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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(MARK ONE)

OR

COMMISSION FILE NUMBER 000-32527

BRIAZZ, INC.

3901 7TH AVENUE SOUTH, SUITE 200
SEATTLE, WASHINGTON 98108-5206
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

(206) 467-0994
(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)

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

The number of outstanding shares of common stock, no par value, of the Registrant at April 30, 2003 was 5,990,916.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of Exchange Act). Yes o No x

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BRIAZZ, INC.

INDEX TO THE FORM 10-Q
FOR THE 13-WEEK PERIOD ENDED March 30, 2003

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PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BRIAZZ, INC.
BALANCE SHEETS
(in thousands, except share data)
(unaudited)

The accompanying notes are an integral part of these financial statements.

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BRIAZZ, INC.
STATEMENTS OF OPERATIONS
(in thousands, except share data)
(unaudited)

The accompanying notes are an integral part of these financial statements.

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BRIAZZ, INC.
Statement of Stockholders’ Equity
(in thousands)
(unaudited)

The accompanying notes are an integral part of these financial statements.

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BRIAZZ, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

The accompanying notes are an integral part of these financial statements.

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BRIAZZ, INC.

NOTES TO FINANCIAL STATEMENTS
(unaudited)

Note 1. Summary of operations and significant accounting policies

Operations – BRIAZZ, INC. (“BRIAZZ” or the “Company”) distributes branded lunch and breakfast foods through multiple points of distribution in urban and suburban locations. The Company commenced operations in 1995 in Seattle and opened new markets in San Francisco in 1996, Chicago in 1997 and Los Angeles in 1998. The Company’s business strategy is to solidify its current markets and as funding becomes available, build BRIAZZ into a national brand by expanding in major metropolitan areas across the United States. The Company’s retail distribution network includes BRIAZZ cafés, as well as box lunch and catered platter delivery. The Company also distributes its products through select wholesale accounts. Each market obtains products from a central kitchen; which prepares meals daily. Until December 2002 the Company operated a central kitchen in each market. The Company’s Chicago and Los Angeles central kitchens were closed in late 2002 and the Seattle central kitchen was closed in February 2003. It is expected the San Francisco central kitchen will close by the end of the second quarter of 2003. Upon closure of the central kitchens, the Company has contracted for the production of its products.

At March 30, 2003, the Company operated 12 cafés in Seattle, 15 cafés in San Francisco, 8 cafés in Chicago and 10 cafés in Los Angeles.

Interim financial information – The financial information at March 30, 2003, and for the 13-week periods ended March 30, 2003 and March 31, 2002 is unaudited but includes all adjustments, consisting only of normal recurring adjustments, that the Company considers necessary for a fair presentation, in all material respects, of its financial position, operating results and cash flows for the interim dates and periods presented. The results of operations for the 13-week period ended March 30, 2003 are not necessarily indicative of results to be expected for the entire fiscal year or future periods.

Use of estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Impairment of long-lived assets – The Company reviews its long-lived assets for impairment, whenever events or changes in circumstances indicate that the carrying amount of an asset might not be recoverable. When such an event occurs, management determines whether there has been an impairment by comparing the anticipated undiscounted future net cash flows at the lowest level for which there are identifiable cash flows, which is at the store level, to the related asset’s carrying value. If an asset is considered impaired, the asset is written down to fair value, which is determined based either on discounted cash flows or appraised values, depending on the nature of the asset.

Accounts Payable – The Company’s banking system provides for the daily replenishment of disbursement bank accounts as checks are presented. Included in accounts payable at March 30, 2003 and December 29, 2002 is $187,000 and $157,000, respectively, representing the excess of outstanding checks over cash on deposit at the bank on which the checks were drawn.

Stock-based compensation – The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25 (“APB No. 25”), “Accounting for Stock Issued to Employees” and complies with the disclosure provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 (“SFAS No. 123”), “Accounting for Stock-Based Compensation.” As amended by SFAS No. 148, “Accounting for Stock-Based Compensation Transition and Disclosure.” Under APB No. 25, compensation expense is based on the difference, if any, on the date of grant, between the deemed fair value of the Company’s stock and the exercise price of the option. Unearned compensation is amortized on a straight-line basis over the vesting period of the individual options. Certain warrants owned by employees contain provisions which result in the application of variable plan accounting in accordance with the provisions of FASB Interpretation No. 44 (“FIN No. 44”). For those warrants, compensation expense is adjusted quarterly as the market price of the Company’s common stock changes at prices in excess of the exercise price.

Had the Company applied the provisions of SFAS No. 123 to all stock option grants, the Company’s net loss would have been increased to the pro forma amounts indicated below (in thousands except share data):

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Net loss per share - The computation of basic and diluted net loss per share is based on the weighted-average number of shares of common stock outstanding during the period, and excludes all outstanding options and warrants to purchase common stock from the calculation of diluted net loss per share, as such securities are anti-dilutive for all periods presented.

The following table presents the calculation of basic and diluted net loss per share (in thousands, except share and per share data):

Reclassifications – Certain components of prior year revenues and expenses have been reclassified to conform to current year classifications. The reclassifications have no effect on stockholder’s equity or net loss.

Recent accounting pronouncements – In July 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, “Accounting for Asset Retirement Obligations” (“SFAS No. 143”). SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. At adoption of SFAS No. 143 the Company did not have any asset retirement obligations.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS No. 146”). SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The adoption of SFAS No 146 did not have a material impact on the Company’s financial position or results of operation.

Note 2. Financial condition and basis of presentation

The Company has incurred substantial operating losses and negative cash flows from operations since inception and had an accumulated deficit of $72.7 million and a working capital deficit of $6.7 million at March 30, 2003. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The Company has financed its operations principally through the net proceeds from debt and equity offerings. The Company’s ability to continue as a going concern is dependant upon numerous factors, including its ability to obtain additional financing, its ability to increase its level of future

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revenues and its ability to reduce operating expenses. The accompanying financial statements have been prepared on the basis that the Company will continue as a going concern and do not include any adjustments to reflect the possible future effects on the recoverability of assets and liquidation of liabilities that may result from this uncertainty.

As described in Note 8, subsequent to March 30, 2003, the Company has raised additional cash from the sale of its debt and equity securities, and as previously disclosed has entered into a letter of intent to sell additional securities. There can be no assurance that the Company will be able to obtain additional financing, increase revenues, reduce expenses or successfully complete other steps to continue as a going concern. If the Company is unable to obtain sufficient funds to satisfy its cash requirements, it may be forced to curtail operations, dispose of assets, seek extended payment terms from its vendors, or consider other alternatives. Such events would materially and adversely affect the Company’s financial position and results of operations.

Note 3. Notes payable and other borrowings

In June 2002, the Company entered into a Securities Purchase Agreement with Laurus Master Fund, Ltd. (“Laurus”) in connection with the issuance of a $1.25 million 14% convertible note (the “14% convertible note”) to Laurus and a warrant to purchase 250,000 shares of common stock. The 14% convertible note is collateralized by all of the Company’s assets. During the fiscal quarter ended March 30, 2003, convertible notes of approximately $8,000 were converted into 40,200 shares of company stock. During the fiscal quarter ended March 30, 2003, the 14% convertible note was amended to among other things, change the Fixed Conversion Price to $0.10 per share and defer principal payments, under certain conditions, to July 2003. Additionally, in March 2003, terms of the 250,000 warrants issued in June 2002 were amended to, among other things, change the exercise price to $0.10 per share and suspend the right of Laurus to exercise the warrant until the earlier of June 30, 2003 or the closing on an investment by Deutsche Bank or any of its affiliates. As a result of the amended conversion price for the notes and exercise price for the warrants being less than the market price of the common stock on the amendment date, the Company recorded the related beneficial conversion features estimated fair value of $107,000 as original issue discount and an increase in common stock and additional paid-in capital during the fiscal quarter ended March 30, 2003.

In March 2003, the Company issued $2 million of promissory notes, 100 shares of series D preferred stock, and warrants to purchase 1,193,546 shares of common stock at a price per share of $0.50 to Briazz Venture L.L.C. (“Briazz Venture”) an affiliate of Flying Food Group, Inc. (“FFG”) in consideration for approximately $550,000 cash and conversion of $1.45 million of outstanding demand notes. The Company recorded a debt discount of approximately $21,000 relating to the issuance of warrants. All Company assets are pledged as collateral for the notes. The notes bear interest at 10% per year, payable monthly, and are due March 6, 2004, subject to earlier maturity under certain conditions. Terms of the notes include certain covenants, including, among others, restrictions on the payment of dividends, limitation on additional indebtedness, and compliance with financial covenants, including minimum future EBITDA and maximum accounts payable. The Company has complied with or obtained waivers relating to such covenants. The warrants are immediately exercisable and have a five year term, subject to shareholder approval of conversion of series D preferred stock into common stock at which time, the warrants are cancelled. Subject to shareholder approval, series D preferred stock would be convertible, for a term of five years, at the option of the holder, into approximately 66.7% of the Company’s outstanding common stock on a fully-diluted post-conversion basis, such percentage being adjustable under certain conditions. Upon the occurrence of any event of default under this 10% note, the amount due and owing under the note shall be increased to 130% of the then outstanding aggregate principal amount of the note together with any accrued and unpaid interest and fees. While any event of default is continuing, a default rate of 14% will apply and FFG may declare all amounts owing under the note immediately due and payable.

Note 4. Stock Options

The Company maintains the BRIAZZ 1996 Stock Option Plan (the “Plan”) to provide for granting of incentive stock options and nonqualified stock options to employees, directors, consultants and certain other non-employees as determined by the Plan Administrator. The Company has authorized 1,165,000 shares of common stock for issuance under the Plan. The date of grant,

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option price, vesting period and other terms specific to options granted under the Plan are determined by the Plan Administrator. Options granted under the Plan generally expire ten years from date of grant and vest over periods ranging from date of grant to five years. In March 2003, the Company Board of Directors accelerated vesting on stock options such that all outstanding options became fully vested. The following summarizes stock option activity from December 29, 2002 to March 30, 2003 (shares in thousands, except exercise price):

Prior to 2002, the Company granted stock options to employees (which vested over four years) and directors at exercise prices deemed to be below the fair value of the underlying stock on the date of grant. Related deferred stock compensation is being amortized generally over a four-year vesting period. As a result of these grants and acceleration of vesting in March 2003, the Company recorded deferred stock compensation of approximately $203,000 and $87,000 in thirteen week periods ended March 30, 2003 and March 31, 2002, respectively.

Note 5. Segment information

The Company manages its business through four reportable segments: Retail, Branded Sales, Kitchens and General and Administrative. Retail consists of sales generated through the Company’s cafés. Branded Sales consists of two subgroups: 1) box lunch, catering and vending and 2) wholesale and grocery. Branded Sales subgroups consist of sales which are aggregated because they have similar economic characteristics. Kitchens consist of unallocated cost of products and packaging, along with unallocated costs of kitchen operations. General and Administrative consists of costs incurred by the corporate office as well as those administrative costs incurred by Retail. Management evaluates segment performance primarily based on sales and segment operating income (loss). Information regarding the Company’s assets is not disaggregated by segment or otherwise. The following table presents certain financial information for each segment (amounts in thousands):

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In the table above, EBITDA represents earnings before interest expense, interest income, income taxes, depreciation, amortization loss on disposal of assets, and provision for asset impairment and store closure. EBITDA data is included because management understands that such information is considered by certain investors as an additional basis on which to evaluate a company’s ability to pay interest, repay debt and make capital expenditures. Because all companies do not calculate EBITDA identically, the above presentation of EBITDA is not necessarily comparable to similarly entitled measures of other companies. EBITDA is not intended to represent and should not be considered more meaningful than, or an alternative to, measures of operating performance as determined in accordance with generally accepted accounting principles. A reconciliation of net loss to EBITDA is as follows:

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Note 6. Commitments and contingencies

The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. Company management currently believes that resolution of such legal matters will not have a material adverse impact on the Company’s financial position, results of operations or cash flows.

The Company is party to an agreement entered into in 2002 with an investment banking firm to become the Company’s exclusive financial advisor with respect to raising capital or otherwise assisting with financing transactions. Pursuant to the agreement, among other things, the Company owes the financial advisor a financing fee of 7% of gross financing proceeds, or 5% in certain financings. In addition, in the event of a transaction, as defined in the agreement, a transaction fee of $750,000 is payable to the financial advisor. In April 2003, the Company received an invoice from the financial advisor for approximately $751,000. The Company, the financial advisor and existing and prospective investors are in the process of negotiations regarding the timing and amounts to be paid with respect to this invoice. Based upon an understanding with the financial advisor and prospective investors, if the proposed financing closes as presently proposed, the transaction fee would be significantly reduced.

Note 7. Related Parties

The Company’s $500,000 note payable to a bank is collateralized by the pledge of a certificate of deposit in such amount owned by the Company’s founder.

As further described in Note 3, in March 2003, the Company issued securities to FFG, such that, subject to shareholder approval, FFG could own approximately 66.7% of the Company’s common stock on a fully-diluted, post conversion basis.

In December 2002, the Company entered into a Food Production Agreement, pursuant to which the Company now purchases its food products from FFG in the Chicago, Los Angeles and Seattle markets. The agreement has a term of ten years subject to earlier termination (i) by FFG upon 180-days’ notice if the Company fails to obtain shareholder approval for the issuance of common stock upon the conversion of shares of Series D Preferred Stock held by FFG’s affiliate or (ii) by either party if the other party becomes insolvent. Purchases from FFG approximated $1.47 million during the fiscal quarter ended March 30, 2003. Included in accounts payable at March 30, 2003 is $820,000 due to FFG.

Note 8. Subsequent events

On April 10, 2003, the Company completed the offer and sale of $550,000 in secured promissory notes, warrants, and series E preferred stock to Spinnaker Investment Partners, L.P. (“Spinnaker”), a fund managed by Spinnaker Capital Partners, LLC (Spinnaker Capital). One of the Company’s directors is a director of Spinnaker Capital. Spinnaker anticipates converting these securities into the proposed financing with DB Advisors, LLC, as previously announced and discussed below. In consideration for $550,000 in cash, Spinnaker was issued a $550,000 secured promissory note, a five-year warrant exercisable for 1,193,546 shares of the Company’s common stock at a price per share of $0.50, and 25 shares of series E preferred stock. The terms of the note, warrant and series E preferred stock are substantially similar to the terms of the note, warrant and series D preferred stock issued to Briazz Venture in March 2003. Spinnaker was granted registration rights covering the shares of common stock issuable upon conversion of the series preferred stock and exercise of the warrant. The Company also agreed to cause up to one person designated by Spinnaker to be appointed to the Company’s Board of Directors. Proceeds of the financing will be used for working capital, after deduction of expenses and a $50,000 management fee payable to Spinnaker Capital. In connection with the financing, Spinnaker Capital, Laurus and FFG and its affiliates, including Briazz Venture, entered into an inter-creditor agreement in which they agreed that their respective security interests in the Company’s assets would rank equally in priority.

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The $550,000 secured promissory note bears interest at 10% per year. Interest is payable monthly in arrears, in cash. The note matures, and all principal and accrued and unpaid interest becomes due, on March 6, 2004. The note may, however, become due prior to March 6, 2004 if the Company fails to meet financial covenants set forth in the note.

If shareholders approve the conversion of series D and series E preferred stock, the series E preferred stock will be convertible at the option of the holder, for an aggregate conversion price of up to $500,000 for a period of five years, into approximately one quarter (1/4) of the number of shares of common stock into which the series D preferred stock is convertible. The number of shares of common stock into which series E preferred stock may be converted and the conversion price per share of common stock will initially be fixed on the date that the series E preferred stock first becomes convertible. If the Company’s shareholders approve the conversion of preferred stock, then based upon outstanding securities as of April 10, 2003, assuming that the Company does not issue, cancel or modify any of its securities prior to the date of shareholder approval and assuming that Briazz Venture and Spinnaker do not exercise their warrants prior to the date of shareholder approval, the series D preferred stock would initially be convertible into a total of approximately 33,171,900 shares of common stock at a conversion price of approximately $0.06 per share of common stock, and the series E preferred stock would initially be convertible into a total of approximately 8,292,975 shares of common stock at a conversion price of approximately $0.06 per share. The exact number of shares of common stock that may be issued on conversion of the series D and series E preferred stock and the exact conversion price of the series D and series E preferred stock cannot be determined until the date shareholder approval is received.

If series E preferred stock becomes convertible, then so long as the secured promissory note issued to Spinnaker remains outstanding, such preferred stock will be entitled to vote, with certain exceptions, together with common stock on an as-converted basis. If the conversion of series D and E preferred stock is not approved by the Company’s shareholders, such preferred stock will not become convertible at the option of the holder and will not be entitled to vote on an as-converted basis. Any shares of series D and E preferred stock outstanding on the fifth anniversary of the initial issuance of such preferred stock will be automatically converted into shares of common stock at a rate of 1/25th of a share of common stock per share of such preferred stock.

Subject to certain exceptions, if any additional shares of common stock or any securities convertible or exercisable for shares of common stock at an effective price that is less than the conversion price of the series D and E preferred stock or exercise price of the warrant are issued, the conversion or exercise price will be adjusted to equal the effective price at which the new securities were issued. Upon the series D and E preferred stock becoming convertible, the warrants automatically terminate. Any exercise of the warrant prior to such time will reduce the aggregate conversion price and number of shares issuable upon conversion of such preferred stock.

As previously disclosed, the Company entered into a letter of intent to sell senior secured notes and warrants to purchase common stock (the “DB securities”) to DB Advisors, LLC, an affiliate of Deutsche Bank, and other investors, which would result in additional cash proceeds of $3.9million. Briazz Venture has agreed to participate in the proposed financing with DB Advisors if the financing is substantially on the same terms as set forth in the letter of intent and if the agreements and related documentation are satisfactory to Briazz Venture. Spinnaker has agreed to participate in the proposed financing with DB Advisors if the financing is substantially on the same terms as set forth in the letter of intent. If Spinnaker and Briazz Venture were to participate in the proposed financing with DB Advisors, their secured promissory notes, warrants and preferred stock would be cancelled as payment for the DB securities.

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report contains statements that may constitute “forward-looking statements” within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995. Such statements include comments regarding our ability to comply with the financial covenants set forth in note agreements, the number of shares of our common stock into which the shares of our series D and series E preferred stock may become convertible, the conversion price at which the shares of our series D and series E preferred stock may become convertible, our proposed financing with DB Advisors, LLC and other investors, and the expected outsourcing of our food production in San Francisco. Our actual results and the timing of certain events could differ materially from those contemplated by such forward-looking statements. Important factors currently known to management that could cause actual results to differ materially from those in forward-looking statements include, without limitation, fluctuation of our operating results, our ability to obtain additional financing on terms favorable to us, or at all, our ability to compete successfully, our ability to successfully transition food production to third parties, our reliance upon FFG, our ability to meet our obligations, actions of our debt holders, landlords and suppliers, office occupancy, our ability to maintain current cafe locations and secure new ones, food and labor

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costs, and operation in only four geographic areas. For additional factors that may cause actual results to differ materially from those contemplated by such forward-looking statements, please see the section entitled “Risk Factors” in Item 1 of December 29, 2002 Annual Report on Form 10-K, and in other filings on file with the SEC, which risk factors are incorporated herein as though fully set forth.

Forward-looking statements can be identified by use of words such as “may,” “will,” “should,” “could,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative or other variations of these words, or other comparable words or phrases. Although we believe the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements or other future events. Moreover, neither we nor anyone else assumes responsibility for the accuracy and completeness of forward-looking statements. We are under no duty to update any of our forward-looking statements after the date of this filing. You should not place undue reliance on forward-looking statements.

Overview – BRIAZZ prepares and sells high-quality, branded lunch and breakfast foods for the “on-the-go” consumer. We sell our products primarily through our company-operated cafes, through delivery of box lunches and catered platters directly to corporate customers and through selected wholesale accounts. Our core products are sandwiches, salads and soups, which are complemented by a variety of fresh baked goods, premium juices, Starbucks coffees and fresh fruit.

As of May 2003, we currently operate a total of 44 cafés in Seattle, San Francisco, Chicago and Los Angeles. Our growth strategy is to open new cafés in our existing markets and, when appropriate, enter into new markets served by one of the central kitchens of FFG or another suitable supplier. The two café decrease since year end is due to the closure of two under-performing locations, one in each of the first and second quarters of 2003. Due to, among other things, capital restrictions, we do not currently plan to open any cafés in 2003. Our growth strategy is to open new cafés in our existing markets and, when appropriate, enter into new markets.

In December 2002, we contracted with FFG to assemble and package substantially all of our food products used at our café locations and in our branded sales. Pursuant to this agreement we closed our central kitchens and transferred our food production to FFG in the Chicago and Los Angeles markets in December 2002 and in the Seattle market at the end of February 2003. Due to FFG’s insufficient capacity in San Francisco, we intend to outsource our food production in San Francisco to another company and to close our remaining central kitchen in San Francisco by the end of the second quarter of 2003. We believe that contracting our food production to another party, such as FFG, will allow us to reduce our overhead in our existing markets and may allow us to lower the costs of entry into new markets served by their central kitchens. There can be no assurance that the transition to third-party central kitchens for food preparation will be successful or that the Company will be able to realize anticipated cost savings.

We have evaluated the grocery segment of our wholesale business and decided to withdraw from this distribution channel. We remain committed to growing profitable wholesale accounts. We are working with FFG in Chicago and New York markets to supply Starbucks branded sandwiches and salads to Starbucks Stores in the future.

As a result of central kitchen closures and reductions in corporate personnel, there was a decrease of 64 employees from the beginning of the year, or 17%, to 307 employees at March 30, 2003, 55 full-time salaried and 252 hourly. These employee reductions will result in decreases in labor expenses in 2003.

Our common stock was transferred to the Nasdaq SmallCap Market on January 27, 2003, because we failed to meet the requirements for listing on the Nasdaq National Market. There are a number of continuing requirements that must be met in order for our common stock to remain eligible for quotation on the Nasdaq SmallCap Market. We do not currently meet the SmallCap Market requirements that a company maintain a minimum bid price of $1.00 and a minimum market value of publicly held shares of $1 million. Nasdaq has provided us with a temporary exemption from these requirements provided that, among other things, we evidence compliance with the $2.5 million shareholders’ equity requirement, we come into compliance with the requirement for a market value of publicly held shares of $1 million by June 5, 2003 and we come into compliance with the requirement for a minimum bid price of $1.00 by August 25, 2003. We are not currently in compliance with the $2.5 million shareholders’ equity requirement. We may therefore be delisted, after which our common stock may continue to be quoted on the OTC Bulletin Board. If we are delisted from the Nasdaq SmallCap Market, it may be more difficult for our shareholders to sell their shares and the market price of our common stock may be depressed. We are discussing the possibility of extensions of time to come into compliance with Nasdaq.

Geographic Markets – We currently operate in four markets: Seattle, San Francisco, Chicago and Los Angeles. We have presented our sales results here by geographic market to help you understand our business, but we do not operate our business

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in geographic segments. We manage our business through four reportable segments: Retail, Branded Sales, Kitchens, and General & Administrative. Retail consists of sales generated through the Company’s cafés. Branded Sales consists of two subgroups: 1) box lunch, catering and vending and 2), wholesale and grocery. Branded Sales consists of sales which are aggregated because they have similar economic characteristics. Kitchens consist of unallocated cost of products and packaging, along with unallocated costs of kitchen operations. General and Administrative consists of costs incurred by the corporate office as well as those administrative costs incurred by Retail. Management evaluates segment performance primarily based on sales and segment operating income (loss).

Below is a comparison of sales in each market for the thirteen weeks ended March 30, 2003 and March 31, 2002. Market pre-tax profit (loss) consists of sales less expenses related to each market other than corporate general and administrative expense. Sales include sales from cafés, box lunches, catering, vending, wholesale, grocery and other accounts. Expenses for each market consist of occupancy expense, labor expense, general and administrative expense, other operating expense, depreciation and amortization and provision for asset impairment and store closure. Each of these items are described in more detail in “Results of Operations.” Because corporate general and administrative included depreciation and amortization related to corporate assets corporate general and administrative totals will differ from the General and Administrative segment financial information.

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Geographic Markets