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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 7, 1997
-------------------------
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. [X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares of Common Stock, $.001 par value, outstanding as of October
5, 1997 was 5,668,625.
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FRESH CHOICE, INC.
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets at September 7, 1997
and December 29, 1996.....................................................................3
Condensed Consolidated Statements of Operations for the Twelve and
Thirty-Six Weeks ended September 7, 1997 and September 8, 1996 ...........................4
Condensed Consolidated Statements of Cash Flow for the Thirty-Six Weeks
ended September 7, 1997 and September 8, 1996.............................................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...................................................................22
Item 6 - Exhibits and Reports on Form 8-K....................................................22
SIGNATURES ......................................................................................22
INDEX TO FORM 10-Q EXHIBITS......................................................................23
</TABLE>
2
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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 7, December 29,
1997 1996
-------- --------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,027 $ 5,647
Receivables 169 218
Inventories 460 432
Pre-opening costs -- 23
Prepaid expenses and other current assets 703 513
-------- --------
Total current assets 6,359 6,833
PROPERTY AND EQUIPMENT, net 30,319 29,509
LEASE ACQUISITION COSTS, net 504 556
DEPOSITS AND OTHER ASSETS 497 268
-------- --------
TOTAL $ 37,679 $ 37,166
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,882 $ 2,077
Accrued salaries and wages 1,366 1,445
Sales tax payable 711 462
Other accrued expenses 2,905 2,790
Restructuring reserve 1,832 2,696
Current portion of capital lease obligations 10 89
-------- --------
Total current liabilities 9,706 9,559
OTHER LONG TERM LIABILITIES 1,363 1,691
-------- --------
Total liabilities 11,069 11,250
-------- --------
STOCKHOLDERS' EQUITY
Convertible preferred stock, $.001 par value;
3.5 million shares authorized;
shares outstanding: 1997 and 1996 - 1,187,906 5,175 5,175
Common stock, $.001 par value; 15 million
shares authorized;
shares outstanding: 1997-5,668,625; 1996-5,660,826 42,115 42,070
Accumulated deficit (20,680) (21,329)
-------- --------
Total stockholders' equity 26,610 25,916
-------- --------
TOTAL $ 37,679 $ 37,166
======== ========
</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 amounts)
(Unaudited)
<TABLE>
<CAPTION>
Twelve Weeks Ended Thirty-Six Weeks Ended
---------------------- ----------------------
September 7, September 8, September 7, September 8,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET SALES $ 18,334 $ 18,644 $ 51,819 $ 55,498
COST AND EXPENSES:
Cost of sales 4,861 5,040 13,966 15,143
Restaurant operating expenses:
Labor 5,445 5,784 15,821 17,621
Occupancy and other 5,076 5,207 15,328 15,738
Depreciation and amortization 723 758 2,121 2,347
General and administrative expenses 1,199 1,459 4,049 4,890
-------- -------- -------- --------
Total costs and expenses 17,304 18,248 51,285 55,739
-------- -------- -------- --------
OPERATING INCOME (LOSS) 1,030 396 534 (241)
-------- -------- -------- --------
Interest income 39 -- 128 1
Interest expense (4) (67) (13) (202)
-------- -------- -------- --------
Interest income (expense), net 35 (67) 115 (201)
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES 1,065 329 649 (442)
Provision for (benefit from) income taxes -- -- -- --
-------- -------- -------- --------
NET INCOME (LOSS) $ 1,065 $ 329 $ 649 $ (442)
======== ======== ======== ========
Net income (loss) per common share $ 0.16 $ 0.06 $ 0.09 $ (0.08)
======== ======== ======== ========
Shares used in computing per share amounts 6,860 5,664 6,855 5,619
======== ======== ======== ========
</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>
Thirty-Six Weeks
--------------------
September 7, September 8,
1997 1996
------- -------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 649 $ (442)
Adjustments to reconcile net income (loss) to
net cash provided by operations:
Depreciation and amortization 2,274 2,510
Issuance of common stock for consulting services -- 325
Loss on disposal of property 69 73
Deferred rent (315) (284)
Changes in operating assets and liabilities:
Receivables 49 (48)
Inventories (28) 8
Prepaid expenses and other current assets (190) (102)
Preopening costs -- (58)
Income taxes refundable -- 1,558
Accounts payable 805 97
Accrued salaries and wages (79) 510
Other accrued expenses (236) (521)
Restructuring reserve (864) (1,274)
------- -------
Net cash provided by operating activities 2,134 2,352
------- -------
INVESTING ACTIVITIES:
Capital expenditures (2,490) (1,323)
Deposits and other assets (229) (127)
------- -------
Net cash used in investing activities (2,719) (1,450)
------- -------
FINANCING ACTIVITIES:
Common stock sales 45 78
Notes payable and line of credit borrowings, net (1) (1)
Capital lease obligations - repayments (79) (338)
------- -------
Net cash used in financing activities (35) (261)
------- -------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (620) 641
CASH AND CASH EQUIVALENTS:
Beginning of period 5,647 1,294
------- -------
End of period $ 5,027 $ 1,935
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 15 $ 46
======= =======
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Acquisition payable related to purchase of restaurants $ 600 $ --
======= =======
</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 7, 1997 and September 8,
1996
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 29, 1996.
2. EARNINGS PER SHARE
Earnings 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 and preferred stock
assumed converted using the if-converted method, have been excluded from the
earnings per share computation for the thirty-six weeks ended September 8, 1996
as they would be anti-dilutive.
3. INCOME TAXES
The Company recorded no tax provision for its operating income
during the thirty-six weeks ended September 7, 1997 due to the availability of
net operating loss carryforwards to offset taxable income. For the thirty-six
weeks ended September 8, 1996, the Company recorded no tax benefit from its
operating loss due to valuation allowances against its net deferred tax assets.
The Company's net deferred assets consist primarily of the tax benefit related
to operating loss carryforwards and non-deductible asset write-downs and
restructuring 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.
4. BANK LINE OF CREDIT
On July 9, 1997, the Company amended its bank line of credit
agreement, increasing the available amount to $5,000,000 and extending the term
until May 27, 1998. Borrowings under the line of credit bear interest at the
prime rate (8.5% at September 7, 1997) plus 1% and are secured by the Company's
personal property and by executed Deeds of Trust on certain Company-owned real
estate. Borrowings under the line of credit are limited to the lesser of
$5,000,000 or three times the Company's earnings before interest, taxes,
depreciation and amortization. The Company had the full $5,000,000 available
under the bank line of credit agreement at September 7, 1997. The agreement also
provides an option for the Company to convert borrowings, up to $3,500,000, to a
48-month term loan at any time prior to the maturity date of May 27, 1998.
Borrowings under the term loan bear interest at the prime rate plus 1.75%.
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The agreement requires the Company to achieve a minimum earnings
before interest, taxes, depreciation and amortization for the 1997 fiscal year,
to maintain a minimum tangible net worth, to not exceed a maximum debt to net
tangible worth ratio and, for the term loan, to maintain a minimum debt service
coverage ratio. The agreement also contains a maximum fixed asset acquisition
limit. The Company was in compliance with these covenants at September 7, 1997.
The Company had no borrowing under the line of credit at September 7, 1997.
4. RESTRUCTURING RESERVE
The following table sets forth the Company's restructuring reserves
and their respective balances at December 31, 1995, December 29, 1996 and
September 7, 1997.
<TABLE>
<CAPTION>
Balance Provided Balance Provided Utilized Balance
(In thousands) December 31, (Reversed) Utilized Reclassified December 29,(Reversed) to date September 7,
1995 in 1996 in 1996 in 1996 1996 in 1997 in 1997 1997
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <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 $ 308 $ (250) $ -- $ -- $ 58 $ -- $ (11) $ 47
Estimated cash costs associated
with restaurant closures and
settlement of lease
obligations 4,450 (1,442) (1,243) -- 1,765 294 (274) 1,785
Impaired restaurants:
Non-cash write-down of assets
to estimated fair value at
other restaurants and other
related costs 326 (326) -- -- -- -- --
Other costs, primarily consulting
and professional fees related
to the restructuring plan:
Cash costs 26 (51) (109) 134 -- -- --
Non-cash costs 156 -- (22) (134) -- -- --
------- ------- ------- ------- ------- ------- ------- -------
1995 restructuring reserve 5,266 (2,069) (1,374) -- 1,823 294 (285) 1,832
------- ------- ------- ------- ------- ------- ------- -------
1996 Restructuring Reserve
Restaurant closures:
Non-cash write-down of
restaurant assets to estimated
fair value and other related
costs -- 650 (622) -- 28 (28) --
Estimated cash costs associated
with restaurant closures and
settlement of lease
obligations -- 968 (123) -- 845 (266) (579) --
------- ------- ------- ------- ------- ------- ------- -------
1996 restructuring reserve -- 1,618 (745) -- 873 (294) (579) --
------- ------- ------- ------- ------- ------- ------- -------
Total restructuring reserve $ 5,266 $ (451) $(2,119) $ -- $ 2,696 $ -- $ (864) $ 1,832
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
In December 1995, the Company finalized and announced a
restructuring plan which called for closing as many as ten of the Company's
restaurants, of which seven restaurants were included in a reserve for
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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 1995 in connection with the plan.
By the end of 1996, the Company had closed six of the seven
restaurants identified for closure and had decided not to close the seventh
restaurant based on its improved operating performance. The Company's decision
not to close one restaurant resulted in a $451,000 reversal in 1996 of
previously recorded restructuring expense. The Company reversed an additional
$1,618,000 in 1996 of previously recorded restructuring expense due to lower
than estimated cash payments to settle lease obligations at five closed
restaurants. At September 7, 1997, the 1995 restructuring reserve balance
consisted of the estimated cash costs to settle the lease obligation at one
restaurant. During the third quarter of 1997, the Company increased the reserve
for this restaurant by $294,000 to cover rent and other lease costs expected to
be incurred during the extended term of the lease settlement negotiations.
During 1996, the Company identified and closed or sold five
additional restaurants for a total of eleven closed restaurants. The Company
recorded an additional $1,618,000 restructuring charge for two of the
restaurants. A third closed restaurant, which was included in the 1995 asset
impairment reserve, did not require a cash settlement with the landlord for
lease obligations, and the Company charged its remaining net assets to
operations at the time the restaurant closed in 1996. In addition, the Company
sold two restaurants in the Washington D.C. market at the end of 1996 for
$750,000 and recorded a gain of $446,000. By September 7, 1997, the Company had
settled all obligations provided for by its 1996 restructuring reserve and
reversed the remaining $294,000 reserve balance in the third quarter of 1997 due
to lower than estimated cash payments to settle the final lease obligation.
The Company has identified no other restaurants for closure as of
October 22, 1997, and believes the balance in its 1995 restructuring reserve at
September 7, 1997 is adequate to cover the remaining estimated costs to be
incurred under its restructuring plan.
5. PURCHASE OF ZOOPA RESTAURANTS
On May 1, 1997, the Company completed the purchase of three Zoopa
restaurants in Bellevue, Tacoma and Tukwila, Washington. The three restaurants,
which will continue to operate under the Zoopa name, offer a self-service format
similar to Fresh Choice restaurants including salads, hot pasta dishes, soups,
bakery goods and desserts. The Company paid $1,250,000 upon closing of the
purchase and agreed to make an additional payment one year after closing of
between $550,000 and $950,000 depending on the achievement of restaurant sales
levels. The Company has recorded a $600,000 acquisition payable in other accrued
liabilities and will record an additional liability when the amount, if any, is
determinable.
6. RECENTLY ISSUED ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS
128). The Company is required to adopt SFAS 128 in the fourth quarter of fiscal
1997 and will restate at that time earnings per share (EPS) data for prior
periods to conform with SFAS 128. Earlier application is not permitted.
SFAS 128 replaces current EPS reporting requirements and requires a
dual presentation of basic and diluted EPS. Basic EPS excludes dilution and is
computed by dividing net income by the weighted average
8
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of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock.
Pro forma amounts for basic and diluted EPS assuming SFAS 128 had
been in effect for the twelve and thirty-six weeks ended ended September 7, 1997
and September 8, 1996 are as follows. The Company has excluded potential common
shares, which are common stock options and warrants assumed converted using the
treasury stock method and preferred stock assumed converted using the
if-converted method, from the computation of diluted net loss per common share
for the thirty-six weeks ended September 8, 1996 as they would be anti-dilutive.
<TABLE>
<CAPTION>
Twelve Weeks Ended Thirty-Six Weeks Ended
-------------------------- ---------------------------
Pro Forma September 7, September 8, September 7, September 8,
EPS 1997 1996 1997 1996
- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Basic $ 0.19 $ 0.06 $ 0.11 $(0.08)
Diluted $ 0.16 $ 0.06 $ 0.10 $(0.08)
</TABLE>
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 7, 1997 as compared to the twelve
and thirty-six weeks ended September 8, 1996. 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 29, 1996 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 29, 1996.
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 ability of the Company to improve
restaurant sales and its overall profitability; the ability of the Company to
obtain funds to pursue its future plans; the ability of the Company to implement
its growth plans; competitive pressures in the food-service marketplace; the
changing tastes of consumers; the effect of general economic conditions;
fluctuations in quarterly results; planned new restaurant openings and future
expansion; availability of suitable lease sites; customer receptiveness to new
products, the new restaurant interior design and the new Zoopa format;
improvements in unit economics; and the ability of the Company to secure and
retain the services of experienced personnel. Actual results could differ
materially from those projected 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.
On May 1, 1997, the Company purchased the three Zoopa restaurants
for $1,250,000 and an additional payment one year later of between $550,000 and
$950,000 depending on the achievement of restaurant sales levels. The Company
has recorded a $600,000 acquisition payable in other accrued liabilities and
will record any additional liability when the amount, if any, is determinable.
The three restaurants, which will continue to operate under the Zoopa name,
offer a self-service format similar to Fresh Choice restaurants including
salads, hot pasta dishes, soups, bakery goods and desserts.
For the thirty-six weeks ended September 7, 1997, the Company
invested $3,090,000 in property and equipment including the purchase of the
three Zoopa restaurants in Bellevue, Tacoma and Tukwila, Washington, spending on
two new restaurants in Houston and San Antonio, Texas with openings scheduled
for the fourth quarter of 1997, spending on remodels which are typically
required every five to seven years and spending on replacement fixtures and
equipment. These investments were funded from internal cash flow, existing cash
balances and the short term liability related to the purchase of the Zoopa
restaurants.
As of September 7, 1997, the Company had incurred aggregate cash
costs of $2,298,000 in connection with restaurant closures and the related
settlements of lease obligations in connection with a restructuring program
begun in December 1995. Cash costs incurred during the thirty-six weeks ended
September 7, 1997 totaled $853,000. The Company has identified no other
restaurants for closure, and believes
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the restructuring reserve balances totaling $1,832,000 at September 7, 1997 are
adequate to cover the remaining estimated costs to be incurred under the plan.
During the thirty-six weeks ended September 7, 1997, operating
activities provided $2,134,000 which includes the $853,000 cash costs related to
the Company's restructuring plan.
On July 9, 1997, the Company amended its bank line of credit
agreement, increasing the available amount to $5,000,000 and extending the term
until May 27, 1998. Borrowings under the line of credit bear interest at the
prime rate (8.5% at September 7, 1997) plus 1% and are secured by the Company's
personal property and by executed Deeds of Trust on certain Company-owned real
estate. Borrowings under the line of credit are limited to the lesser of
$5,000,000 or three times the Company's earnings before interest, taxes,
depreciation and amortization. The Company had the full $5,000,000 available
under the bank line of credit agreement at September 7, 1997. The agreement also
provides an option for the Company to convert borrowings, up to $3,500,000, to a
48-month term loan at any time prior to the maturity date of May 27, 1998.
Borrowings under the term loan bear interest at the prime rate plus 1.75%.
The agreement requires the Company to achieve a minimum earnings
before interest, taxes, depreciation and amortization for the 1997 fiscal year,
to maintain a minimum tangible net worth, to not exceed a maximum debt to net
tangible worth ratio and, for the term loan, to maintain a minimum debt service
coverage ratio. The agreement also contains a maximum fixed asset acquisition
limit. The Company was in compliance with these covenants at September 7, 1997.
The Company had no borrowing under the line of credit at September 7, 1997.
The Company's outstanding Series B non-voting preferred stock is
currently held by one entity and is convertible, at the holders' option, into
Series A voting convertible preferred stock on a one-for-one basis. Although no
Series A preferred stock is currently outstanding, any holders of Series A
preferred stock would be entitled to vote with common stockholders on all
matters submitted to a vote of stockholders. 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 $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 could elect a majority of the Company's board of
Directors. Upon achievement of certain per-share market price test, the Company
may force a mandatory conversion of the Series A preferred stock to common
stock. No shares of Series C preferred stock are currently outstanding, but an
option to purchase such shares is outstanding. The Series A, Series B and Series
C preferred stock are convertible, at the holders' option, into Common Stock on
a one-for-one basis. 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 distribution on liquidation.
The Company's continued growth depends to a significant degree on
its ability to open new restaurants and to operate such restaurants profitably.
In addition to the three Zoopa restaurants purchased in the greater Seattle,
Washington market during the second quarter of 1997, the Company has signed
leases for two new restaurants in Houston, Texas and for one new restaurant in
San Antonio, Texas. One of the two new Houston restaurants and the new San
Antonio restaurant are scheduled to open in the fourth quarter of 1997. The
Company intends to continue its restaurant expansion, assuming its financial
performance continues to improve. The Company's ability to implement an
expansion strategy will depend upon a variety of factors, including the
continued success of efforts to restore profitability and the Company's ability
to obtain funds. See "Business Risks" included herein. The Company believes its
operating cash requirements and near-term capital requirements for restaurant
remodeling and expansion can be met through existing cash balances, cash
provided by operations and its amended line of credit and term loan agreement.
The Company may continue to seek
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<PAGE> 12
additional debt or equity financing to provide greater flexibility toward
improving its operating performance and continuing expansion.
Long-term debt at September 7, 1997 consists of a $118,000 note
for site construction costs which is included in other long-term liabilities on
the balance sheet.
Impact of Inflation
Many of the Company's employees are paid hourly rates related to
the federal and state minimum wage laws. Accordingly, increases in the minimum
wage could materially increase the Company's labor costs. The Federal minimum
wage increased effective September 1, 1997, and, currently, there is a further
scheduled increase in the State of California minimum wage. In addition, the
cost of food commodities utilized by the Company are subject to market supply
and demand pressures. Shifts in these costs may have a significant impact on the
Company's food costs. The Company anticipates that increases in these costs can
be offset through pricing and other cost control efforts; however, there is no
assurance that the Company would be able to pass such costs on to its guests or
that even if it were able to do so, it could do so in a short period of time.
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 financial results.
These risks include:
Recent Declines in Comparable Real Store Sales and Operating Losses.
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. The Company reported a 0.3% decline in
comparable real store sales in the first quarter of 1996. Beginning in the
second quarter of 1996, the magnitude of the declines in comparable real store
sales increased until the first quarter of 1997. Following the introduction of a
one-price system and termination of discount programs, the Company reported an
8.6%, 17.0% and 14.5% decline in comparable real store sales in the second,
third and fourth quarters of 1996, respectively, and a 10.4% , 4.5%, and 3.3%
decline in the first, second and third quarters, respectively, of 1997. There
can be no assurance that comparable real store sales will improve or that the
Company will return to long-term profitability.
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. Although the Company reported operating profits
in the second and third quarters of 1996, it returned to an operating loss for
the fourth quarter and reported a loss for the full year 1996. In 1997, the
Company has reported an operating loss in its first quarter, operating profits
in its second and third quarters and an operating profit year-to-date through
its third quarter. There can be no assurance that the Company will maintain or
improve its profitability.
Expansion. The Company experienced substantial growth prior to
mid-1995, having opened 14 restaurants in 1993, 15 restaurants in 1994, and
seven in 1995. In 1995, the Company suspended its expansion plans after opening
seven restaurants, 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
or
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sold 11 restaurants to date, including three at the end of 1995, and eight in
1996. The Company has identified no further restaurants for closure, although it
continues to review the performance of each of its restaurants. The Company
opened one restaurant in 1996, and in the second quarter of 1997, the Company
purchased three Zoopa restaurants in Bellevue, Tacoma and Tukwila, Washington
which will continue to operate under the Zoopa name and store model. These three
restaurants offer a self-service format similar to Fresh Choice restaurants with
similar menu offerings. The Company believes its growth depends to a significant
degree on its ability to open new restaurants and to operate such restaurants
profitably. During the second quarter of 1997, the Company signed leases for two
new restaurants in Houston and San Antonio, Texas with openings scheduled for
the fourth quarter. During the third quarter of 1997, the Company signed a lease
for a second new restaurant in Houston with a 1998 scheduled opening. The
Company intends to utilize the Zoopa name and restaurant format in these new
restaurants. While the Company intends to continue its expansion, assuming its
financial performance continues to improve and additional funding can be
obtained, there can be no assurance as to whether the Company will continue its
expansion. The Company's ability to implement successfully its expansion
strategy depends on 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 success of the Zoopa store
model, 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 expand its operations
in additional markets outside of California, assuming its financial performance
improves. The Company's expansion plans include entering new geographic regions
in which the Company has no previous operating experience. 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 eleven restaurants closed or sold by the Company,
two were in Texas, one was in the state of Washington, five were in California,
and three were in the Washington, D.C. metropolitan area (where the Company no
longer operates). The Company may expand using either the Fresh Choice or Zoopa
formats but there can be no assurance these concepts or any future formats will
be successful.
Geographic Concentration. As of September 7, 1997, 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 if 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 affect 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
13
<PAGE> 14
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 and 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
12 of the last 13 quarters, 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 recent years,
several senior corporate office employees left the Company. The Company is
currently 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. 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.
14
<PAGE> 15
Ability to Obtain Additional Financing. The Company intends to
continue restaurant expansion, assuming its financial performance continues to
improve. The Company's ability to implement an expansion strategy will depend
upon a variety of factors, including its success in restoring profitability and
its ability to continue to obtain funds. The Company believes its near-term
capital requirements can be met through its existing cash balances, cash
provided by operations, and its available bank line of credit including the the
option to convert up to $3,500,000 into a 48-month term loan any time prior to
the maturity date of the line of credit in May 1998. 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>
Twelve Weeks Ended Thirty-Six Weeks Ended
----------------------------------------- -----------------------------------------
(Dollars in thousands) September 7, 1997 September 8, 1996 September 7, 1997 September 8, 1996
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET SALES $ 18,334 100.0 % $ 18,644 100.0 % $ 51,819 100.0 % $ 55,498 100.0 %
COST AND EXPENSES:
Cost of sales 4,861 26.5 % 5,040 27.0 % 13,966 27.0 % 15,143 27.3 %
Restaurant operating expenses:
Labor 5,445 29.7 % 5,784 31.0 % 15,821 30.5 % 17,621 31.8 %
Occupancy and other 5,076 27.7 % 5,207 27.9 % 15,328 29.6 % 15,738 28.4 %
Depreciation and amortization 723 3.9 % 758 4.1 % 2,121 4.1 % 2,347 4.2 %
General and administrative expenses 1,199 6.6 % 1,459 7.9 % 4,049 7.8 % 4,890 8.7 %
-------- ------ -------- ------- -------- ------- -------- -------
Total costs and expenses 17,304 94.4 % 18,248 97.9 % 51,285 99.0 % 55,739 100.4 %
-------- ------ -------- ------- -------- ------- -------- -------
OPERATING INCOME (LOSS) 1,030 5.6 % 396 2.1 % 534 1.0 % (241) (0.4)%
Interest income 39 0.2 % -- -- % 128 0.2 % 1 -- %
Interest expense (4) (0.0)% (67) (0.4)% (13) (0.0)% (202) (0.4)%
-------- ------ -------- ------- -------- ------- -------- -------
Interest income (expense), net 35 0.2 % (67) (0.3)% 115 0.3 % (201) (0.4)%
-------- ------ -------- ------- -------- ------- -------- -------
INCOME (LOSS) BEFORE INCOME TAXES 1,065 5.8 % 329 1.8 % 649 1.3 % (442) (0.8)%
Provision for (benefit from) income taxes -- -- % -- -- % -- -- % -- -- %
-------- ------ -------- ------- -------- ------- -------- -------
NET INCOME (LOSS) $ 1,065 5.8 % $ 329 1.8 % $ 649 1.3 % $ (442) (0.8)%
======== ====== ======== ======= ======== ======= ======== =======
Number of restaurants:
Open at beginning of period 51 53 48 55
======== ======== ======== ========
Open at end of period 51 51 51 51
======== ======== ======== ========
</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 period:
<TABLE>
<CAPTION>
Twelve Weeks Ended Thirty-Six Weeks Ended
------------------------------------- --------------------------------------
(Dollars in thousands) September 7, 1997 September 8, 1996 September 7, 1997 September 8, 1996
----------------- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET SALES $ 359 100.0 % $ 353 100.0 % $ 1,046 100.0 % $ 1,034 100.0 %
COST AND EXPENSES:
Cost of sales 95 26.5 % 96 27.0 % 282 27.0 % 282 27.3 %
Restaurant operating expenses:
Labor 107 29.7 % 110 31.0 % 319 30.5 % 328 31.8 %
Occupancy and other 100 27.7 % 99 27.9 % 309 29.6 % 293 28.4 %
Depreciation and amortization 14 3.9 % 14 4.1 % 43 4.1 % 44 4.2 %
General and administrative expenses 24 6.6 % 28 7.9 % 82 7.8 % 91 8.7 %
------- ------- ------- ------- ------- ------- ------- -------
Total costs and expenses 340 94.4 % 347 97.9 % 1,035 99.0 % 1,038 100.4 %
------- ------- ------- ------- ------- ------- ------- -------
OPERATING INCOME (LOSS) $ 19 5.6 % $ 6 2.1 % $ 11 1.0 % $ (4) (0.4)%
======= ======= ======= ======= ======= ======= ======= =======
Average restaurants open during the period 51.00 52.75 49.54 53.66
======= ======= ======= =======
</TABLE>
16
<PAGE> 17
Results of Operations: Twelve Weeks Ended September 7, 1997
Compared to Twelve Weeks Ended September 8, 1996
Net Sales. Net sales for the third quarter ended September 7, 1997
were $18,334,000, a decrease of $310,000, or 1.7%, from sales of $18,644,000 for
the third quarter ended September 8, 1996. The primary components of the net
decrease in sales were:
<TABLE>
<S> <C>
The absence of sales from restaurants closed in 1996 $(1,265,000)
Incremental sales from new or acquired restaurants 1,336,000
Decline in comparable store sales (381,000)
------------
$ (310,000)
============
</TABLE>
Comparable store sales declined 2.3% in the third quarter of 1997
compared to the third quarter of 1996. Comparable store customer counts, which
include only restaurants open and operated by the Company at least 18 months,
declined 3.3%. The comparable store average check was $6.85 in the third
quarter, an increase of 1.0% over the comparable store average check of $6.78 in
the prior year third quarter.
Net sales per restaurant averaged $359,000 in the third quarter
of 1997, an increase of 1.7% over net sales per restaurant of $353,000 in the
third quarter of 1996.
Costs and Expenses. Cost of sales (food and beverage costs) was
26.5% of sales in the third quarter of 1997 compared to 27.0% in the third
quarter of 1996. During the second quarter of 1997, the Company developed and
implemented a food cost program which focused on creating a more efficient
product rotation while maintaining a quality menu offering to customers. This
program, which was in place throughout the third quarter, contributed to the
lower food and beverage costs compared to the prior year.
Restaurant operating expenses were 57.4% of net sales in the third
quarter of 1997 compared to 58.9% in the third quarter of 1996. Labor costs were
approximately 1.3% of sales below the prior year primarily due to reduced
restaurant level bonus payouts resulting from a new bonus plan introduced in
1997 which ties bonus payouts to achieving planned profit performance. Occupancy
and other costs, which had increased in the first half of 1997 due to increased
marketing and promotional expenditures, were 0.2% of sales below the prior year.
In the third quarter of 1997, marketing and promotional expenses were
approximately even as a percentage of sales with the prior year.
Depreciation and amortization expenses decreased $35,000 in third
quarter of 1997 compared to the third quarter of 1996 due to approximately two
fewer restaurants operating this year compared to last year. In addition, the
Company completed amortization of its start-up costs in the second quarter of
1997 and had no start-up cost amortization in the third quarter of 1997.
General and administrative expenses were $1,199,000 for the third
quarter of 1997, a decrease of $260,000 from the third quarter of 1996 due to
continued cost management in staffing levels and expenses.
Interest Income. During the third quarter of 1997, the Company
invested the balance of the proceeds from its September 1996 sale of Series B
preferred stock to Crescent Real Estate Equities Limited Partnership in money
market funds and earned $39,000 in interest income. The Company had no invested
cash balances and no interest income from invested cash balances during the
third quarter of 1996.
17
<PAGE> 18
Interest Expense. Interest expense was $4,000 in the third quarter
of 1997 compared to $67,000 in the third quarter of 1996. In 1997, interest
expense consisted of interest on the Company's remaining capital lease
obligations (all of which were paid down by the end of the third quarter of
1997) and a site construction note included in other long-term liabilities. In
the prior year quarter, interest expense also included interest on capital lease
obligations and the site construction note.
Income Taxes. The Company recorded no tax expense in the third
quarters ended September 7, 1997 and September 8, 1996 due to the availability
of net operating loss carryforwards to offset taxable income.
Results of Operations: Thirty-Six Weeks Ended September 7, 1997
Compared to Thirty-Six Weeks Ended September 8, 1996
Net Sales. Net sales for the thirty-six weeks ended September 7,
1997 were $51,819,000, a decrease of $3,679,000, or 6.6%, from sales of
$55,498,000 for the thirty-six weeks ended September 8, 1996. The primary
components of the net decrease in sales were:
<TABLE>
<S> <C>
The absence of sales from restaurants closed in 1996 $ (4,801,000)
Incremental sales from new or acquired restaurants 2,527,000
Decline in comparable store sales (1,405,000)
------------
$ (3,679,000)
============
</TABLE>
Comparable store sales declined 2.3% in the first three quarters
of 1997 compared to the first three quarters of 1996. Comparable store customer
counts, which include only restaurants open and operated by the Company at least
18 months, declined 6.1%. The comparable store average check was $6.80 in the
first three quarters of 1997, an increase of 4.1% versus the first three
quarters last year.
In the prior year, the Company introduced its current one-price
system at the end of the first quarter, replacing its former two-tier pricing
system, and terminated certain discount programs during the second quarter.
These pricing changes contributed to the Company's higher average check
beginning with the second quarter of 1996.
Net sales per restaurant averaged $1,046,000 in the first three
quarters of 1997 compared to $1,034,000 in the first three quarters of 1996, an
increase of 1.2%.
Costs and Expenses. Cost of sales (food and beverage costs) was
27.0% of sales in the first three quarters of 1997 compared to 27.3% in the
first three quarters of 1996. During the first quarter of the prior year, the
Company had launched the roll-out of a major food program that introduced new
recipes and upgraded existing ones based on market research and consumer trends.
The program upgraded the quality of the Company's product and resulted in
increasing food costs per customer throughout the remainder of 1996 and also in
higher food costs per customer in 1997. At the end of the prior year first
quarter, the Company introduced its current one-price system and, during the
second quarter last year, terminated certain discount programs. These pricing
decisions produced a higher average customer check that continued through the
first half of 1997 which tended to keep food costs as a percentage of sales
substantially even or slightly lower compared to the prior year. In addition,
the Company developed and implemented a food cost program in the second quarter
of 1997 which focused on creating a more efficient product rotation while
maintaining a quality menu offering to customers.
18
<PAGE> 19
This program, which was in place throughout the third quarter, tended to lower
lower food and beverage costs compared to the prior year.
Restaurant operating expenses were 60.1% of net sales in the first
three quarters of 1997 compared to 60.2% in the first three quarters of 1996.
Labor savings of approximately 1.3% of sales resulted predominantly from reduced
restaurant level bonus payouts resulting from a new bonus plan introduced in
1997 which ties bonus payouts to achieving planned profit performance. Occupancy
and other cost increases of approximately 1.2% of sales resulted primarily from
the Company's first quarter 1997 investment in advertising, which included
television support, and, to a lesser extent, other marketing and promotion
programs during the first half of 1997. The absence of fixed costs on the eight
restaurants closed or sold in the prior year in connection with the Company's
restructuring plan provided a partial offset to the increase in operating costs.
Depreciation and amortization decreased $226,000 in the first three
quarters of 1997 compared to the first three quarters of 1996. Curtailment of
restaurant expansion resulted in lower start-up cost amortization. The Company
completed amortization of its start-up costs in the second quarter of 1997 and
had no start-up cost amortization in the third quarter of 1997. Depreciation
expense was lower due to approximately four fewer restaurants operating this
year compared to last year from the sale or closure of restaurants not
previously impaired in connection with the Company's 1995 restructuring plan.
General and administrative expenses were $4,049,000 for first three
quarters of 1997, a decrease of $841,000 compared to expenses of $4,890,000 for
the first three quarters of 1996. In the prior year, general and administrative
expenses included consulting fees paid to assist the Company in the development
of its strategic plan and other matters. General and administrative expenses
were also lower due to the Company's continued cost management in staffing
levels and expenses.
Interest Income. During the first three quarters of 1997, the
Company invested the balance of the proceeds from its September 1996 sale of
Series B preferred stock to Crescent Real Estate Equities Limited Partnership in
money market funds and earned $128,000 in interest income. The Company had no
invested cash balances and no interest income from invested cash balances during
the first three quarters of 1996.
Interest Expense. Interest expense was $13,000 in the first three
quarters of 1997 compared to $202,000 in the first three quarters of 1996. In
1997, interest expense consisted solely of interest on the Company's remaining
capital lease obligations and a site construction note included in other
long-term liabilities. In the prior year, interest expense included interest and
fees related to short-term line of credit borrowings to finance the construction
of one restaurant in addition to capital lease obligations and the site
construction note.
Income Taxes. The Company recorded no tax provision for its
operating income during the first three quarters ended September 7, 1997 due to
the availability of net operating loss carryforwards to offset taxable income.
For the three quarters ended September 8, 1996, the Company recorded no tax
benefit from its operating loss due to valuation allowances against its net
deferred tax assets. The Company's net deferred assets consist primarily of the
tax benefit related to operating loss carryforwards and non-deductible asset
write-downs and restructuring 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
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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.
After the Company filed a motion to dismiss the Second Amended
complaint, the parties reached an agreement in principle to settle the lawsuit
in its entirety. The Court granted final approval of the settlement in an order
filed on October 14, 1997. The settlement will be funded by insurance proceeds.
The Company continues to deny all allegations in the lawsuit.
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 7, 1997.
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 E. Pertl
-------------------------------
David E. Pertl
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: October 22, 1997
22
<PAGE> 23
INDEX TO FORM 10-Q EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --- -----------
<S> <C> <C>
3.1 (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
(10) of Fresh Choice, Inc.
3.4 (10) Certificate of Designation of Series A Voting Participating
Convertible Preferred Stock of Fresh Choice, Inc.
3.5 (10) Certificate of Designation of Series B Non-Voting Participating
Convertible Preferred Stock of Fresh Choice, Inc.
3.6 (10) Certificate of Designation of Series C Non-Voting Participating
Convertible Preferred Stock of Fresh Choice, Inc.
4.1 (10) 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
</TABLE>
23
<PAGE> 24
INDEX TO FORM 10-Q EXHIBITS continued
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --- -----------
<S> <C> <C>
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
10.21 (9)(3) Amendment dated July 29, 1996 to Employment Offer Letter
to Robert Ferngren
10.22 (10)(3)Severance Agreement with Charles A. Lynch dated July 18,
1996
10.23 (10)(3)Severance Agreement with David Anderson dated July 18,
1996
10.24 (10)(3)Severance Agreement with Tim G. O'Shea dated July 18, 1996
10.25 (10)(3)Severance Agreement with Joan M. Miller dated July 18,
1996
10.26 (11)(3)Employment Offer Letter to David E. Pertl dated January
24, 1997
10.27 (11)(3)Employment Offer Letter to Everett F. Jefferson dated
January 30, 1997
10.28 (11)(3)Amendment to Employment Offer Letter to Everett F.
Jefferson dated February 10, 1997
10.29 (11) Loan Modification Agreement dated November 27, 1996 with
Silicon Valley Bank
10.30 (11)(3)Severance Agreement with Tina Freedman dated March 13,
1997
10.31 (12) Agreement of Sale and Purchase dated April 2, 1997 with RUI
One Corp.
10.32 (12) Amendment to Loan and Security Agreement dated July 9, 1997
with Silicon Valley Bank
11.1 Computation of Net Loss per Share
27 (7) Financial Data Schedule
</TABLE>
- --------------------
24
<PAGE> 25
(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.
(10) 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 8, 1996.
(11) 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 29, 1996.
(12) 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 15, 1997.
25
<PAGE> 1
FRESH CHOICE, INC. EXHIBIT 11.1
COMPUTATIONS OF NET INCOME PER COMMON AND EQUIVALENT SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Twelve Weeks Ended Thirty-Six Weeks Ended
-------------------------------- --------------------------------
September 7, September 8, September 7, September 8,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income (loss) $1,065 $ 329 $ 649 $ (442)
====== ====== ====== =======
Weighted average
common shares outstanding 5,669 5,646 5,664 5,619
Common share equivalents 1,191 18 1,191 -
------ ------ ------ -------
Shares used in computation 6,860 5,664 6,855 5,619
====== ====== ====== =======
Net loss per
common and equivalent share $ 0.16 $ 0.06 $ 0.09 $ (0.08)
====== ====== ====== =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRESH
CHOICE INC'S REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 7, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT ON FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> JUN-16-1997
<PERIOD-END> SEP-07-1997
<CASH> 5,027
<SECURITIES> 0
<RECEIVABLES> 169
<ALLOWANCES> 0
<INVENTORY> 460
<CURRENT-ASSETS> 6,359
<PP&E> 43,434
<DEPRECIATION> (13,115)
<TOTAL-ASSETS> 37,679
<CURRENT-LIABILITIES> 9,706
<BONDS> 0
0
5,175
<COMMON> 42,115
<OTHER-SE> (20,680)
<TOTAL-LIABILITY-AND-EQUITY> 37,679
<SALES> 18,334
<TOTAL-REVENUES> 18,334
<CGS> 4,861
<TOTAL-COSTS> 17,304
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (35)
<INCOME-PRETAX> 1,065
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,065
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,065
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.16
</TABLE>
