**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

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**FORM 10-Q**

 

**(Mark One)**

| **ý**                         |   | **QUARTERLY  REPORT under SECTION 13 OR 15(d) of the SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                               |
|------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                               |   |                                                                                                                                                                                                                                                                                                                                                 |
|                               |   | **For the  quarter ended****March 23, 2003**                                                                                                                                                                                                                                                                                                         |
|                               |   |                                                                                                                                                                                                                                                                                                                                                 |
| **OR**                             |
|                               |   |                                                                                                                                                                                                                                                                                                                                                 |
| **o**                              |   | **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.**

(Exactname of registrant as specified in its charter)

 

| **Delaware**                                                                             |   | **77-0130849**                        |
|------------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization)                          |   | (I.R.S. Employee  Identification No.) |
|                                                                                     |   |                                  |
| **485 Cochrane Circle, Morgan Hill, California**                                         |   | **95037**                             |
| (Address  of principal executives offices)                                               |   | (Zip  Code)                           |
|                                                                                     |   |                                  |
| Registrant’s  telephone number, including area code:**   (408) 776-0799** |
|                                                                                     |   |                                  |
|                                                                                     |   |                                  |
| 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) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or for suchshorter 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 |
|-------------------|--------|------------|

 

APPLICABLEONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THEPRECEDING FIVE YEARS:

 

Indicate by check mark whether the registranthas filed all documents and reports required to be filed by Section 12, 13 or15(d) of the Securities Exchange Act of 1934 subsequent to the distribution ofsecurities under a plan confirmed by a court.
| o   Yes |   | o  No |
|--------------|--------|------------|

 

APPLICABLEONLY TO CORPORATE ISSUERS:

 

The number of shares of Common Stock, $.001par value, outstanding as of April 21, 2003 was 5,964,068.

 

 

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**FRESH CHOICE, INC.**

 

**INDEX**

 
| PART I - FINANCIAL  INFORMATION                                                                       |
|-------------------------------------------------------------------------------------------------------|
|                                                                                                  |
| Item 1 - Financial  Statements                                                                        |
|                                                                                                  |   |
|                                                                                                  | Condensed  Consolidated Balance Sheets at March 23, 2003 and December 29, 2002 |
|                                                                                                  |   |
|                                                                                                  | Condensed  Consolidated Statements of Operations for the Twelve Weeks ended March 23,  2003 and March 24, 2002 |
|                                                                                                  |   |
|                                                                                                  | Condensed  Consolidated Statements of Cash Flows for the Twelve Weeks ended March 23,  2003 and March 24, 2002 |
|                                                                                                  |   |
|                                                                                                  | 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

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**PARTI.  FINANCIAL INFORMATION**

 

**Item 1 -Financial Statements**

 

FRESH CHOICE, INC.

CONDENSEDCONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)

 
|                                                                                                                                                                                 |   | **March 23,  2003** |   | **December 29,  2002** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|------------------------|--------|
| ASSETS                                                                                                                                                                               |   |                |   |                   |   |
|                                                                                                                                                                                 |   |                |   |                   |   |
| CURRENT ASSETS:                                                                                                                                                                      |   |                |   |                   |   |
| Cash and cash equivalents                                                                                                                                                            |   | $                   | 1,038  |                   | $      | 2,994 |   |
| Inventories                                                                                                                                                                          |   | 508                 |   | 467                    |   |
| Prepaid expenses and other current assets                                                                                                                                            |   | 956                 |   | 524                    |   |
|                                                                                                                                                                                 |   |                |   |                   |   |
| Total current assets                                                                                                                                                                 |   | 2,502               |   | 3,985                  |   |
|                                                                                                                                                                                 |   |                |   |                   |   |
| PROPERTY AND EQUIPMENT, net                                                                                                                                                          |   | 32,037              |   | 31,475                 |   |
|                                                                                                                                                                                 |   |                |   |                   |   |
| DEPOSITS AND OTHER ASSETS                                                                                                                                                            |   | 844                 |   | 869                    |   |
|                                                                                                                                                                                 |   |                |   |                   |   |
| TOTAL ASSETS                                                                                                                                                                         |   | $                   | 35,383 |                   | $      | 36,329 |   |
|                                                                                                                                                                                 |   |                |   |                   |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                            |   |                |   |                   |   |
|                                                                                                                                                                                 |   |                |   |                   |   |
| CURRENT LIABILITIES:                                                                                                                                                                 |   |                |   |                   |   |
| Accounts payable                                                                                                                                                                     |   | $                   | 2,136  |                   | $      | 2,825 |   |
| Other accrued expenses                                                                                                                                                               |   | 2,075               |   | 2,331                  |   |
| Accrued salaries and wages                                                                                                                                                           |   | 1,666               |   | 1,582                  |   |
| Sales tax payable                                                                                                                                                                    |   | 884                 |   | 614                    |   |
| Current portion of long-term obligations                                                                                                                                             |   | 820                 |   | 737                    |   |
|                                                                                                                                                                                 |   |                |   |                   |   |
| Total current liabilities                                                                                                                                                            |   | 7,581               |   | 8,089                  |   |
|                                                                                                                                                                                 |   |                |   |                   |   |
| CAPITAL LEASE OBLIGATIONS                                                                                                                                                            |   | 2,385               |   | 2,132                  |   |
|                                                                                                                                                                                 |   |                |   |                   |   |
| LONG-TERM DEBT                                                                                                                                                                       |   | 2,012               |   | 2,047                  |   |
|                                                                                                                                                                                 |   |                |   |                   |   |
| OTHER LONG-TERM LIABILITIES                                                                                                                                                          |   | 2,313               |   | 2,429                  |   |
|                                                                                                                                                                                 |   |                |   |                   |   |
| Total liabilities                                                                                                                                                                    |   | 14,291              |   | 14,697                 |   |
|                                                                                                                                                                                 |   |                |   |                   |   |
| STOCKHOLDERS’ EQUITY:                                                                                                                                                           |   |                |   |                   |   |
| Convertible preferred stock, $.001 par  value; 3.5 million shares authorized; shares outstanding:  2003 and 2002 - 1,187,906; liquidation  preference; 2003-$8,314; 2002-$8,161 |   | 5,175               |   | 5,175                  |   |
| Common stock - $.001 par value; 15 million  shares authorized; shares outstanding: 2003 - 5,964,068; 2002 - 5,964,068                                                                |   | 42,631              |   | 42,630                 |   |
| Accumulated deficit                                                                                                                                                                  |   | (26,714             | )      | (26,173                | )      |
|                                                                                                                                                                                 |   |                |   |                   |   |
| Total stockholders’ equity                                                                                                                                                      |   | 21,092              |   | 21,632                 |   |
|                                                                                                                                                                                 |   |                |   |                   |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                      |   | $                   | 35,383 |                   | $      | 36,329 |   |

 

The December 29, 2002 amounts are derived from theCompany’s audited financial statements.

 

See accompanying notes to condensed consolidatedfinancial statements.

 

3

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FRESH CHOICE, INC.

CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per shareamounts)

(Unaudited)

** **
|                                                          |   | **Twelve Weeks Ended** |       |
|---------------------------------------------------------------|--------|------------------------|------------|
|                                                          |   | **March 23, 2003**     |       | **March 24, 2002** |   |
|                                                          |   |                   |       |   |   |
| NET SALES                                                     |   | $                      | 17,684     |   | $ | 17,029 |   |
|                                                          |   |                   |       |   |   |
| COSTS AND EXPENSES:                                           |   |                   |       |   |   |
| Cost of sales                                                 |   | 4,015                  |       | 3,792 |   |
| Restaurant operating expenses:                                |   |                   |       |   |   |
| Labor                                                         |   | 6,086                  |       | 5,678 |   |
| Occupancy and other                                           |   | 5,700                  |       | 5,171 |   |
| Depreciation and amortization                                 |   | 789                    |       | 768 |   |
| General and administrative expenses                           |   | 1,366                  |       | 1,362 |   |
| Restaurant opening costs                                      |   | 192                    |       | 53 |   |
|                                                          |   |                   |       |   |   |
| Total costs and expenses                                      |   | 18,148                 |       | 16,824 |   |
|                                                          |   |                   |       |   |   |
| OPERATING INCOME (LOSS)                                       |   | (464                   | )          | 205 |   |
|                                                          |   |                   |       |   |   |
| Interest income                                               |   | 2                      |       | 15 |   |
| Interest expense                                              |   | (79                    | )          | (59 | ) |
|                                                          |   |                   |       |   |   |
| Interest expense, net                                         |   | (77                    | )          | (44 | ) |
|                                                          |   |                   |       |   |   |
| INCOME (LOSS) FROM CONTINUING OPERATIONS  BEFORE INCOME TAXES |   | (541                   | )          | 161 |   |
| Provision for income taxes                                    |   | —                 |       | 4 |   |
|                                                          |   |                   |       |   |   |
| INCOME (LOSS) FROM CONTINUING OPERATIONS                      |   | (541                   | )          | 157 |   |
|                                                          |   |                   |       |   |   |
| LOSS FROM DISCONTINUED OPERATIONS                             |   | —                 |       | (44 | ) |
|                                                          |   |                   |       |   |   |
| NET INCOME (LOSS)                                             |   | $                      | (541       | ) | $ | 113 |   |
|                                                          |   |                   |       |   |   |
| Basic net income (loss) per common share:                     |   |                   |       |   |   |
| Basic income (loss) from continuing  operations               |   | $                      | (0.09      | ) | $ | 0.03 |   |
| Basic income (loss) from discontinued  operations             |   | —                 |       | (0.01 | ) |
|                                                          |   |                   |       |   |   |
| Basic net income (loss) per common share:                     |   | $                      | (0.09      | ) | $ | 0.02 |   |
| Shares used in computing basic per share  amounts             |   | 5,964                  |       | 5,909 |   |
|                                                          |   |                   |       |   |   |
| Diluted net income (loss) per common share:                   |   |                   |       |   |   |
| Diluted income (loss) from continuing  operations             |   | $                      | (0.09      | ) | $ | 0.03 |   |
| Diluted income (loss) from discontinued  operations           |   | —                 |       | (0.01 | ) |
|                                                          |   |                   |       |   |   |
| Diluted net income (loss) per common share:                   |   | $                      | (0.09      | ) | $ | 0.02 |   |
|                                                          |   |                   | ** ** |   | ** ** |
| Shares used in computing diluted per share  amounts           |   | 5,964                  |       | 7,183 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

4

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FRESH CHOICE, INC.

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 
|                                                                                                                                     |   | **Twelve Weeks Ended** |   |
|------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|--------|
|                                                                                                                                     |   |                   |   |   |   |
|                                                                                                                                     |   | **March 23,  2003**    |   | **March 24,  2002** |   |
|                                                                                                                                     |   |                   |   |   |   |
| OPERATING ACTIVITIES OF CONTINUING  OPERATIONS:                                                                                          |   |                   |   |   |   |
| Income (loss) from continuing operations                                                                                                 |   | $                      | (541   | ) | $ | 157 |   |
| Adjustments to reconcile income (loss)  from continuing operations to net cash used by operating activities from  continuing operations: |   |                   |   |   |   |
| Depreciation and amortization                                                                                                            |   | 838                    |   | 814 |   |
| Issuance of common stock for consulting  services                                                                                        |   | 1                      |   | 1 |   |
| Loss on disposal of property and equipment                                                                                               |   | 8                      |   | 5 |   |
| Deferred rent                                                                                                                            |   | (90                    | )      | (144 | ) |
| Change in operating assets and  liabilities:                                                                                             |   |                   |   |   |   |
| Prepaid expenses and other current assets                                                                                                |   | (478                   | )      | 803 |   |
| Accounts payable                                                                                                                         |   | (689                   | )      | (344 | ) |
| Accrued salaries and wages                                                                                                               |   | 57                     |   | 212 |   |
| Other accrued expenses                                                                                                                   |   | 14                     |   | (181 | ) |
| Store closure reserve                                                                                                                    |   | —                 |   | (2 | ) |
|                                                                                                                                     |   |                   |   |   |   |
| Net cash provided (used) by operating  activities of continuing operations                                                               |   | (880                   | )      | 1,321 |   |
|                                                                                                                                     |   |                   |   |   |   |
| INVESTING ACTIVITIES:                                                                                                                    |   |                   |   |   |   |
| Capital expenditures                                                                                                                     |   | (1,386                 | )      | (1,171 | ) |
| Proceeds from sale of property and  equipment                                                                                            |   | —                 |   | 3 |   |
| Deposits and other assets                                                                                                                |   | 8                      |   | (28 | ) |
|                                                                                                                                     |   |                   |   |   |   |
| Net cash used in investing activities                                                                                                    |   | (1,378                 | )      | (1,196 | ) |
|                                                                                                                                     |   |                   |   |   |   |
| FINANCING ACTIVITIES:                                                                                                                    |   |                   |   |   |   |
| Common stock sales                                                                                                                       |   | —                 |   | 5 |   |
| Long-term debt - repayments                                                                                                              |   | (34                    | )      | (27 | ) |
| Capital lease obligations - borrowings                                                                                                   |   | 492                    |   | 434 |   |
| Capital lease obligations - repayments                                                                                                   |   | (156                   | )      | (131 | ) |
| Net cash provided by financing activities                                                                                                |   | 302                    |   | 281 |   |
|                                                                                                                                     |   |                   |   |   |   |
| CASH PROVIDED (USED) BY CONTINUING  OPERATIONS                                                                                           |   | (1,956                 | )      | 406 |   |
|                                                                                                                                     |   |                   |   |   |   |
| CASH USED BY DISCONTINUED OPERATIONS                                                                                                     |   | —                 |   | (34 | ) |
|                                                                                                                                     |   |                   |   |   |   |
| INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS                                                                                        |   | (1,956                 | )      | 372 |   |
| CASH AND CASH EQUIVALENTS:                                                                                                               |   |                   |   |   |   |
|                                                                                                                                     |   |                   |   |   |   |
| Beginning of period                                                                                                                      |   | 2,994                  |   | 4,368 |   |
| End of period                                                                                                                            |   | $                      | 1,038  |   | $ | 4,740 |   |
|                                                                                                                                     |   |                   |   |   |   |
| Supplemental Disclosure of Cash Flow  Information:                                                                                       |   |                   |   |   |   |
| Cash paid during the period for interest                                                                                                 |   | $                      | 90     |   | $ | 50 |   |
|                                                                                                                                     |   |                   |   |   |   |
| Cash paid during the period for income  taxes                                                                                            |   | $                      | 32     |   | $ | — |   |

 

See accompanyingnotes to condensed consolidated financial statements

 

5

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FRESH CHOICE, INC.

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

For the Twelve Weeks Ended March 23, 2003 andMarch 24, 2002

(Unaudited)

 

1.             CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

 

The accompanying condensedconsolidated financial statements have been prepared by the Company withoutaudit and reflect all adjustments, consisting of normal recurring adjustmentsand accruals, which are, in the opinion of management, necessary for a fairstatement of financial position and the results of operations for the interimperiods.  The statements have beenprepared in accordance with the regulations of the Securities and ExchangeCommission, but omit certain information and footnote disclosures necessary topresent the statements in accordance with generally accepted accountingprinciples.  For further information,refer to the financial statements and notes thereto included in the Company’sAnnual Report on Form 10-K for the fiscal year ended December 29, 2002.

 

2.             NETINCOME (LOSS) PER COMMON SHARE

 

Basic net income (loss) percommon share excludes dilution and is computed by dividing net income by theweighted average of its common shares outstanding for the period.  Diluted net income (loss) per common share reflectsthe potential dilution that could occur if securities or other contracts toissue common stock were exercised or converted into common stock.  The Company converts common stock optionsand warrants into potential dilutive shares using the treasury stock method andconverts preferred stock into potential dilutive shares using the “ifconverted” method.

 

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

 
|                                                       |   | **Twelve  Weeks Ended** |   |
|------------------------------------------------------------|--------|-------------------------|--------|
|                                                       |   |                    |   |   |   |
| **(In thousands, except per share  data)**                 |   | **March 23,  2003**     |   | **March 24,  2002** |   |
|                                                       |   |                    |   |   |   |
| Basic Net Income (Loss) Per Common Share                   |   |                    |   |   |   |
| Income (loss) from continuing operations                   |   | $                       | (541   | ) | $ | 157 |   |
| Loss from discontinued operations                          |   | —                  |   | (44 | ) |
| Net Income (Loss)                                          |   | $                       | (541   | ) | $ | 113 |   |
| Average common shares outstanding                          |   | 5,964                   |   | 5,909 |   |
| Basic income (loss) per share from continuing operations   |   | $                       | (0.09  | ) | $ | 0.03 |   |
| Basic loss per share from discontinued operations          |   | —                  |   | (0.01 | ) |
| Basic net income (loss) per common share                   |   | $                       | (0.09  | ) | $ | 0.02 |   |
|                                                       |   |                    |   |   |   |
| Diluted Net Income (Loss) Per Common Share                 |   |                    |   |   |   |
| Income (loss) from continuing operations                   |   | $                       | (541   | ) | $ | 157 |   |
| Loss from discontinued operations                          |   | —                  |   | (44 | ) |
| Net Income (Loss)                                          |   | $                       | (541   | ) | $ | 113 |   |
| Average common shares outstanding                          |   | 5,964                   |   | 5,909 |   |
|                                                       |   |                    |   |   |   |
| Dilutive shares:                                           |   |                    |   |   |   |
| Stock options                                              |   | —                  |   | 86 |   |
| Convertible preferred stock                                |   | —                  |   | 1,188 |   |
| Total shares and dilutive shares                           |   | 5,964                   |   | 7,183 |   |
| Diluted income (loss) per share from continuing operations |   | $                       | (0.09  | ) | $ | 0.03 |   |
| Diluted loss per share from discontinued operations        |   | —                  |   | (0.01 | ) |
| Diluted net income (loss) per common share                 |   | $                       | (0.09  | ) | $ | 0.02 |   |

 

6

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The following table presentsthe total dilutive securities which the Company excluded for each periodpresented from its diluted EPS computation because the exercise price of thesecurities exceeded the average fair value of the Company’s common stock or theCompany had a net loss and therefore, these securities were anti-dilutive:

 
|                          |   | **Twelve  Weeks Ended** |   |
|-------------------------------|--------|-------------------------|--------|
|                          |   |                    |   |   |   |
| **(In thousands)**            |   | **March 23,  2003**     |   | **March 24,  2002** |   |
|                          |   |                    |   |   |   |
| Potential Dilutive Securities |   |                    |   |   |   |
|                          |   |                    |   |   |   |
| Stock options excluded        |   | 1,208                   |   | 788 |   |
| Stock warrants                |   | 100                     |   | 100 |   |
| Convertible preferred stock   |   | 1,188                   |   | — |   |

 

3.             OTHERACCRUED EXPENSES

 

The components of otheraccrued expenses are as follows:

 
| **(In thousands)**                 |   | **March 23,  2003** |   | **December 29,  2002** |   |
|------------------------------------|--------|---------------------|--------|------------------------|--------|
|                               |   |                |   |                   |   |
| Unredeemed gift certificates       |   | $                   | 510    |                   | $      | 572 |   |
| Accrued workers’ compensation |   | 460                 |   | 516                    |   |
| Accrued utilities                  |   | 263                 |   | 300                    |   |
| Accrued property taxes             |   | 72                  |   | 196                    |   |
| Deferred vendor allowances         |   | 115                 |   | 15                     |   |
| Accrued advertising                |   | 285                 |   | 230                    |   |
| Other                              |   | 370                 |   | 502                    |   |
|                               |   | $                   | 2,075  |                   | $      | 2,331 |   |

 

4.             BORROWINGARRANGEMENTS

 

The Company has a $2,200,000 loan (the“Loan”), with a commercial bank.  Underthe terms of the Loan, the Company issued a promissory note (the “Note”) in theamount of $2,200,000.  The Note issecured by a deed of trust on certain Company-owned real estate.  The Note bears interest at the prime rate(4.25% at March 23, 2003) plus 0.625%. The Note has a fifteen-year amortization period and matures after 84monthly payments of principal and interest. All unpaid principal and interest shall be due and payable on the Note’smaturity date of September 2, 2008.

 

On March 23, 2003 theCompany had $2,027,000 of debt outstanding under the Loan described above.  At March 23, 2003 $1,900,000 was included inlong-term debt and $127,000 was included in the current portion of long-termobligations.  The Deed of Trust requiresthe Company to maintain a minimum debt service coverage ratio and to maintain aminimum tangible net worth.

 

On April 7,2003 the Company renegotiated its $2,000,000 revolving line of credit (the  “Agreement”) with its bank, which maintainedthe Agreement’s expiration date at June 3, 2004, but lowered the Company’scovenant requirements and reduced the fixed asset acquisition limit.  Borrowings bear interest at the prime rate(4.25% at March 23, 2003) plus 0.5%. Borrowings under the Agreement are collateralized by the Company’spersonal property.  On March 23, 2003the Company had no borrowings under the Agreement.

 

7

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The amendedAgreement requires the Company to maintain (i) a minimum tangible net worth,(ii) a minimum debt service coverage ratio and (iii) a maximum debt to tangiblenet worth ratio.  The Agreement alsolimits the Company’s fixed asset acquisitions and requires approval beforepaying dividends or repurchasing outstanding shares of stock.  In addition the Agreement requires theoutstanding principal balance of the loan to be zero for at least one period ofthirty consecutive days during the term of the loan.  Covenant compliance is reported quarterly and the Company was incompliance with all covenants under the amended Agreement at March 23, 2003.

 

The Company had a $5.5 million commitmentfor capital equipment lease financing for new furniture, fixtures, equipmentand leasehold items of which the Company had utilized $2.8 million throughMarch 23, 2003.  The Company has beennotified that the remaining commitment has been suspended as the lessorconsidered the Company’s financial results to be a material adverse change inthe Company’s financial condition.  TheCompany is currently seeking a new source for equipment lease financing.

 

5.             CONVERTIBLEPREFERRED STOCK

 

The Company’s outstandingSeries B non-voting convertible preferred stock is currently held by one entityand is convertible, at the holders’ option, into Series A voting convertiblepreferred stock on a one-for-one basis. Although no Series A preferred stock is currently outstanding, holdersof Series A preferred stock, if any, would be entitled to vote with commonstockholders on all matters submitted to a vote of stockholders.  When and if issued, the holders of amajority of the outstanding Series A preferred stock will have a separate rightto approve certain corporate actions.

 

In fiscal 1998, the Companyfailed to achieve a specified earnings target which constituted an event ofdefault of the terms of the preferred stock agreement and which triggered theright of the Series A preferred stockholders to elect a majority of theCompany’s Board of Directors.  Theholder of the Series B preferred stock has not initiated any action to convertsuch shares into shares of Series A preferred stock nor has it exercised itsright to elect a majority of the Board of Directors.  In March, 2003 such holder notified the Company that it had nointention, at that time, of exercising such right; however, it has not waivedany of its rights under the agreement. As of April 29, 2003 management is not aware of any change in theshareholder’s intention.

 

7.             RECENTLYISSUED ACCOUNTING STANDARDS

 

In June 2002,the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 146, “Accounting for Costs Associated with Exit orDisposal Activities” which addresses accounting for restructuring and similarcosts.  SFAS No. 146 supersedes previousaccounting guidance, principally Emerging Issues Task Force (“EITF”) Issue No. 94-3.  TheCompany adopted the provisions of SFAS No. 146 for restructuring activitiesinitiated after December 29, 2002.  SFASNo. 146 requires that the liability for costs associated with an exit ordisposal activity be recognized when the liability is incurred.  Under Issue 94-3, a liability for an exitcost was recognized at the date of the Company’s commitment to an exitplan.  SFAS No. 146 also establishesthat the liability should initially be measured and recorded at fairvalue.  Accordingly, SFAS No. 146 mayaffect the timing of recognizing future restructuring costs as well as theamounts recognized.  In accordance withSFAS No.146, the Company estimates it will incur a charge of $50,000 in the secondquarter of 2003 resulting from severance costs associated with the eliminationof eleven positions in its corporate office that occurred subsequent to March23, 2003.

 

In December2002, the FASB issued SFAS No. 148, “Accounting for Stock-Base Compensation –Transition and Disclosure” which amends SFAS No. 123, “Accounting forStock-Based Compensation,” and provides alternative methods of transition toSFAS No. 123’s fair value method of accounting for stock-based employeecompensation.  SFAS No. 148 also amendsthe disclosure requirements of SFAS No. 123 and Accounting Principles Board (“APB”) Opinion No. 28, “InterimFinancial Reporting,” to require disclosure of the effects of an entity’saccounting policy with respect to stock-

 

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based compensation on reportednet income and earnings per share in annual and interim financialstatements.  The disclosure provisionsof SFAS No. 148 are applicable to all companies with stock-based employeecompensation, regardless of whether the compensation is accounted for using thefair value method of SFAS No. 123 or the intrinsic value method of APB OpinionNo. 25.  As allowed by SFAS No. 123, theCompany utilizes the accounting method prescribed by APB Opinion No. 25 and hasadopted the disclosure requirements of SFAS No. 148.

 

The following table illustrates the effect onnet income (loss) and net income (loss) per common share if the Company hadapplied fair value recognition provisions of SFAS No. 123 to stock basedemployee compensation.

 
| **(In thousands, except per share  data)**                                                                                                    |   | **March 23,  2003** |   | **March 22,  2002** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|---------------------|--------|
|                                                                                                                                          |   |                |   |                |   |
| Net income (loss)                                                                                                                             |   | $                   | (541   | )                   | $      | 113 |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |   | (69                 | )      | (94                 | )      |
| Pro forma net income (loss)                                                                                                                   |   | $                   | (610   | )                   | $      | 19 |   |
|                                                                                                                                          |   |                |   |                |   |
| Net income (loss) per common share:                                                                                                           |   |                |   |                |   |
| Basic-as reported                                                                                                                             |   | $                   | (0.09  | )                   | $      | 0.02 |   |
| Basic-pro forma                                                                                                                               |   | $                   | (0.10  | )                   | $      | 0.00 |   |
| Diluted-as reported                                                                                                                           |   | $                   | (0.09  | )                   | $      | 0.02 |   |
| Diluted-pro forma                                                                                                                             |   | $                   | (0.10  | )                   | $      | 0.00 |   |

 

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

 

The followingdiscussion is intended to highlight significant changes in the Company’sfinancial position and results of operations for the twelve weeks ended March23, 2003.  The interim financialstatements and this Management’s Discussion and Analysis of Financial Conditionand Results of Operations should be read in conjunction with the ConsolidatedFinancial Statements and Notes thereto for the fiscal year endedDecember 29, 2002 and the related Management’s Discussion andAnalysis of Financial Condition and Results of Operations, both of which arecontained in the Company’s Annual Report on Form 10-K for the fiscal year endedDecember 29, 2002.

 

Certain statementsset forth in this discussion and analysis of financial condition and results ofoperations including anticipated store openings, planned capital expendituresand trends in or expectations regarding the Company’s operations constitute“forward-looking statements” within the meaning of the Private SecuritiesLitigation Reform Act of 1995.  Suchstatements are based on currently available operating, financial andcompetitive information and are subject to various risks anduncertainties.  Actual future resultsand trends may differ materially depending on a variety of factors as set forthunder the heading “Business Risks”.  Inparticular, the Company’s future plans to open new restaurants could beaffected by the Company’s ability to locate suitable restaurant sites,construct new restaurants in a timely manner and obtain additional financing.

 

Forward-lookingstatements 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 mayhappen in the future and only at the time they are made.  The Company undertakes no obligation toupdate any forward-looking statements. Although the Company believes it has an appropriate business strategyand the resources necessary for its operations, future revenue and margintrends cannot be reliably predicted and the Company may alter its businessstrategies to address changing conditions.

 

# *Liquidity and Capital Resources*

 

The Company’sprimary capital requirements have been for the expansion of its restaurantoperations and remodeling of its restaurants. The Company has traditionally financed these requirements with fundsfrom equity offerings, cash flow from operations, landlord allowances, capitalequipment leases and short-term bank debt. The Company does not have significant trade receivables or inventory andreceives trade credit based upon negotiated terms in purchasing food andsupplies.

 

The Companyhas a $2,200,000 loan (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 realestate.  The Note bears interest at theprime rate (4.25% at March 23, 2003) plus 0.625%.  The Note has a fifteen-year amortization period and matures after84 monthly payments of principal and interest. All unpaid principal and interest shall be due and payable on the Note’smaturity date of September 2, 2008.

 

On March 23, 2003 theCompany had $2,027,000 of debt outstanding under the Loan described above.  At March 23, 2003 $1,900,000 was included inlong-term debt and $127,000 was included in the current portion of long-termobligations.  The Deed of Trust requiresthe Company to maintain a minimum debt service coverage ratio and to maintain aminimum tangible net worth.

 

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On April 7,2003 the Company renegotiated its $2,000,000 revolving line of credit (the  “Agreement”) with its bank, which maintainedthe Agreement’s expiration date at June 3, 2004, but lowered the Company’scovenant requirements and reduced the fixed asset acquisition limit.  Borrowings bear interest at the prime rate(4.25% at March 23, 2003) plus 0.5%. Borrowings under the Agreement are collateralized by the Company’spersonal property.  On March 23, 2003the Company had no borrowings under the Agreement.

 

The amendedAgreement requires the Company to maintain (i) a minimum tangible net worth,(ii) a minimum debt service coverage ratio and (iii) a maximum debt to tangiblenet worth ratio.  The Agreement alsolimits the Company’s fixed asset acquisitions and requires approval beforepaying dividends or repurchasing outstanding shares of stock.  In addition the Agreement requires theoutstanding principal balance of the loan to be zero for at least one period ofthirty consecutive days during the term of the loan.  Covenant compliance is reported quarterly and the Company was incompliance with all covenants under the amended Agreement at March 23, 2003.

 

On March 23,2003 the Company had a commitment from the bank separate from the Agreement,which makes $1,372,000 available to the Company in support of outstandingletters of credit required under its workers’ compensation program.  The commitment, which is scheduled to expireFebruary 28, 2004, will automatically extend for a one-year period.

 

During thefirst twelve weeks of 2003 the Company entered into an equipment lease for$492,000.  This and other capital lease obligations at March 23, 2003 totaled$3,077,000 of which $692,000 was included in the current portion of long-termobligations.  Long-Term Debt alsoincluded a $ 113,000 note for site construction costs of which $1,000 wasincluded in the current portion of long-term obligations.

 

Net cash usedby operating activities of continuing operations for the first twelve weeks of2003 was $880,000 and consisted of:

 
| **(In thousands)**                                                                                                            |   |   |   |
|-------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|
|                                                                                                                          |   |   |   |
| Loss from continuing operations                                                                                               |   | $      | (541   | ) |
| Adjustments to reconcile loss from  continuing operations to net cash used by operating activities of continuing  operations: |   |   |   |
| Depreciation and amortization                                                                                                 |   | 838    |   |
| Change in operating assets and liabilities                                                                                    |   | (1,096 | )      |
| Other                                                                                                                         |   | (81    | )      |
| Net cash used by operating activities of  continuing operations                                                               |   | $      | (880   | ) |

 

Net cash usedby operating activities for the first twelve weeks of 2003 included a change inoperating assets and liabilities of $1,096,000.  The change in operating assets and liabilities was primarily dueto (a) a reduction in accounts payable as the result of payments forconstruction invoices that were included in accounts payable at December 29,2002 and (b) an increase in accounts receivable as the result of landlordallowances recorded, as construction for two new restaurants was completed duringthe first quarter.

 

During the same period the Company invested$1,386,000 in property and equipment, which includes equipment under capitalleases.

 

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The Company’scontractual obligations as of March 23, 2003 are as follows:

 
| **(In thousands)**                 |   | **Total** |    | **Remainder  of  2003** |   | **2004  through  2006** |   | **2007  through  2008** |   | **2009 and  thereafter** |   |
|------------------------------------|--------|-----------|---------|-------------------------|--------|-------------------------|--------|-------------------------|--------|--------------------------|--------|
| Secured Note                       |   | $         | 2,027   |                    | $      | 94                      |   | $                       | 419    |                     | $      | 1,514 |   | $ | — |   |
| Capital Lease Obligations          |   | 3,077     |    | 529                     |   | 2,025                   |   | 523                     |   | —                   |   |
| Other Note Payable                 |   | 113       |    | 1                       |   | 4                       |   | 4                       |   | 104                      |   |
| Operating Leases                   |   | 121,631   |    | 6,510                   |   | 25,414                  |   | 16,489                  |   | 73,218                   |   |
|                               |   |      |    |                    |   |                    |   |                    |   |                     |   |
| Total Contractual Cash Obligations |   | $         | 126,848 |                    | $      | 7,134                   |   | $                       | 27,862 |                     | $      | 18,530 |   | $ | 73,322 |   |

 

The Company’soutstanding Series B non-voting convertible preferred stock is currently heldby one entity and is convertible, at the holders’ option, into Series A votingconvertible 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 withcommon stockholders on all matters submitted to a vote of stockholders.  When and if issued, the holders of amajority of the outstanding Series A preferred stock will have a separate rightto approve certain corporate actions.

 

In fiscal1998, the Company failed to achieve a specified earnings target (beforeinterest, taxes, depreciation and amortization) of at least $5.5 million whichconstituted an event of default of the terms of the preferred stock agreementand which triggered the right of the Series A preferred stockholders to elect amajority of the Company’s Board of Directors. The holder of the Series B preferred stock has not initiated any action toconvert such shares into shares of Series A preferred stock nor has itexercised its right to elect a majority of the Board of Directors.  In March 2003 such holder notified theCompany 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’scontinued growth depends to a significant degree on its ability to open newrestaurants and to operate such restaurants profitably.  As of April 29, 2003, three new Fresh Choicerestaurants have opened in fiscal 2003. The Company plans to open one additional new Fresh Choice restaurant in2003 in California.  The Company hassigned a lease for this additional Fresh Choice restaurant.  The total leasehold improvements andequipment costs for these four locations is estimated to be approximately $4.3million, of which approximately $2.9 million has been expended through March23, 2003.

 

The Companyhas no development plans beyond 2003. The Company’s ability to resume an expansion strategy will depend upon avariety of factors, including its return to profitability and the Company’sability to obtain funds.  See “BusinessRisks” included herein.

 

The Companyintends to finance its operating cash requirements and fiscal 2003 capitalrequirements through existing cash balances, cash provided by operations, itsborrowing arrangements and equipment lease financing. The Company had a $5.5million commitment for capital equipment lease financing for new furniture,fixtures, equipment and leasehold items of which the Company had utilized $2.8million through March 23, 2003.  TheCompany has been notified that the remaining commitment has been suspended asthe lessor considered the Company’s financial results to be a material adversechange in the Company’s financial condition. The Company is currently seeking a new source for the equipment leasefinancing to fund restaurant equipment primarily in its new restaurants.

 

The Company’sability to resume an expansion strategy will depend upon a variety of factors,including, maintaining a sufficient cash flow from operations and its abilityto obtain additional funds.  The Companybelieves its near-term capital requirements can be met through its existingcash balances, cash provided by operations, its borrowing arrangements andadditional equipment lease financing. However, the Company’s operating cash flow is impacted by the Company’scomparable store sales increases or decreases. In the first quarter of 2003 comparable store sales declined 2.6%.  The Company expects comparable store salesto improve, but there can be no assurance that comparable store sales willimprove.  In addition, the Company isseeking a new source for equipment lease financing. There can be no assurance

 

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that the Company will be able to obtain additional financing onacceptable terms or at all.  To theextent operating cash flow continues to decline, the Company may need tofurther reduce its capital spending plans.

 

*Impact of Inflation*

 

Many of the Company’semployees are paid hourly rates related to the federal and state minimum wagelaws.  Accordingly, increases in theminimum wage could materially increase the Company’s labor costs.  In addition, the cost of food commoditiesutilized by the Company is subject to market supply and demand pressures.  Shifts in these costs may have a significantimpact on the Company’s food costs.  TheCompany anticipates that increases in these costs may be offset through pricingand other cost control efforts; however, there is no assurance that the Companywould be able to pass such costs on to its guests or that even if it were ableto do so, it could do so in a short period of time.

 

# *Business Risks*

 

Certain characteristics anddynamics of the Company’s business and of financial markets in general createrisks to the Company’s long-term success and to predictable financialresults.  These risks include:

 

*Operating Losses and Historical Declines in Comparable StoreSales*.  Our quarterly and annual operating resultsand same store sales have fluctuated significantly in the past and are likelyto fluctuate significantly in the future. Although the Company has reported aprofit for three of the last four years, there can be no assurance that theCompany will be profitable over the long or short term.

 

From the thirdquarter of fiscal 1994 through the end of 1998, the Company reported quarterlycomparable store sales declines.  TheCompany reported positive comparable store sales in each quarter of thefollowing two years; however, the Company’s comparable store sales declined forboth fiscal years 2001 and 2002 and for the first quarter of 2003.  There can be no assurance that thecomparable store sales declines experienced in 2001, 2002 and the first quarterof 2003 will not continue or not decline further.

* *

*Expansion*.  The Company believes itsgrowth depends to a significant degree on its ability to open new restaurantsand to operate such restaurants profitably. The Company resumed its expansion with one new Fresh Choice restaurantopening in 2001, five opening in 2002 and, as of April 29, 2003, threerestaurants opening in 2003.  TheCompany plans to open one additional Fresh Choice restaurant in 2003.  There can be no assurance that these ten newrestaurants or future restaurants will be successful.  The Company currently has no development plans beyond 2003.  The Company’s ability to successfullyresume an expansion strategy will depend upon a variety of factors, many ofwhich may be beyond the Company’s control, including the Company’s ability tolocate suitable restaurant locations, negotiate acceptable lease terms, obtainrequired government approvals, construct new restaurants in a timely manner,attract, train and retrain qualified and experienced personnel and management,operate its restaurants profitably and obtain additional capital to financeexpansion and  equipment costs, as wellas general economic conditions and the degree of competition in the particularmarket.

 

The Company’s futureexpansion plans may include entering new geographic regions in which theCompany has no previous operating experience. There can be no assurance that the Fresh Choice concept will besuccessful in regions outside of California, Texas and Washington where tastesand restaurant preferences may be different. In addition the Company expects intense competition for restaurantsites, which may result in the Company having difficulty leasing desirablesites on terms that are acceptable to the Company. The Company expects that insome cases competitors may be willing to pay more than the Company forsites.  These difficulties may make itdifficult for the Company to achieve any new store growth objectives.

 

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

 

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*Geographic Concentration*.  Asof April 29, 2003, 42 of the Company’s 55 restaurants were located inCalifornia, primarily in Northern California. Accordingly, the Company is susceptible to fluctuations in its businesscaused by adverse economic conditions in this region.  In addition, net sales at certain of the Company’s restaurantshave been adversely affected when a new Company restaurant has been opened inrelatively close geographic proximity. There can be no assurance that expansion within existing or futuregeographic markets will not adversely affect the individual financialperformance of Company restaurants in such markets or the Company’s overallresults 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 negativepublicity relating to an individual Company restaurant could have a morepronounced adverse effect on results of operations than if the Company’srestaurants were more broadly dispersed.

 

*Sensitivity to Economic Conditions and Consumer Spending.*  Therestaurant industry historically has been subject to substantial cyclicalvariation.  The California economy hasslowed and there has been a downturn in the general economy and a decline inconsumer spending in the restaurant industry. A continued decline could have a material adverse effect on theCompany’s financial performance as restaurant sales tend to decline duringrecessionary periods.  A prolongedeconomic downturn could alter customers’ purchasing decisions, which mostlikely would have a material adverse impact on the Company’s revenue andresults of operations.

 

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

 

*Seasonality and Quarterly Fluctuations* The Company’s restaurants have typicallyexperienced seasonal fluctuations, as a disproportionate amount of net salesand net income are generally realized in the second and third fiscalquarters.  In addition, the Company’squarterly results of operations have been, and may continue to be, materiallyimpacted by the timing of new restaurant openings and restaurant closings.  The fourth quarter normally includes 16weeks of operations as compared with 12 weeks for each of the three priorquarters.  As a result of these factors,net sales and net income in the fourth quarter are not comparable to results ineach of the first three fiscal quarters, and net sales can be expected todecline in the first quarter of each fiscal year in comparison to the fourthquarter of the prior fiscal year.

 

*Dependence on Key Personnel*.  Thesuccess of the Company depends on the efforts of key management personnel.  The Company’s success will depend on itsability to motivate and retain its key crewmembers and to attract qualifiedpersonnel, particularly general managers, for its restaurants.  The Company faces significant competition inthe recruitment of qualified crewmembers.

 

*Restaurant Industry*.  The restaurant industry isaffected by changes in consumer tastes, as well as national, regional and localeconomic conditions and demographic trends. The performance of individual restaurants, including the Company’srestaurants, may be affected by factors such as traffic patterns, demographicconsiderations, and the type, number and location of competingrestaurants.  In addition, factors suchas inflation, increased food, labor and crewmember benefit costs, and theavailability of experienced management and hourly crewmembers may alsoadversely affect the restaurant industry in general and the Company’srestaurants in particular.  Restaurantoperating costs are affected by increases in the minimum hourly wage,unemployment tax rates, and various federal, state and local governmentalregulations, including those relating to the sale of food and alcoholicbeverages.  There can be no assurancethat the restaurant industry in general, and the Company in particular, will besuccessful.

 

*Competition*.  The Company’s restaurantscompete with the rapidly growing mid-price, full-service casual dining segment;with traditional limited-service buffet, soup, and salad restaurants; and,increasingly, with fast-casual and quick-service outlets.  The Company’s competitors include nationaland regional chains, as well as local owner-operated restaurants.  Key competitive factors in the industry arethe quality and value of the food products offered, quality and

 

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speedof service, price, dining experience, restaurant location and the ambiance offacilities.  Many of the Company’scompetitors have been in existence longer than the Company, have a moreestablished market presence, and have substantially greater financial,marketing and other resources than the Company, which may give them certaincompetitive advantages.  The Companybelieves that its ability to compete effectively will continue to depend inlarge 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 intensecompetition for restaurant sites, which may result in the Company havingdifficulty leasing desirable sites on terms that are acceptable to theCompany.  The Company expects that insome cases competitors may be willing to pay more than the Company for sites.

 

*Ability to Obtain Additional Financing*.  TheCompany resumed its restaurant expansion in 2001.  The Company currently has no expansion plans beyond 2003.  The Company’s ability to resume an expansionstrategy will depend upon a variety of factors, including its ability to obtainfunds.  The Company believes itsnear-term capital requirements can be met through its existing cash balances,cash provided by operations, its borrowing arrangements and additionalequipment lease financing.  The Companyis seeking a new source for equipment lease financing.  There can be no assurance that the Companywill be able to obtain additional financing on acceptable terms or at all.

 

*Control by Major Shareholder.*  Crescent Real Estate Equities LimitedPartnership (“Crescent”) holds 1,187,906 shares of Series B non-votingconvertible preferred stock, which is convertible into Series A votingconvertible preferred stock at any time at the option of the holder.  Upon conversion, holders of Series Apreferred stock would be entitled to vote with common stockholders and wouldhave a separate right to approve certain corporate actions, such as amendingthe Company’s Certificate of Incorporation or Bylaws, effecting a merger orsale of the Company, or making a fundamental change in the Company’s businessactivity.  In addition, because theCompany did not achieve a specified earnings target in 1998, the holders ofSeries A preferred stock would have the right to elect a majority of theCompany’s Board of Directors.  Thesefactors could have the effect of delaying, deferring or preventing a change incontrol of the Company and, as a result, could discourage acquisition bids forthe Company and limit the price that investors are willing to pay for shares ofcommon stock.

 

##### *Critical Accounting Policies*

 

Our accountingpolicies are more fully described in Note 1 of the Company’s audited December29, 2002 financial statements.  Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect reported amounts of assets, liabilities,revenues and expenses and related disclosures of contingent assets andliabilities as of the dates and for the periods presented.  Management believes the following accountingpolicies, among others, represent its more critical or complex estimates andassumptions used in preparation of its consolidated financial statements.

 

The Companyevaluates its estimates and assumptions on an on-going basis and believes itsestimates and assumptions are reasonable based on historical experience andother factors.  However, actual resultscould differ from those estimates and these differences could be material to theconsolidated financial statements.  Theaccounting policies management has identified as critical or complex accountingpolicies are described below.

 

*Income taxes.  *The Company’s net deferred tax assetsconsist primarily of the tax benefit related to operating loss carryforwards,alternative minimum tax credits and asset write-downs, in connection with storeclosure reserves, that are not deductible for tax purposes until the assets aredisposed.  The Company has providedvaluation allowances against its deferred net tax assets based on management’smost recent assessment that it is not deemed more likely than not that thedeferred tax assets will be realized. If future assessments by management were to determine that the Companywould be able to realize its deferred tax assets in excess of their netrecorded amounts, an adjustment to the deferred tax assets could result in anincrease in net income in the period such determination was made.

 

*Long-lived assets impairment.*  The Company reviews its long-lived assetsrelated to each restaurant annually for impairment, or whenever events orchanges in circumstances indicate that the carrying amount of a restaurant maynot be recoverable.  The Companyconsiders a history of operating losses to be its primary indicator ofpotential impairment, therefore new restaurants are generally not identifiedfor impairment until a sufficient operating history has been

 

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developed.  Assets are groupedand evaluated for impairment at the lowest level for which there areidentifiable cash flows, the individual restaurants.  Impairment evaluations require an estimation of cash flows overthe remaining useful life of the restaurants. If the long-lived assets of a restaurant are not recoverable based uponforecasted undiscounted cash flows, the Company writes down an impairedrestaurant to its estimated fair value, which becomes its new cost basis.  Generally, management considers the presentvalue of a restaurant’s projected future cash flows and estimated sales valuesof a restaurant’s long-lived assets in determining fair value.  Considerable management judgment isnecessary to estimate projected future operating cash flows.  Accordingly, if actual results vary fromsuch estimates, significant future impairment could result.

 

*Discontinued Operations.* Considerable management judgment is necessaryto determine whether a closed restaurant should be classified as discontinuedoperations.  In general, the Companyconsiders the extent to which the restaurant’s operations and cash flow areexpected to be absorbed by other currently operated restaurants or replacedwith a new restaurant in making this determination.  A closed restaurant, or group of restaurants, which is located inan isolated market and not replaced, would generally be classified asdiscontinued operations.

 

*Property and equipment.* Property and equipment are stated atcost.  Depreciation and amortization arecomputed using the straight-line method over the estimated useful lives of theassets which range from 5 to 30 years or the lease term of a restaurantincluding option periods, as appropriate, not to exceed 25 years.

 

S*tock-based compensation. *The Company accounts for stock-based awards toemployees using the intrinsic value method in accordance with AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued toEmployees.”  Accordingly, nocompensation expense has been recognized in the financial statements foremployee stock arrangements.  TheCompany accounts for stock-based awards to non employees in accordance withStatement of Financial Accounting Standards (“SFAS”) No. 123 “Accounting forStock-Based Compensation” and Emerging Issues Task Force (“EITF”) Issue No.96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employeesfor 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 availablehistorical claim settlement data for reported claims.  If a greater number of claims occur in comparison to the amountof claims estimated or medical costs increase beyond anticipated costs,additional charges may be required in the period such determination was made.

 

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# *Results of Operations*

 

The following table setsforth items in the Company’s statements of operations as a percentage of salesand

certain operating data for the periodsindicated:

 
|                                     |   | **Twelve  Weeks Ended** |       |
|------------------------------------------|--------|-------------------------|------------|
| **(Dollars in thousands)**               |   | **March 23,  2003**     |       | **March 24,  2002** |   |
|                                     |   |                    |       |   |   |   |   |   |   |
| NET SALES                                |   | $                       | 17,684     |   | 100.0 | % | $ | 17,029 |   | 100.0 | % |
|                                     |   |                    |       |   |   |   |   |   |   |
| COSTS AND EXPENSES:                      |   |                    |       |   |   |   |   |   |   |
| Cost of sales                            |   | 4,015                   |       | 22.7 | % | 3,792 |   | 22.3 | % |
| Restaurant operating expenses:           |   |                    |       |   |   |   |   |   |   |
| Labor                                    |   | 6,086                   |       | 34.4 | % | 5,678 |   | 33.3 | % |
| Occupancy and other                      |   | 5,700                   |       | 32.2 | % | 5,171 |   | 30.4 | % |
| General and administrative expenses      |   | 1,366                   |       | 7.7 | % | 1,362 |   | 8.0 | % |
| Depreciation and amortization            |   | 789                     |       | 4.5 | % | 768 |   | 4.5 | % |
| Restaurant opening costs                 |   | 192                     |       | 1.1 | % | 53 |   | 0.3 | % |
| Total costs and expenses                 |   | 18,148                  |       | 102.6 | % | 16,824 |   | 98.8 | % |
|                                     |   |                    |       |   |   |   |   |   |   |
| OPERATING INCOME (LOSS)                  |   | (464                    | )          | (2.6 | )% | 205 |   | 1.2 | % |
|                                     |   |                    |       |   |   |   |   |   |   |
| Interest income                          |   | 2                       |       | — | % | 15 |   | 0.1 | % |
| Interest expense                         |   | (79                     | )          | (0.5 | )% | (59 | ) | (0.4 | )% |
|                                     |   |                    |       |   |   |   |   |   |   |
| Interest expense, net                    |   | (77                     | )          | (0.5 | )% | (44 | ) | (0.3 | )% |
|                                     |   |                    |       |   |   |   |   |   |   |
| INCOME (LOSS) BEFORE INCOME TAXES        |   | (541                    | )          | (3.1 | )% | 161 |   | 0.9 | % |
| Provision for income taxes               |   | —                  |       | — | % | 4 |   | — | % |
|                                     |   |                    |       |   |   |   |   |   |   |
| INCOME (LOSS) FROM CONTINUING OPERATIONS |   | (541                    | )          | (3.1 | )% | 157 |   | 0.9 | % |
|                                     |   |                    |       |   |   |   |   |   |   |
| LOSS FROM DISCONTINUED OPERATIONS        |   | —                  |       | — | % | (44 | ) | (0.2 | )% |
|                                     |   |                    |       |   |   |   |   |   |   |
| NET INCOME (LOSS)                        |   | $                       | (541       | ) | (3.1 | )% | $ | 113 |   | 0.7 | % |
|                                     |   |                    |       |   |   |   |   |   |   |
| Number of restaurants:                   |   |                    | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Open at beginning of period              |   | 53                      |       |   |   | 51 |   |   |   |
| Open at end of period                    |   | 55                      |       |   |   | 51 |   |   |   |

 

The following table presentsthe components of average restaurant operating income on a per restaurant basisfor the comparable Fresh Choice and Zoopa restaurants open during the period(the Company’s four Fresh Choice Express restaurants and Fresh Choicerestaurants not open eighteen months are excluded):

 
|                                                  |   | **Twelve  Weeks Ended** |   |
|-------------------------------------------------------|--------|-------------------------|--------|
|                                                  |   |                    |   |   |   |   |   |   |   |
| **(Dollars in thousands)**                            |   | **March 23,  2003**     |   | **March 24,  2002** |   |
|                                                  |   |                    |   |   |   |   |   |   |   |
| NET SALES                                             |   | $                       | 352    |   | 100.0 | % | $ | 361 |   | 100.0 | % |
|                                                  |   |                    |   |   |   |   |   |   |   |
| COSTS AND EXPENSES:                                   |   |                    |   |   |   |   |   |   |   |
| Cost of sales                                         |   | 78                      |   | 22.3 | % | 80 |   | 22.1 | % |
| Restaurant operating expenses:                        |   |                    |   |   |   |   |   |   |   |
| Labor                                                 |   | 115                     |   | 32.8 | % | 119 |   | 33.0 | % |
| Occupancy and other                                   |   | 112                     |   | 31.9 | % | 108 |   | 29.9 | % |
| Depreciation and amortization                         |   | 14                      |   | 3.9 | % | 15 |   | 4.3 | % |
|                                                  |   |                    |   |   |   |   |   |   |   |
| Total costs and expenses                              |   | 320                     |   | 90.9 | % | 323 |   | 89.3 | % |
|                                                  |   |                    |   |   |   |   |   |   |   |
| RESTAURANT OPERATING INCOME                           |   | $                       | 32     |   | 9.1 | % | $ | 39 |   | 10.7 | % |
|                                                  |   |                    |   |   |   |   |   |   |   |
| Comparable Fresh Choice & Zoopa  restaurants open |   | 43                      |   |   |   | 43 |   |   |   |

 

Restaurantoperating income excludes restaurant opening costs and general andadministrative expenses.

 

16

----

 

*Results ofOperations:  Twelve Weeks Ended March23, 2003*

# *Compared to Twelve Weeks Ended March 24, 2002*

 

*Net Sales*.  Net sales for the quarterended March 23, 2003 were $17,684,000, an increase of $655,000, or 3.8%, fromsales from continuing operations of $17,029,000 for the quarter ended March 24,2002. The primary components of the net increase in sales were:

 
| **(In thousands)**                                        |   |   |   |
|-----------------------------------------------------------|--------|--------|--------|
|                                                      |   |   |   |
| Incremental sales from seven new Fresh Choice restaurants |   | $      | 1,530  |   |
|                                                      |   |   |   |
| Decrease in comparable Fresh Choice restaurant sales      |   | (409   | )      |
|                                                      |   |   |   |
| Decrease in sales from closed restaurants                 |   | (515   | )      |
|                                                      |   |   |   |
| Change in sales in Fresh Choice Express restaurants       |   | 49     |   |
|                                                      |   |   |   |
|                                                      |   | $      | 655    |   |

 

The Company operated anaverage of 54.5 restaurants in the first quarter of 2003 compared to 51.5restaurants in the first quarter of 2002. Sales at the Company’s 43 comparable Fresh Choice restaurants, whichinclude restaurants open at least 18 months, decreased 2.6% in the firstquarter of 2003 versus the first quarter of 2002.  Comparable store guest counts decreased 5.9%, while thecomparable store average check increased 3.6% to $7.75, reflecting priceincreases offset by higher-priced-coupon offers.

 

*Costs and Expenses*.  Cost of sales (food andbeverage costs) was 22.7% of sales in the first quarter of 2003 compared to22.3% in the first quarter of 2002. Food and beverage costs increased as a percentage of sales primarilyfrom the introduction of a new menu rotation into the restaurants during thequarter and inflationary cost increases.

 

*Restaurant Operating Expenses*. Restaurant operating expenses (labor, occupancy and other) were 66.6% ofsales in the first quarter of 2003 compared to 63.7% of sales in the firstquarter of 2002, an increase of 2.9% of sales.

 

Labor costs as a percentageof sales were 34.4% for the first quarter of 2003 compared to 33.3% in thefirst quarter of 2002.  Labor costs, asa percentage of sales, were higher primarily due to lower average restaurantsales, a higher average wage and labor inefficiencies at our newlocations.  It typically takes six toeight weeks for a new store to bring its labor in line with our schedulingmatrix as the store’s new crewmembers become more productive and guest trafficpatterns are developed.

 

Occupancy and other expensesas a percentage of sales were 32.2% for the first quarter of 2003 compared to30.4% of sales in the first quarter of 2002, an increase of 1.8% of sales.  The increase is due primarily to loweraverage restaurant sales, higher utility expenses and higher advertising costs.

 

*Depreciation and Amortization*. Depreciation and amortization expenses in the first quarter of 2003 were4.5% of sales, which is flat compared to the first quarter of 2002.

 

*General and Administrative Expenses*. General and administrative expenses were 7.7% of sales in the firstquarter of 2003 compared to 8.0% of sales in the first quarter of 2002.  The decrease is primarily the result of flatspending during the quarter compared to last year and higher sales.

 

*Interest Expense, net*. Interest expense, net was $77,000 in the first quarter of 2003 compared to $45,000 in the firstquarter of 2002. This increase is due to additional equipment lease financingfor the new stores, offset by lower interest earned on the Company’s averagecash balances.  Interest expenseconsists of fees related to securing the Company’s borrowing arrangements andinterest expense on outstanding borrowings and capital lease obligations.

 

17

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*Income Taxes*.  The Company recorded no taxbenefit from its operating loss in the first quarter of 2003 due to valuationallowances against its net deferred tax assets.  The Company’s net deferred tax assets consist primarily of thetax benefit related to operating loss carryforwards, alternative minimum taxcredits and asset write-downs, in connection with store closure reserves, thatare not deductible for tax purposes until the assets are disposed.  The Company will continue to provide a fullvaluation allowance for its deferred tax assets until it becomes more likelythan not, in management’s assessment, that any portion of the Company’sdeferred tax assets will be realized. In addition, should the Company project taxable income in 2003, it willnot be able to utilize its California net operating loss carryforwards.  In September 2002, California enacted a lawsuspending the use of such loss carryforwards to offset taxable income in thedetermination of state income taxes for the 2003 tax year.  The Company recorded an income tax provisionfor the first quarter of 2002, despite net operating loss carryforwardsavailable to offset taxable income, due to projected 2002 net income beingsubject to state alternative minimum tax.

 

**Item 3  - Quantitative and Qualitative DisclosuresAbout Market Risk**

 

The Company is exposed tointerest rate risk primarily through its borrowing activities.  The Company has not used derivative financialinstruments to hedge such risks.  Thereis inherent roll-over risk for borrowings as they mature and are renewed atcurrent market rates.  The extent ofthis risk is not quantifiable or predictable because of the variability offuture interest rates and business financing requirements.  If market rates were to increase immediatelyby 10 percent from levels at March 23, 2003, the fair value of the Company’sborrowings would not be materially affected as borrowings are primarily subjectto variable interest rates.

 

**Item 4  - Controls and Procedures****

 

(a) Under the supervisionand with the participation of our management, including our principal executiveofficer and principal financial officer, we evaluated the effectiveness of thedesign and operation of our disclosure controls and procedures, as such term isdefined under Rule 13a-14(c) promulgated under the Securities Exchange Act of1934, as amended, within the 90 day period prior to the filing date of thisreport. Based on this evaluation, our principal executive officer and principalfinancial officer concluded that our disclosure controls and procedures wereeffective as of that date.

 

(b) There have been nosignificant changes (including corrective actions with regard to significantdeficiencies or material weaknesses) in our internal controls or in otherfactors that could significantly affect these controls subsequent to the dateof the evaluation referenced in paragraph (a) above.

 

18

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**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 arefiled or incorporated by reference as part of this report.

 

(b)                           Reports on Form 8-K.  The registrant filed the following reportson Form 8-K during the quarter ended March 23, 2003.

-                    on February 26, 2003 reporting that theCompany notified Deloitte & Touche LLP. (“Deloitte”) that upon completionof Deloitte’s audit of the Company’s consolidated financial statements for thefiscal year ended December 29, 2002, the Company will dismiss Deloitte andchange auditors

-                    on March 14, 2003 reporting the engagement ofGrant Thornton LLP. as its new independent auditors for the fiscal year endingDecember 28, 2003

-                    on March 21, 2003 reporting that the Companyhad changed its certifying accountant

 

19

----

 

###### **SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the Registrant has duly caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|                        | 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:  April 29, 2003 |                                               |

 

20

----

 

 

**CERTIFICATIONOF PERIODIC REPORT**

 

I, Everett F. Jefferson,certify that:

 

1.               Ihave reviewed this quarterly report on Form 10-Q of Fresh Choice, Inc.

 

2.               Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.               Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.               Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)            designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)           evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)            presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.               Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)              allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.               Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date: April  29, 2003                  |
|----------------------------------------|
|                                   |
|                                   |
| /S/ Everett  F. Jefferson              |   |
| Everett F.  Jefferson                  |
| President  and Chief Executive Officer |

 

21

----

 

I, David E. Pertl, certifythat:

 

1.               Ihave reviewed this quarterly report on Form 10-Q of Fresh Choice, Inc.

 

2.               Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterly report;

 

3.               Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.               Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)            designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)           evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)            presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.             Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)            allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)           anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.               Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date: April  29, 2003                              |
|----------------------------------------------------|
|                                               |
| /S/ David E.  Pertl                                |   |
| David E.  Pertl                                    |
| Senior Vice  President and Chief Financial Officer |

 

22

----

 

**INDEX TO FORM 10-QEXHIBITS**

 
| **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                                                                                                                  |

 

23

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| **Exhibit  No.** |    | **Description**                                                                                                                                                |
|------------------|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |    |                                                                                                                                                           |
| 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                             |
|             |    |                                                                                                                                                           |
| 10.59            | (21)    | Letter dated  December 10, 2002 amending the Revolving Loan Agreement dated October 5, 2001  as amended June 3, 2002 with Mid-Peninsula Bank                   |
|             |    |                                                                                                                                                           |
| 10.60            | (3)     | 2003 Home  Office Incentive Plan                                                                                                                               |
|             |    |                                                                                                                                                           |
| 10.61            |    | Letter dated April 7, 2003  amending the Revolving Loan Agreement dated October 5, 2001 as amended June  3, 2002 and December 10, 2002 with Mid-Peninsula Bank |
|             |    |                                                                                                                                                           |
| 99.1             |    | Certification by the Chief  Executive Officer of his responsibility for financial reports.                                                                     |
|             |    |                                                                                                                                                           |
| 99.2             |    | Certification by the Chief  Financial Officer of his responsibility for financial reports.                                                                     |

 

----

(1)                 Incorporatedby reference from the Exhibits with corresponding numbers filed with theCompany’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 December7, 1992, except that Exhibit 3.1 is incorporated by reference from Exhibit 3.1Cand Exhibit 3.2 is incorporated by reference from Exhibit 3.2B.

 

(2)                Incorporated byreference from the Exhibits with corresponding numbers filed with the Company’sQuarterly Report on Form 10-Q for the quarter ended September 4, 1994.

 

24

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(3)               Agreements or compensatory planscovering executive officers and directors of Fresh Choice, Inc.

 

(6)**              **Incorporatedby reference from the Exhibits with corresponding numbers filed with theCompany’s Annual Report on Form 10-K for the year ended December 31, 1995.

 

(8)               Incorporated by reference from theExhibits with corresponding numbers filed with the Company’s Quarterly Reporton form 10-Q for the quarter ended March 24, 1996.

 

(10)         Incorporatedby reference from the Exhibits with corresponding numbers filed with theCompany’s Quarterly Report on Form 10-Q for the quarter ended September 8,1996.

 

(11)         Incorporatedby reference from the Exhibits with corresponding numbers filed with theCompany’s Annual Report on Form 10-K for the year ended December 29, 1996.

 

(13)         Incorporated by reference from Exhibits withcorresponding numbers filed with the Company’s Quarterly Report on Form 10-Qfor the quarter ended June 14, 1998.

 

(14)         Incorporatedby reference from the Exhibits with corresponding numbers filed with theCompany’s Annual Report on Form 10-K for the year ended December 27, 1998.

 

(15)         Incorporatedby reference from the Exhibits with corresponding numbers filed with theCompany’s Annual Report on Form 10-K for the year ended December 26, 1999.

 

(16)         Incorporatedby reference from the Exhibits with corresponding numbers filed with theCompany’s Annual Report on Form 10-K for the year ended December 31, 2000.

 

(17)         Incorporatedby reference from Exhibits with corresponding numbers filed with the Company’sQuarterly Report on Form 10-Q for the quarter ended March 24, 2002.

 

(18)         Incorporatedby reference from the Exhibits with corresponding numbers filed with theCompany’s Annual Report on Form 10-K for the year ended December 30, 2001.

 

(19)         Incorporatedby reference from Exhibits with corresponding numbers filed with the Company’sQuarterly Report on Form 10-Q for the quarter ended March 24, 2002.

 

(20)         Incorporatedby reference from Exhibits with corresponding numbers filed with the Company’sQuarterly Report on Form 10-Q for the quarter ended June 16, 2002.

 

(21)         Incorporatedby reference from Exhibits with corresponding numbers filed with the Company’sAnnual Report on Form 10-K for the year ended December 29, 2002.

 

25

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