** **

**SECURITIES ANDEXCHANGE COMMISSION**Washington, D.C.  20549

 

----

**FORM 10-Q**

**(MarkOne)**

| **ý** |   | **QUARTERLY REPORT under SECTION 13 OR 15(d) of the SECURITIES EXCHANGE  ACT OF 1934**                                                                                                     |
|------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                       |
|       |   | **For the quarter ended ****September 8, 2002**                                                                                                                                       |
|       |   |                                                                                                                                                                                       |
|       |   | **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 number0-20792**

 

**FRESH CHOICE, INC.**(Exact name of registrant as specifiedin its charter)

 

| **Delaware**                                                                                                       |   | **77-0130849**      |
|--------------------------------------------------------------------------------------------------------------------|--------|---------------------|
| (State or other jurisdiction of                                                                                    |   | (I.R.S. Employee    |
| incorporation or organization)                                                                                     |   | Identification No.) |
|                                                                                                               |   |                |
| **485 Cochrane Circle, Morgan Hill,  California 95037**                                                            |
| (Address of  principal executives offices)            (Zip Code) |
|                                                                                                               |   |                |

Registrant’stelephone number, including area code:                                                           **(408) 776-0799**

** **

 

Former name,former address and former fiscal year, if changed since last report.

 

 

Indicate bycheck whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

ý    Yes             o     No

 

APPLICABLE ONLY TO ISSUERS INVOLVED INBANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate bycheck mark whether the registrant has filed all documents and reports requiredto be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934subsequent to the distribution of securities under a plan confirmed by a court.

o    Yes             o    No

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

The number ofshares of Common Stock, $.001 par value, outstanding as of October 1, 2002 was5,939,146.

 

 

1

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**FRESH CHOICE, INC.**

 

**INDEX**

 

 

 

PART I -FINANCIAL INFORMATION

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

 

 

2

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**PART I.  FINANCIAL INFORMATION**

 

**Item1 - Financial Statements**

 

FRESH CHOICE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share andper share amounts)

(Unaudited)

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

 

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

See accompanying notes to condensed consolidated financialstatements.

 

 

3

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FRESH CHOICE, INC.

CONDENSED CONSOLIDATED STATEMENTS OFINCOME

(In thousands, except per share amounts)

(Unaudited)

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

 

See accompanying notes to condensed consolidated financialstatements.

 

 

4

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FRESH CHOICE,INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

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

 

Seeaccompanying notes to condensed consolidated financial statements

 

 

5

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FRESH CHOICE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Twelve Weeks and Thirty-Six Weeks Ended September8, 2002 and September 9, 2001

(Unaudited)

 

1.           CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

 

                            Theaccompanying condensed consolidated financial statements have been prepared bythe Company without audit and reflect all adjustments, consisting of normalrecurring adjustments and accruals, which are, in the opinion of management,necessary for a fair statement of financial position and the results ofoperations for the interim periods.  Thestatements have been prepared in accordance with the regulations of theSecurities and Exchange Commission, but omit certain information and footnotedisclosures necessary to present the statements in accordance with generallyaccepted accounting principles.  Forfurther information, refer to the financial statements and notes theretoincluded in the Company’s Annual Report on Form 10-K for the fiscal year endedDecember 30, 2001.

 

2.           NETINCOME PER SHARE

 

                            Basicearnings per share (“EPS”) excludes the effect of potentially dilutivesecurities and is computed by dividing the Company’s net income by the weightedaverage of its common shares outstanding for the period.  Diluted EPS reflects the potential dilutionthat could occur if securities or other contracts to issue common stock wereexercised or converted into common stock. The Company converts common stock options and warrants into potentialdilutive shares using the treasury stock method and converts preferred stockinto potential dilutive shares using the “if converted” method.

 

                            Areconciliation of the components of basic and diluted net income per sharefollows:

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

 

 

                            Thefollowing table presents the total dilutive securities which the Companyexcluded for each period presented from its diluted EPS computation because theexercise price of the securities exceeded the average fair value of theCompany’s common stock:

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

 

 

6

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3.           OTHERACCRUED EXPENSES

 

                            Thecomponents of other accrued expenses are as follows:

 

|                               |   | **September 8,** |   | **December 30,** |   |
|------------------------------------|--------|------------------|--------|------------------|--------|
| (In thousands)                     |   | **2002**         |   | **2001**         |   |
| Unredeemed gift certificates       |   | $                | 468    |             | $      | 539 |   |
| Accrued workers’ compensation |   | 331              |   | 240              |   |
| Accrued utilities                  |   | 277              |   | 225              |   |
| Accrued property taxes             |   | 172              |   | 98               |   |
| Deferred vendor allowances         |   | 144              |   | 76               |   |
| Income taxes payable               |   | 111              |   | 37               |   |
| Accrued advertising                |   | 100              |   | 252              |   |
| Other                              |   | 351              |   | 341              |   |
|                               |   | $                | 1,954  |             | $      | 1,808 |   |

 

 

4.           OTHERLONG-TERM LIABILITIES

 

                            Thecomponents of other long-term liabilities are as follows:

 

|                  |   | **September 8,** |   | **December 30,** |   |
|-----------------------|--------|------------------|--------|------------------|--------|
| (In thousands)        |   | **2002**         |   | **2001**         |   |
| Deferred rent         |   | $                | 1,522  |             | $      | 1,799 |   |
| Deferred gain on sale |   | 199              |   | 211              |   |
|                  |   | $                | 1,721  |             | $      | 2,010 |   |

 

 

5.           BORROWINGARRANGEMENTS

 

                            TheCompany has a $2,200,000 loan agreement (the “Loan”), with a commercialbank.   Under the terms of the Loan theCompany issued a promissory note (the “Note”) in the amount of $2,200,000.   The Note is secured by a deed of trust oncertain Company-owned real estate.  TheNote bears interest at the prime rate (4.75% at September 8, 2002) plus0.625%.  The Note has a fifteen-yearamortization period and matures after 84 monthly payments of principal andinterest.  All unpaid principal andinterest shall be due and payable on the Note’s maturity date of September 2,2008.

 

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

 

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

 

                            OnSeptember 8, 2002 the Company had a commitment from the bank, separate from theAgreement, which makes $956,000 available to the Company in support ofoutstanding letters of credit.  Thiscommitment expires March 28, 2003.

 

7

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                            TheAgreement 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.

 

                            TheCompany has obtained commitments for $6.1 million of capital equipment leasefinancing, of which the Company has utilized $1,489,000 through September 8,2002.  On September 28, 2002 the Companyutilized an additional $156,000 of the capital equipment lease financingcommitment.  The Company intends toutilize the remaining commitments to fund restaurant equipment primarily in itsnew restaurants.  The Company may seekadditional debt financing to provide greater flexibility as it continuesrestaurant expansion.

 

 

6.           CONVERTIBLEPREFERRED STOCK

 

                            TheCompany’s outstanding Series B non-voting convertible preferred stock iscurrently held by one entity and is convertible, at the holders’ option, intoSeries A voting convertible preferred stock on a one-for-one basis.  Although no Series A preferred stock iscurrently outstanding, holders of Series A preferred stock, if any, would beentitled to vote with common stockholders on all matters submitted to a vote ofstockholders.  When and if issued, theholders of a majority of the outstanding Series A preferred stock will have aseparate right to approve certain corporate actions.

 

                   Infiscal 1998, the Company failed to achieve a specified earnings target 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 actionto convert 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, 2002 such holder notified theCompany that it had no intention, at that time, of exercising such right;however, it has not waived any of its rights under the agreement.  As of September 8, 2002 management is notaware of any change in the shareholder’s intention.

 

7.           INCOMETAXES

 

              TheCompany recorded an income tax provision for the twelve and thirty-six weeksended September 8, 2002 primarily due to an increase in estimated state incometaxes payable for California state income taxes.  In September 2002, the state of California enacted a lawsuspending the use of net operating loss carryforwards that could be used tooffset taxable income in the determination of state income taxes for the 2002and 2003 tax years.  The Company’s netdeferred tax assets consist primarily of the tax benefit related to operatingloss carryforwards, alternative minimum tax credits and asset write-downs, inconnection with store closure reserves, that are not deductible for taxpurposes until the assets are disposed. The Company will continue to provide a full valuation allowance for itsdeferred tax assets until it becomes more likely than not, in management’sassessment, that any portion of the Company’s deferred tax assets will berealized.

 

8.           RECENTLYISSUED ACCOUNTING STANDARDS

 

                            InJuly 2001, the Financial Accounting Standards Board (“FASB”) issued Statementof Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and OtherIntangible Assets”.  SFAS No. 142requires that an intangible asset that is acquired shall be initiallyrecognized and measured based on its fair value. The statement also providesthat intangible assets shall be tested for impairment annually, or morefrequently if circumstances indicate potential impairment, through a comparisonof fair value to its carrying amount. SFAS No. 142 became effective for fiscalperiods beginning after December 15, 2001.

 

 

8

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                            Inaccordance with SFAS No. 142 and effective December 31, 2001 (fiscal year2002), the Company discontinued the amortization of certain intangible assetsthat were defined by the Company to have an indefinite life.  The Company also increased the amortizationrates of certain other intangible assets to reflect a shorter useful life ofthese assets.  Had SFAS No. 142 been ineffect during the thirty-six weeks ended September 9, 2001, previously reportednet income would have increased by $13,000 and basic and diluted earnings pershare would have been unchanged.

 

                            InAugust 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets,” that replaces SFAS No. 121, “Accounting for theImpairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.”  SFAS No. 144 requires that long-lived assetsto be disposed of by sale, including those of discontinued operations, bemeasured at the lower of carrying amount or fair value less cost to sell.  Discontinued operations will no longer bemeasured at net realizable value or include operating losses that have not yetbeen incurred.  Except for thoseprovisions of this accounting standard whose implementation extends to the endof 2003, the Company has adopted SFAS No. 144 as of December 31, 2001 (fiscalyear 2002).  As the provisions weregenerally to be applied prospectively, the adoption did not have a materialimpact on the Company’s consolidated financial statements.  In addition, the adoption of the remainingprovisions is not expected to have a material impact on the Company’s consolidatedfinancial statements.

 

                            InJune 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated withExit or Disposal Activities” which addresses accounting for restructuring andsimilar costs.  SFAS No. 146 supercedesprevious accounting guidance, principally Emerging Issues Task Force Issue(“EITF”) No. 94-3.  The Company willadopt the provisions of SFAS No. 146 for restructuring activities initiatedafter December 29, 2002.  SFAS No. 146requires that the liability for costs associated with an exit or disposalactivity 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 exit plan.  SFAS No. 146 also establishes that theliability should initially be measured and recorded at fair value.  Accordingly, SFAS No. 146 may affect thetiming of recognizing future restructuring costs as well as the amountsrecognized.  Management does not expectthe adoption of SFAS No. 146 will have a material impact on the Company’sconsolidated financial statements.

 

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

 

                            The followingdiscussion is intended to highlight significant changes in the Company’sfinancial position and results of operations for the twelve weeks ended andthirty-six weeks ended September 8, 2002. The interim financial statements and this Management’s Discussion andAnalysis of Financial Condition and Results of Operations should be read inconjunction with the Consolidated Financial Statements and Notes thereto forthe fiscal year ended December 30, 2001 and the related Management’sDiscussion and Analysis of Financial Condition and Results of Operations, bothof which are contained in the Company’s Annual Report on Form 10-K for thefiscal year ended December 30, 2001.

 

                            Certainstatements set forth in this discussion and analysis of financial condition andresults of operations including anticipated store openings, planned capitalexpenditures and trends in or expectations regarding the Company’s operationsconstitute “forward-looking statements” within the meaning of the PrivateSecurities Litigation Reform Act of 1995. Such statements are based on currently available operating, financialand competitive 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 plans to open new restaurants could be affected bythe Company’s ability to locate suitable restaurant sites, construct newrestaurants 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.

 

9

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# *Liquidity andCapital Resources*

 

                        The Company’s primary capitalrequirements have been for the expansion of its restaurant operations andremodeling of its restaurants.  TheCompany has traditionally financed these requirements with funds from equityofferings, cash flow from operations, landlord allowances, capital equipmentleases and short-term bank debt.  TheCompany does not have significant trade receivables or inventory and receivestrade credit based upon negotiated terms in purchasing food and supplies.

 

                            TheCompany has a $2,200,000 loan agreement (the “Loan”), with a commercialbank.   Under the terms of the Loan theCompany issued a promissory note (the “Note”) in the amount of $2,200,000.   The Note is secured by a deed of trust oncertain Company-owned real estate.  TheNote bears interest at the prime rate (4.75% at September 8, 2002) plus0.625%.  The Note has a fifteen-yearamortization period and matures after 84 monthly payments of principal andinterest.  All unpaid principal andinterest shall be due and payable on the Note’s maturity date of September 2,2008.

 

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

 

                            OnSeptember 8, 2002 the Company had a commitment from the bank, separate from theAgreement, which makes $956,000 available to the Company in support ofoutstanding letters of credit.  Thiscommitment expires March 28, 2003.

 

                            TheAgreement 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.

 

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

 

                            Operatingactivities for the first thirty-six weeks of 2002 provided $4.7 million of cashflows.  During the same period, theCompany invested $5.3 million in property and equipment, which includes theequipment under capital leases.

 

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

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

 

 

10

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                            OnSeptember 28, 2002 the Company entered into a capital lease for equipment thatrequires minimum monthly payments of $3,787 through 2006.

 

                            TheCompany’s outstanding Series B non-voting convertible preferred stock is currentlyheld by one entity and is convertible, at the holders’ option, into Series Avoting convertible preferred stock on a one-for-one basis.  Although no Series A preferred stock iscurrently outstanding, holders of Series A preferred stock, if any, would beentitled to vote with common stockholders on all matters submitted to a vote ofstockholders.  When and if issued, theholders of a majority of the outstanding Series A preferred stock will have aseparate right to approve certain corporate actions.

 

                            Infiscal 1998, 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 actionto convert such shares into shares of Series A preferred stock nor has it exercisedits right to elect a majority of the Board of Directors.  In March 2002 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.

 

                            TheCompany’s continued growth depends to a significant degree on its ability toopen new restaurants and to operate such restaurants profitably.  The Company plans to open a total of six newFresh Choice restaurants in 2002, primarily in California.  As of October 1, 2002, three new FreshChoice restaurants have opened in fiscal 2002. The Company currently has signed leases for five additional Fresh Choicerestaurants.  The total leaseholdimprovements and equipment costs for these five locations is estimated to beapproximately $6.0 million, of which approximately $1.3 million has beenexpended through the first thirty-six weeks of 2002.

 

                            TheCompany continues to look for sites, primarily in its core Northern Californiamarkets as well as in Southern California, for expansion beyond 2002.  The Company’s ability to implement anexpansion strategy will depend upon a variety of factors, including itscontinued profitability and the Company’s ability to obtain funds.  See “Business Risks” included herein.

 

                            TheCompany intends to finance its operating cash requirements and fiscal 2002capital requirements through existing cash balances, cash provided byoperations, its borrowing arrangements and existing equipment lease financingcommitment.  The Company has obtainedcommitments for $6.1 million of capital equipment lease financing, of which theCompany has utilized $1,489,000 through September 8, 2002.  The Company intends to utilize the remainingcommitments to fund restaurant equipment primarily in its new restaurants.  The Company may seek additional debtfinancing to provide greater flexibility as it continues restaurant expansionin 2003 and beyond.

 

                            TheCompany’s ability to continue an expansion strategy will depend upon a varietyof factors, including, maintaining a sufficient cash flow from operations andits ability to obtain additional funds. The Company believes its near-term capital requirements can be metthrough its existing cash balances, cash provided by operations, its borrowingarrangements and additional equipment lease financing.  However, the Company’s operating cash flowis impacted by the Company’s comparable store sales increases ordecreases.  In 2001 comparable storesales, excluding the extra 53rd week of sales in 2000, declined 1.2%and comparable store sales also declined 3.6% in the first thirty-six weeks of2002.  The Company expects comparablestore sales to improve, but there can be no assurance that comparable storesales will improve.  In addition, theCompany will be seeking additional financing to provide greaterflexibility.  There can be no assurancethat the Company will be able to obtain additional financing when needed onacceptable terms or at all.  To theextent operating cash flow declines, or financing cannot be obtained, theCompany intends to reduce its expansion plans.

 

 

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*Impact of Inflation*

 

                            Manyof the Company’s employees are paid hourly rates related to the federal andstate minimum wage laws.  Accordingly,increases in the minimum wage could materially increase the Company’s laborcosts.  In addition, the cost of foodcommodities utilized by the Company is subject to market supply and demandpressures.  Shifts in these costs mayhave a significant impact on the Company’s food costs.  The Company anticipates that increases inthese costs may be offset through pricing and other cost control efforts;however, there is no assurance that the Company would be able to pass suchcosts on to its guests or that even if it were able to do so, it could do so ina short period of time.

 

# *Business Risks*

 

                          Certaincharacteristics and dynamics of the Company’s business and of financial marketsin general create risks to the Company’s long-term success and to predictable financialresults.  These risks include:

 

                          *Operating Losses and Recent Declines in ComparableStore Sales*.  Our quarterlyand annual operating results and same store sales have fluctuated significantlyin the past and are likely to fluctuate significantly in the future.  The Company reported its first operatingloss in the fourth quarter of 1994, and reported operating losses in three ofthe following four years.  Although the Companyhas reported a profit for each of the last three years, there can be no assurancethat the Company will continue to be profitable over the long or short term.

 

From the third quarter of fiscal 1994 through the end of 1998, theCompany reported quarterly comparable store sales declines.  The Company reported positive comparablestore sales in each quarter of the following two years; however, the Company’scomparable store sales decreased for fiscal year 2001 and for the firstthirty-six weeks of 2002.  There can beno assurance that comparable store sales declines experienced in 2001 and thefirst thirty-six weeks of 2002 will not continue to decline further.

 

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

 

                          TheCompany’s expansion plans may include entering new geographic regions in whichthe Company has no previous operating experience.  There can be no assurance that the Fresh Choice concept will besuccessful in regions outside of California, Texas or 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 conditions may make itdifficult for the Company to achieve its store growth objectives.

 

                          *Lease Renewals*.  As existing restaurant leases expire, the Company must negotiatenew leases or lease extensions in order to continue operations at existingrestaurants.  There can be no assurancethat the Company will be able to renew these leases on favorable terms or atall.  If the Company is unable to obtainfavorable terms on new leases or extensions on existing leases, it wouldincrease costs and reduce the Company’s operating margins.  Moreover, if the Company is unable to renewexisting leases and is unable to find suitable alternate locations, theCompany’s revenue and operating results would be adversely affected.

 

 

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                          *Geographic Concentration*.  As of October 1, 2002, 40 of the Company’s53 restaurants were located in California, primarily in NorthernCalifornia.  Accordingly, the Company issusceptible to fluctuations in its business caused by adverse economicconditions in this region.  In addition,net sales at certain of the Company’s restaurants have been adversely affected whena new Company restaurant has been opened in relatively close geographicproximity.  There can be no assurancethat expansion within existing or future geographic markets will not adverselyaffect the individual financial performance of Company restaurants in suchmarkets or the Company’s overall results of operations.  In addition, given the Company’s presentgeographic concentration in Northern California, adverse weather conditions orincreased utility costs in the region or negative publicity relating to anindividual Company restaurant could have a more pronounced adverse effect onresults of operations than if the Company’s restaurants were more broadlydispersed.

 

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

 

                          *Volatility of Stock Price*.  The market price of the Company’s CommonStock has fluctuated substantially since the initial public offering of theCommon Stock in December 1992. Changes in general conditions in the economy,the financial markets or the restaurant industry, natural disasters or otherdevelopments affecting the Company or its competitors could cause the marketprice 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 havetypically experienced seasonal fluctuations, as a disproportionate amount ofnet sales and 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*.  The success of the Company depends on theefforts of key management personnel. The Company’s success will depend on its ability to motivate and retainits key crewmembers and to attract qualified personnel, particularly generalmanagers, for its restaurants.  TheCompany faces significant competition in the recruitment of qualifiedcrewmembers.

 

                          *Restaurant Industry*.  The restaurant industry is affected bychanges in consumer tastes, as well as national, regional and local economicconditions and demographic trends.  Theperformance of individual restaurants, including the Company’s restaurants, maybe affected by factors such as traffic patterns, demographic considerations,and the type, number and location of competing restaurants.  In addition, factors such as inflation,increased food, labor and crewmember benefit costs, and the availability ofexperienced management and hourly crewmembers may also adversely affect therestaurant industry in general and the Company’s restaurants inparticular.  Restaurant operating costsare affected by increases in the minimum hourly wage, unemployment tax rates,and various federal, state and local governmental regulations, including thoserelating to the sale of food and alcoholic beverages.  There can be no assurance that the restaurant industry ingeneral, and the Company in particular, will be successful.

 

 

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                          *Competition*.  The Company’s restaurants compete with the rapidly growingmid-price, full-service casual dining segment; with traditional limited-servicebuffet, soup, and salad restaurants; and, increasingly, with quick-serviceoutlets.  The Company’s competitorsinclude national and regional chains, as well as local owner-operatedrestaurants.  Key competitive factors inthe industry are the quality and value of the food products offered, qualityand speed of service, price, dining experience, restaurant location and theambiance of facilities.  Many of theCompany’s competitors have been in existence longer than the Company, have amore established 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 additionthe Company expects intense competition for restaurant sites, which may resultin the Company having difficulty leasing desirable sites on terms that areacceptable to the Company. The Company expects that in some cases competitorsmay be willing to pay more than the Company for sites.

 

                          *Ability to Obtain Additional Financing*.  The Company resumed its restaurant expansionin 2001. The Company’s ability to implement an expansion strategy will dependupon a variety of factors, including its ability to obtain funds.  The Company believes its near-term capitalrequirements can be met through its existing cash balances, cash provided byoperations, its borrowing arrangements and additional equipment leasefinancing.  The Company may seekadditional financing to provide greater flexibility.  There can be no assurance that the Company will be able to obtainadditional financing when needed 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 the Company’sBoard of Directors.  These factors couldhave the effect of delaying, deferring or preventing a change in control of theCompany and, as a result, could discourage acquisition bids for the Company andlimit the price that investors are willing to pay for shares of common stock

 

 

##### *Critical AccountingPolicies*

 

Our accounting policies are more fully described in Note 1 of theCompany’s audited December 30, 2001 financial statements. The preparationof financial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect reported amounts of assets, liabilities, revenuesand expenses and related disclosures of contingent assets and liabilities as ofthe dates and for the periods presented.  Management believes the following accounting policies, among others,represent its more critical or complex estimates and assumptions used inpreparation 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 tothe consolidated financial statements. The accounting policies management has identified as critical or complexaccounting policies are described below.

 

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

 

 

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

 

                            *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.

 

                            *Stock-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 withSFAS No. 123 “Accounting for Stock-Based Compensation” and EITF 96-18,“Accounting for Equity Instruments That Are Issued to Other Than Employees forAcquiring, 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.

 

 

# *Results ofOperations*

 

                            Thefollowing table sets forth items in the Company’s statements of operations as apercentage of sales and

certain operating data for the periodsindicated:

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

 

 

15

----

 

 

The following table presents thecomponents of average operating income on a per restaurant basis, based on theaverage number of Fresh Choice restaurants open during the period (theCompany’s Fresh Choice Express restaurants are excluded):

 

AVERAGE FRESH CHOICE RESTAURANTS

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

 

(This table excludes Fresh ChoiceExpress restaurants)

 

 

*Results ofOperations:  Twelve Weeks EndedSeptember 8, 2002*

# *Compared toTwelve Weeks Ended September 9, 2001*

 

                            *Net Sales*.  Net sales for the twelve weeks ended September 8, 2002 (thirdquarter of 2002) were $18,738,000, an increase of $395,000, or 2.2%, from salesof $18,343,000 for the twelve weeks ended September 9, 2001 (third quarter of2001). The primary components of the net increase in sales were:

 

| Decrease in comparable Fresh Choice  restaurant sales      |   | $         | (334,000 | )      |
|------------------------------------------------------------|--------|-----------|----------|--------|
|                                                       |   |      |     |
| Incremental sales from three new Fresh  Choice restaurants |   | 1,084,000 |     |
|                                                       |   |      |     |
| Change in sales in Fresh Choice  Express restaurants       |   | 94,000    |     |
|                                                       |   |      |     |
| Decrease in sales from closed restaurant                   |   | (449,000  | )        |
|                                                       |   | $         | 395,000  |   |

 

 

                            TheCompany operated an average of 51.7 restaurants in the third quarter of 2002compared to 49 restaurants in the third quarter of 2001.  Sales at the Company’s 45 comparable FreshChoice restaurants, which include restaurants open at least 18 months,decreased 1.9% in the third quarter of 2002 versus the third quarter of2001.  Comparable store guest countsdecreased 1.9%, while the comparable store average check increased 0.1% to$7.58, reflecting price increases offset by an increase in discounting.

 

                            Netsales per Fresh Choice restaurant averaged $385,000 in the third quarter of2002, a decrease of 2.0% over net sales per restaurant of $393,000 in the thirdquarter of 2001 due primarily to the comparable store sales decreases as notedabove.

 

*                            Costs and Expenses*.  Cost of sales (food andbeverage costs) was 22.3% of sales in the third quarter of 2002 compared to22.0% in the third quarter of 2001. Food and beverage costs increased as a percentage of sales primarily dueto a slightly higher food cost per guest and an average check approximatelyequal to the prior year.

 

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

 

 

16

----

 

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

 

                            Occupancyand other expenses as a percentage of sales were 30.1% for the third quarter of2002 compared to 28.7% of sales in the third quarter of 2001, an increase of1.4% of sales.  The increase is dueprimarily to lower average restaurant sales and higher repair and maintenanceexpenses.

 

                            *Depreciation and Amortization*.  Depreciation and amortization expenses were4.0% of sales in the third quarter of 2002 a decrease of 0.1% of sales from thethird quarter of 2001.  The decreaseresulted from a declining depreciable asset base for older restaurantequipment.

 

                            *General and Administrative Expenses*.  General and administrative expenses were7.1% of sales in the third quarter of 2002 compared to 8.3% of sales in thethird quarter of 2001.  The decrease isprimarily the result of the Company’s overall efforts to keep these expensesdown during the current weak economic environment, lower legal expenses andlower incentive accruals.

 

                            *Interest Expense, net*.  Interest expense, net was  $45,000 in the third quarter of 2002compared to $95,000 in the third quarter of 2001. This decrease is due to lowerinterest rates on borrowings and lower amortized loan fees primarily due to thewrite-off of $38,000 in unamortized fees during the third quarter of the prioryear due to the early payoff of debt. The decrease was partially offset by lower interest earned on theCompany’s average cash balances. Interest expense consists of fees related to securing the Company’sborrowing arrangements and interest expense on outstanding borrowings andcapital lease obligations.

 

                            *Income Taxes*.  The Company increased its income tax provision in the thirdquarter of 2002 primarily due to an increase in estimated state income taxespayable for California state income taxes. In September 2002, the state of California enacted a law suspending theuse of net operating loss carryforwards that could be used to offset taxableincome in determination of state income taxes for the 2002 and 2003 taxyears.  The Company’s net deferred taxassets consist primarily of the tax benefit related to operating losscarryforwards, alternative minimum tax credits and asset write-downs, inconnection with store closure reserves, that are not deductible for taxpurposes until the assets are disposed. The Company will continue to provide a full valuation allowance for itsdeferred tax assets until it becomes more likely than not, in management’sassessment, that any portion of the Company’s deferred tax assets will berealized.

 

 

*Results ofOperations:  Thirty Six Weeks EndedSeptember 8,2002*

*Compared to Thirty-SixWeeks Ended September 9, 2001*

 

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

 

 

| Decrease in comparable Fresh Choice  restaurant sales      |   | $          | (1,890,000 | ) |
|------------------------------------------------------------|--------|------------|------------|---|
|                                                       |   |       |       |
| Incremental sales from three new Fresh  Choice restaurants |   | 2,417,000  |       |
|                                                       |   |       |       |
| Change in sales in Fresh Choice  Express restaurants       |   | 195,000    |       |
|                                                       |   |       |       |
| Decrease in sales from closed  restaurant                  |   | (1,172,000 | )          |
|                                                       |   | $          | (450,000   | ) |

 

 

17

----

 

 

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

 

                            Net sales per FreshChoice restaurant averaged $1,111,000 in the first three quarters of 2002, adecrease of 4.1% from net sales per restaurant of $1,159,000 in the first threequarters of 2001 due primarily to comparable store sales decreases as notedabove.

 

                            *Costs and Expenses.*  Cost of sales (food and beverage costs) was22.3% of sales in the first three quarters of 2002 compared to 22.7% in the first three quarters of2001, a decrease of 0.4% of sales.  Foodand beverage costs declined as a percentage of sales due to the combined effectof controlling food cost per guest and increases in the average check.

 

                            *Restaurant Operating Expenses*.  Restaurant operating expenses (labor, occupancy and other) were 62.8% ofsales in the first three quarters of 2002 compared to 60.2% of sales in the first three quarters of2001, an increase of 2.6% of sales.

 

                            Laborcosts as a percentage of sales were 32.3% in the first three quarters of2002 compared to 31.3% in the first three quarters of 2001, an increase of 1.0% of sales.  The labor costs as a percentage of saleswere higher primarily due to lower average restaurant sales as well as a higheraverage wage.

 

                            Occupancyand other expenses as a percentage of sales were 30.5% in the first three quarters of2002 compared to 28.9% of sales in the first three quarters of 2001, an increase of 1.6% of sales.  The increase is due primarily to loweraverage restaurant sales and higher repair and maintenance expenses.

 

                            *Depreciation and Amortization.*  Depreciation and amortization expenses were4.3% of sales in the first three quarters of 2002 or the same as the first three quarters of 2001.

 

                            *General and Administrative Expenses.*  General and administrative expenses were7.5% of sales in the first three quarters of 2002 compared to 8.5% of sales in the first three quarters of2001.  The decrease is primarily theresult of the Company’s overall efforts to keep these expenses down during thecurrent weak economic environment, lower incentive accruals, lower legalexpenses, lower recruiting costs and reduced spending on the Company’s annualgeneral manager’s conference.

 

                            *Interest Expense, net*.  Interest expense was  $138,000 in the first three quarters of2002 compared to $206,000 in the first three quarters of 2001. This decrease is due primarily to lowerinterest rates on borrowings and lower amortized loan fees primarily due to thewrite-off of $38,000 in unamortized fees during the third quarter of the prioryear due to the early payoff of debt. The decrease was partially offset by lower interest earned on theCompany’s average cash balances. Interest expense consists of fees related to securing the Company’sborrowing arrangements and interest expense on outstanding borrowings andcapital lease obligations.

 

                            *Income Taxes*.  The Company increased its income tax provision in the first threequarters of 2002 primarily due to an increase in estimated state income taxespayable for California state income taxes. In September 2002, the state of California enacted a law suspending theuse of net operating loss carryforwards that could be used to offset taxableincome in determination of state income taxes for the 2002 and 2003 taxyears.  The Company’s net deferred taxassets consist primarily of the tax benefit related to operating losscarryforwards, alternative minimum tax credits and asset write-downs, inconnection with store closure reserves, that are not deductible for taxpurposes until the assets are disposed. The Company will continue to provide a full valuation allowance for itsdeferred tax assets until it becomes more likely than not, in management’sassessment, that any portion of the Company’s deferred tax assets will berealized.

 

18

----

 

 

**Item 3 —  Quantitative and QualitativeDisclosures About Market Risk**

 

                            TheCompany is exposed to interest rate risk primarily through its borrowingactivities.  The Company has not usedderivative financial instruments to hedge such risks.  There is inherent roll-over risk for borrowings as they matureand are renewed at current market rates. The extent of this risk is not quantifiable or predictable because ofthe variability of future interest rates and business financingrequirements.  If market rates were toincrease immediately by 10 percent from levels at September 8, 2002, the fairvalue of the Company’s borrowings would not be materially affected asborrowings are primarily subject to variable interest rates.

 

 

**Item 4  —Controls and Procedures****

 

                            (a)Under the supervision and with the participation of our management, includingour principal executive officer and principal financial officer, we conductedan evaluation of our disclosure controls and procedures, as such term isdefined under Rules 13a-14 promulgated under the Securities and Exchange Act of1934, as amended, within 90 days of the filing date of this report.  Based on their evaluation, our principalexecutive officer and principal accounting officer concluded that ourdisclosure controls and procedures are effective.

 

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

 

 

**PART II. ****OTHER****INFORMATION**

 

 
| **Item 1 - Legal  Proceedings**                                   |   | Not Applicable. |
|-------------------------------------------------------------------|--------|-----------------|
|                                                              |   |            |
| **Item 2 - Changes in Securities**                                |   | Not Applicable. |
|                                                              |   |            |
| **Item 3 - Defaults upon Senior Securities**                      |   | Not Applicable. |
|                                                              |   |            |
| **Item 4 - Submission of Matters to a Vote of  Security Holders** |   | Not Applicable. |
|                                                              |   |            |
| **Item 5 - Other  Information**                                   |   | Not Applicable. |
|                                                              |   |            |
| **Item 6 - Exhibits and Reports on Form 8-K**                     |   |            |

 

(a)                          Exhibits.  The exhibitslisted in the accompanying index to  Form10-Q Exhibits are filed or incorporated by reference as part of this report.

 

(b)         Reports onForm 8-K.  No reports on Form 8-K werefiled during the quarter ended September 8, 2002.

 

19

----

 

**SIGNATURES**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 

 
|   |   | FRESH CHOICE,  INC.                                |
|--------|--------|----------------------------------------------------|
|   |   | (Registrant)                                       |
|   |   |                                               |
|   |   |   /S/ Everett F. Jefferson                    |   |
|   |   | Everett F.  Jefferson                              |
|   |   | President and  Chief Executive Officer             |
|   |   | (Principal  Executive Officer)                     |
|   |   |                                               |
|   |   |   /S/ David E. Pertl                          |   |
|   |   | David E. Pertl                                     |
|   |   | Senior Vice  President and Chief Financial Officer |
|   |   | (Principal  Financial and Accounting Officer)      |

 

 

Dated: October 11, 2002

 

 

 

 

 

20

----

 

**CERTIFICATION OF PERIODIC REPORT**

** **

 

I, Everett F. Jefferson, certify that:

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

 

Date: October 11, 2002

 

 

 /S/ Everett F.Jefferson_____________

 Everett F.Jefferson

 President and ChiefExecutive Officer

 

21

----

 

I, David E. Pertl, certify that:

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

 

  Date: October 11, 2002

 

 

  /S/ David E.Pertl__________________________

  David E. Pertl

 Senior Vice President and Chief Financial Officer

 

 

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

----

 

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

----

 
| (1)    |   | Incorporated by reference from the Exhibits with corresponding  numbers filed with the Company’s Registration Statement on Form S-1 (No.  33-53904) filed October 29, 1992, as amended by Amendment No. 1 to Form S-1  (No. 33-53904) filed December 7, 1992, except that Exhibit 3.1 is  incorporated by reference from Exhibit 3.1C and Exhibit 3.2 is incorporated  by reference from Exhibit 3.2B. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                        |
| (2)    |   | Incorporated  by reference from the Exhibits with corresponding numbers filed with the Company’s  Quarterly Report on Form 10-Q for the quarter ended September 4, 1994.                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                        |
| (3)    |   | Agreements or  compensatory plans covering executive officers and directors of Fresh Choice,  Inc.                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                        |
| (6)    |   | Incorporated by reference from the Exhibits with corresponding  numbers filed with the Company’s Annual Report on Form 10-K for the year  ended December 31, 1995.                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                        |
| (8)    |   | Incorporated by reference from the Exhibits with corresponding  numbers filed with the Company’s Quarterly Report on form 10-Q for the  quarter ended March 24, 1996.                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                        |
| (10)   |   | Incorporated  by reference from the Exhibits with corresponding numbers filed with the  Company’s Quarterly Report on Form 10-Q for the quarter ended September 8,  1996.                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                        |
| (11)   |   | Incorporated  by reference from the Exhibits with corresponding numbers filed with the  Company’s Annual Report on Form 10-K for the year ended December 29, 1996.                                                                                                                                                                                                                                     |

 

 

24

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|   |   |                                                                                                                                                                       |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (13)   |   | Incorporated by reference from Exhibits with corresponding  numbers filed with the Company’s Quarterly Report on Form 10-Q for the  quarter ended June 14, 1998.      |
|   |   |                                                                                                                                                                       |
| (14)   |   | Incorporated  by reference from the Exhibits with corresponding numbers filed with the  Company’s Annual Report on Form 10-K for the year ended December 27, 1998.    |
|   |   |                                                                                                                                                                       |
| (15)   |   | Incorporated  by reference from the Exhibits with corresponding numbers filed with the  Company’s Annual Report on Form 10-K for the year ended December 26, 1999.    |
|   |   |                                                                                                                                                                       |
| (16)   |   | Incorporated  by reference from the Exhibits with corresponding numbers filed with the  Company’s Annual Report on Form 10-K for the year ended December 31, 2000.    |
|   |   |                                                                                                                                                                       |
| (17)   |   | Incorporated  by reference from Exhibits with corresponding numbers filed with the  Company’s Quarterly Report on Form 10-Q for the quarter ended September 9,  2001. |
|   |   |                                                                                                                                                                       |
| (18)   |   | Incorporated  by reference from the Exhibits with corresponding numbers filed with the  Company’s Annual Report on Form 10-K for the year ended December 30, 2001.    |
|   |   |                                                                                                                                                                       |
| (19)   |   | Incorporated  by reference from Exhibits with corresponding numbers filed with the  Company’s Quarterly Report on Form 10-Q for the quarter ended March 24, 2002.     |
|   |   |                                                                                                                                                                       |
| (20)   |   | Incorporated  by reference from Exhibits with corresponding numbers filed with the  Company’s Quarterly Report on Form 10-Q for the quarter ended June 16, 2002.      |

 

 

25

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