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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 June 16, 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
(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
- --------------------------------------------------------------------------------
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 July
14, 1996 was 5,646,228.
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FRESH CHOICE, INC.
INDEX
<TABLE>
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets at June 16, 1996
and December 31, 1995.................................................................... 3
Condensed Consolidated Statements of Operations for the Twelve and Twenty-four Weeks
ended June 16, 1996 and June 11, 1995 ................................................... 4
Condensed Consolidated Statements of Cash Flow for the Twelve and Twenty-four Weeks
ended June 16, 1996 and June 11, 1995.................................................... 5
Notes to Unaudited Condensed Consolidated Financial Statements........................... 6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................................ 8
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.................................................................. 20
Item 2 - Changes in Securities.............................................................. 20
Item 3 - Defaults Upon Senior Securities.................................................... 20
Item 4 - Submission of Matters to a Vote of Security Holders................................ 20
Item 5 - Other Information.................................................................. 20
Item 6 - Exhibits and Reports on Form 8-K................................................... 20
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FRESH CHOICE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 16, December 31,
1996 1995
----------- ------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 613 $ 1,294
Receivables 358 207
Inventories 447 465
Pre-opening costs 53 117
Refundable income taxes 45 1,602
Prepaid expenses and other current assets 552 686
-------- --------
Total current assets 2,068 4,371
PROPERTY AND EQUIPMENT, net 31,608 31,983
LEASE ACQUISITION COSTS, net 596 630
DEPOSITS AND OTHER ASSETS 302 322
-------- --------
TOTAL $ 34,574 $ 37,306
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,794 $ 2,909
Accrued salaries and wages 1,568 1,121
Sales tax payable 835 627
Other accrued expenses 2,573 2,954
Restructuring reserve 4,222 5,266
Current portion of capital lease obligations 228 406
-------- --------
Total current liabilities 11,220 13,283
CAPITAL LEASE OBLIGATIONS 31 89
OTHER LONG TERM LIABILITIES 1,403 1,643
-------- --------
Total liabilities 12,654 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: 1996-5,645,807; 1995-5,582,449 42,019 41,619
Accumulated deficit (20,099) (19,328)
-------- --------
Total stockholders' equity 21,920 22,291
-------- --------
TOTAL $ 34,574 $ 37,306
======== ========
</TABLE>
See accompanying notes to unaudited 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 Twenty-four Weeks Ended
---------------------- -----------------------
June 16, June 11, June 16, June 11,
1996 1995 1996 1995
--------- -------- -------- --------
<S> <C> <C> <C> <C>
NET SALES $ 18,793 $19,175 $36,854 $ 36,109
COST AND EXPENSES:
Cost of sales 5,050 5,285 10,103 9,868
Restaurant operating expenses:
Labor 5,931 6,266 11,837 12,180
Occupancy and other 5,247 6,287 10,531 11,852
Depreciation and amortization 772 1,364 1,589 2,627
General and administrative expenses 1,635 2,271 3,431 4,025
-------- ------- ------- --------
Total costs and expenses 18,635 21,473 37,491 40,552
-------- ------- ------- --------
OPERATING INCOME (LOSS) 158 (2,298) (637) (4,443)
-------- ------- ------- --------
Interest income 1 6 1 52
Interest expense (64) (50) (135) (91)
-------- ------- ------- --------
Interest income (expense), net (63) (44) (134) (39)
-------- ------- ------- --------
INCOME (LOSS) BEFORE INCOME TAXES 95 (2,342) (771) (4,482)
Provision for (benefit from) income taxes -- (780) -- (1,636)
-------- ------- ------- --------
NET INCOME (LOSS) $ 95 $(1,562) $ (771) $ (2,846)
======== ======= ======= ========
Net income (loss) per common share $ 0.02 $ (0.28) $ (0.14) $ (0.52)
======== ======= ======= ========
Shares used in computing per share amounts 5,686 5,488 5,605 5,486
======== ======= ======= ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
4
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FRESH CHOICE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Twenty-four Weeks Ended
--------------------------
June 16, June 11,
1996 1995
-------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (771) $(2,846)
Adjustments to reconcile net loss to
net cash provided by operations:
Depreciation and amortization 1,700 2,767
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 20 225
Deferred rent (115) 204
Deferred income taxes -- (382)
Changes in operating assets and liabilities:
Receivables (26) 42
Inventories 18 35
Pre-opening costs (52) (441)
Prepaid expenses and other current assets 134 (1,121)
Income taxes payable (refundable) 1,557 (263)
Accounts payable (1,115) 1,216
Accrued salaries and wages 447 263
Other accrued expenses (173) 730
Restructuring reserve (1,140) --
------- -------
Net cash provided by operating activities 809 501
------- -------
INVESTING ACTIVITIES:
Capital expenditures (1,081) (7,456)
Proceeds from sale of short-term investments -- 4,652
Deposits and other assets (248) 162
------- -------
Net cash used in investing activities (1,329) (2,642)
------- -------
FINANCING ACTIVITIES:
Common stock sales 75 131
Other note payable - borrowings -- 120
Notes payable and line of credit - borrowings 1,701 3,755
Notes payable and line of credit - repayments (1,701) (1,465)
Capital lease obligations - repayments (236) (186)
------- -------
Net cash (used in) provided by financing activities (161) 2,355
------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (681) 214
CASH AND CASH EQUIVALENTS:
Beginning of period 1,294 1,542
------- -------
End of period $ 613 $ 1,756
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 37 $ 83
Cash paid during the year for income taxes $ -- $ 14
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Income tax benefit from employee stock option transactions $ -- $ 13
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 Twenty-four Weeks Ended June 16, 1996 and June 11, 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 converted using the treasury stock method, have been
excluded from the earnings per share computation for the twenty-four weeks ended
June 16, 1996 and for the twelve and twenty-four weeks ended June 11, 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 others.
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 of 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 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 has closed six restaurants to date. Three restaurants were
closed at the end of 1995, one restaurant was closed in the first quarter of
1996, and two restaurants were closed in the second quarter of 1996. Five of the
six closed restaurants were included in the reserve for closures. The Company
negotiated cash payments to landlords to settle the lease obligations for the
first four restaurants closed under the restructuring plan and is negotiating
the lease settlement with the landlord of the fifth restaurant closed under the
plan. The sixth restaurant, which was closed in the second quarter of 1996, was
included in the
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asset impairment charge at year end 1995, and its remaining net assets were
charged to operations at the time the restaurant closed. This sixth restaurant
closure required no cash payments to the landlord.
Of the six 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 and Los Angeles, California.
The following table sets forth the Company's 1995 restructuring reserve
and the reserve balance at December 31, 1995 and June 16, 1996:
<TABLE>
<CAPTION>
1995 Utilized Balance, Utilized Reclassified Balance
(dollars in thousands) Restructuring in Dec. 31, to date to date June 16,
Reserve 1995 1995 1996 1996 1996
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Restaurant closures:
Non-cash write-down of restaurant assets to
estimate fair value and other related costs $ 8,318 $ (8,010) $ 308 $ -- $ -- $ 308
Estimated cash costs associated with restaurant
closures and settlement of lease obligations 4,655 (205) 4,450 (913) -- 3,537
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 (109) 108 25
Non-cash costs 500 (344) 156 (22) (108) 26
-------------------------------------------------------------------
Total $23,932 $(18,666) $5,266 $(1,044) $ -- $4,222
===================================================================
</TABLE>
The Company plans to complete these restaurant closures by the end of
1996 and believes the reserve balance at June 16, 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
twenty-four weeks ended June 16, 1996. The Company reported operating losses in
the six consecutive quarters ending with the first quarter of 1996 and a small
operating profit in the second quarter of 1996. In late 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 AGREEMENT
On April 26, 1996, subject to approval by the stockholders of the
Company at the annual stockholder meeting and certain other conditions, the
Company entered into a preferred stock purchase agreement (the "Agreement") with
Crescent Real Estate Equities Limited Partnership ("Crescent"). Under the terms
of the Agreement, Crescent agreed to purchase 1,187,906 shares of the Company's
Series B non-voting convertible preferred stock for $4.63 per share, or
approximately $5,500,000, in a private offering. Crescent will also have 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 for a period of three years
following its initial investment.
The Series B non-voting preferred stock will be 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 will be convertible, at
the holders' option, into Common Stock on a one-for-one basis. The Series A
preferred stock will entitle its holders to vote with
7
<PAGE> 8
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 Fresh Choice, Inc. 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), any
Series A preferred stockholders would elect a majority of the Company's Board of
Directors. Upon achievement of certain per-share market price tests, Fresh
Choice 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 will
be 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.
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.
8
<PAGE> 9
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
twenty-four weeks ended June 16, 1996 as compared to the twelve and twenty-four
weeks ended June 11, 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 and a partial write-down of assets to estimated fair value in 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 of 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 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.
9
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The Company has closed six restaurants to date. Three restaurants were
closed at the end of 1995, one restaurant was closed in the first quarter of
1996, and two restaurants were closed in second quarter of 1996. Five of the six
closed restaurants were included in the reserve for closures. The Company
negotiated cash payments to landlords to settle the lease obligations for the
first four restaurants closed under the restructuring plan and is negotiating
the lease settlement with the landlord of the fifth restaurant closed under the
plan. The sixth restaurant, which was closed in the second quarter of 1996, was
included in the asset impairment charge at year end 1995, and its remaining net
assets were charged to operations at the time the restaurant closed. This sixth
restaurant closure required no cash payments to the landlord.
Of the six 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 and Los Angeles, California.
The Company estimated it would incur cash costs of $4.8 million in
connection with restaurant closures and the related lease settlements. To date,
the Company has incurred cash costs of approximately $1.3 million, disbursing
$1.0 million during the twenty-four weeks ended June 16, 1996. The Company plans
to complete these restaurant closures by the end of 1996, and believes the
restructuring reserve balance at June 16, 1996 is adequate to cover the
remaining estimated costs to be incurred under the plan.
The Company opened one restaurant during the twelve and twenty-four
weeks ended June 16, 1996, a leased in-line location in Roseville, California.
This restaurant is a new store model which the Company plans to use as a
prototype for any future expansion. The model reduces the Company's average
cash investment per unit, has a more efficient operating layout and is designed
to have a warmer, more inviting atmosphere.
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.
The Company believes its operating cash requirements and near-term capital
requirements for closing as many as four additional restaurants can be met
through cash provided by operations and its available bank line of credit that
expires in November 1996. However, the Company is seeking additional debt or
equity financing to provide greater flexibility toward improving its operating
performance, which could permit it to resume expansion.
On April 26, 1996, subject to approval by the stockholders of the
Company at the annual stockholder meeting and certain other conditions, the
Company entered into a preferred stock purchase agreement (the "Agreement") with
Crescent Real Estate Equities Limited Partnership ("Crescent"). Under the terms
of the Agreement, Crescent agreed to purchase 1,187,906 shares of the Company's
Series B non-voting convertible preferred stock for $4.63 per share, or
approximately $5,500,000, in a private offering. Crescent will also have 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 for a period of three years
following its initial investment.
The Series B non-voting preferred stock will be 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 will be convertible, at
the holders' option, into Common Stock on a one-for-one basis. The Series A
preferred stock will entitle 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 Fresh Choice, Inc. 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), any Series A preferred stockholders would
elect a majority of the Company's Board of Directors. Upon achievement of
certain per-share market price tests, Fresh Choice 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 will be
10
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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.
For the twenty-four weeks ended June 16, 1996 and June 11, 1995, the
Company invested $1.1 million and $7.5 million, respectively, in property and
equipment. In 1996, 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 twenty-four weeks ended June 16, 1996 and June 11,1995,
operating activities provided $0.8 million and $0.5 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.
At June 16, 1996, the Company had no borrowing 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 June 16, 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 June 16, 1996.
Total long-term debt outstanding as of June 16, 1996 was $0.4 million,
a decrease of $0.2 million from December 31, 1995. The long-term debt consists
of $0.3 million of obligations under capital equipment leases and 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 has reported additional operating losses in each
subsequent quarter until the second quarter of 1996, during which the Company
reported a small operating profit.
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
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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.
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% decline in
comparable real store sales in the second quarter of 1996. 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, the Company announced in December 1995 a restructuring plan to close as
many as ten restaurants. The Company has closed six restaurants to date,
including three at the end of 1995, one in the first quarter of 1996 and two in
the second quarter of 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. 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 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. 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 six restaurants closed by the Company to date, two
were in Texas, one was in the state of Washington, and three were in California.
Geographic Concentration. As of June 16, 1996, 45 of the Company's 53
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
12
<PAGE> 13
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 eight
quarters beginning in the third quarter of 1994, may continue to be negative.
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 currently
assessing its management needs and has hired, or plans to hire, 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 hired, or if hired, 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.
13
<PAGE> 14
Ability to Obtain 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 as many as four additional restaurants can be met through cash provided
by operations and its available bank line of credit. However, the Company is
seeking additional debt or equity financing to provide greater flexibility
toward improving its operating performance and has entered into an agreement
with Crescent Real Estate Equities Limited Partnership ("Crescent") to provide
funds of approximately $5,500,000 in a private offering, subject to stockholder
approval and other conditions. If such stockholder approval is not obtained or
if the Company's transaction with Crescent is not concluded for any other
reason, there can be no assurance that the Company will be able to obtain
financing when needed on acceptable terms or at all.
14
<PAGE> 15
Results of Operations
The following table set 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 Twenty-four Weeks Ended
(Unaudited) --------------------------------- ------------------------------------
June 16, 1996 June 11, 1995 June 16, 1996 June 11, 1995
---------------- --------------- ---------------- ------------------
<S> <C> <C> <C> <C>
NET SALES $ 18,793 100.0 % $19,175 100.0 % $36,854 100.0 % $36,109 100.0 %
COST AND EXPENSES:
Cost of sales 5,050 26.9 % 5,285 27.6 % 10,103 27.4 % 9,868 27.3 %
Restaurant operating expenses:
Labor 5,931 31.6 % 6,266 32.7 % 11,837 32.1 % 12,180 33.7 %
Occupancy and other 5,247 27.9 % 6,287 32.8 % 10,531 28.6 % 11,852 32.8 %
Depreciation and amortization 772 4.1 % 1,364 7.1 % 1,589 4.3 % 2,627 7.3 %
General and administrative expenses 1,635 8.7 % 2,271 11.8 % 3,431 9.3 % 4,025 11.2 %
-------------- -------------- -------------- ----------------
Total costs and expenses 18,635 99.2 % 21,473 112.0 % 37,491 101.7 % 40,552 112.3 %
-------------- -------------- -------------- ----------------
OPERATING (INCOME) LOSS 158 0.8 % (2,298) (12.0)% (637) (1.7)% (4,443) (12.3)%
-------------- -------------- -------------- ----------------
Interest income 1 -- % 6 -- % 1 -- % 52 0.1 %
Interest expense (64) (0.3)% (50) (0.2)% (135) (0.4)% (91) (0.2)%
-------------- -------------- -------------- ----------------
Interest income (expense), net (63) (0.3)% (44) (0.2)% (134) (0.4)% (39) (0.1)%
-------------- -------------- -------------- ----------------
INCOME (LOSS) BEFORE INCOME TAXES 95 0.5 % (2,342) (12.2)% (771) (2.1)% (4,482) (12.4)%
Provision for (benefit from) income taxes -- -- % (780) 4.1 % -- -- % (1,636) 4.5 %
-------------- -------------- -------------- ----------------
NET INCOME (LOSS) $ 95 0.5 % $(1,562) (8.1)% $ (771) (2.1)% $(2,846) (7.9)%
============== ============== ============== ================
Number of restaurants:
Open at beginning of period 54 53 55 51
Open at end of period 53 57 53 57
</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 Twenty-four Weeks Ended
(Unaudited) -------------------------------------- ------------------------------------
June 16, 1996 June 11, 1995 June 16, 1996 June 11, 1995
--------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
NET SALES $ 350 100.0% $ 347 100.0 % $ 681 100.0 % $ 674 100.0 %
COST AND EXPENSES:
Cost of sales 94 26.9% 96 27.6 % 187 27.4 % 184 27.3 %
Restaurant operating expenses:
Labor 111 31.6% 113 32.7 % 219 32.1 % 227 33.7 %
Occupancy and other 98 27.9% 114 32.8 % 195 28.6 % 221 32.8 %
Depreciation and amortization 14 4.1% 25 7.1 % 29 4.3 % 49 7.3 %
General and administrative expenses 30 8.7% 41 11.8 % 63 9.3 % 75 11.2 %
-------------- -------------- -------------- -------------
Total costs and expenses 347 99.2% 389 112.0 % 693 101.7 % 756 112.3 %
-------------- -------------- -------------- -------------
OPERATING (INCOME) LOSS $ 3 0.8% $ (42) (12.0)% $ (12) (1.7)% $ (82) (12.3)%
============== =============== =============== =============
Average restaurants open during the period 53.65 55.33 54.12 53.59
</TABLE>
15
<PAGE> 16
Results of Operations: Twelve Weeks Ended June 16, 1996
Compared to Twelve Weeks Ended June 11, 1995
Net Sales Net sales for the second quarter ended June 16, 1996 were
$18.8 million, a $0.4 million, or 2%, decrease from sales of $19.2 million for
same twelve weeks ended June 11, 1995. The components of the net decrease in
sales were:
<TABLE>
<S> <C>
The absence of sales from six closed restaurants (of which three were closed near
the end of fiscal 1995, one was closed in the first quarter of 1996, and two
were closed in the second quarter of 1996) ..................................... $(0.9) million
Incremental sales from six restaurants opened since the beginning of
the second quarter of 1995 (of which four were opened in the
second quarter of 1995, one in the third quarter of 1995 and one
in the second quarter of 1996) ................................................. $ 0.7 million
Decline in sales for the remaining 47 restaurants opened prior to the second
quarter of 1995................................................................. $(0.2) million
</TABLE>
Comparable real store sales, which include only sales for restaurants
open at least 18 months, declined 8.6% during the second 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 $6.73 at the end of
the second quarter of 1996 from $6.18 during the second quarter of 1995. The
Company believes that as a result of the termination of certain discount
programs, it lost a portion of its price-sensitive customer segment, although
the Company believes this segment is the smallest and least profitable segment
of its customer base. Net sales per restaurant averaged $350,000 in 1996 and
$347,000 in 1995.
Costs and Expenses. Cost of sales (food and beverage costs) decreased
as a percentage of net sales to 26.9% in the second quarter of 1996 compared to
27.6% in the second quarter of 1995. The decrease is attributed to the Company's
new one-price system introduced at the end of the first quarter of 1996 and
termination of discount programs during the second quarter of 1996. These
actions resulted in a higher average customer check that was more than adequate
to cover the higher food costs from the Company's first-quarter roll-out of a
major food program. 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
59.5% in the second quarter of 1996 from 65.5% for the second quarter of 1995.
Tighter management controls and cost reduction programs produced substantial
reductions in variable operating costs. The relationship of restaurant operating
costs to net sales also improved as a result of the absence non recurring
charges incurred in the second quarter of 1995 related to the Company's
curtailment of restaurant expansion and, to a lesser extent, the absence of
fixed costs on six low-volume restaurants closed to date in connection with the
Company's restructuring plan.
Depreciation and amortization decreased $0.6 million in the second
quarter of 1996 compared to the second quarter of 1995 and also decreased as a
percentage of net sales to 4.1% in the second quarter of 1996 compared to 7.1%
in the second 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 second quarter of 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 late 1995 contributed to a $0.3 million
reduction in restaurant depreciation expense in the second quarter of 1996
compared to the second quarter of 1995.
16
<PAGE> 17
General and administrative expenses were $1.6 million for second
quarter of 1996, a decrease of $0.7 million compared to expenses of $2.3 million
for the second quarter of 1995. In the second quarter of 1995, the Company
recorded a non recurring $0.5 million charge 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
quarter 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 second quarter of 1996 or during the second
quarter of 1995. The Company sold the final investments from its December 1992
initial public offering and its July 1993 secondary offering during the first
quarter of 1995 to finance the construction of the seven restaurants opened in
1995.
Interest Expense. Interest expense was $64,000 in the second quarter
of 1996 compared to $50,000 in the second 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 second quarter of 1996. The Company has incurred
operating losses in six consecutive quarters ending with the first quarter 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.
17
<PAGE> 18
Results of Operations: Twenty-four Weeks Ended June 16, 1996
Compared to Twenty-four Weeks Ended June 11, 1995
Net Sales Net sales for twenty-four weeks ended June 16, 1996 were
$36.9 million, a $0.8 million, or 2%, increase over sales of $36.1 million for
the twenty-four weeks ended June 11, 1995. The significant components of the
net increase in sales were:
<TABLE>
<S> <C>
The absence of sales from six closed restaurants (of which three were closed near
the end of fiscal 1995, one was closed in the first quarter of 1996, and two
were closed in the second quarter of 1996) ..................................... $(1.5) million
Incremental sales from eight restaurants opened since the beginning of fiscal
1995 (of which two were opened in the first quarter of 1995, four
in the second quarter of 1995, one in the third quarter of 1995
and one in the second quarter of 1996).......................................... $ 2.4 million
Decline in sales for the remaining 45 restaurants opened prior to 1995............... $(0.2) million
</TABLE>
Comparable real store sales, which include only sales for restaurants
open at least 18 months, declined 4.7% during the first half of 1996 versus
the same period in the prior year. In the first and second quarters of 1996,
comparable real store sales declined 0.3% and 8.6%, 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 $6.73 at the end of the second quarter of 1996
from $6.18 during the second quarter of 1995. The Company believes it lost a
portion of its price-sensitive customer segment during the second quarter,
although the Company believes this segment is the smallest and least profitable
segment of its customer base. Net sales per restaurant averaged $681,000 in 1996
and $674,000 in 1995.
Costs and Expenses. Cost of sales (food and beverage costs) was 27.4%
of net sales in the twenty-four weeks ended June 16, 1996, a slight increase
compared to 27.3% for the twenty-four weeks ended June 11, 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 to 28.0% in the first
quarter compared to 27.0% in last year's first quarter. 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 discount programs. These actions resulted in a higher average
customer check in the second quarter that was more than adequate to cover the
higher food costs. As a result, the second quarter's food and beverage costs
decreased to 26.9% from 27.6% last year, and food and beverage costs remained
about even for the first twenty-four weeks of 1996 and 1995, respectively.
Restaurant operating expenses decreased as a percentage of net sales to
60.7% in the twenty-four weeks ended June 16, 1996 compared to 66.5% in the
twenty-four weeks ended June 11, 1995. Tighter management controls and cost
reduction programs produced substantial reductions in variable operating costs.
The relationship of restaurant operating costs to net sales also improved as a
result of the absence non recurring charges incurred in the first twenty-four
weeks of 1995 related to the Company's curtailment of restaurant expansion and,
to a lesser extent, the absence of fixed costs on six low-volume restaurants
closed to date in connection with the Company's restructuring plan.
Depreciation and amortization decreased $1.0 million in the twenty-four
weeks ended June 16, 1996 compared to the first twenty-four weeks of 1995 and
also decreased as a percentage of net sales to 4.3% in the current period
compared to 7.3% in the same period of 1995. The Company's curtailment of
restaurant expansion in 1995 resulted in a $0.6 million reduction in restaurant
start-up cost amortization in the twenty-four weeks ended June 16, 1996 compared
to the same period in 1995. The write-down of assets to
18
<PAGE> 19
estimated fair value in connection with the Company's restructuring plan in late
1995 contributed to a $0.6 million reduction in restaurant depreciation expense
in the twenty-four weeks ended June 16, 1996 compared to the twenty-four weeks
ended June 11, 1995.
General and administrative expenses were $3.4 million for the
twenty-four weeks ended June 16, 1996, a decrease of $0.6 million compared to
expenses of $4.0 million for the first twenty-four weeks of 1995. In the second
quarter of 1995, the Company incurred a one-time charge of $0.5 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 twenty-four weeks ended June 16, 1996. During
the twenty-four weeks ended June 11, 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 $52,000 on its investments.
Interest Expense. Interest expense was $135,000 in the twenty-four
weeks ended June 16, 1996 compared to $91,000 in the twenty-four weeks ended
June 11, 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 twenty-four weeks ended June 16, 1996. The Company has incurred operating
losses in six consecutive quarters ending with the first quarter 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.
19
<PAGE> 20
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 June 16, 1996
20
<PAGE> 21
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: July 31, 1996
21
<PAGE> 22
INDEX TO FORM 10-Q EXHIBITS
EXHIBIT
NO. DESCRIPTION
- --------------------------------------------------------------------------------
3.1 (1) Certification of Incorporation of Fresh Choice, Inc.
3.2 (8) Amended By-Laws of Fresh Choice, Inc. dated April 11,
1996
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
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
22
<PAGE> 23
INDEX TO FORM 10-Q EXHIBITS continued
EXHIBIT
NO. DESCRIPTION
- --------------------------------------------------------------------------------
10.21 (3) Amendment dated July 29, 1996 to Employment Offer Letter
to Robert Ferngren
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.
23
<PAGE> 1
EXHIBIT 10.21
July 29, 1996
Robert Ferngren
Executive Department
Fresh Choice, Inc.
Dear Bob:
Fresh Choice, Inc. (the "Company") has been asked by the SEC to make additional
disclosures regarding your employment offer letter dated November 9, 1996 (the
"Offer Letter") with the Company. In order to clarify certain terms and rights
set forth in the Offer Letter, we agree to the following amendments to the Offer
Letter:
1. Paragraph 8 of the Offer Letter is hereby amended to read in its entirety as
follows: "Upon the closing of a "change in control" event of the Company, your
outstanding options will immediately become fully vested and exercisable. If,
within 6 months of such "change in control" event, you are terminated by the
acquiring company, you shall be entitled to receive the severance benefits
described in Paragraph 7 of the Offer Letter. For purposes of this Offer Letter,
as amended, "change in control" shall mean an ownership change in which the
stockholders of the 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 company after the ownership change."
2. The following new Paragraph 12 shall be added: "In the event of any dispute,
claim or controversy arising out of or in any way related to this Offer Letter,
the interpretation of this Offer Letter 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.
<PAGE> 2
Robert Ferngren
July 29, 1996
Page 2
We would like to resolve this issue quickly for purposes of making appropriate
filings with the SEC, although of course you have the right to have the change
reviewed by your own counsel before you agree to the above terms. Please contact
me if you have any questions about this clarification.
Sincerely,
/s/Charles A. Lynch
Chairman
Accepted and agreed:
/s/ Robert Ferngren
<PAGE> 1
FRESH CHOICE, INC. EXHIBIT 11.1
COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Twelve Weeks Ended Twenty-four Weeks Ended
--------------------- -------------------------
June 16, June 11, June 16, June 11,
1996 1995 1996 1995
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Net income (loss) $ 95 $(1,562) $ (771) $ (2,846)
====== ======= ====== ========
Weighted average
common shares outstanding 5,646 5,488 5,605 5,486
Common share equivalents related
to stock options and warrants (1) 40 -- -- --
------ ------- ------ --------
Shares used in computation 5,686 5,488 5,605 5,486
====== ======= ====== ========
Net income (loss) per common and
common equivalent share $ 0.02 $ (0.28) $(0.14) $ (0.52)
====== ======= ====== ========
</TABLE>
(1) Common share equivalents relating to stock options and warrants have been
excluded from the computations for the twelve weeks ended June 11, 1995 and
the twenty-four weeks ended June 16, 1996 and June 11, 1995 as they would
be anti-dilutive.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000893741
<NAME> FRESH CHOICE, INC.
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-START> MAR-25-1996
<PERIOD-END> JUN-16-1996
<EXCHANGE-RATE> 1
<CASH> 613
<SECURITIES> 0
<RECEIVABLES> 358
<ALLOWANCES> 0
<INVENTORY> 447
<CURRENT-ASSETS> 2068
<PP&E> 41278
<DEPRECIATION> (9670)
<TOTAL-ASSETS> 34574
<CURRENT-LIABILITIES> 11220
<BONDS> 0
0
0
<COMMON> 42019
<OTHER-SE> (20099)
<TOTAL-LIABILITY-AND-EQUITY> 34574
<SALES> 18793
<TOTAL-REVENUES> 18793
<CGS> 5050
<TOTAL-COSTS> 18635
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 64
<INCOME-PRETAX> 95
<INCOME-TAX> 0
<INCOME-CONTINUING> 95
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 95
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
