<PAGE>
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 3, 2000
--------------------------
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.)
485 COCHRANE CIRCLE, MORGAN HILL, CALIFORNIA 95037
--------------------------------------------------
(Address of principal executives offices) (Zip Code)
Registrant's telephone number, including area code: (408) 776-0799
--------------
2901 TASMAN DRIVE - SUITE 109, SANTA CLARA, CALIFORNIA 95054
------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X Yes _____ No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
_____ Yes _____No
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares of Common Stock, $.001 par value, outstanding as of October
4, 2000 was 5,793,999.
<PAGE>
FRESH CHOICE, INC.
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
<S> <C>
Condensed Consolidated Balance Sheets at September 3, 2000
and December 26, 1999..........................................................................................3
Condensed Consolidated Statements of Operations for the Twelve and Thirty-Six Weeks
ended September 3, 2000 and September 5, 1999 .................................................................4
Condensed Consolidated Statements of Cash Flows for the Thirty-Six Weeks
ended September 3, 2000 and September 5, 1999..................................................................5
Notes to Unaudited Condensed Consolidated Financial Statements.................................................6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................................................................9
Item 3 - Quantitative and Qualitative Disclosures About Market Risk...............................................17
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings........................................................................................18
Item 2 - Changes in Securities....................................................................................18
Item 3 - Defaults Upon Senior Securities..........................................................................18
Item 4 - Submission of Matters to a Vote of Security Holders......................................................18
Item 5 - Other Information........................................................................................18
Item 6 - Exhibits and Reports on Form 8-K.........................................................................18
SIGNATURES ............................................................................................................19
INDEX TO FORM 10-Q EXHIBITS............................................................................................20
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1 - FINANCIAL STATEMENTS
FRESH CHOICE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited) September 3, December 26,
2000 1999
------------- ------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 3,457 $ 2,458
Receivables 73 186
Inventories 487 555
Prepaid expenses and other current assets 678 479
-------- --------
Total current assets 4,695 3,678
PROPERTY AND EQUIPMENT, net 26,523 27,231
LEASE ACQUISITION COSTS, net 255 332
DEPOSITS AND OTHER ASSETS 636 616
-------- --------
TOTAL ASSETS $ 32,109 $ 31,857
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,909 $ 2,317
Accrued salaries and wages 1,573 1,459
Sales tax payable 656 510
Other accrued expenses 1,785 1,844
Restructuring reserve 78 570
Current portion of long-term obligations 844 800
-------- --------
Total current liabilities 6,845 7,500
CAPITAL LEASE OBLIGATIONS 721 1,126
LONG-TERM DEBT 1,116 1,316
OTHER LONG-TERM LIABILITIES 1,325 1,703
-------- --------
Total liabilities 10,007 11,645
-------- --------
STOCKHOLDERS' EQUITY
Convertible preferred stock, $.001 par value;
3.5 million shares authorized; shares
outstanding: 2000 and 1999 - 1,187,906 5,175 5,175
Common stock - $.001 par value;
15 million shares authorized; shares
outstanding: 2000 - 5,793,999; 1999 - 5,762,444 42,346 42,291
Accumulated deficit (25,419) (27,254)
-------- --------
Total stockholders' equity 22,102 20,212
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 32,109 $ 31,857
======== ========
</TABLE>
The December 26, 1999 amounts are derived from the Company's audited financial
statements. See accompanying notes to unaudited condensed consolidated financial
statements.
3
<PAGE>
FRESH CHOICE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Twelve Months Ended Thirty-Six Weeks Ended
-------------------------------------- --------------------------------------
September 3, 2000 September 5, 1999 September 3, 2000 September 5, 1999
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
NET SALES $ 18,830 $ 18,446 $ 54,141 $ 52,378
----------------- ----------------- ----------------- -----------------
COSTS AND EXPENSES:
Cost of sales 4,561 4,471 13,097 12,766
Restaurant operating expenses:
Labor 5,653 5,765 16,924 16,792
Occupancy and other 5,228 5,213 15,234 15,730
Depreciation and amortization 886 818 2,599 2,442
General and administrative expenses 1,390 1,293 4,223 3,784
Gain and sale of property and equipment - (452) - (452)
Restructuring and asset impairment expenses - 443 (8) 443
----------------- ----------------- ----------------- -----------------
Total costs and expenses 17,718 17,551 52,069 51,505
----------------- ----------------- ----------------- -----------------
OPERATING INCOME 1,112 895 2,072 873
Interest income 49 28 113 53
Interest expense (100) (121) (300) (341)
----------------- ----------------- ----------------- -----------------
Interest expense, net (51) (93) (187) (288)
----------------- ----------------- ----------------- -----------------
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 1,061 802 1,885 585
Provision for income taxes 28 - 50 -
----------------- ----------------- ----------------- -----------------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 1,033 802 1,835 585
Cumulative effect of change in accounting principle-
adoption of SOP 98-5, "Reporting on the Costs
of Start-up Activities" - - - (70)
----------------- ----------------- ----------------- -----------------
NET INCOME $ 1,033 $ 802 $ 1,835 $ 515
================= ================= ================= =================
Basic net income per common share before
cumulative effect of change in accounting
principle $ 0.18 $ 0.14 $ 0.32 $ 0.10
Cumulative effect of change in accounting principle - - - (0.01)
----------------- ----------------- ----------------- -----------------
Basic net income per common share $ 0.18 $ 0.14 $ 0.32 $ 0.09
================= ================= ================= =================
Shares used in computing basic per share amounts 5,794 5,742 5,775 5,728
================= ================= ================= =================
Diluted net income per common share before
cumulative effect of change in accounting
principle $ 0.15 $ 0.12 $ 0.26 $ 0.08
Cumulative effect of change in accounting principle - - - (0.01)
----------------- ----------------- ----------------- -----------------
Diluted net income per common share $ 0.15 $ 0.12 $ 0.26 $ 0.07
================= ================= ================= =================
Shares used in computing diluted per share amounts 7,087 6,944 7,113 6,932
================= ================= ================= =================
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
4
<PAGE>
<TABLE>
<CAPTION>
FRESH CHOICE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) Thirty-Six Weeks Ended
------------------------------------------------
September 3, 2000 September 5, 1999
--------------------- ---------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,835 $ 515
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,816 2,617
Adoption of SOP 98-5, "Reporting on the Costs of Start-Up Activities" -- 70
Restructuring and asset impairment expenses (166) 252
Issuance of stock options for consulting services 10 20
Loss (gain) on disposal of property and equipment 93 (439)
Deferred rent (378) (330)
Change in operating assets and liabilities:
Receivables 113 10
Inventories (4) (91)
Prepaid expenses and other current assets (199) (67)
Accounts payable (408) (1,199)
Accrued salaries and wages 114 139
Other accrued expenses 87 (481)
Restructuring reserve (151) (623)
------- -------
Net cash provided by operating activities 3,762 393
------- -------
INVESTING ACTIVITIES:
Capital expenditures (2,601) (899)
Proceeds from disposal of property and equipment 397 692
Deposits and other assets (41) (63)
------- -------
Net cash used in investing activities (2,245) (270)
------- -------
FINANCING ACTIVITIES:
Common stock sales 45 30
Line of credit - borrowings (repayments), net -- (1,155)
Long term debt - borrowings -- 2,500
Long term debt - repayments (200) --
Capital lease obligations - borrowings -- 294
Capital lease obligations - repayments (363) (278)
------- -------
Net cash provided by (used in) financing activities (518) 1,391
------- -------
INCREASE IN CASH AND CASH EQUIVALENTS 999 1,514
CASH AND CASH EQUIVALENTS:
Beginning of period 2,458 1,830
------- -------
End of period $ 3,457 $ 3,344
======= =======
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest $ 241 $ 326
======= =======
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
5
<PAGE>
FRESH CHOICE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Twelve Weeks and Thirty-Six Weeks Ended September 3, 2000 and
September 5, 1999
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 for 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 26, 1999.
2. NET INCOME PER SHARE
Basic earnings per share ("EPS") excludes potentially dilutive
securities and is computed by dividing the Company's net income by the weighted
average of its 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. The Company
converts common stock options and warrants into dilutive potential shares using
the treasury stock method and converts preferred stock into dilutive potential
shares using the "if converted" method.
A reconciliation of the components of basic and diluted net income
(loss) per share follows:
<TABLE>
<CAPTION>
Twelve Weeks Ended Thirty-Six Weeks Ended
------------------------------------- --------------------------------------
September 3, 2000 September 5, 1999 September 3, 2000 September 5, 1999
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
(In thousands, except per share data)
Net income $ 1,033 $ 802 $ 1,835 $ 515
================= ================= ================ =================
Shares
------
Average common shares outstanding 5,794 5,742 5,775 5,728
Stock options 105 14 150 16
Convertible preferred stock 1,188 1,188 1,188 1,188
----------------- ----------------- ---------------- ----------------
Total shares and diluted shares 7,087 6,944 7,113 6,932
================= ================= ================ ===============
Basic net income per common share $ 0.18 $ 0.14 $ 0.32 $ 0.09
================= ================= ================= ===============
Diluted net income per common share $ 0.15 $ 0.12 $ 0.26 $ 0.07
================= ================= ================= ===============
</TABLE>
The following table presents the total dilutive securities which the
Company excluded for each period presented from its diluted EPS computation
because either the exercise price of the securities exceeded the average fair
value of the Company's common stock or the Company had net losses and,
therefore, these securities were anti-dilutive:
6
<PAGE>
<TABLE>
<CAPTION>
Twelve Weeks Ended Thirty-Six Weeks Ended
------------------------------------ --------------------------------------
September 3, 2000 September 5, 1999 September 3, 2000 September 5, 1999
----------------- ----------------- ----------------- -----------------
(In thousands)
Potential Dilutive Securities
-----------------------------
<S> <C> <C> <C> <C>
Stock options excluded 492 610 381 610
Stock warrants 138 732 138 732
</TABLE>
3. INCOME TAXES
The Company recorded an income tax provision for the thirty-six weeks
ended September 3, 2000, despite net operating loss carryforwards available to
offset taxable income, due to projected fiscal 2000 net income being subject to
alternative minimum tax. The Company recorded no tax provision for its operating
income during the thirty-six weeks ended September 5, 1999 due to the
availability of net operating loss carryforwards to offset taxable income. The
Company's net deferred tax assets consist primarily of the tax benefit related
to operating loss carryforwards and non-deductible asset write-downs in
connection with restructuring reserves. 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. BORROWING ARRANGEMENTS
On September 3, 2000, the Company had $1,300,000 of long-term debt
borrowed under the terms of a $4,000,000 loan and security agreement (the
"Agreement"), of which $300,000 was included in the current portion of long-term
obligations. As of September 3, 2000, the Company had an additional $1,450,000
available for borrowing under the Agreement.
Borrowings under the Agreement initially bear interest at the prime
rate (9.5% at September 3, 2000) plus 1.25% and, once repaid, can be re-borrowed
unless converted to a term loan. Outstanding borrowings on December 29, 2000
convert into a term loan which becomes payable at 1/60th of the converted
balance each month plus interest at 1.75% above the prime rate. All borrowings,
including any term loans, are fully payable on December 29, 2001. Aggregate
borrowings in excess of $2,500,000 bear an additional 0.5% interest. The
Agreement also provides for a monthly collateral monitoring fee and a 0.5%
unused line fee.
The Agreement requires the Company to maintain a minimum net worth and
debt service coverage ratio and to not exceed maximum interest and debt to cash
flow ratios and limits its aggregate indebtedness. The Agreement also requires
approval before paying dividends and limits the Company's fixed asset
acquisitions based on its operating cash flows. The Company was in compliance
with the loan agreement covenants at September 3, 2000.
5. RESTRUCTURING RESERVE
At December 26, 1999, the Company's restructuring reserve of $570,000
consisted of the remaining scheduled cash payments to be made on an agreement to
settle the lease obligation on one closed restaurant and the estimated cash
costs to close and settle the lease obligations at two other restaurants
identified for closure. The Company closed one of these restaurants during the
first quarter. During the twelve weeks ended June 11, 2000, the Company reversed
its decision to close the other restaurant previously identified for closure
based upon continued improved performance and accordingly reversed the reserve
provided for the restaurant. In addition, during the twelve weeks ended June 11,
2000, the Company made the decision to close its last remaining restaurant in
Houston due to continued poor performance. The restructuring reserve of $78,000
at September 3, 2000 consisted of the remaining cash payments to be made on an
agreement to settle the lease obligations and other closing costs for the
Houston restaurant and the remaining closing costs for one other restaurant
where the lease expired in the third quarter of 2000. Both of these restaurants
closed
7
<PAGE>
in the third quarter. In addition, the Company recorded an asset impairment
expense of $171,000 for one underperforming restaurant in the twelve weeks ended
June 11, 2000. A summary of the Company's restructuring reserve follows:
<TABLE>
<CAPTION>
Provided Balance
(In thousands) Balance (Reversed) Utilized Sept. 03,
1999 in 2000 in 2000 2000
------- --------- -------- --------
<S> <C> <C> <C> <C>
1998 Reserve:
------------
Estimated cash costs associated with restaurant closures and settlement of lease obligations $ 430 $ (421) $ (9) $ -
1999 Reserve:
------------
Estimated cash costs associated with restaurant closures and settlement of lease obligations 140 - (140) -
2000 Reserve:
------------
Non-cash write-down of restaurant assets to estimate fair value and other related costs - 5 (5) -
Estimated cash costs associated with restaurant closures and settlement of lease obligations - 237 (159) 78
Asset Impairment 171 (171)
------ ------- ------ ----
Restructuring Reserve $ 570 $ (8) $(484) $ 78
====== ======= ====== ====
</TABLE>
6. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Cost of
Start-Up Activities," which requires companies to expense the costs of start-up
activities and organization costs as incurred. The Company adopted SOP 98-5
effective at the beginning of its fiscal year ending December 26, 1999 and
expensed $70,000 of unamortized pre-opening costs at the time of adoption.
7. CONVERTIBLE PREFERRED STOCK
The Company's outstanding Series B non-voting convertible 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, holders of Series
A preferred stock, if any, 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 fiscal 1998, the Company failed to achieve a specified earnings
target (before interest, taxes, depreciation and amortization) of at least
$5,500,000 which constituted an event of default of the terms of the preferred
stock agreement and which triggered the right of the Series A preferred
stockholders to elect a majority of the Company's Board of Directors. The holder
of the Series B preferred stock has not initiated any action to convert such
shares into shares of Series A preferred stock nor has it exercised its right to
elect a majority of the Board of Directors. Such holder has notified the Company
that it has no present intention of exercising such right; however, it has not
waived any of its rights under the agreement.
8. RECENTLY ISSUED ACCOUNTING STANDARDS
In December 1999, the Securities and Exchange Commission released
Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements"
which summarizes certain of the staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. Based on
these guidelines, revenue should not be recognized until it is realized or
realizable and earned. The Company will adopt this statement in the fourth
fiscal quarter of its fiscal year ending December 31, 2000. Management does not
expect any material impact as a result of adopting the guidelines of this
standard.
8
<PAGE>
In May 2000, the Emerging Issues Task Force reached a consensus on
Issue 00-14 "Accounting for Certain Sales Incentives". The issue addresses the
accounting for sales incentives by vendors without charge to customers that can
be used in a single exchange transaction. For example, cash incentives must be
recorded as a reduction in revenue. The consensus is required to be adopted
prospectively in the first fiscal quarter beginning after May 18, 2000. The
Company adopted this statement in the third quarter with no material impact on
its financial results.
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 thirty-six
weeks ended September 3, 2000. 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 26, 1999 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 26, 1999.
Certain statements set forth in this discussion and analysis of
financial condition and results of operations including anticipated store
openings, planned capital expenditures and trends in or expectations regarding
the Company's operations constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements
are based on currently available operating, financial and competitive
information and are subject to various risks and uncertainties. Actual future
results and trends may differ materially depending on a variety of factors as
set forth herein. Among the risks and uncertainties are the continuation of
positive comparable store sales; continued profitability; the effect of general
economic and weather conditions; the ability to obtain additional financing on
favorable terms; and the Company's ability to locate suitable restaurant sites
and construct new restaurants in a timely manner.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company's primary capital requirements have been for the expansion
of its restaurant operations and remodeling of its restaurants. The Company has
traditionally financed these requirements with funds from equity offerings, cash
flow from operations, landlord allowances, capital equipment leases 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.
The Company has a $4,000,000 loan and security agreement (the
"Agreement") with a finance company. The Agreement expires on December 29, 2001
and provides for one-year renewals thereafter. During the thirty-six weeks ended
September 3, 2000, the Company paid $200,000 of principal borrowed on a
$1,500,000 term loan converted under the Agreement on December 29, 1999. In
addition, the Company borrowed and repaid $500,000 during the first quarter
under the terms of the Agreement. On September 3, 2000, the Company had
$1,300,000 of long term debt borrowed under the terms of the Agreement, of which
$300,000 was included in the current portion of long-term obligations. As of
September 3, 2000, the Company had an additional $1,450,000 available for
borrowing under the terms of the Agreement.
Borrowings under the Agreement initially bear interest at the prime
rate (9.5% at September 3, 2000) plus 1.25% and, once repaid, can be re-borrowed
unless converted to a term loan. Outstanding borrowings on December 29, 2000
convert into a term loan which becomes payable at 1/60th of the converted
balance each month plus interest at 1.75% above the prime rate. All borrowings,
including any term loans, are fully payable on December 29, 2001. Aggregate
borrowings in excess of $2,500,000 bear an additional 0.5% interest. The
Agreement also provides for a monthly collateral monitoring fee and a 0.5%
unused line fee.
The Agreement requires the Company to maintain a minimum net worth and
debt service coverage ratio and to not exceed maximum interest and debt to cash
flow ratios and limits its aggregate indebtedness. The Agreement also requires
approval before paying dividends and limits the Company's fixed asset
acquisitions based on its operating cash
9
<PAGE>
flows. The Company was in compliance with the loan agreement covenants at
September 3, 2000.
Long-term debt at September 3, 2000 also included $1,265,000 of
capital lease obligations, of which $543,000 was included in the current portion
of long term obligations, and a $116,000 note for site construction costs.
Operating activities for the thirty-six weeks ended September 3, 2000
provided $3,762,000 of cash flows. During the same period, the Company invested
$2,601,000 in property and equipment, including the remodeling of fifteen
restaurants. The Company plans to remodel 7 additional restaurants in fiscal
2000 to complete its remodeling program. In addition, at the beginning of the
second quarter of fiscal 2000, the Company opened its second Fresh Choice
Express test location, expects to open a third test location late in the fourth
quarter of the year, and is seeking additional test locations in Texas and its
core Northern California market.
The restructuring reserve of $78,000 at September 3, 2000 consisted of
the remaining cash payments to be made on an agreement to settle the lease
obligation and other closing costs for one restaurant identified for closure and
the estimated closing costs for one other restaurant whose lease expired in the
third quarter. Both restaurants closed in the third quarter.
The Company's outstanding Series B non-voting convertible 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, holders of Series
A preferred stock, if any, 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 fiscal 1998, the Company failed to achieve a specified earnings
target (before interest, taxes, depreciation and amortization) of at least
$5,500,000 which constituted an event of default of the terms of the preferred
stock agreement and which triggered the right of the Series A preferred
stockholders to elect a majority of the Company's Board of Directors. The holder
of the Series B preferred stock has not initiated any action to convert such
shares into shares of Series A preferred stock nor has it exercised its right to
elect a majority of the Board of Directors. Such holder has notified the Company
that it has no present intention of exercising such right; however, it has not
waived any of its rights under the agreement.
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 currently is negotiating leases on three new Fresh Choice locations,
which are expected to open in fiscal 2001. In addition, the Company expects to
open a third test location for its Fresh Choice Express concept late in the
fourth quarter and is seeking additional test locations in Texas and its core
Northern California market. The Company's ability to implement an expansion
strategy will depend upon a variety of factors, including its continued
profitability and the Company's ability to obtain funds. See "Business Risks"
included herein. The Company believes its operating cash requirements and fiscal
2000 capital requirements can be met through existing cash balances, cash
provided by operations and its borrowing arrangements. The Company may continue
to seek additional debt or equity financing to provide greater flexibility
toward improving its operating performance and resuming restaurant expansion.
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 State of Washington
minimum wage increased effective January 1, 2000. The Company raised prices in
its Washington restaurants in response to the increase. No further minimum wage
increases are currently scheduled. 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 may 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.
10
<PAGE>
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:
OPERATING LOSSES AND HISTORICAL DECLINES IN COMPARABLE 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 operating losses in both 1995 and 1996. The Company reported a modest
profit in 1997 but again incurred an operating loss in 1998. The Company
reported a profit for 1999 and for the thirty-six weeks ended September 3, 2000.
There can be no assurance that the Company will continue to be profitable over
the long or short term.
Beginning late in the third quarter of fiscal 1994, the Company began
reporting comparable store sales declines. Comparable store sales continued to
decline in each quarter through the end of 1998. The Company reported comparable
store sales declines of 4.6%, 15.3%, 5.9%, 2.7% and 4.8% for fiscal years 1994,
1995, 1996, 1997 and 1998, respectively. During 1999, the Company reported
positive comparable store sales in each quarter and reported a comparable store
sales increase of 3.5% for fiscal year 1999. The Company also reported a
comparable store sales increase of 7.1% for the thirty-six weeks ended September
3, 2000. There can be no assurance that comparable store sales will continue to
improve or that the Company will maintain profitability over the long term.
EXPANSION. The Company believes its growth depends to a significant
degree on its ability to open new restaurants and to operate such restaurants
profitably. While the Company intends to resume its expansion, assuming its
financial performance continues to improve, there can be no assurance that the
Company will be able to so. The Company's ability to implement successfully an
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.
While on a long-term basis, the Company intends to expand its
operations in markets outside of California, assuming its financial performance
continues to improve, there can be no assurance as to when or whether the
Company will resume its expansion. The Company's expansion plans may include
entering new geographic regions in which the Company has no previous operating
experience. There can be no assurance that the concept will be successful in
regions outside of California, where tastes and restaurant preferences may be
different.
GEOGRAPHIC CONCENTRATION. As of September 3, 2000, 37 of the Company's
48 restaurants were located in California, primarily in Northern California.
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 store sales. There can be no
assurance that 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.
11
<PAGE>
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.
The fourth quarter of 2000 will include 17 weeks. 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 store sales, which had
been negative for four consecutive years through fiscal year 1998, may again
turn 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 crewmembers and to attract qualified
personnel, particularly general managers, for its restaurants. The Company faces
significant competition in the recruitment of qualified crewmembers.
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
crewmember benefit costs, and the availability of experienced management and
hourly crewmembers 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
limited-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 resume
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 ability 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 line of credit. 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.
CONTROL BY MAJOR SHAREHOLDER. Crescent Real Estate Equities Limited
Partnership holds 1,187,906 shares of Series B non-voting convertible preferred
stock, which is convertible into Series A voting convertible preferred stock at
any time at the option of the holder. Upon conversion, holders of Series A
preferred stock would be entitled to vote with common stockholders and would
have a separate right to approve certain corporate actions, such as amending the
Company's Certificate of Incorporation or Bylaws, effecting a merger or sale of
the Company, or making a fundamental change in the Company's business activity.
In addition because the Company did not achieve an earnings target (before
interest, taxes, depreciation and amortization) of $5,500,000 in 1998, the
holders of Series A preferred stock would have the right to elect a majority of
the Company's Board of Directors. These factors could have the effect of
delaying, deferring or preventing a change in control of the Company and, as a
result, could discourage acquisition bids for the Company and limit the price
that investors are willing to pay for shares of common stock.
12
<PAGE>
RESULTS OF OPERATIONS
---------------------
The following table sets forth items in the Company's statements 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 3, 2000 September 5, 1999 September 3, 2000 September 5, 1999
------------------- ------------------- ------------------ -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET SALES $ 18,830 100.0 % $ 18,446 100.0 % $ 54,141 100.0 % $ 52,378 100.0 %
COSTS AND EXPENSES:
Cost of sales 4,561 24.2 % 4,471 24.2 % 13,097 24.2 % 12,766 24.4 %
Restaurant operating expenses:
Labor 5,653 30.0 % 5,765 31.3 % 16,924 31.3 % 16,792 32.1 %
Occupancy and other 5,228 27.8 % 5,213 28.3 % 15,234 28.1 % 15,730 30.0 %
Depreciation and amortization 886 4.7 % 818 4.4 % 2,599 4.8 % 2,442 4.7 %
General and administrative expenses 1,390 7.4 % 1,293 7.0 % 4,223 7.8 % 3,784 7.2 %
Gain on sale of property and equipment - - % (452) (2.5)% - - % (452) (0.9)%
Restructuring and asset impairment
expenses - - % 443 2.4 % (8) - % 443 0.8 %
------------------- ------------------ ---------------- ---------------
Total costs and expenses 17,718 94.1 % 17,551 95.1 % 52,069 96.2 % 51,505 98.3 %
------------------- ------------------ --------------- ---------------
OPERATING INCOME 1,112 5.9 % 895 4.9 % 2,072 3.8 % 873 1.7 %
Interest income 49 0.2 % 28 0.2 % 113 0.2 % 53 0.1 %
Interest expense (100) (0.5)% (121) (0.8)% (300) (0.6)% (341) (0.7)%
------------------- ------------------ -------------- -------------
Interest expense, net (51) (0.3)% (93) (0.6)% (187) (0.4)% (288) (0.6)%
------------------- ------------------ -------------- -------------
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE 1,061 5.6 % 802 4.3 % 1,885 3.4 % 585 1.1 %
Provision for income taxes 28 0.1 % - - % 50 - % - - %
------------------- ------------------ ------------- -------------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 1,033 5.5 % 802 4.3 % 1,835 3.4 % 585 1.1 %
Cumulative effect of change in accounting
principle - adoption of SOP 98-5,
"Reporting on the
Costs of Start-Up Activities" - - % - - % - - % (70) (0.1)%
------------------- ------------------ ------------- ------------
NET INCOME $ 1,033 5.5 % $ 802 4.3 % $ 1,835 3.4 % $ 515 1.0 %
=================== =================== ================ ===============
Number of restaurants:
Open at beginning of period 50 51 50 51
======== ======== ======== ======
Open at end of period 48 51 48 51
======== ======== ======== =======
</TABLE>
13
<PAGE>
The following table presents the components of average operating
income on a per restaurant basis, based on the average number of Fresh Choice
restaurants open during the period (the Company's two Fresh Choice Express
restaurants are excluded):
<TABLE>
<CAPTION>
Twelve Weeks Ended Thirty-Six Weeks Ended
---------------------------------------- ------------------------------------
(Dollars in thousands) September 3, 2000 September 5, 1999 September 3, 2000 September 5, 1999
------------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET SALES $ 399 100.0 % $ 362 100.0 % $ 1,126 100.0 % $ 1,027 100.0 %
COSTS AND EXPENSES:
Cost of sales 96 24.1 % 88 24.3 % 271 24.1 % 250 24.3 %
Restaurant operating expenses:
Labor 119 29.9 % 113 31.2 % 351 31.1 % 359 32.0 %
Occupancy and other 111 27.9 % 102 28.2 % 318 28.2 % 309 30.1 %
Depreciation and amortization 19 4.7 % 16 4.4 % 54 4.8 % 49 4.8 %
------------------- ----------------- ----------------- ----------------
Total costs and expenses 345 86.6 % 319 88.1 % 994 88.2 % 937 91.2 %
------------------- ----------------- ----------------- ----------------
RESTAURANT OPERATING INCOME $ 54 13.4 % $ 43 11.9 % $ 132 11.8 % $ 90 8.8 %
=================== ================= ================== ================
Average Fresh Choice restaurants open 46.6 50.8 47.6 50.9
========= ======== ========= =======
</TABLE>
(This table excludes Fresh Choice Express restaurants)
RESULTS OF OPERATIONS: TWELVE WEEKS ENDED SEPTEMBER 3, 2000
------------------------------------------------------------
COMPARED TO TWELVE WEEKS ENDED SEPTEMBER 5, 1999
------------------------------------------------
NET SALES. Net sales for the twelve weeks ended September 3, 2000
(third quarter of 2000) were $18,830,000, an increase of $384,000, or 2.1%, from
sales of $18,446,000 for the twelve weeks ended September 5, 1999 (third quarter
of 1999). The primary components of the net increase in sales were:
<TABLE>
<CAPTION>
<S> <C>
Increase in comparable store sales $ 1,234,000
Incremental sales from new restaurants 184,000
Absence of sales from closed restaurants (1,034,000)
--------------
$ 384,000
==============
</TABLE>
The Company operated an average of 48.6 restaurants in the twelve
weeks ended September 3, 2000 compared to 51.5 restaurants in the twelve weeks
ended September 5, 1999. Sales at the Company's 46 comparable stores, which
include restaurants open at least 18 months, increased 7.2% in the third quarter
of 2000 versus the third quarter of 1999. Comparable store guest counts
increased 8.2% in the third quarter, while the comparable store average check
decreased 1.0% to $7.25, reflecting increased coupon redemptions.
Net sales per Fresh Choice restaurant averaged $399,000 in the third
quarter of 2000, an increase of 10.2% over net sales per restaurant of $362,000
in the third quarter of 1999 due to comparable store sales increases as noted
above and closure of lower sales volume restaurants.
COSTS AND EXPENSES. Cost of sales (food and beverage costs) was 24.2%
of sales in the third quarter of 2000 the same as the third quarter of 1999.
Food costs did not increase due to the Company's food program which manages food
costs through an efficient product rotation while maintaining a quality menu
offering to guests. In addition, food costs benefited from cost efficiencies
experienced with new products and new production methods.
RESTAURANT OPERATING EXPENSES. Restaurant operating expenses (labor,
occupancy and other) were 57.8% of sales in the third quarter of 2000 compared
to 59.6% of sales in the third quarter of 1999, a decrease of 1.8% of sales.
Labor costs were 30.0% of sales for the third quarter of 2000 compared
to 31.3% of sales in the third quarter
14
<PAGE>
of 1999. Labor costs as a percentage of sales benefited from the Company's
increased sales as well as labor savings from improved food production and
scheduling methods.
Occupancy and other expenses of 27.8% of sales in the third quarter of
2000 compared to 28.3% of sales in the third quarter of 1999, a decrease of 0.5%
of sales. The decline is primarily the result of higher average sales on these
mostly fixed costs.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
were 4.7% of sales in the third quarter of 2000 an increase of 0.3% of sales
from the third quarter of 1999. This is primarily a result of the Company's
investment in its remodeling program and point of sale systems.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses were 7.4% of sales in the third quarter of 2000 compared to 7.0% of
sales in the third quarter of 1999. The increase is due primarily to increased
accruals for expected incentive payouts, costs to relocate the Company's
headquarters and increased legal and litigation expenses.
GAIN ON SALE OF PROPERTY AND EQUIPMENT. In accordance with the
Company's continuing strategy to close restaurants that compete with other Fresh
Choice restaurants, the Company sold the property and equipment of one
restaurant in the third quarter of 1999. The Company received cash proceeds of
$692,000 and recorded a gain of $452,000 in the third quarter of 1999. The
restaurant was leased back from the buyer for approximately two months and was
closed during the fourth quarter of 1999.
RESTRUCTURING AND ASSET IMPAIRMENT EXPENSES. In accordance with the
Company's strategy to dispose of under-performing restaurants, the Company
closed a previously impaired restaurant in the third quarter of 1999 and
recorded a restructuring and asset impairment charge of $443,000 in the third
quarter of 1999, primarily for the estimated lease settlement and other closure
costs.
INTEREST EXPENSE, NET. Interest expense, net was $51,000 in the third
quarter of 2000 compared to $93,000 in the third quarter of 1999. This decrease
is due to decreased borrowings and increased interest earned on its average cash
balances. Interest expense consists of fees related to securing the Company's
borrowing arrangements and interest expense on outstanding borrowings and
capital lease obligations. Interest income increased in the third quarter of
2000 due to higher interest earned on its average cash balances.
INCOME TAXES. The Company recorded an income tax provision for the
third quarter of 2000, despite net operating loss carryforwards available to
offset taxable income, due to projected fiscal 2000 net income being subject to
alternative minimum tax. In the third quarter of 1999, the Company offset
currently taxable income with available net operating loss carryforwards and, as
a result, recorded no tax provision for its operating income. The Company's net
deferred tax assets consist primarily of the tax benefit related to operating
loss carryforwards and non-deductible asset write-downs in connection with
restructuring reserves. 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.
15
<PAGE>
RESULTS OF OPERATIONS: THIRTY-SIX WEEKS ENDED SEPTEMBER 3 ,2000
----------------------------------------------------------------
COMPARED TO THIRTY-SIX WEEKS ENDED SEPTEMBER 5, 1999
----------------------------------------------------
NET SALES. Net sales for the thirty-six weeks ended September 3, 2000
(first three quarters of 2000) were $54,141,000, an increase of $1,763,000, or
3.4%, from sales of $52,378,000 for the thirty-six weeks ended September 5, 1999
(first three quarters of 1999). The primary components of the net change in
sales were:
<TABLE>
<CAPTION>
<S> <C>
Increase in comparable store sales $ 3,438,000
Incremental sales from new restaurants 531,000
Absence of sales from closed restaurants (2,206,000)
-------------
$ 1,763,000
=============
</TABLE>
The Company operated an average of 49.2 restaurants in the first three
quarters of 2000 compared to 51.2 restaurants in the first three quarters of
1999. Sales at the Company's 45 comparable stores, which include restaurants
open at least 18 months, increased 7.1% in the first three quarters of 2000
versus the first three quarters of 1999. Comparable store guest counts increased
8.7%, while the comparable store average check decreased 1.4% to $7.23,
reflecting increased coupon redemption.
Net sales per Fresh Choice restaurant averaged $1,126,000 in the first
three quarters of 2000, an increase of 9.6% over net sales per restaurant of
$1,027,000 in the first three quarters of 1999 due to comparable store sales
increases as noted above and closure of lower sales volume restaurants.
COSTS AND EXPENSES. Cost of sales (food and beverage costs) was 24.2%
of sales in the first three quarters of 2000 compared to 24.4% in the first
three quarters of 1999, a decrease of 0.2% of sales. Food costs continued to
benefit from the Company's food program which manages food costs through an
efficient product rotation while maintaining a quality menu offering to guests.
In addition, food costs benefited from cost efficiencies experienced with new
products and new production methods.
RESTAURANT OPERATING EXPENSES. Restaurant operating expenses (labor,
occupancy and other) were 59.4% of sales in the first three quarters of 2000
compared to 62.1% of sales in the first three quarters of 1999, a decrease of
2.7% of sales.
Labor costs were 31.3% of sales in the first three quarters of 2000
compared to 32.1% in the first three quarters of 1999, a decrease of 0.8% of
sales. Labor costs as a percentage of sales benefited from the Company's
increased sales as well as labor savings from improved food production and
scheduling methods.
Occupancy and other expenses of 28.1% in the first three quarters of
2000 compared to 30.0% in the first three quarters of 1999, a decrease of 1.9%
of sales. The decline is primarily the result of a reduction in marketing and
promotional costs, property taxes, utilities and training expenditures, and
higher average sales on these mostly fixed costs.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
were 4.8% of sales in the first three quarters of 2000 compared to 4.7% of sales
in the first three quarters of 1999. This is primarily the result of the
Company's investment in its remodeling program and point of sale systems.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses were 7.8% of sales in the first three quarters of 2000 compared to 7.2%
of sales in the first three quarters of 1999. The increase is due primarily to
increased accruals for expected incentive payouts, costs to relocate the
Company's headquarters and increased legal and litigation expenses.
GAIN ON SALE OF PROPERTY AND EQUIPMENT. In accordance with the
Company's continuing strategy to close restaurants that compete with other Fresh
Choice restaurants, the Company sold the property and equipment of one
16
<PAGE>
restaurant in the third quarter of 1999. The Company received cash proceeds of
$692,000 and recorded a gain of $452,000 in the third quarter of 1999. The
restaurant was leased back from the buyer for approximately two months and was
closed during the fourth quarter of 1999.
RESTRUCTURING AND ASSET IMPAIRMENT EXPENSE. During the thirty-six
weeks ended September 3, 2000, the Company reversed its decision to close one
restaurant previously identified for closure based upon continued improved
performance and accordingly reversed the reserve provided for the restaurant. In
addition, during the thirty-six weeks ended September 3, 2000, the Company made
the decision to close its last remaining restaurant in Houston due to continued
poor performance. The restructuring reserve of $78,000 at September 3, 2000
consisted of the remaining cash payments to be made on an agreement to settle
the lease obligations and other closing costs for this restaurant and the
estimated closing costs for one other restaurant whose lease expired in the
third quarter of 2000. Both of these restaurants closed in the third quarter. In
addition, during second quarter ended June 11, 2000, the Company recorded an
asset impairment expense of $171,000 for one underperforming restaurant. Below
is a summary of the restructuring and asset impairment expense:
<TABLE>
<CAPTION>
Cash Non-Cash Total
------ ---------- -------
<S> <C> <C> <C>
Reversal of reserves $ - $ (416) $ (416)
Asset impairment expense - 171 171
Estimated lease settlement and other closing costs 237 - 171
------- ---------- -------
$ 237 $ (245) $ (8)
======= ========== ========
</TABLE>
During the thirty-six weeks ended September 5, 1999, in accordance
with the Company's continuing strategy to dispose of under-performing
restaurants, the Company closed a previously impaired restaurant in the third
quarter of 1999 and recorded a restructuring and asset impairment charge of
$443,000, primarily for the estimated lease settlement and other closure costs.
INTEREST EXPENSE, NET. Interest expense, net was $187,000 in the first
three quarters of 2000 compared to $288,000 in the first three quarters of 1999.
This decrease is due to decreased borrowings and increased interest earned on
its average cash balances. Interest expense consists of fees related to securing
the Company's borrowing arrangements and interest expense on outstanding
borrowings and capital lease obligations. Interest income increased in the first
three quarters of 2000 due to higher interest earned on its average cash
balances.
INCOME TAXES. The Company recorded an income tax provision for the
first three quarters of 2000, despite net operating loss carryforwards available
to offset taxable income, due to projected fiscal 2000 net income being subject
to alternative minimum tax. In the first three quarters of 1999, the Company
offset currently taxable income with available net operating loss carryforwards
and, as a result, recorded no tax provision for its operating income. The
Company's net deferred tax assets consist primarily of the tax benefit related
to operating loss carryforwards and non-deductible asset write-downs in
connection with restructuring reserves. 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.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. In April 1998,
the American Institute of Certified Public Accountants issued Statement of
Position 98-5 ("SOP 98-5"), "Reporting on the Cost of Start-Up Activities,"
which requires companies to expense the costs of start-up activities and
organization costs as incurred. The Company adopted SOP 98-5 effective for at
the beginning of its fiscal year ending December 26, 1999 and expensed $70,000
of unamortized pre-opening costs at the time of adoption.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate risk primarily through its
borrowing activities. The Company has
17
<PAGE>
not used derivative financial instruments to hedge such risks. There is inherent
roll-over risk for borrowings as they mature and are renewed at current market
rates. The extent of this risk is not quantifiable or predictable because of the
variability of future interest rates and business financing requirements. If
market rates were to increase immediately by 10 percent from levels at September
3, 2000, the fair value of the Company's borrowings would not be materially
affected as borrowings are primarily subject to variable interest rates.
PART II. OTHER INFORMATION
<TABLE>
<CAPTION>
<S> <C> <C>
ITEM 1 - LEGAL PROCEEDINGS Not Applicable.
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
</TABLE>
(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 3, 2000.
18
<PAGE>
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/ Everett F. Jefferson
------------------------
Everett F. Jefferson
President and Chief Executive Officer
(Principal Executive Officer)
/S/ David E. Pertl
-------------------
David E. Pertl
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: October 17, 2000
19
<PAGE>
INDEX TO FORM 10-Q EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
_______________________________________________________________________________
<S> <C> <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
</TABLE>
20
<PAGE>
INDEX TO FORM 10-Q EXHIBITS continued
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
_______________________________________________________________________________
<S> <C> <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
10.33 (13) Amendment to Loan and Security Agreement dated May 27, 1998 with Silicon Valley Bank
10.34 (13)(3) Consulting Agreement with Charles A. Lynch dated April 17, 1998
10.35 (14) Amendment to Loan and Security Agreement dated October 28, 1998 with Silicon Valley Bank
10.36 (14) Loan and Security Agreement dated December 29, 1998 with FINOVA Capital Corporation
10.37 (14)(3) Form of Severance Agreement with Senior Vice Presidents
10.38 (14)(3) Officer Incentive Plan for fiscal year 1999
10.39 (15)(3) Officer Incentive Plan for fiscal year 2000
10.40 (15)(3) Senior Vice President of Operations Incentive Plan for fiscal year 2000
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.
21
<PAGE>
(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.
(13) 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 14, 1998.
(14) Incorporated by reference from the Exhibits with corresponding numbers
filed with the Company's Annual Report on Form 10-K/A for the year ended
December 27, 1998.
(15) 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 26, 1999.
22
