SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

 

FORM 10-Q

(Mark One)

 

Commission file number 0-20792

 

FRESH CHOICE, INC.
(Exact name of registrant as specified in its charter)

 

Registrant’s telephone number, including area code:                                                           (408) 776-0799

 

 

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.

ý    Yes             o     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.

o    Yes             o    No

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

The number of shares of Common Stock, $.001 par value, outstanding as of October 1, 2002 was 5,939,146.

 

1

 

 

FRESH CHOICE, INC.

 

INDEX

 

 

 

PART I - FINANCIAL INFORMATION

 

Item 1 - Financial Statements
		Condensed Consolidated Balance Sheets at September 8, 2002 and December 30, 2001
		Condensed Consolidated Statements of Income for the Twelve and Thirty-Six Weeks ended September 8, 2002 and September 9, 2001
		Condensed Consolidated Statements of Cash Flows for the Thirty-Six Weeks ended September 8, 2002 and September 9, 2001
		Notes to Condensed Consolidated Financial Statements
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
Item 4- Controls and Procedures
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Item 2 - Changes in Securities
Item 3 - Defaults Upon Senior Securities
Item 4 - Submission of Matters to a Vote of Security Holders
Item 5 - Other Information
Item 6 - Exhibits and Reports on Form 8-K
SIGNATURES
CERTIFICATION OF PERIODIC REPORT
INDEX TO FORM 10-Q EXHIBITS

 

 

2

 

PART I.  FINANCIAL INFORMATION

 

Item 1 - Financial Statements

 

FRESH CHOICE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)

 

		September 8,			December 30,
		2002			2001
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	4,313		$	4,368
Receivables		596			224
Inventories		478			404
Prepaid expenses and other current assets		626			1,202
Total current assets		6,013			6,198
PROPERTY AND EQUIPMENT, net		30,526			27,717
LEASE ACQUISITION COSTS, net		243			286
DEPOSITS AND OTHER ASSETS		672			639
TOTAL ASSETS		$	37,454		$	34,840
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	2,889		$	2,434
Accrued salaries and wages		1,792			1,523
Sales tax payable		823			582
Other accrued expenses		1,954			1,808
Current portion of long-term obligations		594			567
Total current liabilities		8,052			6,914
CAPITAL LEASE OBLIGATIONS		1,047			484
LONG-TERM DEBT		2,081			2,173
OTHER LONG-TERM LIABILITIES		1,721			2,010
Total liabilities		12,901			11,581
STOCKHOLDERS’ EQUITY:
Convertible preferred stock, $.001 par value; 3.5 million shares authorized; shares outstanding:  2002 and 2001 — 1,187,906; liquidation preference of $6.70 per share		5,175			5,175
Common stock — $.001 par value; 15 million shares authorized; shares outstanding: 2002 — 5,939,146;  2001 — 5,906,965		42,599			42,538
Accumulated deficit		(23,221		)	(24,454		)
Total stockholders’ equity		24,553			23,259
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	37,454		$	34,840

 

The December 30, 2001 amounts are derived from the Company’s audited financial statements.

See accompanying notes to condensed consolidated financial statements.

 

 

3

 

FRESH CHOICE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)

 

		Twelve Weeks Ended						Thirty-Six Weeks Ended
		September 8, 2002			September 9, 2001			September 8, 2002			September 9, 2001
NET SALES		$	18,738		$	18,343		$	53,693		$	54,143
COSTS AND EXPENSES:
Cost of sales		4,180			4,032			11,955			12,300
Restaurant operating expenses:
Labor		5,894			5,586			17,327			16,935
Occupancy and other		5,633			5,265			16,356			15,650
Depreciation and amortization		758			762			2,296			2,350
General and administrative expenses		1,339			1,520			4,050			4,588
Restaurant opening costs		162			7			249			13
Total costs and expenses		17,966			17,172			52,233			51,836
OPERATING INCOME		772			1,171			1,460			2,307
Interest income		16			33			41			110
Interest expense		(61		)	(128		)	(179		)	(316		)
Interest expense, net		(45		)	(95		)	(138		)	(206		)
INCOME BEFORE INCOME TAXES		727			1,076			1,322			2,101
Provision for income taxes		81			33			89			69
NET INCOME		$	646		$	1,043		$	1,233		$	2,032
Basic net income per common share		$	0.11		$	0.18		$	0.21		$	0.35
Shares used in computing basic per share amounts		5,939			5,873			5,922			5,850
Diluted net income per common share		$	0.09		$	0.15		$	0.17		$	0.29
Shares used in computing diluted per share amounts		7,173			7,166			7,174			7,124

 

See accompanying notes to condensed consolidated financial statements.

 

 

4

 

 

FRESH CHOICE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

		Thirty-Six Weeks Ended
		September 8, 2002			September 9, 2001
OPERATING ACTIVITIES:
Net income		$	1,233		$	2,032
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,435			2,510
Issuance of stock options for consulting services		4			5
Loss on disposal of property and equipment		90			46
Deferred rent		(289		)	(303		)
Change in operating assets and liabilities:
Receivables		(372		)	36
Inventories		(82		)	(72		)
Prepaid expenses and other current assets		576			578
Accounts payable		455			(52		)
Accrued salaries and wages		269			362
Other accrued expenses		390			(144		)
Store closure reserve		(3		)	(364		)
Net cash provided by operating activities		4,706			4,634
INVESTING ACTIVITIES:
Capital expenditures		(4,733		)	(1,719		)
Proceeds from disposal of property and equipment		24			2
Deposits and other assets		(42		)	(40		)
Net cash used in investing activities		(4,751		)	(1,757		)
FINANCING ACTIVITIES:
Common stock sales		57			63
Long term debt — borrowings		—			2,200
Long term debt — repayments		(87		)	(1,200		)
Capital lease obligations — proceeds		490			—
Capital lease obligations — repayments		(470		)	(374		)
Net cash provided by (used in) financing activities		(10		)	689
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(55		)	3,566
CASH AND CASH EQUIVALENTS:
Beginning of period		4,368			2,918
End of period		$	4,313		$	6,484
Noncash Investing and Financing Activities — Equipment acquired under capital leases		$	565		$	—
Supplemental Disclosure of Cash Flow Information — Cash paid during the period for interest		$	183		$	177

 

See accompanying notes to condensed consolidated financial statements

 

 

5

 

 

FRESH CHOICE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Twelve Weeks and Thirty-Six Weeks Ended September 8, 2002 and September 9, 2001

(Unaudited)

 

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 30, 2001.

 

2.           NET INCOME PER SHARE

 

                            Basic earnings per share (“EPS”) excludes the effect of 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 potential dilutive shares using the treasury stock method and converts preferred stock into potential dilutive shares using the “if converted” method.

 

                            A reconciliation of the components of basic and diluted net income per share follows:

 

		Twelve Weeks Ended						Thirty-Six Weeks Ended
		September 8, 2002			September 9, 2001			September 8, 2002			September 9, 2001
(In thousands, except per share data)
Net income		$	646		$	1,043		$	1,233		$	2,032
Shares
Average common shares outstanding		5,939			5,873			5,922			5,850
Stock options		46			105			64			86
Convertible preferred stock		1,188			1,188			1,188			1,188
Total shares and diluted shares		7,173			7,166			7,174			7,124
Basic net income per common share		$	0.11		$	0.18		$	0.21		$	0.35
Diluted net income per common share		$	0.09		$	0.15		$	0.17		$	0.29

 

 

                            The following table presents the total dilutive securities which the Company excluded for each period presented from its diluted EPS computation because the exercise price of the securities exceeded the average fair value of the Company’s common stock:

 

		Twelve Weeks Ended				Thirty-Six Weeks Ended
		September 8, 2002		September 9, 2001		September 8, 2002		September 9, 2001
(In thousands)
Potential Dilutive Securities
Stock options excluded		1,024		580		957		768
Stock warrants		100		100		100		100

 

 

6

 

 

3.           OTHER ACCRUED EXPENSES

 

                            The components of other accrued expenses are as follows:

 

 

 

4.           OTHER LONG-TERM LIABILITIES

 

                            The components of other long-term liabilities are as follows:

 

 

 

5.           BORROWING ARRANGEMENTS

 

                            The Company has a $2,200,000 loan agreement (the “Loan”), with a commercial bank.   Under the terms of the Loan the Company issued a promissory note (the “Note”) in the amount of $2,200,000.   The Note is secured by a deed of trust on certain Company-owned real estate.  The Note bears interest at the prime rate (4.75% at September 8, 2002) plus 0.625%.  The Note has a fifteen-year amortization period and matures after 84 monthly payments of principal and interest.  All unpaid principal and interest shall be due and payable on the Note’s maturity date of September 2, 2008.

 

                            On September 8, 2002 the Company had $2,091,000 of debt outstanding under the Loan described above.  At September 8, 2002 $1,968,000 was included in long-term debt and $123,000 was included in the current portion of long-term obligations.  The deed of trust securing the Note requires the Company to maintain a minimum debt service coverage ratio and to maintain a minimum tangible net worth.

 

                            On June 3, 2002 the Company renegotiated its $2,000,000 revolving line of credit (the  “Agreement”) with its bank, which extends the Agreement’s expiration date to June 3, 2004.  Borrowings bear interest at the prime rate (4.75% at September 8, 2002) plus 0.5%.  Borrowings under the Agreement are collateralized by the Company’s personal property.  On September 8, 2002 the Company had no borrowings under the Agreement.

 

                            On September 8, 2002 the Company had a commitment from the bank, separate from the Agreement, which makes $956,000 available to the Company in support of outstanding letters of credit.  This commitment expires March 28, 2003.

 

7

 

                            The Agreement requires the Company to maintain (i) a minimum tangible net worth, (ii) a minimum debt service coverage ratio and (iii) a maximum debt to tangible net worth ratio.  The Agreement also limits the Company’s fixed asset acquisitions and requires approval before paying dividends or repurchasing outstanding shares of stock.  In addition the Agreement requires the outstanding principal balance of the loan to be zero for at least one period of thirty consecutive days during the term of the loan.

 

                            The Company has obtained commitments for $6.1 million of capital equipment lease financing, of which the Company has utilized $1,489,000 through September 8, 2002.  On September 28, 2002 the Company utilized an additional $156,000 of the capital equipment lease financing commitment.  The Company intends to utilize the remaining commitments to fund restaurant equipment primarily in its new restaurants.  The Company may seek additional debt financing to provide greater flexibility as it continues restaurant expansion.

 

 

6.           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 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.  In March, 2002 such holder notified the Company that it had no intention, at that time, of exercising such right; however, it has not waived any of its rights under the agreement.  As of September 8, 2002 management is not aware of any change in the shareholder’s intention.

 

7.           INCOME TAXES

 

              The Company recorded an income tax provision for the twelve and thirty-six weeks ended September 8, 2002 primarily due to an increase in estimated state income taxes payable for California state income taxes.  In September 2002, the state of California enacted a law suspending the use of net operating loss carryforwards that could be used to offset taxable income in the determination of state income taxes for the 2002 and 2003 tax years.  The Company’s net deferred tax assets consist primarily of the tax benefit related to operating loss carryforwards, alternative minimum tax credits and asset write-downs, in connection with store closure reserves, that are not deductible for tax purposes until the assets are disposed.  The Company will continue to provide a full valuation allowance for its deferred tax assets until it becomes more likely than not, in management’s assessment, that any portion of the Company’s deferred tax assets will be realized.

 

8.           RECENTLY ISSUED ACCOUNTING STANDARDS

 

                            In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”.  SFAS No. 142 requires that an intangible asset that is acquired shall be initially recognized and measured based on its fair value. The statement also provides that intangible assets shall be tested for impairment annually, or more frequently if circumstances indicate potential impairment, through a comparison of fair value to its carrying amount. SFAS No. 142 became effective for fiscal periods beginning after December 15, 2001.

 

 

8

 

                            In accordance with SFAS No. 142 and effective December 31, 2001 (fiscal year 2002), the Company discontinued the amortization of certain intangible assets that were defined by the Company to have an indefinite life.  The Company also increased the amortization rates of certain other intangible assets to reflect a shorter useful life of these assets.  Had SFAS No. 142 been in effect during the thirty-six weeks ended September 9, 2001, previously reported net income would have increased by $13,000 and basic and diluted earnings per share would have been unchanged.

 

                            In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” that replaces SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.”  SFAS No. 144 requires that long-lived assets to be disposed of by sale, including those of discontinued operations, be measured at the lower of carrying amount or fair value less cost to sell.  Discontinued operations will no longer be measured at net realizable value or include operating losses that have not yet been incurred.  Except for those provisions of this accounting standard whose implementation extends to the end of 2003, the Company has adopted SFAS No. 144 as of December 31, 2001 (fiscal year 2002).  As the provisions were generally to be applied prospectively, the adoption did not have a material impact on the Company’s consolidated financial statements.  In addition, the adoption of the remaining provisions is not expected to have a material impact on the Company’s consolidated financial statements.

 

                            In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” which addresses accounting for restructuring and similar costs.  SFAS No. 146 supercedes previous accounting guidance, principally Emerging Issues Task Force Issue (“EITF”) No. 94-3.  The Company will adopt the provisions of SFAS No. 146 for restructuring activities initiated after December 29, 2002.  SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred.  Under Issue 94-3, a liability for an exit cost was recognized at the date of the Company’s commitment to an exit plan.  SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value.  Accordingly, SFAS No. 146 may affect the timing of recognizing future restructuring costs as well as the amounts recognized.  Management does not expect the adoption of SFAS No. 146 will have a material impact on the Company’s consolidated financial statements.

 

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

                            The following discussion is intended to highlight significant changes in the Company’s financial position and results of operations for the twelve weeks ended and thirty-six weeks ended September 8, 2002.  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 30, 2001 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 30, 2001.

 

                            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 under the heading “Business Risks”.  In particular, the Company’s plans to open new restaurants could be affected by the Company’s ability to locate suitable restaurant sites, construct new restaurants in a timely manner and obtain additional financing.

 

                            Forward-looking statements reflect the expectations of the Company at the time they are made, and investors should rely on them only as expressions of opinion about what may happen in the future and only at the time they are made.  The Company undertakes no obligation to update any forward-looking statements.  Although the Company believes it has an appropriate business strategy and the resources necessary for its operations, future revenue and margin trends cannot be reliably predicted and the Company may alter its business strategies to address changing conditions.

 

9

 

 

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 trade receivables or inventory and receives trade credit based upon negotiated terms in purchasing food and supplies.

 

                            The Company has a $2,200,000 loan agreement (the “Loan”), with a commercial bank.   Under the terms of the Loan the Company issued a promissory note (the “Note”) in the amount of $2,200,000.   The Note is secured by a deed of trust on certain Company-owned real estate.  The Note bears interest at the prime rate (4.75% at September 8, 2002) plus 0.625%.  The Note has a fifteen-year amortization period and matures after 84 monthly payments of principal and interest.  All unpaid principal and interest shall be due and payable on the Note’s maturity date of September 2, 2008.

 

                            On June 3, 2002 the Company renegotiated its $2,000,000 revolving line of credit (the  “Agreement”) with its bank, which extends the Agreement’s expiration date to June 3, 2004.  Borrowings bear interest at the prime rate (4.75% at September 8, 2002) plus 0.5%.  Borrowings under the Agreement are collateralized by the Company’s personal property.  On September 8, 2002 the Company had no borrowings under the Agreement.

 

                            On September 8, 2002 the Company had a commitment from the bank, separate from the Agreement, which makes $956,000 available to the Company in support of outstanding letters of credit.  This commitment expires March 28, 2003.

 

                            The Agreement requires the Company to maintain (i) a minimum tangible net worth, (ii) a minimum debt service coverage ratio and (iii) a maximum debt to tangible net worth ratio.  The Agreement also limits the Company’s fixed asset acquisitions and requires approval before paying dividends or repurchasing outstanding shares of stock.  In addition the Agreement requires the outstanding principal balance of the loan to be zero for at least one period of thirty consecutive days during the term of the loan.

 

                            During the first thirty-six weeks of 2002 the Company entered into equipment leases which total $1,055,000 of which $207,000 was included in the current portion of long-term obligations.  This and other capital lease obligations at September 8, 2002 totaled $1,517,000 of which $470,000 was included in current portion of long-term debt.  Long-Term Debt also included a $114,000 note for site construction costs of which $1,000 was included in the current portion of long-term obligations.

 

                            Operating activities for the first thirty-six weeks of 2002 provided $4.7 million of cash flows.  During the same period, the Company invested $5.3 million in property and equipment, which includes the equipment under capital leases.

 

                            The Company’s contractual obligations as of September 8, 2002 are as follows:

 

(In thousands)
		Total			Remainder of 2002			2003 through 2005			2006 through 2007			2008 and thereafter
Secured Note		2,091			$	30		$	397		$	303		$	1,361
Capital Lease Obligations		1,517			149			1,066			302			—
Other Note Payable		114			1			4			3			106
Operating Leases		116,701			2,244			24,467			15,267			74,723
Total Contractual Cash Obligations		$	120,423		$	2,424		$	25,934		$	15,875		$	76,190

 

 

10

 

 

                            On September 28, 2002 the Company entered into a capital lease for equipment that requires minimum monthly payments of $3,787 through 2006.

 

                            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 $5.5 million 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.  In March 2002 such holder notified the Company that it had no intention, at that time, of exercising such right; however, the holder 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 plans to open a total of six new Fresh Choice restaurants in 2002, primarily in California.  As of October 1, 2002, three new Fresh Choice restaurants have opened in fiscal 2002.  The Company currently has signed leases for five additional Fresh Choice restaurants.  The total leasehold improvements and equipment costs for these five locations is estimated to be approximately $6.0 million, of which approximately $1.3 million has been expended through the first thirty-six weeks of 2002.

 

                            The Company continues to look for sites, primarily in its core Northern California markets as well as in Southern California, for expansion beyond 2002.  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 intends to finance its operating cash requirements and fiscal 2002 capital requirements through existing cash balances, cash provided by operations, its borrowing arrangements and existing equipment lease financing commitment.  The Company has obtained commitments for $6.1 million of capital equipment lease financing, of which the Company has utilized $1,489,000 through September 8, 2002.  The Company intends to utilize the remaining commitments to fund restaurant equipment primarily in its new restaurants.  The Company may seek additional debt financing to provide greater flexibility as it continues restaurant expansion in 2003 and beyond.

 

                            The Company’s ability to continue an expansion strategy will depend upon a variety of factors, including, maintaining a sufficient cash flow from operations and its ability to obtain additional funds.  The Company believes its near-term capital requirements can be met through its existing cash balances, cash provided by operations, its borrowing arrangements and additional equipment lease financing.  However, the Company’s operating cash flow is impacted by the Company’s comparable store sales increases or decreases.  In 2001 comparable store sales, excluding the extra 53^rd week of sales in 2000, declined 1.2% and comparable store sales also declined 3.6% in the first thirty-six weeks of 2002.  The Company expects comparable store sales to improve, but there can be no assurance that comparable store sales will improve.  In addition, the Company will be seeking additional financing to provide greater flexibility.  There can be no assurance that the Company will be able to obtain additional financing when needed on acceptable terms or at all.  To the extent operating cash flow declines, or financing cannot be obtained, the Company intends to reduce its expansion plans.

 

 

11

 

 

 

Impact of Inflation

 

                            Many of the Company’s employees are paid hourly rates related to the federal and state minimum wage laws.  Accordingly, increases in the minimum wage could materially increase the Company’s labor costs.  In addition, the cost of food commodities utilized by the Company is 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 Recent Declines in Comparable Store Sales.  Our quarterly and annual operating results and same store sales have fluctuated significantly in the past and are likely to fluctuate significantly in the future.  The Company reported its first operating loss in the fourth quarter of 1994, and reported operating losses in three of the following four years.  Although the Company has reported a profit for each of the last three years, there can be no assurance that the Company will continue to be profitable over the long or short term.

 

From the third quarter of fiscal 1994 through the end of 1998, the Company reported quarterly comparable store sales declines.  The Company reported positive comparable store sales in each quarter of the following two years; however, the Company’s comparable store sales decreased for fiscal year 2001 and for the first thirty-six weeks of 2002.  There can be no assurance that comparable store sales declines experienced in 2001 and the first thirty-six weeks of 2002 will not continue to decline further.

 

                          Expansion.  The Company believes its growth depends to a significant degree on its ability to open new restaurants and to operate such restaurants profitably.  The Company resumed its expansion with one new Fresh Choice restaurant opening in 2001 and another three opening through October 1, 2002.  The Company plans to open another three Fresh Choice restaurants in 2002 in addition to the three restaurants already opened in 2002.  There can be no assurance that the opened restaurants or future restaurants will be successful.  The Company’s ability to successfully implement an expansion strategy will depend upon a variety of factors, many of which may be beyond the Company’s control, including the Company’s ability to locate suitable restaurant locations, negotiate acceptable lease terms, obtain required government approvals, construct new restaurants in a timely manner, attract, train and retain qualified and experienced personnel and management, operate its restaurants profitably and obtain additional capital to finance expansion and  equipment costs, as well as general economic conditions and the degree of competition in the particular market.

 

                          The Company’s expansion plans may include entering new geographic regions in which the Company has no previous operating experience.  There can be no assurance that the Fresh Choice concept will be successful in regions outside of California, Texas or Washington where tastes and restaurant preferences may be different.  In addition, the Company expects intense competition for restaurant sites, which may result in the Company having difficulty leasing desirable sites on terms that are acceptable to the Company. The Company expects that in some cases competitors may be willing to pay more than the Company for sites.  These conditions may make it difficult for the Company to achieve its store growth objectives.

 

                          Lease Renewals.  As existing restaurant leases expire, the Company must negotiate new leases or lease extensions in order to continue operations at existing restaurants.  There can be no assurance that the Company will be able to renew these leases on favorable terms or at all.  If the Company is unable to obtain favorable terms on new leases or extensions on existing leases, it would increase costs and reduce the Company’s operating margins.  Moreover, if the Company is unable to renew existing leases and is unable to find suitable alternate locations, the Company’s revenue and operating results would be adversely affected.

 

 

12

 

 

                          Geographic Concentration.  As of October 1, 2002, 40 of the Company’s 53 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.  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 or increased utility costs in the region or negative publicity relating to an individual Company restaurant could have a more pronounced adverse effect on results of operations than if the Company’s restaurants were more broadly dispersed.

 

                          Sensitivity to Economic Conditions and Consumer Spending.  The restaurant industry historically has been subject to substantial cyclical variation.  The California economy has slowed since the events of September 11, 2001 and there has been a downturn in the general economy and a decline in consumer spending in the restaurant industry.  A continued decline could have a material adverse effect on the Company’s financial performance as restaurant sales tend to decline during recessionary periods.  A prolonged economic downturn could alter customers’ purchasing decisions, which most likely would have a material adverse impact on the Company’s revenue and results of operations.

 

                          Volatility of Stock Price.  The market price of the Company’s Common Stock has fluctuated substantially since the initial public offering of the Common Stock in December 1992. Changes in general conditions in the economy, the financial markets or the restaurant industry, natural disasters or other developments affecting the Company or its competitors could cause the market price of the Company’s Common Stock to fluctuate substantially.  In addition, in recent years the stock market has experienced extreme price and volume fluctuations.  This volatility has had significant effect on the market prices of securities issued by many companies, including the Company, for reasons sometimes unrelated to the operating performance of these companies.  Any shortfall in the Company’s net sales or earnings from levels expected by securities analysts could have an immediate and significant adverse effect on the trading price of the Company’s Common Stock in any given period.  Additionally, such shortfalls may not become apparent until late in the fiscal quarter, which could result in an even more immediate and significant adverse effect on the trading price of the Company’s Common Stock.

 

                          Seasonality and Quarterly Fluctuations.  The Company’s restaurants have typically experienced seasonal fluctuations, as a disproportionate amount of net sales and net income are generally realized in the second and third fiscal quarters.  In addition, the Company’s quarterly results of operations have been, and may continue to be, materially impacted by the timing of new restaurant openings and restaurant closings.  The fourth quarter normally includes 16 weeks of operations as compared with 12 weeks for each of the three prior quarters.  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 can be expected to decline in the first quarter of each fiscal year in comparison to the fourth quarter of the prior fiscal year

 

                          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.

 

 

13

 

 

                          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. In addition the Company expects intense competition for restaurant sites, which may result in the Company having difficulty leasing desirable sites on terms that are acceptable to the Company. The Company expects that in some cases competitors may be willing to pay more than the Company for sites.

 

                          Ability to Obtain Additional Financing.  The Company resumed its restaurant expansion in 2001. 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, its borrowing arrangements and additional equipment lease financing.  The Company may seek additional financing to provide greater flexibility.  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 (“Crescent”) 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 a specified earnings target 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

 

 

Critical Accounting Policies

 

Our accounting policies are more fully described in Note 1 of the Company’s audited December 30, 2001 financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities as of the dates and for the periods presented.   Management believes the following accounting policies, among others, represent its more critical or complex estimates and assumptions used in preparation of its consolidated financial statements.

 

                            The Company evaluates its estimates and assumptions on an on-going basis and believes its estimates and assumptions are reasonable based on historical experience and other factors.  However, actual results could differ from those estimates and these differences could be material to the consolidated financial statements.  The accounting policies management has identified as critical or complex accounting policies are described below.

 

                            Income taxes.  The Company has provided valuation allowances against its deferred net tax assets based on management’s most recent assessment that it is not deemed more likely than not that the deferred tax assets will be realized.  If future assessments by management were to determine that the Company would be able to realize its deferred tax assets in excess of their net recorded amounts, an adjustment to the deferred tax assets could result in an increase in income in the period such determination was made.

 

 

14

 

 

Long-lived assets impairment.  The Company records an asset impairment charge when events or changes in assumptions indicate that the carrying amount of a long-lived asset may not be recoverable based on estimated future cash flows.  At least annually the Company performs an impairment review of its investment in property and equipment for all of its restaurants.  If management decided that a restaurant’s long-lived assets were not recoverable based on estimated future cash flows, an impairment charge would be recorded in the period such determination was made.

 

                            Property and equipment.  Property and equipment are stated at cost.  Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets which range from 5 to 30 years or the lease term of a restaurant including option periods, as appropriate, not to exceed 25 years.

 

                            Stock-based compensation.  The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.”  Accordingly, no compensation expense has been recognized in the financial statements for employee stock arrangements.  The Company accounts for stock-based awards to non employees in accordance with SFAS No. 123 “Accounting for Stock-Based Compensation” and EITF 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”.

 

                            Workers’ Compensation Claims Accrual.  The Company records estimates for workers’ compensation claims under its workers’ compensation program.  Estimated reserves are based on available historical claim settlement data for reported claims.  If a greater number of claims occur in comparison to the amount of claims estimated or medical costs increase beyond anticipated costs, additional charges may be required in the period such determination was made.

 

 

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:

 

		Twelve Weeks Ended										Thirty-Six Weeks Ended
(Dollars in thousands)		September 8, 2002					September 9, 2001					September 8, 2002							September 9, 2001
NET SALES		$	18,738		100.0	%	$	18,343		100.0	%	$	53,693			100.0	%		$	54,143		100.0		%
COSTS AND EXPENSES:
Cost of sales		4,180			22.3	%	4,032			22.0	%	11,955				22.3	%		12,300				22.7	%
Restaurant operating expenses:
Labor		5,894			31.5	%	5,586			30.5	%	17,327				32.3	%		16,935				31.3	%
Occupancy and other		5,633			30.1	%	5,265			28.7	%	16,356				30.5	%		15,650				28.9	%
Depreciation and amortization		758			4.0	%	762			4.1	%	2,296				4.3	%		2,350				4.3	%
General and administrative expenses		1,339			7.1	%	1,520			8.3	%	4,050				7.5	%		4,588				8.5	%
Restaurant opening costs		162			0.9	%	7			—	%	249				0.4	%		13				—	%
Total costs and expenses		17,966			95.9	%	17,172			93.6	%	52,233				97.3	%		51,836				95.7	%
OPERATING INCOME		772			4.1	%	1,171			6.4	%	1,460				2.7	%		2,307				4.3	%
Interest income		16			0.1	%	33			0.2	%	41				—	%		110				0.2	%
Interest expense		(61		)	(0.3	)%	(128		)	(0.7	)%	(179			)	(0.2	)%		(316		)		(0.6	)%
Interest expense, net		(45		)	(0.2	)%	(95		)	(0.5	)%	(138			)	(0.2	)%		(206		)		(0.4	)%
INCOME BEFORE INCOME TAXES		727			3.9	%	1,076			5.9	%	1,322				2.5	%		2,101				3.9	%
Provision for income taxes		81			0.5	%	33			0.2	%	89				0.2	%		69				0.1	%
NET INCOME		$	646		3.4	%	$	1,043		5.7	%	$	1,233			2.3	%		$	2,032			3.8	%
Number of restaurants:
Open at beginning of period		51					49					51							48
Open at end of period		53					49					53							49

 

 

15

 

 

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 Fresh Choice Express restaurants are excluded):

 

AVERAGE FRESH CHOICE RESTAURANTS

 

		Twelve Weeks Ended													Thirty-Six Weeks Ended
(Dollars in thousands)		September 8, 2002					September 9, 2001								September 8, 2002									September 9, 2001
NET SALES		$	385		100.0	%	$	393				100.0		%		$	1,111				100.0		%		$	1,159				100.0		%
COSTS AND EXPENSES:
Cost of sales		85			22.1	%	86				21.8		%		245					22.0		%		261					22.5		%
Restaurant operating expenses:
Labor		121			31.4	%	119				30.3		%		357					32.2		%		361					31.2		%
Occupancy and other		116			30.0	%	113				28.8		%		337					30.4		%		336					29.0		%
Depreciation and amortization		15			3.8	%	16				4.1		%		45					4.1		%		49					4.3		%
Total costs and expenses		337			87.3	%	334				85.0		%		984					88.7		%		1,007					87.0		%
RESTAURANT OPERATING INCOME		$	48		12.7	%	$	59				15.0		%		$	127				11.3		%		$	152				13.0		%
Average Fresh Choice restaurants open		47.7					46.0								47.4									46.0

 

(This table excludes Fresh Choice Express restaurants)

 

 

Results of Operations:  Twelve Weeks Ended September 8, 2002

Compared to Twelve Weeks Ended September 9, 2001

 

                            Net Sales.  Net sales for the twelve weeks ended September 8, 2002 (third quarter of 2002) were $18,738,000, an increase of $395,000, or 2.2%, from sales of $18,343,000 for the twelve weeks ended September 9, 2001 (third quarter of 2001). The primary components of the net increase in sales were:

 

 

 

                            The Company operated an average of 51.7 restaurants in the third quarter of 2002 compared to 49 restaurants in the third quarter of 2001.  Sales at the Company’s 45 comparable Fresh Choice restaurants, which include restaurants open at least 18 months, decreased 1.9% in the third quarter of 2002 versus the third quarter of 2001.  Comparable store guest counts decreased 1.9%, while the comparable store average check increased 0.1% to $7.58, reflecting price increases offset by an increase in discounting.

 

                            Net sales per Fresh Choice restaurant averaged $385,000 in the third quarter of 2002, a decrease of 2.0% over net sales per restaurant of $393,000 in the third quarter of 2001 due primarily to the comparable store sales decreases as noted above.

 

                            Costs and Expenses.  Cost of sales (food and beverage costs) was 22.3% of sales in the third quarter of 2002 compared to 22.0% in the third quarter of 2001.  Food and beverage costs increased as a percentage of sales primarily due to a slightly higher food cost per guest and an average check approximately equal to the prior year.

 

                            Restaurant Operating Expenses.   Restaurant operating expenses (labor, occupancy and other) were 61.6% of sales in the third quarter of 2002 compared to 59.2% of sales in the third quarter of 2001, an increase of 2.4% of sales.

 

 

16

 

                            Labor costs as a percentage of sales were 31.5% for the third quarter of 2002 compared to 30.5% in the third quarter of 2001.  Labor costs, as a percentage of sales, were higher primarily due to lower average restaurant sales as well as a higher average wage.

 

                            Occupancy and other expenses as a percentage of sales were 30.1% for the third quarter of 2002 compared to 28.7% of sales in the third quarter of 2001, an increase of 1.4% of sales.  The increase is due primarily to lower average restaurant sales and higher repair and maintenance expenses.

 

                            Depreciation and Amortization.  Depreciation and amortization expenses were 4.0% of sales in the third quarter of 2002 a decrease of 0.1% of sales from the third quarter of 2001.  The decrease resulted from a declining depreciable asset base for older restaurant equipment.

 

                            General and Administrative Expenses.  General and administrative expenses were 7.1% of sales in the third quarter of 2002 compared to 8.3% of sales in the third quarter of 2001.  The decrease is primarily the result of the Company’s overall efforts to keep these expenses down during the current weak economic environment, lower legal expenses and lower incentive accruals.

 

                            Interest Expense, net.  Interest expense, net was  $45,000 in the third quarter of 2002 compared to $95,000 in the third quarter of 2001. This decrease is due to lower interest rates on borrowings and lower amortized loan fees primarily due to the write-off of $38,000 in unamortized fees during the third quarter of the prior year due to the early payoff of debt.  The decrease was partially offset by lower interest earned on the Company’s 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.

 

                            Income Taxes.  The Company increased its income tax provision in the third quarter of 2002 primarily due to an increase in estimated state income taxes payable for California state income taxes.  In September 2002, the state of California enacted a law suspending the use of net operating loss carryforwards that could be used to offset taxable income in determination of state income taxes for the 2002 and 2003 tax years.  The Company’s net deferred tax assets consist primarily of the tax benefit related to operating loss carryforwards, alternative minimum tax credits and asset write-downs, in connection with store closure reserves, that are not deductible for tax purposes until the assets are disposed.  The Company will continue to provide a full valuation allowance for its deferred tax assets until it becomes more likely than not, in management’s assessment, that any portion of the Company’s deferred tax assets will be realized.

 

 

Results of Operations:  Thirty Six Weeks Ended September 8,2002

Compared to Thirty-Six Weeks Ended September 9, 2001

 

                            Net Sales.  Net sales for the thirty-six weeks ended September 8, 2002 (first three quarters of 2002) were $53,693,000, a decrease of $450,000, or 0.8%, from sales of $54,143,000 for the thirty-six weeks ended September 9, 2001 (first three quarters of 2001). The primary components of the net decrease in sales were:

 

 

 

 

17

 

 

The Company operated an average of 51.4 restaurants in the first three quarters of 2002 compared to 48.9 restaurants in the first three quarters of 2001.  Sales at the Company’s 45 comparable stores, which include restaurants open at least 18 months, decreased 3.6% in the first three quarters of 2002 versus the first three quarters of 2001.  Comparable store guest counts decreased 4.0%, while the comparable store average check increased 0.4% to $7.57, reflecting price increases partially offset by increased discounting.

 

                            Net sales per Fresh Choice restaurant averaged $1,111,000 in the first three quarters of 2002, a decrease of 4.1% from net sales per restaurant of $1,159,000 in the first three quarters of 2001 due primarily to comparable store sales decreases as noted above.

 

                            Costs and Expenses.  Cost of sales (food and beverage costs) was 22.3% of sales in the first three quarters of 2002 compared to 22.7% in the first three quarters of 2001, a decrease of 0.4% of sales.  Food and beverage costs declined as a percentage of sales due to the combined effect of controlling food cost per guest and increases in the average check.

 

                            Restaurant Operating Expenses.   Restaurant operating expenses (labor, occupancy and other) were 62.8% of sales in the first three quarters of 2002 compared to 60.2% of sales in the first three quarters of 2001, an increase of 2.6% of sales.

 

                            Labor costs as a percentage of sales were 32.3% in the first three quarters of 2002 compared to 31.3% in the first three quarters of 2001, an increase of 1.0% of sales.  The labor costs as a percentage of sales were higher primarily due to lower average restaurant sales as well as a higher average wage.

 

                            Occupancy and other expenses as a percentage of sales were 30.5% in the first three quarters of 2002 compared to 28.9% of sales in the first three quarters of 2001, an increase of 1.6% of sales.  The increase is due primarily to lower average restaurant sales and higher repair and maintenance expenses.

 

                            Depreciation and Amortization.  Depreciation and amortization expenses were 4.3% of sales in the first three quarters of 2002 or the same as the first three quarters of 2001.

 

                            General and Administrative Expenses.  General and administrative expenses were 7.5% of sales in the first three quarters of 2002 compared to 8.5% of sales in the first three quarters of 2001.  The decrease is primarily the result of the Company’s overall efforts to keep these expenses down during the current weak economic environment, lower incentive accruals, lower legal expenses, lower recruiting costs and reduced spending on the Company’s annual general manager’s conference.

 

                            Interest Expense, net.  Interest expense was  $138,000 in the first three quarters of 2002 compared to $206,000 in the first three quarters of 2001. This decrease is due primarily to lower interest rates on borrowings and lower amortized loan fees primarily due to the write-off of $38,000 in unamortized fees during the third quarter of the prior year due to the early payoff of debt.  The decrease was partially offset by lower interest earned on the Company’s 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.

 

                            Income Taxes.  The Company increased its income tax provision in the first three quarters of 2002 primarily due to an increase in estimated state income taxes payable for California state income taxes.  In September 2002, the state of California enacted a law suspending the use of net operating loss carryforwards that could be used to offset taxable income in determination of state income taxes for the 2002 and 2003 tax years.  The Company’s net deferred tax assets consist primarily of the tax benefit related to operating loss carryforwards, alternative minimum tax credits and asset write-downs, in connection with store closure reserves, that are not deductible for tax purposes until the assets are disposed.  The Company will continue to provide a full valuation allowance for its deferred tax assets until it becomes more likely than not, in management’s assessment, that any portion of the Company’s deferred tax assets will be realized.

 

18

 

 

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 September 8, 2002, the fair value of the Company’s borrowings would not be materially affected as borrowings are primarily subject to variable interest rates.

 

 

Item 4  — Controls and Procedures

 

                            (a) Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rules 13a-14 promulgated under the Securities and Exchange Act of 1934, as amended, within 90 days of the filing date of this report.  Based on their evaluation, our principal executive officer and principal accounting officer concluded that our disclosure controls and procedures are effective.

 

                            (b) There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced in paragraph (a) above.

 

 

PART II.  OTHER INFORMATION

 

 

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

 

(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 8, 2002.

 

19

 

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 11, 2002

 

 

 

 

 

20

 

CERTIFICATION OF PERIODIC REPORT

 

 

I, Everett F. Jefferson, certify that:

 

1	I have reviewed this quarterly report on Form 10-Q of Fresh Choice, Inc.
2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
	a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
	b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
	c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
	a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6.	The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date: October 11, 2002

 

 

 /S/ Everett F. Jefferson_____________

 Everett F. Jefferson

 President and Chief Executive Officer

 

21

 

I, David E. Pertl, certify that:

 

1.	I have reviewed this quarterly report on Form 10-Q of Fresh Choice, Inc.
2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
	a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
	b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
	c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
	a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6.	The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

  Date: October 11, 2002

 

 

  /S/ David E. Pertl__________________________

  David E. Pertl

  Senior Vice President and Chief Financial Officer

 

 

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INDEX TO FORM 10-Q EXHIBITS

 

Exhibit
No.			Description
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
10.8	(8)		Preferred Stock Purchase Agreement with Crescent Real Estate Equities Limited Partnership dated April 26, 1996
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
10.26	(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
10.34	(13) (3)		Consulting Agreement with Charles A. Lynch dated April 17, 1998
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
10.41	(16) (3)		2001 Home Office Incentive Plan
10.42	(16) (3)		Senior Vice President of Operations 2001 Incentive Plan
10.43	(17) (3)		Amendment to Employment offer letter to David E. Pertl dated August 23, 2001
10.44	(17) (3)		Employment Agreement with Everett F. Jefferson dated October 9, 2001
10.45	(17) (3)		Amended and Restated Form of Severance Agreement with Senior Vice Presidents dated August 14, 2001
10.46	(17) (3)		2001 Employee Stock Purchase Plan

 

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10.47	(17) (3)	Second Amended and Restated 1988 Stock Option Plan as amended through July 12, 2001
10.48	(17)	Promissory Note Secured by Deed of Trust dated August 13, 2001 with Mid-Peninsula Bank
10.49	(17)	Commercial Deed of Trust, Financing Statement, Security Agreement and Fixture Filing dated August 13, 2001 with Mid-Peninsula Bank
10.50	(17)	Revolving Loan Agreement dated October 5, 2001 with Mid-Peninsula Bank
10.51	(17)	Pledge Agreement dated October 5, 2001 with Mid-Peninsula Bank
10.52	(17)	Promissory Note dated October 5, 2001 with Mid Peninsula Bank
10.53	(18) (3)	2002 Home Office Incentive Plan
10.54	(18) (3)	Senior Vice President of Operations 2002 Incentive Plan
10.55	(18) (3)	Non Qualified Deferred Compensation Plan of Fresh Choice, Inc. effective as of December 1, 2001
10.56	(18) (3)	Trust Agreement Under The Non Qualified Deferred Compensation Plan of Fresh Choice, Inc. dated December 17, 2001
10.57	(19)	Letter dated April 25, 2002 amending the Revolving Loan Agreement dated October 5, 2001 with Mid-Peninsula Bank
10.58	(20)	Change in Terms Agreement dated June 3, 2002 amending the Revolving Loan Agreement dated October 5, 2001 with Mid-Peninsula Bank
99		Certification by the Chief Executive Officer and Chief Financial Officer of their responsibility for financial reports.

 

(1)		Incorporated by reference from the Exhibits with corresponding numbers filed with the Company’s Registration Statement on Form S-1 (No. 33-53904) filed October 29, 1992, as amended by Amendment No. 1 to Form S-1 (No. 33-53904) filed December 7, 1992, except that Exhibit 3.1 is incorporated by reference from Exhibit 3.1C and Exhibit 3.2 is incorporated by reference from Exhibit 3.2B.
(2)		Incorporated by reference from the Exhibits with corresponding numbers filed with the Company’s Quarterly Report on Form 10-Q for the quarter ended September 4, 1994.
(3)		Agreements or compensatory plans covering executive officers and directors of Fresh Choice, Inc.
(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.
(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.
(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.

 

 

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(13)		Incorporated by reference from 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 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.
(16)		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, 2000.
(17)		Incorporated by reference from Exhibits with corresponding numbers filed with the Company’s Quarterly Report on Form 10-Q for the quarter ended September 9, 2001.
(18)		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 30, 2001.
(19)		Incorporated by reference from Exhibits with corresponding numbers filed with the Company’s Quarterly Report on Form 10-Q for the quarter ended March 24, 2002.
(20)		Incorporated by reference from Exhibits with corresponding numbers filed with the Company’s Quarterly Report on Form 10-Q for the quarter ended June 16, 2002.

 

 

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