<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 June 11, 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.)
2901 TASMAN DRIVE - SUITE 109, SANTA CLARA, CALIFORNIA 95054
------------------------------------------------------------
(Address of principal executives offices) (Zip Code)
Registrant's telephone number, including area code: (408) 986-8661
---------------
--------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X Yes No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant
has filed all documents and reports required to be filed by Section 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court. _____ Yes _____No
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares of Common Stock, $.001 par value, outstanding as of July
11, 1999 was 5,793,999.
<PAGE>
FRESH CHOICE, INC.
INDEX
<TABLE>
<CAPTION>
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets at June 11, 2000
and December 26, 1999..........................................................................................3
Condensed Consolidated Statements of Operations for the Twelve and Twenty-Four Weeks
ended June 11, 2000 and June 13, 1999 .........................................................................4
Condensed Consolidated Statements of Cash Flows for the Twenty-Four Weeks
ended June 11, 2000 and June 13, 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
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PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
FRESH CHOICE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
June 11, December 26,
2000 1999
------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,681 $ 2,458
Receivables 124 186
Inventories 523 555
Prepaid expenses and other current assets 521 479
------------- --------------
Total current assets 3,849 3,678
PROPERTY AND EQUIPMENT, net 26,717 27,231
LEASE ACQUISITION COSTS, net 285 332
DEPOSITS AND OTHER ASSETS 562 616
------------- --------------
TOTAL ASSETS $ 31,413 $ 31,857
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,743 $ 2,317
Accrued salaries and wages 1,603 1,459
Sales tax payable 951 510
Other accrued expenses 1,469 1,844
Restructuring reserve 237 570
Current portion of long-term obligations 833 800
------------- --------------
Total current liabilities 6,836 7,500
CAPITAL LEASE OBLIGATIONS 860 1,126
LONG-TERM DEBT 1,191 1,316
OTHER LONG-TERM LIABILITIES 1,460 1,703
------------- --------------
Total liabilities 10,347 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 42,343 42,291
Accumulated deficit (26,452) (27,254)
------------- --------------
Total stockholders' equity 21,066 20,212
------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 31,413 $ 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
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FRESH CHOICE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Twelve Weeks Ended Twenty-Four Weeks Ended
--------------------------------- ---------------------------------
June 11, 2000 June 13, 1999 June 11, 2000 June 13, 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
NET SALES $ 18,184 $ 17,141 $ 35,311 $ 33,932
--------------- --------------- --------------- ---------------
COSTS AND EXPENSES:
Cost of sales 4,401 4,217 8,536 8,295
Restaurant operating expenses:
Labor 5,724 5,443 11,271 11,027
Occupancy and other 5,082 5,204 10,006 10,517
Depreciation and amortization 881 819 1,713 1,624
General and administrative expenses 1,480 1,222 2,833 2,491
Restructuring and asset impairment expenses (8) - (8) -
--------------- --------------- --------------- ---------------
Total costs and expenses 17,560 16,905 34,351 33,954
--------------- --------------- --------------- ---------------
OPERATING INCOME (LOSS) 624 236 960 (22)
Interest income 33 15 64 25
Interest expense (95) (115) (200) (220)
--------------- --------------- --------------- ---------------
Interest expense, net (62) (100) (136) (195)
--------------- --------------- --------------- ---------------
INCOME (LOSS) BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 562 136 824 (217)
Provision for income taxes 15 - 22 -
--------------- --------------- --------------- ---------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 547 136 802 (217)
Cumulative effect of change in accounting
principle - adoption of SOP 98-5, "Reportin
on the Costs of Start-Up Activities" - - - (70)
--------------- --------------- --------------- ---------------
NET INCOME (LOSS) $ 547 $ 136 $ 802 $ (287)
=============== =============== =============== ===============
Basic net income (loss) per common share before
cumulative effect of change in accounting
principle $ 0.09 $ 0.02 $ 0.14 $ (0.04)
Cumulative effect of change in accounting principle - - - (0.01)
=============== =============== =============== ===============
Basic net income (loss) per common share $ 0.09 $ 0.02 $ 0.14 $ (0.05)
=============== =============== =============== ===============
Shares used in computing basic per share amounts 5,770 5,723 5,766 5,721
=============== =============== =============== ===============
Diluted net income (loss) per common share before
cumulative effect of change in accounting
principle $ 0.08 $ 0.02 $ 0.11 $ (0.04)
Cumulative effect of change in accounting principle - - - (0.01)
--------------- --------------- --------------- ---------------
Diluted net income (loss) per common share $ 0.08 $ 0.02 $ 0.11 $ (0.05)
=============== =============== =============== ===============
Shares used in computing diluted per share amounts 7,148 6,930 7,127 5,721
=============== =============== =============== ===============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
4
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FRESH CHOICE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Twenty-Four Weeks Ended
------------------------------------
June 11, 2000 June 13, 1999
--------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 802 $ (287)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 1,850 1,737
Adoption of SOP 98-5, "Reporting on the Costs of Start-Up Activities" - 70
Restructuring and asset impairment expenses (8) -
Issuance of stock options for consulting services 7 17
Loss on disposal of property 62 10
Deferred rent (243) (212)
Change in operating assets and liabilities:
Receivables 62 7
Inventories (18) (6)
Prepaid expenses and other current assets (42) 98
Accounts payable (574) (1,114)
Accrued salaries and wages 144 47
Other accrued expenses 66 (562)
Restructuring reserve (150) (593)
--------------- ---------------
Net cash provided by (used in) operating activities 1,958 (788)
--------------- ---------------
INVESTING ACTIVITIES:
Capital expenditures (1,464) (466)
Proceeds from sale of property and equipment 2 -
Deposits and other assets 40 (57)
--------------- ---------------
Net cash used in investing activities (1,422) (523)
--------------- ---------------
FINANCING ACTIVITIES:
Common stock sales 45 30
Line of credit - borrowings (repayments), net - (1,155)
Long term debt - borrowings - 2,695
Long term debt - repayments (125) -
Capital lease obligations - borrowings - 100
Capital lease obligations - repayments (233) (182)
--------------- ---------------
Net cash provided by (used in) financing activities (313) 1,488
--------------- ---------------
INCREASE IN CASH AND CASH EQUIVALENTS 223 177
CASH AND CASH EQUIVALENTS:
Beginning of period 2,458 1,830
--------------- ---------------
End of period $ 2,681 $ 2,007
=============== ===============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest $ 177 $ 210
=============== ===============
</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 Twenty-Four Weeks Ended June 11, 2000 and June 13, 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 (LOSS) PER SHARE
Basic earnings per share ("EPS") excludes potentially dilutive
securities and is computed by dividing the Company's net income (loss) 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.
Diluted EPS presented for the twelve and twenty-four weeks ended
June 11, 2000 and the twelve weeks ended June 13, 1999 include potential
dilutive securities. Diluted EPS presented for the twenty-four weeks ended June
13, 1999 are the same as basic EPS since the Company had net losses, and
therefore, all potential dilutive securities are antidilutive and are excluded
from the computation.
A reconciliation of the components of basic and diluted net
income (loss) per share follows:
<TABLE>
<CAPTION>
Twelve Weeks Ended Twenty-Four Weeks Ended
----------------------------- ------------------------------
June 11, 2000 June 13, 1999 June 11, 2000 June 13, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(In thousands, except per share data)
Net income (loss) $ 547 $ 136 $ 802 $ (287)
============= ============= ============= =============
SHARES
Average common shares outstanding 5,770 5,723 5,766 5,721
Stock options 190 19 173 -
Convertible preferred stock 1,188 1,188 1,188 -
------------- ------------- ------------- -------------
Total shares and diluted shares 7,148 6,930 7,127 5,721
============= ============= ============= =============
Basic net income (loss) per common share $ 0.09 $ 0.02 $ 0.14 $(0.05)
============= ============= ============= =============
Diluted net income (loss) per common share $ 0.08 $ 0.02 $ 0.11 $(0.05)
============= ============= ============= =============
</TABLE>
6
<PAGE>
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:
<TABLE>
<CAPTION>
Twelve Weeks Ended Twenty-Four Weeks Ended
----------------------------- ------------------------------
June 11, 2000 June 13, 1999 June 11, 2000 June 13, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(In thousands)
POTENTIAL DILUTIVE SECURITIES
Stock options excluded 340 631 380 717
Stock warrants 138 732 138 732
Convertible preferred stock - - - 1,188
</TABLE>
3. INCOME TAXES
The Company recorded an income tax provision for the
twenty-four weeks ended June 11, 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 income tax
benefit for its operating loss during the twenty-four weeks ended June 13, 1999
due to the Company's net loss for the period and valuation allowances against
its net deferred tax assets. 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 June 11, 2000, the Company had $1,375,000 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 June 11, 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 June 11, 2000) plus 1.25% and, once repaid, can be
re-borrowed unless converted to a term loan. Outstanding borrowings on the first
and second anniversaries of the Agreement convert into term loans which become
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 June 11, 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
7
<PAGE>
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 $237,000 at June 11, 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 estimated
closing costs for one other restaurant where the lease expired in the third
quarter of 2000. As of July 10, 2000, both of these restaurants had been closed.
In addition, the Company recorded an asset impairment expense of $171,000 for
one underperforming restaurant. A summary of the Company's restructuring reserve
follows:
<TABLE>
<CAPTION>
Provided Balance
(In thousands) Balance (Reversed) Utilized June 11,
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 - 237
Asset Impairment 171 (171)
--------- ----------- ---------- ---------
Restructuring Reserve $ 570 $ (8) $ (325) $ 237
========= =========== ========== =========
</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 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.
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
8
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"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.
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 than 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.
Management does not expect any material impact as a result of adopting the
guidelines of this standard.
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
twenty-four weeks ended June 11, 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; future profitability; the Company's successful
efforts to close, sell or improve operating results of underperforming stores
which depend on many factors not within the Company's control such as the
negotiation of settlements of existing lease obligations under acceptable terms;
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 twenty-four weeks
ended June 11, 2000, the Company paid $125,000 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 June 11, 2000, the Company had $1,375,000
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 June 11,
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 June 11, 2000) plus 1.25% and, once repaid, can be
re-borrowed unless converted to a term loan. Outstanding borrowings on the first
and second
9
<PAGE>
anniversaries of the Agreement convert into term loans which become 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 June 11, 2000.
Long-term debt at June 11, 2000 also included $1,393,000 of
capital lease obligations, of which $533,000 was included in the current portion
of long term obligations, and a $116,000 note for site construction costs.
Operating activities for the twenty-four weeks ended June 11,
2000 provided $1,958,000. During the same period, the Company invested
$1,464,000 in property and equipment, including the remodeling of nine
restaurants. The Company plans to remodel 13 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 in the second half
of the year, and is seeking a fourth test location in its core Northern
California market.
The restructuring reserve of $237,000 at June 11, 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. As of July 10, 2000 both restaurants had been closed.
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 plans to open one new Fresh Choice restaurant
in fiscal 2000. In addition, the Company expects to open a third test location
for its Fresh Choice Express concept and is seeking a fourth location in its
core Northern California market. The Company's ability to implement an expansion
strategy will depend upon a variety of factors, including the continued success
of efforts to restore profitability and the Company's ability to obtain funds.
See "Business Risks" included herein. The Company believes its operating cash
requirements and 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
10
<PAGE>
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.
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 twenty-four weeks ended June 11, 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 twenty-four weeks
ended June 11, 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 continue expansion. 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 July 10, 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,
11
<PAGE>
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 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
12
<PAGE>
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.
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 Twenty-Four Weeks Ended
----------------------------------------- -----------------------------------------
(Dollars in thousands) June 11, 2000 June 13, 1999 June 11, 2000 June 13, 1999
------------------- -------------------- ------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET SALES $ 18,184 100.0 % $ 17,141 100.0 % $ 35,311 100.0 % $ 33,932 100.0 %
COSTS AND EXPENSES:
Cost of sales 4,401 24.2 % 4,217 24.6 % 8,536 24.2 % 8,295 24.4 %
Restaurant operating expenses:
Labor 5,724 31.5 % 5,443 31.8 % 11,271 31.9 % 11,027 32.5 %
Occupancy and other 5,082 27.9 % 5,204 30.4 % 10,006 28.3 % 10,517 31.0 %
Depreciation and amortization 881 4.9 % 819 4.8 % 1,713 4.9 % 1,624 4.8 %
General and administrative expenses 1,480 8.1 % 1,222 7.0 % 2,833 8.0 % 2,491 7.4 %
Restructuring and asset impairment
expenses (8) - % - - % (8) - % - - %
------------------- -------------------- ------------------- --------------------
Total costs and expenses 17,560 96.6 % 16,905 98.6 % 34,351 97.3 % 33,954 100.1 %
------------------- -------------------- ------------------- --------------------
OPERATING INCOME (LOSS) 624 3.4 % 236 1.4 % 960 2.7 % (22) (0.1)%
Interest income 33 0.2 % 15 0.1 % 64 0.2 % 25 0.1 %
Interest expense (95) (0.5)% (115) (0.7)% (200) (0.6)% (220) (0.6)%
------------------- -------------------- ------------------- --------------------
Interest expense, net (62) (0.3)% (100) (0.6)% (136) (0.4)% (195) (0.5)%
------------------- -------------------- ------------------- --------------------
INCOME (LOSS) BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE 562 3.1 % 136 0.8 % 824 2.3 % (217) (0.6)%
Provision for income taxes 15 0.1 % - - % 22 - % - - %
------------------- -------------------- ------------------- --------------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 547 3.0 % 136 0.8 % 802 2.3 % (217) (0.6)%
Cumulative effect of change in accounting
principle - adoption of SOP 98-5,
"Reporting on the Costs of Start-Up
Activities" - - % - - % - - % (70) (0.2)%
------------------- -------------------- ------------------- --------------------
NET INCOME (LOSS) $ 547 3.0 % $ 136 0.8 % $ 802 2.3 % $ (287) (0.8)%
=================== ==================== =================== ====================
Number of restaurants:
Open at beginning of period 49 51 50 51
========== =========== ========== ===========
Open at end of period 50 51 50 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 Twenty-Four Weeks Ended
-------------------------------------- ---------------------------------------
(Dollars in thousands) June 11, 2000 June 13, 1999 June 11, 2000 June 13, 1999
----------------- ----------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET SALES $ 374 100.0 % $ 336 100.0 % $ 727 100.0 % $ 665 100.0 %
COSTS AND EXPENSES:
Cost of sales 90 24.1 % 83 24.6 % 175 24.1 % 162 24.4 %
Restaurant operating expenses:
Labor 117 31.4 % 107 31.8 % 231 31.8 % 216 32.5 %
Occupancy and other 106 28.1 % 101 30.4 % 207 28.4 % 207 31.0 %
Depreciation and amortization 18 4.8 % 16 4.8 % 35 4.8 % 33 5.0 %
----------------- ----------------- ------------------ ----------------
Total costs and expenses 331 88.4 % 307 91.5 % 648 89.1 % 618 92.9 %
----------------- ----------------- ------------------ ----------------
RESTAURANT OPERATING INCOME $ 43 11.6 % $ 29 8.5 % $ 79 10.9 % $ 47 7.1 %
================= ================= ================== ================
Average Fresh Choice restaurants open 48.0 51.0 48.1 51.0
========== ========== =========== ==========
</TABLE>
RESULTS OF OPERATIONS: TWELVE WEEKS ENDED JUNE 11, 2000
COMPARED TO TWELVE WEEKS ENDED JUNE 13, 1999
NET SALES. Net sales for the quarter ended June 11, 2000 were
$18,184,000, an increase of $1,043,000, or 6.1%, from sales of $17,141,000 for
the quarter ended June 13, 1999. The primary components of the net increase in
sales were:
<TABLE>
<S> <C>
Increase in comparable store sales $ 1,482,000
Incremental sales from new restaurants 209,000
Absence of sales from closed restaurants (648,000)
----------------
$ 1,043,000
================
</TABLE>
The Company operated an average of 49.8 restaurants in the
twelve weeks ended June 11, 2000, opening one Fresh Choice Express during the
quarter, compared to 51 restaurants in the twelve weeks ended June 13, 1999.
Sales at the Company's 48 comparable stores, which include restaurants open at
least 18 months, increased 9.0% in the second quarter of 2000 versus the second
quarter of 1999. Comparable store guest counts increased 11.8% in the second
quarter, while the comparable store average check decreased 2.5% to $7.24,
reflecting increased coupon redemptions.
Net sales per Fresh Choice restaurant averaged $374,000 in the
second quarter of 2000, an increase of 11.3% over net sales per restaurant of
$336,000 in the second 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 second quarter of 2000 compared to 24.6% in the second
quarter of 1999, a decrease of 0.4% 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 second quarter of 2000
compared to 62.2% of sales in the second quarter of 1999, a decrease of 2.8% of
sales.
14
<PAGE>
Labor costs were 31.5% of sales for the second quarter of 2000
compared to 31.8% of sales in the second quarter 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 27.9% of sales in the second
quarter of 2000 compared to 30.4% of sales in the second quarter of 1999, a
decrease of 2.5% of sales. The decline is primarily the result of a reduction in
property taxes, utilities and training expenditures, and higher average sales on
these mostly fixed costs.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization
expenses were 4.9% of sales in the second quarter of 2000 an increase of 0.1% of
sales from the second 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 8.1% of sales in the second quarter of 2000 compared to 7.0% of
sales in the second quarter of 1999. The increase is due primarily to increased
accruals for expected incentive payouts and increased legal and litigation
expenses in the second quarter of 2000.
RESTRUCTURING AND ASSET IMPAIRMENT EXPENSES. During the twelve
weeks ended June 11, 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 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 $237,000 at June 11, 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. As of July 10, 2000, both of these restaurants had been closed. In
addition, 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 - 237
--------- ------------ ----------
$ 237 $ (245) $ (8)
========= ============ ==========
</TABLE>
INTEREST EXPENSE, NET. Interest expense was $62,000 in the
second quarter of 2000 compared to $100,000 in the second 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 second quarter
of 2000 due to higher interest earned on its average cash balances.
INCOME TAXES. The Company recorded an income tax provision for
the twelve weeks ended June 11, 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 second 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: TWENTY-FOUR WEEKS ENDED JUNE 11,2000
COMPARED TO TWENTY-FOUR WEEKS ENDED JUNE 13, 1999
NET SALES. Net sales for the twenty-four weeks ended June 11,
2000 (first half of 2000) were $35,311,000, an increase of $1,379,000, or 4.1%,
from sales of $33,932,000 for the twenty-four weeks ended June 13, 1999 (first
half of 1999). The primary components of the net change in sales were:
<TABLE>
<S> <C>
Increase in comparable store sales $ 2,263,000
Incremental sales from new restaurants 325,000
Absence of sales from closed restaurants (1,209,000)
----------------
$ 1,379,000
================
</TABLE>
The Company operated an average of 49.5 restaurants in the first
half of 2000 compared to 51 restaurants in the first half of 1999. Sales at the
Company's 47 comparable stores, which include restaurants open at least 18
months, increased 7.1% in the first half of 2000 versus the first half of 1999.
Comparable store guest counts increased 9.0%, while the comparable store average
check decreased 1.8% to $7.21, reflecting increased coupon redemption.
Net sales per Fresh Choice restaurant averaged $727,000 in the
first half of 2000, an increase of 9.3% over net sales per restaurant of
$665,000 in the first half 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 half of 2000 compared to 24.4% in the first half 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 60.2% of sales in the first half of 2000
compared to 63.5% of sales in the first half of 1999, a decrease of 3.3% of
sales.
Labor costs were 31.9% of sales in the first half of 2000
compared to 32.5% in the first half of 1999, a decrease of 0.6% 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 28.3% in the first half of 2000
compared to 31.0% in the first half of 1999, a decrease of 2.7% of sales. The
decline is primarily a result of a reduction in marketing and promotional costs
and higher average sales on these mostly fixed costs.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization
expenses were 4.9% of sales in the first half of 2000 compared to 4.8% of sales
in the first half 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 8.0% of sales in the first half of 2000 compared to 7.4% of sales
in the first half of 1999. The increase is due primarily to increased accruals
for expected incentive payouts and increased legal and litigation expenses.
RESTRUCTURING AND ASSET IMPAIRMENT EXPENSE. During the
twenty-four weeks ended June 11, 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 twenty-four 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 $237,000 at June 11,
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
16
<PAGE>
costs for one other restaurant whose lease expired in the third quarter of 2000.
As of July 10, 2000, both of these restaurants had been closed. In addition, 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 - 237
--------- ------------ ----------
$ 237 $ (245) $ (8)
========= ============ ==========
</TABLE>
INTEREST EXPENSE, NET. Interest expense was $136,000 in the
first half of 2000 compared to $195,000 in the first half 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 half of 2000
due to higher interest earned on its average cash balances.
INCOME TAXES. The Company recorded an income tax provision for
the first half 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. The Company recorded no income tax benefit for its
operating loss during the first half of 1999 due to valuation allowances against
its net deferred tax assets. 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 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 June 11, 2000, the fair value of the
Company's borrowings would not be materially affected as borrowings are
primarily subject to variable interest rates.
17
<PAGE>
PART II. OTHER INFORMATION
<TABLE>
<CAPTION>
<S> <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
</TABLE>
The Company held its Annual Meeting of Stockholders on May 18,
2000. The stockholders voted on proposals on:
(1) The election of two Class II directors to hold office for
a three-year term and until their respective successors are elected and
qualified. The proposal was approved by the following vote:
<TABLE>
<CAPTION>
Nominee In Favor Withheld
------- -------- --------
<S> <C> <C>
Carl R. Hays 5,000,947 29,538
Charles A. Lynch 4,998,824 31,661
</TABLE>
(2) The appointment of Deloitte & Touche LLP as the Company's
independent accountants for the fiscal year ending December 31, 2000. The
proposal was approved by the following vote:
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
4,998,855 9,965 21,665
</TABLE>
ITEM 5 - OTHER INFORMATION Not Applicable.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The exhibits listed in the accompanying index to Form 10-Q
Exhibits are filed or incorporated by reference as part of this report.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the
quarter ended June 11, 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: July 25, 2000
19
<PAGE>
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
</TABLE>
20
<PAGE>
INDEX TO FORM 10-Q EXHIBITS continued
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--------------------------------------------------------------------------------
<S> <C> <C>
10.15 (5) Amendment No. 3 dated April 27, 1994 to the Business
Loan Agreement dated September 3, 1993
10.16 (6) Loan and Security Agreement dated December 20, 1995 with
Silicon Valley Bank
10.17 (6) Third Party Security agreement dated December 20, 1995
between Silicon Valley Bank and Moffett Design
Corporation
10.18 (6) Warrant to Purchase up to 75,000 Shares of the Company's
Common Stock issued to Silicon Valley Bank on
December 20, 1995
10.19 (6) Common Stock Purchase Warrant to Purchase 100,000 Shares
of the Company's Common Stock issued to Bain &
Company, dated December 15, 1995
10.20 (6) (3) Employment Offer Letter to Robert Ferngren dated
November 9, 1995
10.21 (9) (3) Amendment dated July 29, 1996 to Employment Offer Letter
to Robert Ferngren
10.22 (10) (3) Severance Agreement with Charles A. Lynch dated
July 18, 1996
10.23 (10)(3) Severance Agreement with David Anderson dated
July 18, 1996
10.24 (10)(3) Severance Agreement with Tim G. O'Shea dated
July 18, 1996
10.25 (10)(3) Severance Agreement with Joan M. Miller dated
July 18, 1996
10.26 (11)(3) Employment Offer Letter to David E. Pertl dated
January 24, 1997
10.27 (11)(3) Employment Offer Letter to Everett F. Jefferson dated
January 30, 1997
10.28 (11)(3) Amendment to Employment Offer Letter to Everett F.
Jefferson dated February 10, 1997
10.29 (11) Loan Modification Agreement dated November 27, 1996 with
Silicon Valley Bank
10.30 (11)(3) Severance Agreement with Tina Freedman dated
March 13, 1997
10.31 (12) Agreement of Sale and Purchase dated April 2, 1997 with
RUI One Corp.
10.32 (12) Amendment to Loan and Security Agreement dated July 9,
1997 with Silicon Valley Bank
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
