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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 March 23, 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.
[ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares of Common Stock, $.001 par value, outstanding as of April
20, 1997 was 5,661,428.
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FRESH CHOICE, INC.
INDEX
<TABLE>
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets at March 23, 1997
and December 29, 1996..........................................................................................3
Condensed Consolidated Statements of Operations for the Twelve Weeks
ended March 23, 1997 and March 24, 1996 .......................................................................4
Condensed Consolidated Statements of Cash Flow for the Twelve Weeks
ended March 23, 1997 and March 24, 1996........................................................................5
Notes to Unaudited Condensed Consolidated Financial Statements.................................................6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................................................................9
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings........................................................................................17
Item 2 - Changes in Securities....................................................................................17
Item 3 - Defaults Upon Senior Securities..........................................................................17
Item 4 - Submission of Matters to a Vote of Security Holders......................................................17
Item 5 - Other Information........................................................................................17
Item 6 - Exhibits and Reports on Form 8-K.........................................................................17
SIGNATURES.............................................................................................................18
INDEX TO FORM 10-Q EXHIBITS............................................................................................19
</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>
March 23, December 29,
ASSETS 1997 1996
----------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 5,221 $ 5,647
Receivables 188 218
Inventories 419 432
Pre-opening costs 9 23
Prepaid expenses and other current assets 302 513
-------- --------
Total current assets 6,139 6,833
PROPERTY AND EQUIPMENT, net 29,158 29,509
LEASE ACQUISITION COSTS, net 538 556
DEPOSITS AND OTHER ASSETS 263 268
-------- --------
TOTAL $ 36,098 $ 37,166
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,846 $ 2,077
Accrued salaries and wages 1,354 1,445
Sales tax payable 810 462
Other accrued expenses 2,653 2,790
Restructuring reserve 2,522 2,696
Current portion of capital lease obligations 60 89
-------- --------
Total current liabilities 9,245 9,559
OTHER LONG TERM LIABILITIES 1,585 1,691
-------- --------
Total liabilities 10,830 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 - 5,661,428; 1996 - 5,660,826 42,071 42,070
Accumulated deficit (21,978) (21,329)
-------- --------
Total stockholders' equity 25,268 25,916
-------- --------
TOTAL $ 36,098 $ 37,166
======== ========
</TABLE>
3
See accompanying notes to unaudited condensed consolidated financial statements.
<PAGE> 4
FRESH CHOICE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Twelve Weeks Ended
-----------------------
March 23, March 24,
1997 1996
-------- --------
<S> <C> <C>
NET SALES $ 16,106 $ 18,061
COST AND EXPENSES:
Cost of sales 4,389 5,053
Restaurant operating expenses:
Labor 5,057 5,906
Occupancy and other 5,249 5,284
Depreciation and amortization 701 817
General and administrative expenses 1,406 1,796
-------- --------
Total costs and expenses 16,802 18,856
-------- --------
OPERATING LOSS (696) (795)
-------- --------
Interest income 52 -
Interest expense (5) (71)
-------- --------
Interest income (expense), net 47 (71)
-------- --------
LOSS BEFORE INCOME TAXES (649) (866)
Benefit from income taxes -- -
-------- --------
NET LOSS $ (649) $ (866)
======== ========
Net loss per common share $ (0.11) $ (0.16)
======== ========
Shares used in computing per share amounts 5,661 5,584
======== ========
</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>
Twelve Weeks Ended
---------------------
March 23, March 24,
1997 1996
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (649) $ (866)
Adjustments to reconcile net loss to net cash used
in operations:
Depreciation and amortization 754 829
Loss on disposal of property 11 7
Deferred rent (102) (84)
Changes in operating assets and liabilities:
Receivables 30 63
Inventories 13 38
Prepaid expenses and other current assets 211 216
Accounts payable (231) (115)
Accrued salaries and wages (91) 489
Other accrued expenses 211 209
Restructuring reserve (174) (972)
------- -------
Net cash used in operating activities (17) (186)
------- -------
INVESTING ACTIVITIES:
Capital expenditures (386) (432)
Deposits and other assets 5 (22)
------- -------
Net cash used in investing activities (381) (454)
------- -------
FINANCING ACTIVITIES:
Common stock sales 1 6
Notes payable and line of credit borrowing, net - 391
Capital lease obligations - repayments (29) (119)
------- -------
Net cash used in financing activities (28) 278
------- -------
DECREASE IN CASH AND CASH EQUIVALENTS (426) (362)
CASH AND CASH EQUIVALENTS:
Beginning of period 5,647 1,294
------- -------
End of period $ 5,221 $ 932
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 6 $ 20
======= =======
</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 Weeks Ended March 23, 1997 and March 24, 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
Net loss per common and equivalent share is based on the
weighted average number of common and dilutive common equivalent shares
outstanding during the period. Common share equivalents, which are common stock
options and warrants assumed converted using the treasury stock method and
preferred stock using the if-converted method, have been excluded from the
earnings per share computation for the twelve weeks ended March 23, 1997 and
March 24, 1996 as they would be anti-dilutive.
3. INCOME TAXES
The Company recorded no tax benefit from its operating loss
during the twelve weeks ended March 23, 1997 and March 24, 1996. The Company has
provided valuation allowances against its net deferred tax assets which 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. RESTRUCTURING RESERVE
The following table sets forth the Company's restructuring
reserves and their respective balances at December 31, 1995, December 29, 1996
and March 23, 1997.
6
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<TABLE>
<CAPTION>
BALANCE PROVIDED BALANCE UTILIZED BALANCE
(DOLLARS IN THOUSANDS) DECEMBER 31, (REVERSED) UTILIZED RECLASSIFIED DECEMBER 29, TO DATE MARCH 23,
1995 IN 1996 IN 1996 IN 1996 1996 IN 1997 1997
------------ ---------- -------- ------------ ------------ -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
1995 RESTRUCTURING RESERVE
Restaurant closures:
Non-cash write-down of
restaurant assets to estimated
fair value and other related
costs $ 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 (81) 1,684
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 (92) 1,731
------ ------ ------- ------ ------ ------ -------
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 (82) 763
------ ------ ------- ------ ------ ------ -------
1996 restructuring reserve -- 1,618 (745) -- 873 (82) 791
------ ------ ------- ------ ------ ------ -------
Total restructuring reserve $5,266 $ (451) $(2,119) $ -- $2,696 $ (174) $ 2,522
====== ====== ======= ====== ====== ====== =======
</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 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 of previously
recorded restructuring expense. The Company reversed an additional $1,618,000 of
previously recorded restructuring expense due to lower than estimated cash
payments to settle lease obligations at five closed restaurants. At March 23,
1997, the 1995 restructuring reserve balance consisted of the estimated cash
costs to settle the lease obligation at one restaurant and the remaining
scheduled payments for the lease settlement at another restaurant.
7
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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. 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. At March 23, 1997, the 1996 restructuring reserve
balance consisted of the estimated cash costs to settle the lease obligation at
one restaurant.
The Company has identified no other restaurants for closure as
of May 7, 1997, and believes the balances at March 23, 1997 are adequate to
cover the remaining estimated costs to be incurred under the plans.
5. SUBSEQUENT EVENT
On April 2, 1997, the Company entered into an agreement to
purchase three Zoopa restaurants in Bellevue, Tacoma and Tukwila, Washington for
$1,250,000 upon closing and an additional payment one year later of $750,000
which may be increased or decreased by up to $200,000 depending on the
achievement of restaurant sales targets. 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 purchase was completed on May 1, 1997.
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 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.
If SFAS 128 had been in effect during the current and prior year
periods, the Company's basic and diluted net loss per common share would not
have been different for the twelve weeks ended March 23, 1997 and March 24, 1996
as the Company would not have included potential common shares in its
computation as they would have been anti-dilutive. Potential common shares are
common stock options and warrants assumed converted using the treasury stock
method and preferred stock assumed converted using the if-converted method.
8
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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 weeks ended March 23, 1997 as compared to the twelve weeks ended March
24, 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 and the new restaurant interior design; volume purchasing discounts and
operating efficiencies from the Company's clustering strategy; 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.
As of March 23, 1997, the Company had incurred cash costs of
$1,923,000 in connection with restaurant closures and related settlement of
lease obligations in connection with a restructuring program begun in December
1995. Cash costs incurred in the twelve weeks ended March 23, 1997 totaled
$163,000. The Company has identified no other restaurants for closure, and
believes the restructuring reserve balance of $2,522,000 at March 23, 1997 is
adequate to cover the remaining estimated costs to be incurred under the plan.
For the twelve weeks ended March 23, 1997, the Company invested
$386,000 in property and equipment. The investment consisted primarily of
spending on remodels which are typically required every five to seven years and
on replacement fixtures and equipment. This investment was funded from existing
cash balances.
During the twelve weeks ended March 23, 1997, operating
activities used $17,000. The use of cash for operations in the Company's first
quarter reflects the seasonality in the Company's operations. The Company's
restaurants experience a seasonally downward fluctuation in the first quarter of
the year. This quarter contains twelve weeks compared to the prior quarter which
is typically 16 weeks, and the Company also generally realizes a seasonally
disproportionate amount of restaurant sales and restaurant operating income in
the second and third fiscal quarters.
9
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Subsequent to the end of the quarter, the Company purchased
three Zoopa restaurants in Bellevue, Tacoma and Tukwila, Washington for
$1,250,000 at closing on May 1, 1997 and an additional payment one year later of
$750,000 which may be increased or decreased by up to $200,000 depending on the
achievement of restaurant sales targets. 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.
In November 1996, the Company entered into an amendment of its
bank line of credit. The amendment reduced the available line to $3.0 million
and extended the maturity date to May 27, 1997. Under the amended agreement
borrowings pay interest at a rate equal to one percentage point above the prime
rate (8.25% at March 23, 1997). The amended line of credit agreement requires
the Company to achieve a minimum tangible net worth, limits the Company's
capital spending and prohibits the payment of dividends. Borrowings under the
line are collateralized by the Company's personal property and executed
leasehold interest in certain Company restaurants. Borrowings under the line are
limited to the amount of cash flow (not to exceed $3,000,000) generated by the
restaurant sites at which the bank holds executed leasehold interests
($1,510,000 at March 23, 1997). At March 23, 1997, the Company had no borrowings
under this agreement and was in compliance with all covenants. The Company is in
discussions to renew the line of credit with the bank.
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. The Company intends to continue its restaurant expansion, assuming
its financial performance improves and additional financing can be obtained. The
Company's ability to implement an expansion strategy will depend upon a variety
of factors, including the 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 can be met through existing cash balances and cash provided by
operations. The Company may continue to seek additional debt or equity financing
to provide greater flexibility toward improving its operating performance and
continuing expansion and is also currently in discussions to renew its current
line of credit.
Long-term debt at March 23, 1997 consists of a $0.1 million
note for site construction costs which is included in other long-term
liabilities on the balance sheet.
10
<PAGE> 11
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. Currently, there are
further scheduled increases in the federal and 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 Operating Losses and Declines in Comparable Real Store
Sales. The Company's profitability began to decline in the second half of 1994.
In the fourth quarter of 1994, the Company reported its first operating loss,
and reported additional operating losses in each subsequent quarter ending with
the first quarter of 1996. The Company reported operating profits in the second
and third quarters of 1996, but reported an operating loss for the fourth
quarter and full year 1996. The Company reported an operating loss in the first
quarter of 1997.
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. Beginning in the second
quarter of 1996, the magnitude of the declines in comparable real store sales
has increased. The Company reported a 0.3% decline in comparable real store
sales in the first quarter of 1996. Following the introduction of a one-price
system and termination of discount programs, the Company reported an 8.6%, 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% decline in the first quarter of 1997.
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 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 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, which uses a new store model with a reduced cash
investment, more efficient operating layout and a warmer ambiance and which the
Company has begun to use as a prototype for future expansion and for ongoing
remodeling of existing stores. Additionally, subsequent to the end of the first
quarter of 1997, the Company purchased three Zoopa restaurants in Bellvue,
Tacoma and Tukwila, Washington which will continue to operate under the Zoopa
name and store model. The 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.
11
<PAGE> 12
While the Company intends to continue its expansion, assuming its financial
performance improves and additional funding can be obtained, there can be no
assurance as to when or whether the Company will continue its expansion. The
Company's ability to implement successfully its expansion strategy will depend
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 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. 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 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 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).
Geographic Concentration. As of March 23, 1997, 43 of the
Company's 48 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 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
12
<PAGE> 13
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 10 of the last 11 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.
Ability to Obtain Additional Financing. The Company intends to
continue restaurant expansion, assuming its financial performance improves. 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 which expires in May 1997. The
Company is also in discussions to renew the line of credit with the bank.
However, the Company may seek additional financing to provide greater
flexibility toward improving its operating performance. There can be no
assurance that the Company will be able to obtain additional financing when
needed on acceptable terms or at all.
13
<PAGE> 14
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
--------------------------------------------------
(Dollars in thousands) March 23, 1997 March 24, 1996
---------------------- --------------------
<S> <C> <C> <C> <C>
NET SALES $ 16,106 100.0 % $ 18,061 100.0 %
COST AND EXPENSES:
Cost of sales 4,389 27.3 % 5,053 28.0 %
Restaurant operating expenses:
Labor 5,057 31.4 % 5,906 32.7 %
Occupancy and other 5,249 32.6 % 5,284 29.3 %
Depreciation and amortization 701 4.4 % 817 4.5 %
General and administrative expenses 1,406 8.6 % 1,796 9.9 %
---------------------- ---------------------
Total costs and expenses 16,802 104.3 % 18,856 104.4 %
---------------------- ---------------------
OPERATING LOSS (696) (4.3)% (795) (4.4)%
Interest income 52 0.3 % - - %
Interest expense (5) (0.0)% (71) (0.4)%
---------------------- ---------------------
Interest income (expense), net 47 0.3 % (71) (0.4)%
---------------------- ---------------------
LOSS BEFORE INCOME TAXES (649) (4.0)% (866) (4.8)%
Benefit from income taxes - - % - - %
---------------------- ---------------------
NET LOSS $ (649) (4.0)% $ (866) (4.8)%
====================== =====================
Number of restaurants:
Open at beginning of period 48 55
============= ============
Open at end of period 48 54
============= ============
</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
--------------------------------------------------
(Dollars in thousands) March 23, 1997 March 24, 1996
----------------------- --------------------
<S> <C> <C> <C> <C>
NET SALES $ 336 100.0 % $ 332 100.0 %
COST AND EXPENSES:
Cost of sales 91 27.3 % 93 28.0 %
Restaurant operating expenses:
Labor 105 31.4 % 109 32.7 %
Occupancy and other 110 32.9 % 97 29.3 %
Depreciation and amortization 15 4.4 % 15 4.5 %
General and administrative expenses 30 8.3 % 33 9.9 %
----------------------- --------------------
Total costs and expenses 351 104.3 % 347 104.4 %
----------------------- --------------------
OPERATING LOSS $ (15) (4.3)% $ (15) (4.4)%
======================= ====================
Average restaurants open during the period 48.00 54.43
============ =========
</TABLE>
14
<PAGE> 15
Results of Operations: Twelve Weeks Ended March 23, 1997
Compared to Twelve Weeks Ended March 24, 1996
Net Sales. Net sales for the first quarter ended March 23, 1997
were $16.1 million, a decrease of $2.0 million, or 10.8%, from sales of $18.1
million for the twelve weeks ended March 24, 1996. The primary components of the
net decrease in sales were:
<TABLE>
<S> <C>
The absence of sales from eight restaurants closed in 1996 $(1.9) million
Incremental sales from one restaurant opened during the second quarter of 1996 0.4
Decline in sales for the 47 restaurants opened prior to the first quarter of 1996 (0.5)
--------
$(2.0) million
========
</TABLE>
Comparable store customer counts, which include only
restaurants open at least 18 months, declined 10.4% during the first quarter of
1997 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 of 1996. As a result, the comparable store average check
increased to $6.73 during the first quarter of 1997 compared to $6.15 during the
first quarter of 1996 and comparable store sales decreased only 1.9%.
Net sales per restaurant averaged $336,000 in the first quarter
of 1997 compared to $332,000 in the first quarter of 1996, an increase of 1.2%.
Costs and Expenses. Cost of sales (food and beverage costs) was
27.3% in the first quarter of 1997 compared to 28.0% in the first quarter 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 increased food costs based on a
constant average check. At the end of the prior year first quarter, the Company
introduced its new one-price system and, during the second quarter of 1996,
terminated certain discount programs. These pricing decisions produced a higher
average customer check in subsequent quarters which reduced food costs as a
percentage of sales.
Restaurant operating expenses were 64.0% of net sales in the
first quarter of 1997 compared to 62.0% in the first quarter of 1996. In the
first quarter of 1997, the Company invested 6.8% of net sales in advertising,
which included television support for the first time, compared to advertising
spending of 3.4% of net sales in the prior year quarter. The absence of fixed
costs on the eight restaurants closed in the prior year in connection with the
Company's restructuring plan contributed to a decrease in restaurant operating
expenses as a percentage of sales which partially offset the Company's increased
advertising expenditures.
Depreciation and amortization decreased $0.1 million in the
first quarter of 1997 compared to the first quarter of 1996. Curtailment of
restaurant expansion resulted in continued lower start-up cost amortization and
the sale or closure of restaurants not previously impaired in connection with
the Company's 1995 restructuring plan resulted in slightly lower depreciation.
General and administrative expenses were $1.4 million for first
quarter of 1997, a decrease of $0.4 million compared to expenses of $1.8 million
for the first quarter of 1996. In the prior year quarter, general and
administrative expenses included consulting fees paid to assist the Company in
the development of its strategic plan and other matters.
15
<PAGE> 16
Interest Income. In the first quarter of 1997, the Company had
invested the balance of the proceeds from its September 1996 sales of Series B
preferred stock to Crescent Real Estate Equities Limited Partnership in money
market funds and earned $52,000 in interest income. The Company had no invested
cash balances and no interest income during the first quarter of 1996.
Interest Expense. Interest expense was $5,000 in the first
quarter of 1997 compared to $71,000 in the first quarter 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 quarter, interest expense included interest on
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 benefit from its
operating loss during the twelve weeks ended March 23, 1997 and March 24, 1996.
The Company has provided valuation allowances against its net deferred tax
assets which 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.
16
<PAGE> 17
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 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 March 23, 1997
17
<PAGE> 18
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: May 7, 1997
18
<PAGE> 19
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 (10) Certificate of Amendment of Restated Certificate of Incorporation
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
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
</TABLE>
19
<PAGE> 20
INDEX TO FORM 10-Q EXHIBITS continued
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
11.1 Computation of Net Loss per Share
27 (7) Financial Data Schedule
</TABLE>
- ---------------
(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.
20
<PAGE> 21
(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.
21
<PAGE> 1
EXHIBIT 11.1
FRESH CHOICE, INC.
COMPUTATIONS OF NET INCOME PER COMMON AND EQUIVALENT SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Twelve Weeks Ended
----------------------
March 23, March 24,
1997 1996
-------- --------
<S> <C> <C>
Net loss $ (649) $ (866)
======= =======
Weighted average
common shares outstanding 5,661 5,584
Common share equivalents(1) - -
------- -------
Shares used in computation 5,661 5,584
======= =======
Net loss per
common and equivalent share $ (0.11) $ (0.16)
======= =======
</TABLE>
(1) Common share equivalents relating to stock options, warrants and convertible
preferred shares have been excluded from the computations for 1997 and 1996 as
they would be anti-dilutive.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FRESH
CHOICE, INC.'S REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 23, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT ON FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> DEC-30-1996
<PERIOD-END> MAR-23-1997
<CASH> 5,221
<SECURITIES> 0
<RECEIVABLES> 188
<ALLOWANCES> 0
<INVENTORY> 419
<CURRENT-ASSETS> 6,139
<PP&E> 40,884
<DEPRECIATION> 11,726
<TOTAL-ASSETS> 36,098
<CURRENT-LIABILITIES> 9,245
<BONDS> 0
0
5,175
<COMMON> 42,071
<OTHER-SE> (21,978)
<TOTAL-LIABILITY-AND-EQUITY> 36,098
<SALES> 16,106
<TOTAL-REVENUES> 16,106
<CGS> 4,389
<TOTAL-COSTS> 16,802
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5
<INCOME-PRETAX> (649)
<INCOME-TAX> 0
<INCOME-CONTINUING> (649)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (649)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
</TABLE>
