Board's Compensation
Committee and shall terminate on the sixth month anniversary of the Transfer of
Control Event.
2. Employee acknowledges that the events which shall result in
Severance Pay for the Employee pursuant to this Agreement are limited to either
a layoff, approved by the President and/or Chairman, of the Employee or an
involuntary separation as a result of a "Transfer of Control." The Employee
shall not be eligible for Severance Pay for all other separations of employment,
including but not necessarily limited to voluntary resignations, mutually
agreeable separations, or separations for performance issues or any other
separation for cause.
3. During the Severance Period, it is understood by Fresh Choice and
Employee that Employee shall not be considered an employee of Fresh Choice and,
therefore, shall not be eligible for any other employer-provided benefits
including but not limited to vacation accrual, sick days, disability benefits,
or any other benefit program in which active employees of Fresh Choice may
participate.
4. The execution of this Severance Agreement does not constitute an
employment contract between Fresh Choice and Employee or an agreement by Fresh
Choice to continue to employ Employee. By signing this Severance Agreement,
Employee acknowledges that his employment with Fresh Choice is and continues to
be "at-will", and that such employment may be terminated at any time with or
without cause.
5. Subject to Paragraph 1 above, Employee shall be entitled to no
further compensation for any damage or injury arising out of the termination of
Employee's employment by the Company in the event of a layoff or Transfer of
Control.
6. In the event of any dispute, claim or controversy arising out of or
in any way related to this Agreement, the interpretation of this Agreement or
the alleged breach thereof, such dispute, claim or controversy shall be
submitted by the parties to binding arbitration provided by the American
Arbitration Association in Santa Clara County, California.
7. This Agreement constitutes the entire agreement of Fresh Choice and
Employee regarding Severance Pay upon separation of employment, as defined
herein, and supersedes all agreements prior to the effective date of this
Agreement, whether written or
<PAGE> 3
oral. Fresh Choice reserves the right to amend or terminate this Agreement in
whole or in part upon written notification to the Employee.
8. This Agreement shall be governed by and construed in accordance with
the laws of the State of California applicable to contracts made and to be
performed herein.
IN WITNESS WHEREOF, Fresh Choice and Employee have executed this
Agreement on 7/22/96 (date) to be effective as of the day and year first above
written.
"FRESH CHOICE": "EMPLOYEE"
- --------------- ----------
FRESH CHOICE, INC.,
a Delaware Corporation
by: /s/ Robert Ferngren /s/ Joan M. Miller
------------------------------- ------------------------------
Robert Ferngren Joan M. Miller
<PAGE> 1
FRESH CHOICE, INC. EXHIBIT 11.1
COMPUTATION OF NET LOSS PER COMMON SHARE
(In thousands, except per share data)
<TABLE>
<CAPTION>
Twelve Weeks Ended Thirty-six Weeks Ended
------------------------- --------------------------
September 8, September 3, September 8, September 3,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income (loss) $ 329 $ (228) $ (442) $(3,074)
======= ======= ======= =======
Weighted average
common shares outstanding 5,646 5,509 5,619 5,493
Common share equivalents related
to stock options and warrants (1) 18 -- -- --
------- ------- ------- -------
Shares used in computation 5,664 5,509 5,619 5,493
======= ======= ======= =======
Net income (loss) per common and
common equivalent share $ 0.06 $ (0.04) $ (0.08) $ (0.56)
======= ======= ======= =======
</TABLE>
(1) Common share equivalents relating to stock options and warrants have
been excluded from the computations for the twelve weeks ended
September 3, 1995 and the thirty-six weeks ended September 8, 1996 and
September 3, 1995 as they would be anti-dilutive and September 3, 1995
as they would be anti-dilutive.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) FRESH
CHOICE, INC.'S REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 8. 1996 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) REPORT ON FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-START> JUN-17-1996
<PERIOD-END> SEP-08-1996
<EXCHANGE-RATE> 1
<CASH> 1,935
<SECURITIES> 0
<RECEIVABLES> 255
<ALLOWANCES> 0
<INVENTORY> 447
<CURRENT-ASSETS> 3,510
<PP&E> 40,736
<DEPRECIATION> (10,336)
<TOTAL-ASSETS> 34,776
<CURRENT-LIABILITIES> 11,221
<BONDS> 0
0
0
<COMMON> 42,022
<OTHER-SE> (19,770)
<TOTAL-LIABILITY-AND-EQUITY> 34,776
<SALES> 18,644
<TOTAL-REVENUES> 18,644
<CGS> 5,040
<TOTAL-COSTS> 18,248
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 67
<INCOME-PRETAX> 329
<INCOME-TAX> 0
<INCOME-CONTINUING> 329
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 329
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
