SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF |
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For the fiscal year ended December 28, 2003 |
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF |
For the transition period from __________ to __________.
Commission File Number 0-20792
FRESH
CHOICE, INC.
(Exact name of registrant as specified in its charter)
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Delaware |
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77-0130849 |
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(State or other jurisdiction of |
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(I.R.S. Employer |
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485 Cochrane Circle, Morgan Hill, CA |
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95037-2831 |
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(Address of principal executive offices) |
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Registrant’s telephone number, including area code: (408) 776-0799
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to
Section 12(g) of the Act:
Common Stock, $0.001 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definite proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K o
Indicate by check mark whether the registrant is an accelerated filer Yes o No x
Approximate aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant computed by reference to the closing sales price of such stock as reported in the Nasdaq National Market on June 13, 2003, the last business day of the registrant’s second fiscal quarter, was $7,120,635. Excludes shares of Common Stock held by directors, officers and each person who holds 5% or more of the outstanding Common Stock because such persons may be deemed to be affiliates. This exclusion is not a conclusive determination of such status for other purposes.
Number of shares of Common Stock, $0.001 par value, outstanding as of March 5, 2004 was 6,017,190.
DOCUMENTS INCORPORATED BY REFERENCE
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Form 10-K Reference |
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(1) Proxy Statement for the Annual Meeting of Stockholders scheduled for May 5, 2004 |
Part III |
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FRESH CHOICE, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS |
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT |
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EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K |
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FORM 10-K EXHIBITS |
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Certain statements set forth in or incorporated by reference into this Annual Report on Form 10-K, including anticipated store openings, planned capital expenditures, settlement of lease obligations and trends in or expectations regarding the Company’s operations, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. They use such words as “may,” “will,” “expect,” “believe,” “plan” and other similar terminology. Such statements are based on currently available operating, financial and competitive information and are subject to various risks and uncertainties. Actual future results and trends may differ materially depending on a variety of factors as set forth under the heading “Business - Business Risks”. In particular, among these risks and uncertainties is the ability of the Company to return to positive comparable-store sales and improve newer restaurant sales, operate its restaurants profitably and obtain additional financing, as well as general economic conditions. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
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BUSINESS. |
As of March 5, 2004, the Company operated 57 restaurants of which 53 restaurants operate under the “Fresh Choice” and “Zoopa” brand names, 1 operates under the “Fresh Choice Express” brand name, two operate as dual branded Fresh Choice Express and licensed Starbucks retail stores and one operates as a licensed Starbucks retail store. The Company operates 43 restaurants in California, 4 restaurants in the state of Washington and 10 restaurants in Texas, including the Fresh Choice Express restaurant, the two dual branded Fresh Choice Express and licensed Starbucks retail stores and the one licensed Starbucks retail store. Fresh Choice and Zoopa restaurants feature an extensive selection of healthy, high-quality, freshly-made specialty and traditional salads, hot pasta, pizza, hot baked potatoes, soups, fresh breads and muffins, frozen low-fat soft serve and other desserts, offered in a limited-service format. The Company’s goal is to create a distinctive dining experience that combines the selection, quality and ambiance of full-service, casual restaurants with the convenience and value appeal of traditional buffet restaurants.
The Fresh Choice and Zoopa restaurants use fresh produce and high-quality ingredients in their menu offerings. Fresh produce is delivered several days per week to each restaurant, and all menu items are prepared on-site. To reinforce the Company’s commitment to freshness, many of the Company’s food offerings are prepared in exhibition-style cooking areas throughout the day. Guests make their selections from salads, soups, baked potatoes, hot pasta, pizza, muffins, breads, bakery goods, fresh fruit, frozen low-fat soft serve and specialty desserts. Rotisserie chicken and related side dishes are served in several Texas and selected rural California locations.
The Company believes that its Fresh Choice and Zoopa restaurants provide guests an excellent price/value relationship by offering unlimited servings for a single price. Although prices vary, in most locations the prices as of March 5, 2004 are $7.29 at lunch, $8.99 at dinner, $5.99 for teens thirteen to fifteen: $3.99 for children ages nine to twelve; $2.99 for children ages six to eight and $0.99 for children three to five with children under three free, plus the cost of a beverage. The Company’s wide variety of high-quality food and attractive prices are designed to appeal to a broad range of guests, including families, business professionals, students and senior citizens. In addition, the Company believes the concept appeals to health-conscious diners who are focused on the nutritional content of their meals.
Fresh Choice Express is a concept designed as an extension of the Fresh Choice brand, and existing local Fresh Choice restaurants. Two of the locations are in office buildings providing breakfast and lunch, Monday through Friday. One of these locations is dual branded with a licensed Starbucks retail store. These restaurants allow a guest to choose from tossed-to-order salads, made-to-order oven-toasted sandwiches, signature soups and baked potatoes. The third location is in a mall and is dual branded with a licensed Starbucks retail store. The mall location is open seven days per week for breakfast, lunch and dinner. The menu features a selection of tossed-to-order salads, made-to-order oven-toasted sandwiches and signature soups. The one licensed Starbucks retail store and the two dual branded Fresh Choice Express and licensed Starbucks retail stores were opened under a licensing agreement between Fresh Choice and Starbucks Coffee Company and offer handcrafted espresso beverages, drip coffee and a selection of freshly baked pastries. Additional licensed Starbucks retail store locations, if any, will be determined jointly between Starbucks Coffee Company and Fresh Choice.
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The Company views its commitment to its employees, or crewmembers, as critical to its long-term success. The Company depends on a high rate of repeat business, and views the quality of its crewmember interaction with guests as an important element of its strategy. By providing extensive training and competitive compensation, the Company seeks to foster a strong corporate culture and encourage a sense of personal commitment from crewmembers at all levels. The Company believes that its strong culture helps it attract and retain highly-motivated crewmembers who provide its guests with a level of service superior to that traditionally associated with limited-service restaurants.
The Company acquired the Zoopa trade name and three Zoopa restaurants in fiscal 1997 and currently operates its four Washington restaurants and one restaurant in San Antonio, Texas under the Zoopa name. The Company opened four Fresh Choice restaurants in fiscal 2003. Three of these restaurants were in California and one in Texas. The Company has generally attempted to cluster its restaurants in each market area to benefit from operating, purchasing and advertising efficiencies, enhance brand-name recognition, and discourage competition.
The Company was incorporated in California on October 20, 1986 under the name Gourmet California, Inc. In August 1988, the Company was recapitalized as a result of a merger with Moffett Partners, Inc., and the survivor of the merger was re-named Fresh Choice, Inc. Effective December 4, 1992, the Company was reincorporated in Delaware. Unless the context otherwise requires, all references to the “Company” or “Fresh Choice” mean Fresh Choice, Inc. and its predecessors.
The Company maintains a worldwide website at www.freshchoice.com. Investors can obtain copies of our Securities and Exchange Commission filings from this site free of charge.
Business Strategy
The Company’s objective is to create a distinctive dining experience that combines the selection, quality and ambiance of full-service, casual dining restaurants with the convenience and value appeal of traditional buffet restaurants. Each element of the Company’s strategy is designed to exceed guests’ expectations, encourage repeat business, and establish a significant presence in each of its targeted markets. The key elements of the Company’s strategy include the following:
Fresh, Healthy, High-Quality Food. The Company is committed to using fresh produce and high-quality ingredients in its menu offerings. Fresh produce is delivered several days per week to each restaurant, and all menu items are prepared on-site. To reinforce the Company’s commitment to freshness, many of the Company’s food offerings are prepared in separate exhibition-style cooking areas throughout the day. The Company maintains stringent quality standards in identifying, purchasing and preparing fresh food and ingredients.
Extensive Food Selection. The restaurant’s broad selection of food offerings is designed to appeal to a wide range of guests. Each restaurant features a selection of specialty salads daily, prepared from recipes developed or acquired by the Company, as well as salad ingredients and a variety of dressings that allow guests to create their own salads. Each restaurant also offers a selection of delicious freshly-prepared soups, hot pasta, pizza, hot breads, muffins and other bakery goods, baked potatoes, fresh fruits, frozen low-fat soft serve and other desserts. Rotisserie chicken and related side dishes are served in several Texas and selected rural California locations.
Quality Assurance/Food Safety Program. The Company is committed to ensuring the highest levels of product quality, consistency and freshness. The Company’s restaurant managers test the taste of the food and monitor safe food temperatures throughout the day. Strict shelf life standards are required on all food items. Only high quality ingredients from reputable sources are used in the restaurants. The regional managers inspect the restaurants regularly to assure that all standards are in place and the individual restaurants are complying with product specifications and recipe adherence.
Fresh Choice provides and requires food safety training to all crewmembers and managers. All restaurants food safety practices are inspected by the regional manager regularly and typically once per quarter by a trained home office crewmember or qualified outside service provider. Prepared food and food storage temperatures are checked for adherence to standards throughout the day with the results recorded. Frequent crewmember hand
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washing is required and monitored. Fresh Choice restaurants use a safe, flavor and odor free anti-microbial wash on all fruits and vegetables to ensure that clean and safe produce is served to guests. Digital cameras are strategically placed throughout each restaurant to enhance safety in the restaurants. These cameras are capable of being accessed off premise to allow the regional managers and other authorized home office crewmembers to observe the restaurants as deemed necessary.
Excellent Price/Value Relationship. The Company believes its pricing strategy, for offering unlimited servings, is an excellent price/value alternative to other casual dining restaurants. Discounts are provided for children and senior citizens receive a discount through the Company’s Masters Club™.
Commitment to Guest Service. The Company is committed to providing its guests with a level of service superior to that traditionally associated with limited-service restaurants. Fresh Choice depends upon a high rate of repeat business, and views the quality of its crewmember interaction with guests as critical to its long-term success. By providing extensive training and competitive compensation, the Company believes it fosters a strong corporate culture and encourages a sense of personal commitment from crewmembers at all levels.
The Company devotes substantial attention and resources to maintaining the cleanliness and consistent high-quality presentation of the salad bar and other exhibition cooking areas in order to enhance the visual appeal of the Company’s offerings.
Distinctive Design and Casual Atmosphere. The Company devotes significant resources to the design and decor of its restaurants. The restaurants have a flexible design which can accommodate a variety of available sites. The Company’s new restaurant design and decor incorporated into its new restaurants and the current Fresh Choice restaurants remodel plan, uses an interior design that is in the style of an open-air international marketplace, like a farmer’s market. The food is displayed in colorful arcades with fun and distinctive signage segregating each arcade section.
Expansion Strategy
The Company currently has no expansion plans for fiscal 2004. The Company opened four new Fresh Choice restaurants in 2003. No new Fresh Choice Express restaurants were opened in 2003 and no additional Fresh Choice Express restaurants are planned for 2004. If and when the Company resumes expansion it intends to expand within the Company’s existing markets, which would allow the Company to generally benefit from advertising, purchasing and operating efficiencies. In addition, the Company believes clustering allows the Company to capture more of the available guest base and to discourage competition. To the extent that the Company elects to open new restaurants in markets outside of its existing markets, the Company expects that these restaurants may benefit from certain volume purchasing discounts and operating efficiencies generally applicable to its current restaurants.
The Company currently operates all of its existing restaurants, and has no current plans to offer franchises. In addition, the Company has no current plans to begin purchasing rather than leasing its restaurant sites on a regular basis.
Site Selection
To date, the Company has located its restaurants in regional malls, strip centers and freestanding locations. The Company considers the location of each restaurant to be critical to its long-term success, and management devotes significant effort to the investigation and evaluation of potential sites. The site selection process focuses on market area demographics including targets for population, household income and education, as well as site specific characteristics including daytime traffic volumes and patterns, visibility, accessibility and availability of adequate parking. The Company also reviews potential competition and guest activity at other restaurants operating in the area. The Company believes that its flexibility in utilizing its different restaurant layouts gives it a competitive advantage in selecting sites. The Company requires approximately twelve to eighteen months after identifying a site to complete negotiation of a lease and construct and open a new restaurant. While the Company currently leases most of its restaurant sites and expects to lease virtually all of its sites in the future, it may purchase one or more
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sites for construction of new restaurants if available on acceptable financial terms. Currently, the Company owns land and buildings at two of its restaurant sites and owns buildings on leased land at seven others.
Restaurant Economics
For the 52 weeks ended December 28, 2003, the 43 comparable Fresh Choice and Zoopa restaurants open throughout the entire period generated average net sales of approximately $1,558,000 and average store level cash flow, after occupancy expenses, of approximately $190,000 or 12.2% of net sales. The Company does not include any new stores as a comparable store until it has been open for 18 months. Store level cash flow excludes depreciation and amortization expense, general and administrative expense, store closure and asset impairment expense, restaurant opening expense and net interest expense. During fiscal 2003 the Company opened four new Fresh Choice restaurants and currently plans to add no new Fresh Choice restaurants in fiscal 2004. The average cash cost of these four restaurants was $1.1 million, not including restaurant opening expenses. The investment of capital to open a new restaurant typically includes the purchase and installation of furniture, fixtures, equipment and leasehold improvements, and in the case of a land lease the cost to construct the building. The Company currently leases the sites for most of its restaurants, mixed between in-line, mall and stand-alone sites.
Concept and Menu
Each Fresh Choice and Zoopa restaurant features a salad bar offering signature specialty tossed and prepared salads with an extensive choice of salad ingredients and dressings. All specialty tossed salads and specialty prepared salads are clearly marked, and low-fat and fat-free items are prominently identified. Throughout the day several crewmembers maintain the salad bar and replenish individual salads and ingredients from the opposite side of the salad bar, minimizing interference with guests. Separate exhibition-style arcades offer fresh soups, hot pasta dishes, pizza, baked potatoes, hot breads, muffins and other bakery goods, fresh fruits, frozen low-fat soft serve and other desserts. Rotisserie chicken and related side dishes are served in Texas and selected rural California locations. During peak hours, each guest is escorted to his or her table. Each guest may obtain unlimited refills of all food and dessert dishes, soft drinks, lemonade, coffee and tea.
The Company has developed proprietary recipes for a broad assortment of specialty salads, soups, pasta sauces, and muffins. In each product category, the restaurants offer several standard dishes daily, and rotates additional offerings to provide variety for the Company’s many repeat guests. Each category also contains daily offerings that are particularly low in fat. Because the restaurants utilize a broad variety of produce and other ingredients in its dishes and is not overly dependent on any individual recipe, it is able to substitute dishes and ingredients in the event that weather conditions or supply factors lead to high prices or shortages of particular produce items or other ingredients. The Company believes that the flexibility of its menu allows it to accommodate regional tastes and minimize the impact of cost increases.
Salads. The restaurants offer signature specialty tossed salads and specialty prepared salads, each of which is made from recipes created by the Company, and salads made by the guest from a broad assortment of salad ingredients. The salad bar in each restaurant features specialty tossed salads that are prepared exhibition-style and are rotated frequently.
Each day the salad bar features a selection of specialty prepared salads from among the Company’s more than 90 recipes. The Company’s salad bar also offers more than 40 salad ingredients and toppings, allowing guests to create their own salad. The ingredients include various types of lettuce and a broad assortment of vegetables, cheeses, and other toppings. The Company offers 10 dressings and a selection of gourmet oils and vinegars.
Soups. The restaurants offer a variety of soups selected daily from among its more than 50 soup recipes. All soups are prepared on-site utilizing fresh produce and other high-quality ingredients, and include low-fat and non-fat selections.
Pasta. The Company expects to complete the introduction of four daily-featured freshly tossed pastas with sauces prepared from scratch in the first half of fiscal 2004. These pastas are tossed with fresh ingredients
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and garnished with fresh herbs. The new offerings will enhance both the quality and selection of the Company’s pasta offerings.
Pizza. In 2003 the Company introduced a new Sicilian style freshly prepared pizza. The dough is prepared and proofed on premise daily by our bakery chefs and topped with a variety of toppings including cheese, vegetables and pepperoni.
Muffins, Biscuits and Breads. The restaurants offer a variety of muffins daily, including a low-fat muffin, selected from among its more than 70 muffin recipes. All muffins and biscuits are baked in the exhibition bakery area and are replenished frequently to ensure warmth and freshness. The restaurants also offer warm sliced sourdough and harvest breads and in 2003 the Company introduced a new garlic herb focaccia bread.
Rotisserie Chicken (Texas and selected California locations only). These restaurants offer a savory herb crusted rotisserie chicken served with a variety of side dishes including mashed red potatoes, stuffing and macaroni and cheese.
Desserts. The restaurants offer an assortment of desserts, including fresh fruits, sugar free jello, tapioca, chocolate pudding, frozen low-fat soft serve, tasty cakes, and a triple chocolate decadence brownie.
Beverages. For a separate charge the restaurants offer an assortment of fruit juices, fresh lemonades and flavored iced teas. Fresh Choice also offers sodas and sparkling waters, and in most restaurants, beer and wine. Refills of juices, lemonade, soft drinks, coffee and tea are provided at no extra cost to our guests.
Protein Toppings. As a result of the increasing trend to low carbohydrate and high protein diets, the Company introduced, in 2003, pre-portioned seasoned chicken and tuna for an additional charge.
Guest Service
The Company is committed to providing a superior level of service in order to distinguish itself from traditional limited-service restaurants. During peak hours, guests are escorted from the salad bar to a table. Crewmembers are in the dining area during meal hours to ensure each guest leaves the restaurant with the intent to return. Guest servers provide follow up beverage service, clear and clean tables, and attend to other guest needs.
The Company devotes substantial attention and resources to maintaining the cleanliness and consistent high-quality presentation of the salad bar and other exhibition cooking areas in order to enhance the visual appeal of the Company’s food offerings. The restaurant’s crewmembers are present behind the salad bar and in the exhibition cooking areas to replenish and replace food offerings, to answer guest questions, and to assist guests in serving themselves. All crewmembers in each restaurant are required to maintain a high standard of dress and grooming.
The Company actively solicits guest input through several sources. In the restaurant, comment cards are prominently displayed in several areas and guests can also submit their comments via the Company’s web site.
Restaurant Design
The Company’s restaurants utilize a salad bar, with the cash registers placed at the end of the salad bar in most of the restaurants before the guest has access to the other food service areas. A few of the Company’s restaurants have been designed so that the cash registers are positioned toward the front of the restaurant to provide guests with direct access to the various food service areas. The Company’s new restaurants incorporate an open, colorful, fun, brighter, more inviting decor package and a more efficient layout. This look was incorporated into the Company’s remodel program completed in fiscal 2000.
The Company’s restaurants range from 4,800 to 9,014 square feet, seating from 108 to 304 guests inside. The Company’s average Fresh Choice restaurant is approximately 6,761 square feet and has inside seats for approximately 218 guests. In addition, many of the Company’s restaurants provide limited outdoor seating. The flexible design of the restaurants enables the Company to take advantage of a broad range of available sites.
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Remodeling
Remodeling is an integral part of the Company’s strategic plan. Restaurants typically require remodeling every five to seven years. The Company’s latest remodel program incorporated an open, colorful, fun, brighter, more inviting decor package. This remodeling program was completed in fiscal 2000.
Marketing and Promotion
The Company’s marketing strategy in its existing markets is to increase unaided brand awareness toward building top-of-mind recall of the Fresh Choice or Zoopa brand resulting in increased usage among targeted consumers.
The Company intends to maximize exposure within its target market with a consistent program of high impact, four color, broad reaching mediums such as freestanding inserts in key newspapers. These tactics are designed to leverage both the high level of brand awareness and build a positive identifiable perception of Fresh Choice and Zoopa in the mind of the consumer. Additionally, by consistently providing a positive dining experience, the Company believes it benefits from significant word-of-mouth advertising.
In new markets, the marketing strategy is to build brand name awareness where no or very low awareness exists. The Company intends to accomplish this through the use of appropriate local advertising mediums and creative messages. Prior to opening each new restaurant, the Company typically sponsors fund-raisers and pre-opening parties in the restaurant with local charities or schools to build community relationships and attract customers to the restaurant.
Restaurant Operations and Management
Management and Crewmembers. The Company has endeavored to establish a strong corporate identity and culture and to maintain quality and consistency in its restaurants through the careful training of personnel and the establishment of rigorous standards relating to food purchasing and preparation and maintenance of the serving areas and facilities. Responsibility for managing the Company’s restaurant operations is currently shared by eight Regional Managers, who report to either the Area Vice President, or the Area Director who each reports to the Executive Vice President and Chief Operating Officer who reports to the President and Chief Executive Officer. Regional managers are generally responsible for four to ten restaurants.
The management staff of a typical Fresh Choice restaurant consists of one general manager, two or three restaurant managers and a shift manager. The Company externally recruits most of its restaurant managers, virtually all of whom have prior restaurant management experience. Most of the Company’s current general managers have been promoted from restaurant managers. All newly hired managers participate in the Company’s training course. Each restaurant also employs approximately 35 hourly crewmembers, many of whom work part-time. The general manager of each restaurant is responsible for the day-to-day operation and profitability of the restaurant. To enhance quality, service, cleanliness, maintenance and safety, the Company has developed detailed systems, procedures and controls with respect to labor and food cost standards, food preparation, planning and scheduling. The Company’s culture emphasizes a sense of ownership and entrepreneurship. The Company maintains a variety of programs to reward excellent service and performance by each crewmember at the restaurant level. In addition to a competitive base salary, the Company has incentive plans that rewards restaurant managers based upon achieving sales and profit targets, controlling costs and tenure with the Company.
Food Purchasing. The Company has designed systems for determining order quantities and has developed preparation methods that together ensure freshness, maximize usage and minimize waste. Most food items are purchased on a centralized basis to ensure uniform quality and adequate supplies, and to obtain competitive prices. To the extent possible, the Company purchases food items pursuant to fixed-price, annual contracts that are not subject to minimum quantity requirements. All produce is purchased from sources that have been pre-qualified to meet the Company’s specifications. Produce is delivered directly to individual restaurants. At each restaurant, the management team is responsible for assuring that all deliveries meet the Company’s guidelines regarding freshness and quality. The Company believes alternate sources are available for all products.
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Recipe Development. The Company’s food development efforts focus on introducing compelling and innovative new recipes, as well as upgrading the flavor profiles and presentation standards of existing recipe favorites. Seasonal and upscale produce items are rotated into the salad bar product mix to provide guests an additional reason to return.
Training and Support. The Company believes that its training programs have been successful in developing commitment to the Company, a consistent level of execution, and high-quality guest service. Upon joining Fresh Choice, each restaurant manager participates in a training course that covers all aspects of restaurant operations and develops management skills. All crewmembers are instructed through a combination of written materials and hands-on training prior to their performance being validated by a certified trainer and restaurant management. In addition, the Company creates and facilitates management and hourly crewmember workshops that apply to and support the Company’s current goals and objectives.
Information Systems. Each restaurant is equipped with a computer containing programs to perform crewmember timekeeping and daily cash and sales reporting. The automation of these important administrative responsibilities reduces the time spent by restaurant managers preparing daily reports of cash, deposits, sales, sales mix and guest counts, labor costs, and food waste. In addition guest count forecasts are generated automatically, which assists restaurant managers in the more accurate scheduling of crewmembers and the production of food. Reports are run and distributed automatically to regional managers each morning as well as compiled for executive management review. Payroll information is processed every two weeks at the restaurants and transmitted electronically to the corporate office.
Financial controls are maintained centrally through a computerized accounting system at the Company’s corporate office. Sales are posted electronically to the general ledger from the central cash and sales database. Profit and loss statements are compiled every four weeks by the accounting department and provided to the general managers and regional managers for analysis and comparison to the Company’s budgets.
Hours of Restaurant Operation. Most of the Company’s restaurants are open seven days a week, typically from 11:00 a.m. to 9:00 p.m. Sunday through Thursday, and from 11:00 a.m. to 10:00 p.m. on Fridays and Saturdays.
Competition
The Company’s restaurants compete with the growing mid-price, full-service casual dining segment; with traditional limited-service buffet, soup, and salad restaurants; and, increasingly, with fast-casual and quick-service outlets. The Company’s competitors include national and regional chains, as well as local owner-operated restaurants. Key competitive factors in the industry are the quality and value of the food products offered, quality and speed of service, price, dining experience, restaurant location and the ambiance of facilities. The Company believes that it competes favorably with respect to these factors, although many of the Company’s competitors have been in existence longer than the Company, have a more established market presence, and have substantially greater financial, marketing and other resources than the Company, which may give them certain competitive advantages. The Company believes that its ability to compete effectively will continue to depend in large measure upon its ability to offer a diverse selection of high-quality, fresh food products with an attractive price/value relationship. In addition, if and when the Company resumes expansion, it expects intense competition for restaurant sites, which may result in the Company having difficulty leasing desirable sites on terms that are acceptable to the Company. The Company expects that in some cases competitors may be willing to pay more than the Company for sites.
Government Regulation
Each of the Company’s restaurants is subject to various federal, state and local laws, regulations and administrative practices affecting its business, and must comply with provisions regulating health and sanitation standards, equal employment, minimum wages and licensing for the sale of food and alcoholic beverages. Difficulties or failures in obtaining or maintaining required beer and wine licenses or other required licenses or approvals could delay or prevent the opening of new restaurants or adversely affect the operations of existing restaurants. The Company has no reason to believe that any of such future license applications would not be approved.
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Trademarks and Service Marks
“Fresh Choice”, “Zoopa”, “Fresh Choice Masters Club”, “Fresh Choice Express”, The Company Logo, “Fresh Choice Restaurant and Design”, “Great Taste. It’s Our Bag”, “Now That’s Fresh”, “Fresh Choice Express and Design”, “Fresh Choice Now That’s Fresh and Design”, “Fresh Choice Ultimate Salad, Soup Bakery Pasta Bar and Design”, and “Your Fresh Connection For Life and Design” are registered marks of the Company. The Company’s policy is to strenuously police the use of its marks and to oppose infringement of its marks.
Employees
As of March 5, 2004, the Company had approximately 1,958 crewmembers. These included approximately 1,765 hourly restaurant crewmembers, of whom approximately 1,141 were part-time crewmembers, approximately 161 full-time restaurant managers and trainees and approximately 32 full-time corporate management and staff. None of the Company’s crewmembers is represented by a labor union. The Company believes its employee relations are excellent.
Executive Officers of the Registrant
The executive officers of the Company as of March 5, 2004 are as follows:
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Everett F. Jefferson |
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65 |
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President, Chief Executive Officer and Director |
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Tim G. O’Shea |
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56 |
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Executive Vice President, Chief Operating Officer |
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David E. Pertl |
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51 |
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Senior Vice President and Chief Financial Officer |
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Joan M. Miller |
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51 |
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Senior Vice President, Human Resources |
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Tina E. Freedman |
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43 |
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Senior Vice President, Product Development and |
Mr. Jefferson was elected President and Chief Executive Officer and a director of the Company in February 1997. Mr. Jefferson has an extensive background in restaurant operations. From June 1996 to February 1997 Mr. Jefferson was an independent consultant. From June 1993 to June 1996 Mr. Jefferson was President and Chief Executive Officer of Cucina Holding, Inc., the operator of Java City coffee and bakery. From March 1990 to June 1993 he was an independent consultant and independent restaurant operator. From May 1987 to March 1990 he was President and Chief Executive Officer of Skipper’s, Inc. From May 1986 to April 1987 he was President of Kings Table, Inc. Earlier in his career Mr. Jefferson was with Pizza Hut, Inc. for five years including three years as Senior Vice President of Operations and was with Saga Corporation for ten years including two years as Regional Director of the Southeast and Caribbean.
Mr. O’Shea joined Fresh Choice in March 1996 as Vice President, Marketing, was named a Senior Vice President in December 1998 and was named Executive Vice President and Chief Operating Officer in November 2002. From July 1991 to March 1996 he was Vice President, Marketing for retail and foodservice products for W.R. Grace and Co., a food processor. Mr. O’Shea has over 25 years of experience in restaurant management and marketing including positions as Vice President of Foodservice Marketing for Culinary Brands, Inc. from January 1987 to June 1991 and Vice President and General Manager of the hotel foodservices division of Saga Corporation from October 1975 to January 1987.
Mr. Pertl joined Fresh Choice in January 1997 as Vice President and Chief Financial Officer and was named a Senior Vice President in December 1998. Mr. Pertl was Vice President and Chief Financial Officer of Summit Family Restaurants, Inc., a publicly-held family style restaurant company, from September 1989 until July 1996, when Summit was acquired. From September 1977 to September 1989 he held various financial positions with Ponderosa, Inc., including Senior Vice President and Chief Financial Officer from January 1987 to September 1989.
10
Ms. Miller joined Fresh Choice in June, 1995 as Vice President, Human Resources and was named a Senior Vice President in December 1998. From March 1992 to March 1995 she was Vice President, Human Resources for Medallion Mortgage Co., a mortgage banking company. From March 1990 to March 1992 she was an attorney with Littler Mendelson Fastiff Tichy & Mathiason, specializing in labor law. From 1981 to 1990 Ms. Miller was Senior Vice President, Human Resources for Pacific Western Bank.
Ms. Freedman joined Fresh Choice in May 1992 as a restaurant manager and was named Vice President, Product Development and Purchasing in August 1996, was elected as an executive officer in March 1997 and was named a Senior Vice President in December 1998. Ms. Freedman has held various positions at Fresh Choice, including Director of Product Development from April 1995 to August 1996, Director of Training from December 1994 to April 1995, Regional Manager from October 1993 to December 1994, and General Manager from September 1992 to October 1993. From September 1982 to May 1992 she was Director of Food Services for Macy’s, California, a retail/restaurant company.
Business Risks
Certain characteristics and dynamics of the Company’s business and of financial markets in general create risks to the Company’s long-term success and to predictable financial results. These risks include:
Operating Losses and Historical Declines in Comparable Store Sales. Our quarterly and annual operating results and same store sales have fluctuated significantly in the past and are likely to fluctuate significantly in the future. The Company has reported a loss for the last two years and there can be no assurance that the Company will be profitable over the long or short term.
The Company’s comparable store sales have decreased for the three fiscal years of 2001 through 2003. There can be no assurance that the comparable store sales declines experienced in 2001 through 2003 will not continue or not decline further.
Expansion. The Company believes its growth depends to a significant degree on its ability to open new restaurants and to operate such restaurants profitably. The Company resumed its expansion with one new Fresh Choice restaurant opening in 2001, five opening in 2002 and four restaurants opening in 2003. For fiscal 2003 certain of these ten new locations have not met the Company’s financial expectations with average sales for the ten newer restaurants 27.5% below the comparable-store average sales. There can be no assurance that these ten newly opened restaurants or future restaurants will be successful. The Company recorded a non-cash impairment charge of $3.7 million in 2003 primarily related to four of these restaurants and one additional restaurant. An impairment charge was deemed appropriate based on the expected cash flows over the remaining lease terms, as compared to the net book value of the restaurant assets. If performance does not improve, or deteriorates further in certain other new restaurants, the Company may be required to record additional impairment expenses.
The Company currently has no development plans beyond 2003. The Company’s ability to successfully resume an expansion strategy will depend upon a variety of factors, many of which may be beyond the Company’s control, including the Company’s ability to locate suitable restaurant locations, negotiate acceptable lease terms, obtain required government approvals, construct new restaurants in a timely manner, attract, train and retrain qualified and experienced personnel and management, operate its restaurants profitably and obtain additional capital to finance expansion and equipment costs, as well as general economic conditions and the degree of competition in the particular market.
The Company’s future expansion plans may include entering new geographic regions in which the Company has no previous operating experience. There can be no assurance that the Fresh Choice concept will be successful in new geographic regions. In addition the Company expects intense competition for restaurant sites, which may result in the Company having difficulty leasing desirable sites on terms that are acceptable to the Company. The Company expects that in some cases competitors may be willing to pay more than the Company for sites. These circumstances may make it difficult for the Company to achieve any new store growth objectives.
Lease Renewals. As existing restaurant leases expire, the Company must negotiate new leases or lease extensions in order to continue operations at existing restaurants. There can be no assurance that the Company will
11
be able to renew these leases on favorable terms or at all. If the Company is unable to obtain favorable terms on new leases or extensions on existing leases, it would increase costs and reduce the Company’s operating margins. Moreover, if the Company is unable to renew existing leases and is unable to find suitable alternate locations, the Company’s revenue and operating results would be adversely affected.
Geographic Concentration. As of March 5, 2004, 43 of the Company’s 57 restaurants were located in California, primarily in Northern California. Accordingly, the Company is susceptible to fluctuations in its business caused by adverse economic conditions in this region. In addition, net sales at certain of the Company’s restaurants have been adversely affected when a new Company restaurant has been opened in relatively close geographic proximity. There can be no assurance that expansion within existing or future geographic markets will not adversely affect the individual financial performance of Company restaurants in such markets or the Company’s overall results of operations. In addition, given the Company’s present geographic concentration in Northern California, adverse weather conditions or increased utility costs in the region or negative publicity relating to an individual Company restaurant could have a more pronounced adverse effect on results of operations than if the Company’s restaurants were more broadly dispersed.
Sensitivity to Economic Conditions and Consumer Spending. The restaurant industry historically has been subject to substantial cyclical variation. The California economy has slowed and there has been a downturn in the general economy and a decline in consumer spending in the restaurant industry. A continued decline could have a material adverse effect on the Company’s financial performance as restaurant sales tend to decline during recessionary periods. A prolonged economic downturn could alter customers’ purchasing decisions, which most likely would have a material adverse impact on the Company’s revenue and results of operations.
Seasonality and Quarterly Fluctuations The Company’s restaurants have typically experienced seasonal fluctuations, as a disproportionate amount of net sales and net income are generally realized in the second and third fiscal quarters. In addition, the Company’s quarterly results of operations have been, and may continue to be, materially impacted by the timing of new restaurant openings, restaurant closings and impairment charges. The fourth quarter normally includes 16 weeks of operations as compared with 12 weeks for each of the three prior quarters. As a result of these factors, net sales and net income in the fourth quarter are not comparable to results in each of the first three fiscal quarters, and net sales can be expected to decline in the first quarter of each fiscal year in comparison to the fourth quarter of the prior fiscal year.
Dependence on Key Personnel. The success of the Company depends on the efforts of key management personnel. The Company’s success will depend on its ability to motivate and retain its key crewmembers and to attract qualified personnel, particularly general managers, for its restaurants. The Company faces significant competition in the recruitment of qualified crewmembers.
Restaurant Industry. The restaurant industry is affected by changes in consumer tastes, as well as national, regional and local economic conditions and demographic trends. The performance of individual restaurants, including the Company’s restaurants, may be affected by factors such as traffic patterns, demographic considerations, and the type, number and location of competing restaurants. In addition, factors such as inflation, increased food, labor and crewmember benefit costs, and the availability of experienced management and hourly crewmembers may also adversely affect the restaurant industry in general and the Company’s restaurants in particular. Restaurant operating costs are affected by increases in the minimum hourly wage, unemployment tax rates, and various federal, state and local governmental regulations, including those relating to the sale of food and alcoholic beverages. There can be no assurance that the restaurant industry in general, and the Company in particular, will be successful.
Competition. The Company’s restaurants compete with the rapidly growing mid-price, full-service casual dining segment; with traditional limited-service buffet, soup, and salad restaurants; and, increasingly, with fast-casual and quick-service outlets. The Company’s competitors include national and regional chains, as well as local owner-operated restaurants. Key competitive factors in the industry are the quality and value of the food products offered, quality and speed of service, price, dining experience, restaurant location and the ambiance of facilities. Many of the Company’s competitors have been in existence longer than the Company, have a more established
12
market presence, and have substantially greater financial, marketing and other resources than the Company, which may give them certain competitive advantages. The Company believes that its ability to compete effectively will continue to depend in large measure upon its ability to offer a diverse selection of high-quality, fresh food products with an attractive price/value relationship. In addition, if and when the Company resumes expansion, it expects intense competition for restaurant sites, which may result in the Company having difficulty leasing desirable sites on terms that are acceptable to the Company. The Company expects that in some cases competitors may be willing to pay more than the Company for sites.
Ability to Obtain Additional Financing. The Company resumed its restaurant expansion in 2001. The Company currently has no expansion plans beyond 2003. The Company’s ability to resume an expansion strategy will depend upon a variety of factors, including its ability to obtain funds. The Company believes its near-term capital requirements can be met through its existing cash balances, cash provided by operations and its borrowing arrangements. Should the Company seek new financing there can be no assurance that the Company would be able to obtain additional financing on acceptable terms or at all.
Loan Covenants. Based on the Company’s most current financial projections the Company may be out of compliance with one or more of its existing loan covenants by the end of the Company’s first quarter 2004. The Company believes it can obtain a waiver or renegotiate these covenants with its bank. However, there can be no assurance that the Company will be able to obtain a waiver or renegotiate its covenants. If the Company is unable to renegotiate the covenants or obtain a waiver from its bank, the bank could declare the Company’s outstanding loans in default and demand immediate payment in full of all outstanding principal and interest.
Control by Major Shareholder. Crescent Real Estate Equities Limited Partnership (“Crescent”) holds 1,187,906 shares of Series B non-voting convertible preferred stock, which is convertible into Series A voting convertible preferred stock at any time at the option of the holder. Upon conversion, holders of Series A preferred stock would be entitled to vote with common stockholders and would have a separate right to approve certain corporate actions, such as amending the Company’s Certificate of Incorporation or Bylaws, effecting a merger or sale of the Company, or making a fundamental change in the Company’s business activity. In addition, because the Company did not achieve a specified earnings target in 1998, the holders of Series A preferred stock would have the right to elect a majority of the Company’s Board of Directors. Crescent has entered into a letter agreement waiving this right until the date that Crescent elects to sell, transfer, convey or otherwise dispose of all its shares. These factors could have the effect of delaying, deferring or preventing a change in control of the Company and, as a result, could discourage acquisition bids for the Company and limit the price that investors are willing to pay for shares of common stock.
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PROPERTIES. |
The Company currently owns both the land and buildings at two of its restaurant locations, and owns restaurant buildings on leased land at seven other locations. The Company leases all of its other restaurant locations, but may purchase future restaurant locations where it believes it is cost-effective to do so. The Company’s restaurants are located in regional malls, strip centers, and freestanding locations.
The Company’s restaurants range from 4,800 to 9,014 square feet with inside seating for 108 to 304 guests. Many of the Company’s restaurants provide limited outdoor seating.
Restaurant locations leased by the Company are typically leased under “triple net” leases that require the Company to pay real estate taxes, maintenance costs and insurance premiums and, in many cases, to pay contingent rentals based on sales in excess of specified amounts. Generally, the leases have initial terms of ten to twenty years, with options to renew for additional periods, which range from five to fifteen years. Of the Company’s current leases all, except four, have remaining terms or renewal options extending more than five years following the date of this report. Of these four, two expire in 2004, one in 2006 and one in 2007. There can be no assurance that the Company will be able to extend these four leases on favorable terms or at all. To the extent the Company is unable to extend these leases, or secure alternative locations on favorable terms, the Company’s operating results would be adversely impacted.
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The Company currently leases a separate facility for its executive headquarters pursuant to a lease that expires July 31, 2010. The Company believes that such facility is adequate for its office space requirements through fiscal 2004. If additional space is required in the future, the Company further believes that suitable facilities can be leased on commercially reasonable terms.
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LEGAL PROCEEDINGS. |
From time to time, the Company may be involved in litigation relating to claims arising out of its operations. As of the date of this Annual Report on Form 10-K, the Company is not engaged in any legal proceedings that are expected by the Company’s management, individually or in the aggregate, to have a material adverse effect on the Company’s business, financial condition or results of operations.
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SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. |
None.
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MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. |
Stock Information. Fresh Choice, Inc.’s common stock trades on The Nasdaq Stock Marketâ under the Symbol: SALD. On March 5, 2004, 6,017,190 shares were owned by 313 stockholders of record. The following are the Company’s common stock high and low closing sales prices for the fiscal years 2002 and 2003:
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2002 |
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High |
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Low |
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||
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First Quarter |
|
$ |
3.000 |
|
$ |
2.180 |
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|
|
Second Quarter |
|
|
2.700 |
|
|
2.250 |
|
|
|
Third Quarter |
|
|
2.501 |
|
|
1.870 |
|
|
|
Fourth Quarter |
|
|
2.090 |
|
|
1.550 |
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|
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|
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||
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|
2003 |
|
High |
|
Low |
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||
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|
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|
||
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|
|
|
First Quarter |
|
$ |
1.920 |
|
$ |
1.310 |
|
|
|
Second Quarter |
|
|
2.000 |
|
|
1.400 |
|
|
|
Third Quarter |
|
|
2.190 |
|
|
1.760 |
|
|
|
Fourth Quarter |
|
|
2.199 |
|
|
1.540 |
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Fresh Choice, Inc. had its initial public offering on December 9, 1992 at a price of $13.00. Fresh Choice, Inc. had a follow-on public offering on July 15, 1993 at a price of $25.00.
The Company has not paid cash dividends on its common or preferred stock, and presently intends to continue this policy in order to retain its earnings for the development of the Company’s business. In addition, the Company’s current loan and security agreement prohibits the payment of dividends.
On September 13, 1996, the Company sold to Crescent Real Estate Equities Ltd. (“Crescent”) 1,187,906 shares of Series B Non-Voting Convertible Participating Preferred Stock (“Series B Preferred Stock”), and granted Crescent an option to purchase 593,953 shares of Series C Non-Voting Convertible Participating Preferred Stock, which expired in 1999, (“Series C Preferred Stock”) (collectively, the “Stock”) for an aggregate purchase price of approximately $5.5 million, or $4.63 per share of Series B Preferred Stock pursuant to a Preferred Stock Purchase Agreement dated April 26, 1996. The Series B Preferred Stock is convertible into Series A Voting Convertible Participating Preferred Stock (“Series A Preferred Stock”) at any time at the option of the holder, and the Series A and Series B Preferred Stock is convertible into Common Stock at any time at the option of the holder. The Company offered and sold the Stock to Crescent, a sophisticated investor who purchased such shares for investment purposes, as transactions not involving a public offering pursuant to the exemption from registration provisions of Section 4(2) of the Securities Act of 1933, as amended.
The Company currently maintains two compensation plans that provide for the issuance of the Company’s Common Stock to officers and other employees, directors and consultants. These consist of the 1998 Stock Option Plan (the “Option Plan”) and the 2001 Employee Stock Purchase Plan (the “Purchase Plan”), both of which have been approved by stockholders.
15
The following table sets forth information regarding outstanding options and shares reserved for future issuance under the foregoing plans, as well as non-qualified options issued outside of the Option Plan, as of December 28, 2003:
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Plan Category |
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Number of Securities to |
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Weighted-average |
|
Number of securities |
|
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|
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Equity compensation |
|
|
1,051,269 |
(1) |
|
|
$ |
3.055 |
|
|
|
424,799 |
(1)(3) |
|
|
Equity compensation |
|
|
120,000 |
(2) |
|
|
$ |
4.375 |
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|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,171,269 |
|
|
|
$ |
3.190 |
|
|
|
424,799 |
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|
|
|
|
|
|
|
|
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|
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|
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1 |
Reflects options issued or outstanding under the Company’s Option Plan. |
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2 |
Reflects non-qualified options issued to an executive officer, by the Board of Directors, in 1997 outside of the option Plan. |
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|
3 |
Includes 206,557 shares that are reserved for issuance under the Purchase Plan. |
16
|
SELECTED FINANCIAL DATA. |
A five-year summary of selected financial data follows:
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(Dollars in thousands, except per share amounts) |
|
December 28, |
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December 29, |
|
December 30, |
|
December 31, |
|
December 26, |
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Consolidated statement of operations data: |
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
78,492 |
|
$ |
74,951 |
|
$ |
74,152 |
|
$ |
76,781 |
|
$ |
72,928 |
|
|
Operating income (loss) (1) |
|
|
(5,584 |
) |
|
(1,331 |
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