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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 28, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________ .
Commission file number 000-32527
BRIAZZ, INC.
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(Exact name of registrant as specified in its charter)
Washington 91-1672311
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(Jurisdiction of incorporation) (I.R.S. Employer Identification No.)
3901 7th Avenue South, Suite 200
Seattle, Washington 98108
(Address of principal executive offices)
Registrant's telephone number: (206) 467-0994
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no 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 [ ]
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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold on the OTC Bulletin Board as of the last business day of the
registrant's most recently completed second fiscal quarter, which was June 29,
2003 was $1,078,365
The number of shares of the registrant's Common Stock outstanding as of
March 1, 2004 was 5,990,916.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to shareholders
in connection with the Annual Meeting of Shareholders to be held in 2004 are
incorporated by reference into Part III.
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BRIAZZ, INC.
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TABLE OF CONTENTS
Page
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PART I.
ITEM 1. Business ..................................................................... 4
ITEM 2. Properties ................................................................... 20
ITEM 3. Legal Proceedings ............................................................ 21
ITEM 4. Submission of Matters to a Vote of Security Holders .......................... 21
PART II
ITEM 5. Market for Registrant's Common Equity and Related Shareholder Matters ........ 21
ITEM 6. Selected Financial Data ...................................................... 21
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................................. 23
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk ................... 35
ITEM 8. Financial Statements and Supplementary Data .................................. 35
ITEM 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure .................................................. 55
ITEM 9A. Control and Procedures ....................................................... 55
PART III
ITEM 10. Directors and Executive Officers of the Registrant ........................... 56
ITEM 11. Executive Compensation ....................................................... 56
ITEM 12. Security Ownership of Certain Beneficial Owners and Management ............... 56
ITEM 13. Certain Relationships and Related Transactions and Related Shareholder Matters 56
ITEM 14. Principal Acccountant Fees and Services ...................................... 56
PART IV
ITEM 15. Exhibits, Financial Statements and Reports on Form 8-K ....................... 57
SIGNATURES ............................................................................ 60
Unless the context indicates otherwise, the terms "we," "us," "our," the
"Company," or "BRIAZZ" refer to BRIAZZ, INC., a Washington corporation.
2
FORWARD LOOKING STATEMENTS
Certain statements in this Annual Report ("Annual Report" or the "Report")
constitute forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements can often be
identified by terminology such as may, will, should, expect, plan, intend,
anticipate, believe, estimate, predict, potential or continue, the negative of
such terms or other comparable terminology. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance or achievements of BRIAZZ, INC., or developments
in our industry, to differ materially from the anticipated results, performance
or achievements expressed or implied by such forward-looking statements. Any
such forward-looking statements are not guarantees of future results or
performance and involve risks and uncertainties, and actual results may 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 and/or to
our cafes, our reliance upon Flying Food Group, L.L.C. ("FFG"), our ability to
achieve profitable operations in the test stores within the Borders Bookstores,
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, our ability to retrofit existing locations, food and labor
costs, operation in only four geographic areas and the other risks and
uncertainties described under "Business--Risk Factors" in Part I of this Annual
Report. We undertake no obligation to update these forward-looking statements to
reflect events or circumstances occurring after the date of this Annual Report
3
PART I
Item 1. Business.
Overview - BRIAZZ 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.
At March 22, 2004, we operate a total of 38 cafes in Seattle, San Francisco,
Chicago and Los Angeles. In addition, we operate four cafes inside four Borders
Bookstores in the Chicago market pursuant to an agreement with Borders. This
agreement is in effect through June 2004, and can be extended or renewed if
certain objectives are achieved. We are currently focused on achieving
profitable operations in our core cafes in 2004 and have no plans to open
additional cafes during the current fiscal year.
Our target customers are office workers. Our cafes are conveniently located
either in city center locations with a high density of office buildings and
retail foot traffic or within individual office buildings where we serve as an
amenity for building tenants. To satisfy the demands of our time-constrained
customers for lunch, breakfast and between-meal snacks, we design our cafes for
quick service. Refrigerated display cases offer easy access to pre-packaged food
items.
We currently contract with a third party to assemble and package substantially
all of our food products used at our cafe locations and in our branded sales
operations in Chicago, Los Angeles and Seattle. In Seattle, we have transitioned
our food production from the Flying Food Group, L.L.C. ("FFG") central kitchen
to another third party supplier. We intend to close our remaining central
kitchen in San Francisco by the end of our second fiscal quarter. During the
first half of 2004, we intend to move the majority of the assembly and packaging
of our food products into our cafes and move out of the central kitchens in
Chicago, Los Angeles, and San Francisco. As of March 26, 2004, we have completed
the transition to in-cafe production in Chicago and Los Angeles. Bringing food
production into our cafes allows us to reduce food costs, reduces our reliance
on a third party manufacturer, and allows us to lower the costs of entry into
new markets. We have entered into an agreement with FFG whereby FFG has agreed
to release us from our obligations to have our food exclusively produced in
their kitchens. We anticipate we will terminate the Food Production Agreement
with FFG in its entirety once we have successfully transitioned our food
production from their central kitchens to our cafes. We currently are working to
bring substantially all of our food preparation into individual cafes. See the
Section entitled "Central Kitchens; Flying Food Group Production Agreement."
Competitive Strengths - Subject to the availability of additional funding, we
intend to expand product offerings in our existing cafes. The following are
central factors in our business strategy and to achieve our goals, we intend to
leverage the following strengths:
Well-defined business concept - Over the past seven years, we have refined our
menu selections and cafe layout, while reducing unit production costs, and
changed the way that we will be supplying our cafes with food and related
supplies to respond to customer demands and business environment.
Diverse, high-quality product offerings. We offer a diverse range of menu items
designed for broad appeal to our target customers. We also offer varying portion
sizes for selected salads and sandwiches. We believe our product selection,
ranging from traditional foods, such as Cobb salads and tuna sandwiches, to
gourmet foods and a large selection of hot foods and soups attracts new
customers and increases the frequency of visits by repeat customers. We have
placed increased emphasis on hot menu items with significant focus on a line of
Hot Panini Sandwiches, and began offering a selection of made-to-order (MTO)
food items during the first fiscal quarter of 2004.
Frequent menu changes. Our goal is to introduce new food selections to our
customers approximately quarterly. We also adjust our menu seasonally, for
instance, by offering a larger variety of hot soups and hot sandwiches during
the winter months and a larger variety of salads during the summer months. We
began preparing more of our product offerings in our cafes including
made-to-order salads and sandwiches during the first fiscal quarter of 2004.
Speed and quality of service. We have designed our cafes to serve a large number
of customers in a very short period of time and to allow easy movement within
the cafe from entry to exit. In addition, our cafe employees are trained to
focus their attention on customer service. All employees receive extensive
in-cafe training under the direction of a store manager in areas such as quality
food preparation, speed of customer service, health standards, and customer
satisfaction.
4
Range of prices. Our entrees range in price from $3.49 to $6.95. In addition,
our multiple price point strategy allows customers to select their own meal
combinations, such as a soup and salad or a soup and sandwich, providing further
flexibility in offering meals to fit differing budgets.
Multiple distribution channels. For the convenience of our corporate customers,
in some markets we deliver box lunches and catered platters for office meetings
through trucks and vans. We also deliver to selected wholesale customers.
Strategic cafe locations. We locate our cafes primarily in areas with many
office buildings or within individual buildings where we serve as an amenity for
building tenants. Amenity locations are typically sites on the ground floor or
in the plaza of an office building and are often leased at favorable rates
because they offer conveniences to building tenants. In addition, for cafes in
amenity locations, very little marketing is required due to the high visibility
of the cafe within the building and the comparatively low level of competition
within the building.
Experienced management. Our management team has significant experience in the
retail and food industries. We believe our management team is well-positioned to
manage our existing operations and the anticipated revenue growth in our
business.
Growth Strategy - We believe that measured growth opportunities exist for us
both in our current markets and in new markets. Our key strategies to drive
growth are:
Increase our penetration in existing markets. Subject to available funding and
general economic conditions in the downtown corridors we serve, our expansion
plans in our current markets call for the establishment of new cafes and an
increase in our distribution capabilities to expand our sales from box lunches,
catering platters and wholesale accounts. We believe that the opportunity exists
to add several cafes in our existing geographic markets over the next five
years, however we have no plans to add any additional new cafes this year.
Expand into new geographic markets. In the next few years, we intend to expand
into new geographic markets. Although we have not yet identified specific new
markets, we believe many of the 25 largest metropolitan areas in the United
States are suitable for potential expansion of BRIAZZ operations and brand. When
appropriate, and subject to available funding, we intend to enter into new
markets by concurrently opening cafes and initiating delivery of box lunch and
catering services. It typically takes eight months to open a new cafe from the
date of signing the lease.
Build brand awareness. We believe that sales of our branded food products
through our cafes and other distribution channels reinforce our image as a
provider of fresh, high-quality lunch and breakfast foods and between-meal
snacks. We currently build brand awareness through cafe visibility, branded
delivery vans and trucks and product packaging. We are engaged in a number of
marketing initiatives designed to further build brand awareness, such as in-cafe
promotions and redesigned signage for our cafes.
History - Victor D. Alhadeff founded BRIAZZ in 1995, after recognizing the
convergence of two consumer trends: (i) decreasing time for lunch and breakfast
and (ii) an increasing desire for high-quality, healthy food at affordable
prices. Mr. Alhadeff founded BRIAZZ on the belief that demand for healthy,
premium foods served quickly and conveniently could be met through the sale of
pre-packaged food items from open, self-serve refrigerated cases. In September
1995, the first BRIAZZ cafe in Seattle, Washington was opened. We expanded our
operations into San Francisco in 1996, Chicago in 1997 and Los Angeles in 1998
and now operate 38 cafes. In November 2003, we opened four cafes inside Borders
Bookstores in the Chicago area on a test basis
Our Menu - We offer hot and cold sandwiches, salads and soups, as well as a
variety of fresh baked goods, juices, gourmet coffees and fresh fruit. Within
each basic product category, such as sandwiches, salads, soups and baked goods,
we strive to offer a large number of choices. On average, we offer approximately
300 different items in our cafes.
Our food products are made with high-quality, fresh ingredients and are served
in our cafes, in box lunches or on our catered platters within a short time. We
develop our menu and recipes to provide flavorful choices, ranging from the
traditional to the gourmet. Our sandwiches are made with a variety of
traditional and artisan breads.
We are committed to an ongoing process of introducing new food items
approximately quarterly. New food items are introduced based on factors
including food trends, customer input and test marketing in a limited number of
cafes. In response to customer requests, we now offer hot panini sandwiches such
as tuscan turkey and chicken mozzarella, and hot breakfast items such as omelets
in each of our geographic markets. Cafes designed to produce and sell our hot
offerings generate more of hot food sales compared to an overall company
average. We now have hot sandwiches in most of our locations. We are testing
rapid cook technology that, if successful, will enable us to offer hot menu
items in all locations. The ability to expand with rapid cook technology is
dependent upon successfully obtaining additional financing to provide adequate
capital to purchase or lease this equipment. In addition, to keep our product
offering current, we adjust our menu on a seasonal basis. For example, we offer
a larger variety of hot soups and sandwiches during the winter months, and a
larger variety of salads during the summer months. We are also beginning to
offer a selection of made-to-order salads and sandwiches in selected cafes and
will have these products available in the majority of our cafes by the end of
the second fiscal quarter of 2004.
5
We derive the majority of our cafe sales from sandwiches, salads and soups. Our
sandwiches and salads are currently prepared in central kitchens and our soups
are prepared by Stockpot Soups, a division of the Campbell Soup Co. Our beverage
selection includes Starbucks coffee, fresh juices and other brand-name
beverages. Our baked goods include bagels, muffins, pound cakes, scones and
cookies. We have recently completed a program of new in-cafe signage bringing
greater Starbucks brand awareness within Briazz cafes. Cookies are baked in
ovens in our cafes, providing fresh cookies to our customers and filling the
cafes with the aroma of baking cookies. In the morning and after lunch, the
majority of cafe sales consist of beverages and fresh baked goods. During the
breakfast hours, we offer a selection of hot egg sandwiches on an English
muffin, as well as hot oatmeal, along with other pre-packaged items for
takeaway.
Most of our products are pre-packaged for convenience and labeled with our logo
and a list of ingredients, which, in combination with clear packaging material,
allows for easy product and ingredient identification and additional branding.
Our Distribution Channels - Our food products are distributed through our
company-operated cafes, through delivery of box lunches and catered platters
directly to corporate customers, and through selected wholesale accounts. These
distribution channels are designed to increase market penetration within each
geographic market.
Cafes - Our cafes are typically open from early morning to late afternoon. These
hours of operation are designed to capture the breakfast, lunch and afternoon
traffic. Typically, our cafes have a manager supported by senior hourly "lead"
employees. Each hourly employee is trained to facilitate speed and quality of
service, performing such functions as cashiering, food preparation, coffee and
other drink preparation, greeting customers and bussing tables. As we transition
to in-cafe production of food, our employees will receive additional training on
food safety and preparation. We believe that the impact to cafes in terms of
hours of operation and number of employees will be minimal, as we will believe
we will be able to better utilize our existing employees. As of March 26, 2004,
we have completed the transition to in-cafe production in Chicago and Los
Angeles.
Under the guidance of a district manager, each cafe manager or lead employee is
responsible for ordering the appropriate products and quantities from the
central kitchens and other suppliers. A central purchasing manager sources our
products. This manager then provides our district and cafe managers with
guidelines for placing orders with the central kitchens and third party
suppliers. This practice will continue as we transition to in-cafe production.
To aid in this process, we have developed extensive cafe-level reports that
provide managers with trend and product-volume information. The use of these
reports helps ensure adequate inventory levels and helps reduce the amount of
unsold products.
Of our 38 company-owned cafes, approximately half are amenity locations. The
size of our cafes ranges from approximately 170 square feet in the Wrigley
Building in Chicago to 3,800 square feet in the 525 Market building in San
Francisco. Our cafes sell a diverse selection of BRIAZZ branded and third-party
products and incorporate a distinctive decor that is instrumental in building
the BRIAZZ brand.
We believe our target customers place a high priority on speed of service.
Accordingly, we strive to make the entire process of selecting and purchasing
products require a very short amount of time inside our cafes, even during the
lunch hour rush. We have designed our cafes to serve a large number of customers
in a very short period of time and to allow easy movement within the cafes from
entry to exit. Most food items are clearly labeled and selected from self-serve
refrigerated cases, requiring minimal employee assistance. The hot items on our
menu, such as soups, hot subs and paninis, can be served quickly. This focus on
speed and convenience caters to the time-constrained individual and, we believe,
builds a loyal customer base.
The preparation of food products at central kitchens minimizes the space
required for food preparation in our cafes. Generally, our customers consume
their purchases elsewhere; we do, however, provide a limited number of tables
and chairs at some cafes for customers who wish to eat on the premises. As we
transition to in-cafe production, we will require more space for food
preparation, however we believe we have adequate space in our existing
locations.
Box Lunches and Catered Platters - We deliver box lunches and catered platters
in our Seattle and San Francisco markets. We provide service to customers in the
vicinities of our cafes and to customers whose business sites are located
outside these vicinities. Our box lunches come in a BRIAZZ branded box and
include a BRIAZZ branded sandwich or salad entree, complemented by a bag of
chips, a beverage, a fruit cup and a cookie or brownie. Catering choices include
breakfast trays, sandwich platters, salad bowls, party platters, dessert trays
and cold beverages. Box lunches and catered platters are delivered by employees
wearing BRIAZZ uniforms driving BRIAZZ branded trucks or vans. Our target
customers are companies that order food items for participants of in-house
business meetings.
6
We receive box lunch or catering orders on a daily basis by telephone, fax and
through our web site. Substantially all of our orders are filled at a central
kitchen and delivered directly to the customers. We have consolidated the box
lunch ordering into a call center in Seattle to improve service and reduce
costs. We anticipate an increasing portion of this business will be serviced
directly from our cafes as we complete our transition to in-cafe production in
2004. In addition, we may not be able to provide as wide a variety of product as
we currently do and we may not be able to service the same number and size of
accounts that we currently service as the transition to in-cafe production
occurs.
Wholesale Accounts - We remain committed to maintaining profitable wholesale
accounts. Accounts such as Tully's and Seattle's Best Coffee remain attractive
since they do not require the same level of discount that is required by the
grocery segment. We also have established a successful business relationship
with the University of Washington in Seattle and the University of California in
San Francisco.
Currently, BRIAZZ is supporting FFG under an informal agreement to sell, service
and support Starbucks. Prior to establishing a business relationship with
BRIAZZ, FFG was and is a supplier to Starbucks in Chicago, New York and Los
Angeles. It is anticipated we will expand this arrangement to the San Francisco
market in the second quarter 2004. BRIAZZ and FFG are currently working together
to supply Starbucks branded sandwiches and salads to multiple Starbucks cafes in
the Chicago, New York, and other markets. We are negotiating with FFG to
finalize a formal agreement in the second quarter of 2004.
Borders Agreement - In November 2003, the Company entered into a Food Service
Concession Agreement ("Borders Agreement") with Borders, Inc. to manage and
operate the cafe portion of eight stores on a test basis for a period of six
months after the last test cafe is opened. We will retain all receipts generated
from these cafes and be responsible for substantially all of the costs resulting
from the operations of these cafes. In exchange, the Company will pay Borders an
amount equal to $60,000 for each cafe opened, or a total amount of $480,000, for
improvements made to the cafes. In addition, we will pay a base rent of $8,073
per month for each cafe operated. To date, the Company has opened four test
cafes in the Chicago market and has no plans to open additional cafes prior to
the end of the test period. We have paid Borders $240,000 for improvements to
these cafes as provided for in the agreement.
To date, we have only opened 4 of the 8 stores provided for in the test
agreement. In January 2004, we have agreed with Borders to limit the test to
only these stores. Borders has incurred costs associated with the anticipated
opening of the four remaining stores provided for in the agreement. It is
anticipated that the Company will be required to reimburse Borders for some or
all of these costs in the first half of 2004. It is estimated that this
reimbursement may be between $50,000 and $125,000.
Distribution Logistics - During 2003, most of our products originated at a
central kitchen and were transferred to various distribution points by our fleet
of delivery trucks and vans, many of which are refrigerated. We deliver food
products at different times of the day, allowing us to use our fleet throughout
the day. For example, our trucks and vans deliver each day's food products to
our cafes very early in the morning. Our fleet delivers food products to our
wholesale accounts mid-morning and delivers box lunches and catered platters at
lunchtime. We pick up leftover food products from our cafes at the end of each
day. Most unsold food is donated to charity.
Central Kitchens; Flying Food Group Production Agreement - Until December 2002,
we operated a central kitchen in each of our geographic markets. Our central
kitchens prepared, assembled and distributed substantially all of our food
products. Establishing a central kitchen in each of our geographic locations was
intended to enable us to deliver consistently high-quality, affordable food at
an attractive unit cost. During 2002, we recognized that the costs of carrying
excess capacity at our central kitchen facilities outweighed the benefits of
potential rapid expansion in food output and that our current utilization rates
did not achieve the economies of scale that we had envisioned. As a result, we
entered into an agreement wherein we agreed to purchase our branded food from
FFG. FFG maintains central kitchens in our existing markets and, therefore, was
in an ideal position to support our operations. Accordingly, we have been
gradually phasing out our central kitchens. As of December 29, 2002, we had
completed our transition to purchasing food products from FFG and closed our
central kitchens in Chicago and Los Angeles. By the end of February 2003 we had
also closed our Seattle central kitchen and begun purchasing food products from
FFG in that market. Under our food product agreement, FFG has a right of first
refusal to provide us with our food products in additional markets we may enter;
however, FFG is under no obligation to do so. The Company and FFG have agreed to
eliminate the exclusivity provisions of the Food Production Agreement, which
will allow us to commence in-cafe production in 2004. As of March 26, 2004, we
have completed the transition to in-cafe production in Chicago and Los Angeles.
It is anticipated that once the transition to in-cafe production is complete in
all markets, the Food Production Agreement will be terminated.
7
Under the food production agreement, FFG has agreed to manufacture and package
all food products we sell in our existing markets for the term of the agreement.
We will pay FFG for its actual cost incurred in production of the food items
plus a profit factor to be negotiated. The agreement allows us to change our
menu items provided we give reasonable notice to FFG and the number of items on
our menu remains relatively constant. In addition, the agreement generally
prohibits FFG from using our trademarks for its own purposes. However, it does
not forbid FFG from using the same food formulations, recipes or ingredients for
products that it sells to the food service industry.
As part of the agreement, we agreed to transfer production of our food products
over to FFG in a multi-staged process. We also agreed to transfer to FFG,
without charge, any of our central kitchen equipment that may be requested by
FFG. Since the production agreement was not terminated within one year of
commencement of production FFG will retain all transferred equipment under the
terms of the agreement.
The agreement provides that our rights and remedies for any breach by FFG of its
representations, warranties and covenants under the agreement are limited to (i)
actual damages of up to $50,000 if FFG's failure to assume food production in a
particular market results in us being unable to take advantage of a subleasing
opportunity for our central kitchen in that market, (ii) our ability to reject
nonconforming products or recover the actual costs of nonconforming products,
(iii) indemnification by FFG for any claims or other liabilities arising from
any personal injury resulting from the use of nonconforming products, and (iv)
our ability to terminate the agreement as to a specific geographic market in
which a breach has occurred. The agreement provides that we are not entitled to
any additional damages in the event of a breach by FFG, including actual or
consequential damages resulting from lost sales or lost profits. In addition, we
are not entitled to terminate the agreement in the event of a breach by FFG,
except by terminating the agreement as to the specific geographic market in
which the breach occurred.
The agreement has a term of ten years subject to earlier termination by either
party if the other party becomes insolvent. In addition, the agreement may be
terminated in specific markets (i) by the non-defaulting party in the event of a
default in a specific market by the other party or (ii) by us if FFG is not able
to resume production within 60 days of a Force Majeure event, until FFG can
resume production in the specific market. After the initial ten-year term, the
agreement renews automatically for successive one-year terms unless terminated
by either party on one-year's notice. It is anticipated that the parties will
mutually agree to terminate this agreement after the Company completes its
transition to in-cafe production.
Our remaining central kitchen in San Francisco functions as a food preparation,
assembly and distribution hub. Central kitchen functions include ingredient
preparation, baking, and assembly and packaging of food products. The central
kitchens are designed to benefit from the economies of scale generated by high
unit-production volumes. However, our central kitchens have traditionally run
significantly below capacity diminishing the actual economies of scale.
A key element of our brand-building strategy is to maintain consistent product
quality through our comprehensive quality assurance programs. As part of our
food production agreement with FFG, FFG must ensure that all products sold to us
meet state and federal standards and must maintain a Hazard Analysis Critical
Control Point (HACCP) program similar to the program maintained at our remaining
central kitchen. FFG must also indemnify us for damages arising from their
failure to provide us with food meeting these standards. In our remaining
central kitchen, the manager compiles and analyzes daily reports that detail key
central kitchen statistics, including total production, production by business
unit, labor as a percentage of sales and labor cost per unit produced. Our
quality assurance programs include the HACCP program for use in our central
kitchens and the ServSafe Training Program for use in our cafes and central
kitchens, which training program was created by the Education Foundation of the
National Restaurant Association. In addition to our quality assurance and safety
programs at our cafes and central kitchen, all delivery vehicles used to deliver
food requiring refrigeration are refrigerated for food safety.
In the first quarter of 2004, we have made the decision to transition our
business from the central kitchen production concept to in-cafe production. We
anticipate that we will complete this transition by the end of 2004. As of March
26, 2004, we have completed the transition to in-cafe production in Chicago and
Los Angeles. As we retrofit our cafes for this transition, we are installing
food safety and food-handling equipment as required. We are subject to health
inspections by appropriate local health agencies and expect to pass each
inspection without incident. We are also expanding our food safety program to
include all requirements for in-cafe production.
8
In January 2004, pursuant to an agreement with FFG, we contracted to have our
food production done by a non-affiliated third party kitchen in the Seattle
market and have ceased buying product from FFG. We believe that this arrangement
will result in a lower cost of food in that market while maintaining the same
level of quality.
Employee Training and Development - We have developed a comprehensive program to
train employees in customer service, operations, and product preparation and
knowledge. We provide product and customer service training to all employees.
Our retail employees are exposed to a high level of product training. We believe
that our personnel must be able to provide customers with information about the
food products we offer. In addition, we believe that customer service training
and awareness is critical to our success. We reinforce the importance of
training on a daily basis in our retail locations. In addition to product
training, we train our cafe employees in general store operations to achieve and
maintain a high level of quality and customer service.
Purchasing - In the markets where we have switched food production over to FFG
central kitchens, FFG procures most of our food ingredients, products and
supplies. We pay FFG a handling fee for acquiring products and supplies for our
use from third parties. In San Francisco, where we still maintain our central
kitchen, our purchasing staff procures all of our food ingredients, products and
supplies. We seek to obtain high quality ingredients, products and supplies from
reliable sources at competitive prices. To that end, we continually research and
evaluate various food ingredients, products and supplies for consistency and
compare them to our specifications.
As a result of our initiative to transition to in-cafe production by the end of
2004, we will assume the responsibility for procuring our food ingredients,
products, and supplies we use.
Competition - The quick-service segment within the restaurant industry is highly
competitive. We compete on the basis of many factors, including service,
convenience, taste, quality, value and price. We believe our menu, the quality
of our food, our convenient cafe locations and our prices allow us to compete
with and differentiate ourselves from our competitors. Competitors include
sandwich shops, company cafeterias, delicatessens, pushcart vendors, fast food
chains, catering companies and other providers that offer quick and inexpensive
lunch and breakfast meals and between-meal snacks. Many of our competitors have
significantly more capital, research and development, distribution,
manufacturing, marketing, human and other resources than we do. As a result,
they may be able to adapt more quickly to market trends, devote greater
resources to the promotion or sale of their products, receive greater support
and better pricing terms from independent distributors, initiate or withstand
substantial price competition or take advantage of acquisition or other
opportunities more readily than we can.
Intellectual Property - We regard our trademarks and service marks as an
important factor in the marketing and branding of our products and services. Our
registered trademarks and service marks include, among others, the text "BRIAZZ"
and our stylized logo. We have registered all of these marks with the United
States Patent and Trademark Office. We have registered our ownership of the
Internet domain name "www.BRIAZZ.com." We also own a Washington state
registration for "JAVA JUMBLES." We believe that our trademarks, service marks
and other proprietary rights have significant value and are important to our
brand-building efforts.
An individual in Mexico City, Mexico has opened a restaurant called cafe Briazz
and has registered the Internet domain name "www.cafeBRIAZZ.com." In the past,
we attempted to have ownership of the domain name terminated or transferred to
us. However, we have put these efforts on hold indefinitely. We are not aware of
any other infringing uses that could materially affect our business, nor any
prior claim to BRIAZZ(R), our stylized logo or JAVA JUMBLES that would prevent
us from using these marks.
We have certain copyrights such as the design of our menus, brochures and
designs used in connection with our trademarks and service marks, and trade
secrets such as recipes, methods and processes, marketing and promotional
strategies and proprietary customer lists. We have not recorded any copyrights
with the United States Copyright Office.
In addition to registered trademarks, we consider our food product packaging
(typically consisting of a clear plastic container with a bold label and product
description), our box lunch packaging (consisting of a brown cardboard box
printed with our logo) and the design of the interior of our cafes (consisting
of bright lighting, walls lined with well-lit refrigerated cases, and metal
designwork) to be strong identifiers of our brand. Although we consider our
packaging and store design to be essential to our brand identity, we have not
applied to register trademarks and trade dress for these features, and therefore
cannot rely on the legal protections provided by trademark registration.
We intend to vigorously protect our proprietary rights. We cannot predict,
however, whether steps taken by us to protect our proprietary rights will be
adequate to prevent misappropriation of these rights or the use by others of
cafe or retail features based upon, or otherwise similar to, our concept. We may
be unable to prevent others, including FFG, from copying elements of our concept
and any litigation to enforce our rights will likely be costly and may divert
resources away from our day-to-day operations.
9
Employees - As of December 28, 2003, BRIAZZ employed 45 full-time salaried
employees and 281 hourly employees. Of these employees, 10% were involved in our
central kitchens, 7% were involved in our box lunch, catering and wholesale
operations, 75% were involved in cafe operations, and 8% were involved in
administrative/corporate functions, including senior management. This was a
decrease from 69 full-time salaried employees and an increase from 276 hourly
employees at December 29, 2002. Hourly employees increased in 2003 primarily due
to the opening of the Borders test cafes. We believe our relationship with our
employees is good. None of our employees is a party to a collective bargaining
agreement or represented by a labor union.
Financial Information About Segments and Geographic Areas - We operate through
four reportable segments: Retail, Branded Sales, Kitchens and General &
Administrative. Retail consists of sales generated through our cafes. Branded
Sales consists of two subgroups: (1) box lunch and catering and (2) wholesale.
Branded Sales subgroups consist of sales which are aggregated because they have
similar economic characteristics. Kitchens consists of unallocated costs of
products and packaging, along with unallocated costs of kitchen operations.
General & Administrative consists of all costs incurred by the corporate office
as well as those administrative costs incurred by retail, branded sales and the
kitchens. All sales have been attributed to the United States, and all of our
long-lived assets are located in the United States. Segment results for each of
our past three fiscal years are provided in the financial statements included in
this Annual Report.
Government Regulation - We must comply with local, state and federal government
regulations, standards and other requirements for food storage, preparation
facilities, food handling procedures, other good manufacturing practices
requirements, and product labeling. The U.S. Department of Agriculture has broad
jurisdiction over all meat and poultry products, and separate authority over
non-meat and poultry products is exercised by the Food and Drug Administration.
State and local jurisdictions also have separate, distinct authority over our
food-related operations. Advertising and promotional activities are subject to
the jurisdiction of the Federal Trade Commission, which has jurisdiction over
all consumer advertising with respect to unfair or deceptive business practices.
State and local jurisdictions typically enforce similar consumer protection
statutes.
Our facilities are subject to licensing and regulation by state and local
health, sanitation, safety, fire and other authorities, including licensing and
regulation requirements for the sale of food. To date, we have not experienced
an inability to obtain or maintain any necessary licenses, permits or approvals,
including restaurant and retail licensing. The development and construction of
additional cafes must also comply with applicable zoning, land use and
environmental regulations. Various federal and state labor laws govern our
relationship with our employees and affect our operating costs. These laws
include minimum wage requirements, overtime, unemployment tax rates, workers'
compensation rates, citizenship requirements and sales taxes. In addition, the
federal Americans with Disabilities Act prohibits discrimination on the basis of
disability in public accommodations and employment.
Available Information - BRIAZZ files regular disclosures with the SEC. The
public may read and copy any materials BRIAZZ files with the SEC at the SEC's
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.
Information about the SEC's Public Reference Room may be obtained at
1-800-SEC-0330. BRIAZZ files its reports electronically and the SEC maintains an
Internet site that contains reports, proxy and information statements and other
information regarding issuers at http://www.sec.gov. Our Internet address is
http://www.BRIAZZ.com. The information on our Internet site is not a part of
this filing.
RISK FACTORS
Risks Related To Our Business
We Have A History Of Losses And Anticipate Continued Losses In The Future, Which
May Have A Material Adverse Effect On Our Business, Our Ability To Implement Our
Business Strategy And Our Stock Price.
Since inception, we had accumulated net losses of approximately $72.8 million
through December 28, 2003 and have experienced negative cash flows from
operations. These matters raise substantial doubt about our ability to continue
as a going concern. Our ability to continue as a going concern is dependent upon
numerous factors, including our ability to obtain additional financing, our
ability to increase our level of future revenues and our ability to reduce
operating expenses. Failure to achieve profitability, or maintain profitability
if achieved, may have a material adverse effect on our business, our ability to
implement our business strategy and our stock price. It is anticipated that
additional cash will be needed in order to continue operating.
10
There can be no assurance that we will be able to obtain additional financing,
increase revenues, reduce expenses or successfully complete other steps to
continue as a going concern. Due to the substantial number of shares issuable
upon conversion of our Convertible Preferred Stock, we may be unable to
negotiate subsequent equity financings on terms favorable to us, or at all. In
addition, our existing debt represents a substantial percentage of our asset
value. As a result of this high level of leverage, we may find it difficult to
incur additional debt, either in the form of an operating line of credit or debt
financing. If we are unable to obtain sufficient funds to satisfy our cash
requirements in the near future, we may be forced to substantially reduce and/or
curtail operations. Such events would materially and adversely affect our
financial position and results of operations.
Our Business Strategy Is To Focus Our Efforts On Improving Our Financial
Performance Through A Combination of Cost Cutting Measures and New Corporate
Development Initiatives. Our Inability to Implement Our Business Strategy Would
Have A Material Adverse Effect on Our Operating Results And Prospects.
Our business strategy is to focus our efforts on achieving profitability through
a combination of cost cutting measures and new corporate development
initiatives, which may include licensing or franchising our products to third
parties and securing additional wholesale accounts. The success of our business
strategy will depend in part upon our ability to conclude agreements with
retailers, wholesalers or others who may license, resell or purchase a franchise
for our products. We have also recently begun to implement a strategy to
transition to in-cafe production from central kitchens.
If we enter into agreements with third party distributors of our products, our
existing cafe management systems, financial and management controls and
information systems may not be adequate to support our planned expansion. Our
ability to manage our growth effectively will require us to continue to expend
funds to improve these systems, procedures and controls, which we expect will
increase our operating expenses and capital requirements. In addition, we must
effectively expand, train and manage our work force. We cannot assure you that
we will be able to respond on a timely basis to all of the changing demands that
our planned expansion will impose on management and on our existing systems,
procedures and controls. In addition, we cannot assure you that we will be able
to continue to improve our information systems and financial controls or to
manage other factors necessary for us to achieve our growth strategy. For any of
these reasons, we could lose opportunities or overextend our resources, which
could adversely affect our operating results.
In addition, agreements with third party distributors may prove to be
unsuccessful. In the past, we distributed our products through Quality Food
Centers, Albertson's, Safeway, Ralph's and Dominick's grocery stores and through
Target stores. We also developed a line of dinner foods for home meal
replacement that was tested through one of our Seattle cafes. These attempts
were unsuccessful and have been discontinued. Following the discontinuation of
these relationships, we evaluated the grocery segment of our wholesale business
and decided to withdraw from this distribution channel.
As part of our strategy to improve our financial performance, we are continuing
to review our cost structure and to make cost reductions where possible. In the
last year, we have taken significant steps designed to reduce our costs,
including personnel reductions, reductions in general and administrative
expenses, reorganization of certain business operations, elimination of certain
wholesale accounts, discontinuation of branded sales in the Los Angeles market,
and closure of certain cafes, in addition to the closure of our Seattle, Chicago
and Los Angeles central kitchens and the outsourcing of our food production in
those markets to third party suppliers. We will continue to seek to reduce our
general and administration and other expenses in order to improve our margins
and help us achieve profitability. We cannot assure you that we will be able to
achieve the desired level of cost reductions or that such reductions, if
achieved, will not have an adverse impact on our revenues. If we are not able to
sufficiently reduce our costs or implement new distribution relationships on
terms favorable to us, we will continue to experience losses which will have a
material adverse affect on our business.
We Have Entered Into a Test Agreement With Borders, Inc. to Operate and Manage
Cafes in Eight Borders Locations. Even if the Test is Successful, the Test May
Not Be Extended.
We have signed an agreement with Borders, Inc. to manage and operate the cafe
portion of 8 stores on a test basis for a period of six months after the last
test store is opened. We will retain all the receipts generated from these cafes
and be responsible for substantially all of the costs resulting from the
operations of these cafes. In exchange, the Company will pay Borders an amount
equal to $60,000 for each cafe opened, or a total amount of $480,000, for
improvements made to the cafes. In addition, we will pay a base rent. Even if
the test proves to be successful, there can be no assurance that upon the end of
the test period the agreement will be extended.
11
To date, we have only opened 4 of the 8 stores provided for in the test
agreement. In January, 2004, we have agreed with Borders to limit the test to
only these stores. Borders has incurred costs associated with the anticipated
opening of the four remaining stores provided for in the agreement. It is
anticipated that the Company will be required to reimburse Borders for some or
all of these costs in the first half of 2004. It is estimated that this
reimbursement may be between $50,000 and $125,000.
We Have Not Made Rent Payments on Certain of Our Leases and Payments to Certain
of Our Suppliers. If We Are Unable to Meet Our Obligations to Third Parties, We
May Be Required to Discontinue Our Operations.
We have deferred payments to certain of our landlords and suppliers, including
FFG. If our landlords or our suppliers require payments in excess of our
available cash, we may be required to close cafes, discontinue use of suppliers,
limit our product offerings or cease operations altogether. Any such action by
our landlords or suppliers may also cause an event of default under the terms of
our debt financings or our other contractual relationships, or adversely affect
our relationships with other third parties, all of which would adversely affect
our operations.
We Have Become Increasingly Dependent Upon Third Parties for the Supply,
Quality, Safety and Cost of Our Food Products.
Although we have transitioned our food production to in-cafe production in Los
Angeles and Chicago, we are dependent on third parties for the production and
assembly of our food products. Any failure or delay by them to manufacture and
assemble our food products, even for a short period of time, would impair our
ability to supply our cafes and would harm our business. We cannot assure you
that we will be able to maintain satisfactory relationships with these third
parties on acceptable commercial terms. Nor can we assure you that they will
continue to provide food products that meet our quality standards In Seattle, we
are dependent upon SK Foods for our food production. If our food production
relationship was to terminate unexpectedly, we may have difficulty obtaining,
manufacturing and assembling our food products, or obtaining adequate quantities
of products, at the same quality at competitive prices in a timely fashion,
which could limit our ability to adequately supply our cafes and could adversely
affect our operating results. If we were unable to find another third party to
produce our food products on acceptable terms, we might be required to
reestablish central kitchens, to move more rapidly than expected into in-cafe
production, or to discontinue our operations.
We Have Transferred Most of Our Central Kitchen Equipment to FFG, Which Limits
Our Ability to Establish New Central Kitchens Should It Become Necessary to Do
So.
As part of the food production agreement with FFG, we agreed to transfer to FFG
without charge any of our central kitchen equipment that may be requested by
FFG. Pursuant to this agreement, we have transferred certain of our central
kitchen equipment to FFG in the Chicago and Seattle and certain other equipment
to HEMA in Los Angeles. As a result of the equipment transfers, we will find it
necessary to acquire new equipment should we cease to use FFG in an existing
market. Due to the high cost of equipment, any future need to acquire such
equipment will have a material adverse effect on our results. In addition, we
may not have adequate capital to procure the required equipment. Further, we may
not be able to acquire necessary equipment in a timely manner and, as a result,
may not be able to meet food production requirements. Any failure to acquire
necessary equipment could have a material adverse effect on our business and
results.
We May Face Competition From FFG or Its Customers Providing Similar Products to
Those We Market.
While the food production agreement with FFG generally prohibits FFG from using
our trademarks for its own purposes, it does not forbid FFG from using the same
food formulations, recipes or ingredients for products that it sells to the food
service industry. FFG may thus compete with us directly by selling the same or
similar products to wholesalers that we target for wholesale accounts. In such
event, we will not be able to offer products at a competitive price compared to
FFG. FFG may also sell such products to wholesalers or retailers with whom we
compete. In the event of such sales, we may not be able to offer products at a
competitive price compared to wholesalers or retailers who purchased the similar
products from FFG because these retailers and wholesalers were not required to
invest the large amounts we spend in product development, and may not be
required to provide FFG with the same profit factor as we are under the food
production agreement. In any such case, we may lose customers to FFG or to these
wholesalers and retailers, and our business and results may suffer materially.
12
If We Are Unable to Complete Our Announced San Francisco Central Kitchen Closure
and Transition to In-cafe Production On Terms Favorable To Us, Our Business May
Be Harmed.
We intend to close our remaining central kitchen in the San Francisco market and
transition our food production in that market to in-cafe production. The timing
and benefits of this transition will depend on a number of factors, many of
which are outside our control, including maintaining product quality, ensuring
adequate product quantities, the closing of our remaining central kitchen in San
Francisco, including the transfer or sale of equipment, termination or transfer
of staff and termination or sublease of the space, and transfer of the central
kitchen functions to in-cafe production, including hiring, training, production
and assembly and coordination of functions.
Any Unwaived Default in the Repayment of the Convertible Note Held By Laurus
Master Fund, Ltd. (Laurus) Could Have a Material Adverse Affect on Our Business,
Prospects, Results of Operations or Financial Condition.
In August 2003, we made a $300,000 principal payment on our $1.25 million
convertible note, reducing the principal amount to $626,400. In October 2003, we
made an additional principal payment of $52,000 reducing the balance to
$574,400. This unpaid principal amount, together with a $75,000 fee relating to
the $300,000 prepayment, is payable in 12 equal installments on the first
business day of each calendar month, beginning September 1, 2003. Accrued and
unpaid interest must also be paid monthly; however, Laurus has waived its right
to receive any interest payments until October 1, 2003. The amounts due under
the note are secured by a blanket security interest in all our assets. On
October 1, 2003, the Company was in arrears on its interest and principal
payments to Laurus. Subsequently, in October 2003 the Company received a waiver
from Laurus in which Laurus agreed to waive any defaults resulting from the late
payment of the monthly amount due October 1, 2003 and agreed to make all
payments due and payable under the note from October 1, 2003 to November 15,
2003 due and payable on November 16, 2003 and waived any defaults and penalties
resulting from the postponement of payments. The current principal balance of
this note is approximately $547,400, the amount currently due in fees is
approximately $68,750 and the past due interest as of December 28, 2003 is
approximately $92,000. We have not made any payments due under the note since
October 24, 2003 and as a result we are currently in default under the note with
Laurus. Laurus may accelerate the payment due under the note or take other
action to enforce their rights with respect to the amounts due. Such actions
could include foreclosure on our assets or causing the Company to enter into
involuntarily reorganization.
In some circumstances, the note is convertible into shares of our common stock.
The conversion price under the note is $0.10 per share for the first $350,700
converted into shares of our common stock after July 31, 2003 and $0.30 per
share for any additional amounts converted into shares of our common stock.
Although the convertible note provides us with the option of making monthly
payments by issuing shares, the number of shares that we can issue with respect
to any payment is limited to 25% of the number of shares of our common stock
traded on our principal trading market during the 30 calendar day period
preceding the date on which we provide notice of repayment in shares, unless
waived by Laurus. Any additional amounts must be paid in cash. Due to the
limited trading volume of our shares in recent periods, we expect that our
ability to issue shares in satisfaction of the monthly payments will be very
limited. In addition, we are not permitted to make such payments in shares and
are required to make such payments in cash if any of the following events
occurs: (i) the average daily volume weighted average price of our shares on our
principal trading market for the 11 trading days preceding a payment date is
less than 115% of the applicable conversion price, (ii) there fails to exist an
effective resale registration statement with respect to the shares; or (iii)
there occurs any event of default. The events of default under the convertible
note are similar to those customary for convertible debt securities, including
breaches of material terms, failure to pay amounts owed, delisting of our common
stock from the OTC Bulletin Board or a national securities exchange, or failure
to comply with the reporting, filing or other obligations of listing on such
market. In the event that a payment default occurs and is continuing, Laurus may
convert all or part of any monthly payment into shares of our common stock at
the lower of the applicable fixed conversion price or 70% of the average of the
three lowest closing prices for our common stock on our principal trading market
for the 30 trading days prior to the conversion date.
If we default on our obligations under the convertible note, or if we fail to
have a resale registration statement declared and maintained as effective with
respect to the shares, we may be required to immediately repay the outstanding
principal amount of the convertible note and any accrued and unpaid interest. We
do not currently have cash or cash equivalents or available debt or equity
financing sufficient to repay such amounts if such repayment is required.
Accordingly, we anticipate that additional financing would be required to repay
such amounts. We cannot guarantee that such financing would be available on
terms favorable to us, or at all. If we could not arrange for such financing on
favorable terms, our business and financial results would be materially
adversely affected. In the event of any sale or liquidation of our assets to
repay such debt, the note holder, as a secured party, would have priority over
other creditors and over our shareholders with respect to such assets and the
proceeds of such assets.
13
Any Unwaived Default in the Repayment of Our $7.0 Million In Senior Secured
Notes Could Have a Material Adverse Affect on Our Business, Prospects, Results
of Operations and Financial Condition.
The principal and accrued and unpaid interest on the $6.0 million principal
amount of senior secured notes we issued to DB Advisors, L.L.C. ("DB"), Briazz
Venture, L.L.C. ("BV"), Spinnaker Investment Partners, L.P. ("Spinnaker"), and
Delafield Hambrecht, Inc, ("Delafield") are due on August 1, 2005. The principal
and accrued and unpaid interest on the $1.0 million principal amount of senior
secured notes we issued to DB, and Victor D. Alhadeff, the Company's founder,
are due on December 8, 2005. The senior secured notes will accelerate and become
due if we (i) fail to pay any amount when due, (ii) fail to cure defaults under
the notes within ten days of notice or (iii) are forced to seek bankruptcy
protection or otherwise become insolvent. The amounts due under the notes are
secured by a blanket security interest in all our assets. If we are unable to
pay any amount when due, DB, BV, and Spinnaker may foreclose on our assets,
which could substantially adversely impact our ability to continue as a going
concern. We do not currently have cash or cash equivalents or available debt or
equity financing sufficient to repay the principal amounts if such repayment is
required. Accordingly, we anticipate that additional financing would be required
to repay such amounts. We cannot guarantee that such financing would be
available on terms favorable to us, or at all. If we cannot arrange for such
financing on favorable terms, our business and financial results would be
materially adversely affected. In the event of any sale or liquidation of our
assets to repay such debt, the note holders, as secured parties, would have
priority over other creditors and over our shareholders with respect to such
assets and the proceeds of such assets. Subsequently, in March 2004 the Company
received a waiver from DB, BV, Spinnaker, Delafield, and Victor D. Alhadeff in
which they agreed to waive any defaults with respect to non-payment of interest
until June 30, 2004 and agreed to delay payment of any and all accrued but
unpaid interest to July 5, 2004, and waived any defaults and penalties resulting
from the postponement of payments.
We Continue To Experience A Decline In Our Same Store Sales When Compared To
Prior Periods. If This Trend Continues We May Have To Close Additional Cafes.
In the past, we have closed cafes because they did not generate sufficient
revenues and we cannot assure you that additional cafes will not be closed. For
the years ended December 29, 2002 and December 28, 2003, our same-store sales
decreased compared to the prior fiscal years. If our same-store sales continue
to decline or fail to sufficiently improve, we may be required to close
additional cafes. The closing of a significant number of cafes or the failure to
increase same-store sales could have an adverse impact on our reputation,
operations and financial results. During the year ended December 28, 2003 we
closed a total of 6 cafes. We have closed two additional cafes in the Seattle
market in the first fiscal quarter of 2004 pursuant to the expiration of a
license agreement.
If We Are Unable To Continue Leasing Our Retail Locations Or Obtain Acceptable
Leases For New Cafes, Our Business May Suffer.
All of our cafe locations are on leased premises. If we are unable to renew our
leases on acceptable terms, or if we are subject to substantial rent increases,
our business could suffer. Because we compete with other retailers for cafe
sites and because some landlords may grant exclusive rights to locations to our
competitors, we may not be able to obtain new leases or renew existing leases on
acceptable terms. Any inability to renew or obtain leases could increase our
costs and adversely affect our operating results and brand-building strategy.
Our Third Party Distribution Strategy Could Result In Increased Competition In
Our Existing Markets. This Strategy Could Cause Sales In Some Of Our Existing
Cafes To Decline.
In accordance with our expansion strategy, we may enter into agreements with
third parties to distribute our products through new distribution channels in
our existing markets. The presence of additional distribution channels in
existing markets may result in diminished sales performance and customer counts
for cafes near the area in which third parties distribute our products, due to
sales cannibalization.
Tenant Turnover And Vacancies In Office Buildings Where Our Cafes Are Located
Could Cause Our Cafe Sales To Decline.
Our business has and could continue to suffer as a result of tenant turnover and
vacancies. Many of our cafes are located in office buildings, and office workers
are our target customers. Vacancies, tenant turnover or tenants with few office
workers, especially in San Francisco and Chicago, have negatively impacted the
operations of our cafes located in office buildings during the last two years
due to the reduction in the number of potential customers in the building, and
could continue to have a negative impact on our operations. The risk related to
vacancies and tenant turnover is greater in office buildings with larger
tenants, where the loss of a single tenant may have a greater impact on that
cafe's sales.
14
If Production at SK Foods Central Kitchen or Our San Francisco Central Kitchen
Is Interrupted, We May Be Unable To Supply Our Cafes In That Geographic Market
And Our Business Will Suffer.
SK Foods' central kitchen and our San Francisco central kitchen produce or
distribute substantially all of our food products for the cafes and wholesale
accounts in their geographic regions, as well as all of the box lunches and
catered platters in each region. If any of these central kitchens were to close
for any reason, such as fire, natural disaster or failure to comply with
government regulations, we would be unable to provide our food products in the
areas served by the affected central kitchen. These central kitchens are
geographically dispersed and none could cost effectively supply another market
if a central kitchen were to close. As a result, the closure of any central
kitchen even for a short period of time would have a material adverse effect on
our operating results. We may have no control over any such closures.
We Are Substantially Dependent On Third-Party Suppliers And Distributors And The
Loss Of Any One Of Them Could Harm Our Operating Results.
We are substantially dependent on a small number of suppliers and distributors
for our products, including SK Foods, suppliers of meat, breads and soups, and
Sysco Distribution Services, which during the Fiscal year ended December 28,
2003 procured from our suppliers and delivered to us the majority of our
ingredients and packaging products. Most of our packaging products come through
Bunzl, a national distributor. Such packaging products represent roughly 15% of
our purchases. During the year ended December 29, 2002, Stockpot, Inc. provided
approximately 20% of our cost of food and packaging. Any failure or delay by any
of these suppliers or distributors to deliver products to or our San Francisco
central kitchen, even for a short period of time, would impair our ability to
supply our cafes and could harm our business. We have limited control over these
third parties, and we cannot assure you that we will be able to maintain
satisfactory relationships with any of them on acceptable commercial terms. Nor
can we assure you that they will continue to provide food products that meet our
quality standards. Our relationships with our suppliers are generally governed
by short-term contracts. If any of these relationships were to terminate
unexpectedly, we may have difficulty obtaining adequate quantities of products
of the same quality at competitive prices in a timely fashion, which could limit
our product offerings or our ability to adequately supply our cafes and could
adversely affect our operating results.
Our transition to in-cafe production in Los Angeles and Chicago in 2004 has
significantly increased the number of suppliers we are dependent upon. If we
experience a disruption of supply from these suppliers, it could materially
impact our ability to produce products for our customers which could result in a
loss of customers which could materially disrupt our operations.
If We Fail To Further Develop And Maintain Our Brand, Our Business Could Suffer.
We believe that maintaining and developing our brand is critical to our success
and that the importance of brand recognition may increase as a result of
competitors offering products similar to ours. Subject to available funding, we
intend to increase our marketing expenditures to create and maintain brand
loyalty and increase awareness of our brand. If our brand-building strategy is
unsuccessful, these expenses may never be recovered, and we may be unable to
increase or maintain our revenues.
Our success in promoting and enhancing the BRIAZZ brand will also depend on our
ability to provide customers with high-quality products, which is, in part,
dependent on the performance of FFG, SK Foods, HEMA and our San Francisco
central kitchen, and customer service. We cannot assure you that consumers will
perceive our products as being of high quality. If they do not, the value of our
brand may be diminished and, consequently, our ability to implement our business
strategy may be adversely affected.
We May Be Unable to Successfully Transition to In-cafe Production.
We are currently in the process of transitioning our food production from a
central kitchen to in-cafe production. This transition will require us to source
the ingredients and supplies for food production, retrain many of the employees
currently in the cafes, institute new quality and health standards, and make
modifications to our existing cafes. If we are unable to successfully complete
any or all of these tasks, it may disrupt the service and products we supply to
our customers, which could result in a loss of customers and have a material
adverse change on our business.
If Our Customers Do Not Perceive Pre-Packaged Sandwiches And Salads As Fresh And
Desirable, Our Operating Results Will Suffer.
Although we are transitioning to in-cafe production, our current business
focuses on pre-packaged food items and made-to-order items in some markets. Many
of our salads and most of our sandwiches are prepared and assembled in central
kitchens and sold as pre-packaged items. Unlike delicatessens, our cafes
generally do not add or omit specific ingredients to or from food items at the
customer's request. If customers prefer custom prepared items over pre-packaged
items, or if they do not perceive pre-packaged sandwiches and salads as fresh
and desirable, we may be unsuccessful in attracting and retaining customers,
causing our operating results to suffer.
15
Our Business Could Be Harmed By Litigation Or Publicity Concerning Food Quality,
Health And Other Issues, Which May Cause Customers To Avoid Our Products And
Result In Liabilities.
Our business could be harmed by litigation or complaints from customers or
government authorities relating to food quality, illness, injury or other health
concerns or operating issues. Because most of our food products for each
geographic market are currently prepared in a central kitchen, health concerns
surrounding our food products, if raised, may adversely affect sales in all of
our cafes in that market. Adverse publicity about such allegations may
negatively affect our business, regardless of whether the allegations are true,
by discouraging individuals from buying our products. Because we emphasize the
freshness and quality of our products, adverse publicity relating to food
quality or similar concerns may affect us more than it would food service
businesses that compete primarily on other factors. Such adverse publicity could
damage our reputation and divert the attention of our management from other
business concerns. We could also incur significant liabilities if a lawsuit or
claim resulted in an adverse decision or in a settlement payment, and incur
substantial litigation costs regardless of the outcome of such litigation. As we
outsource our food production in most markets to third parties, we are similarly
affected by any litigation, complaints or publicity relating to those suppliers.
Our Quarterly Operating Results May Fluctuate And Could Fall Below Expectations
Of Securities Analysts And Investors, Resulting In A Decline In Our Stock Price.
Our quarterly and yearly operating results have varied in the past, and we
believe that our operating results will continue to vary in the future. For this
reason, you should not rely on our past operating results as indications of
future performance. In future periods, our operating results may fall below the
expectations of securities analysts and investors, causing the trading price of
our common stock to fall. In addition, most of our expenses, such as employee
compensation and lease payments for facilities and equipment, are relatively
fixed. Our expense levels are based, in part, on our expectations regarding
future sales. As a result, any shortfall in sales relative to our expectations
may cause significant decreases in our operating results from quarter to
quarter, cause us to fail to meet the expectations of securities analysts and
investors and result in a decline in our stock price.
Our Cafes Are Currently Located In Four Geographic Markets. As A Result, We Are
Highly Vulnerable To Negative Occurrences In Those Markets.
We currently operate our cafes in Seattle, San Francisco, Chicago and Los
Angeles. As a result, we are susceptible to adverse trends and economic
conditions in these markets. Additionally, given our geographic concentration,
negative publicity regarding any of our cafes, or other regional occurrences
such as local strikes, earthquakes or other natural disasters, in these markets,
may have a material adverse affect on our business and operations.
Our Food Preparation And Presentation Methods Are Not Proprietary, And Therefore
Competitors May Be Able To Copy Them, Which May Harm Our Business.
We consider our food preparation and presentation methods, including our food
product packaging, box lunch packaging and design of the interior of our cafes,
essential to the appeal of our products and brand. Although we consider our
packaging and store design to be essential to our brand identity, we have not
applied to register all trademarks or trade dress in connection with these
features, and therefore cannot rely on the legal protections provided by
trademark registration. Because we do not hold any patents for our preparation
methods, it may be difficult for us to prevent competitors from copying our
methods. In addition, under our food production agreement with FFG, FFG is
permitted to use our recipes, food formulations and ingredients for products it
sells in the food industry, including products that may compete directly with
our products. If our competitors copy our preparation and presentation methods,
the value of our brand may be diminished and our market share may decrease. In
addition, competitors may be able to develop food preparation and presentation
methods that are more appealing to consumers than our methods, which may also
harm our business.
We Depend On The Expertise Of Key Personnel. If These Individuals Were To Leave,
Our Business May Suffer.
We are dependent to a large degree on the services of Victor D. Alhadeff and
Milton Liu. Our operations may suffer if we were to lose the services of these
individuals, who could leave BRIAZZ at any time. In addition, competition for
qualified management in our industry is intense. Many of the companies with
which we compete for experienced management personnel have greater financial and
other resources than we do.
16
Risks Related To Our Industry
Our Operations Are Susceptible To Changes In Food And Supply Costs, Which Could
Adversely Affect Our Margins.
Our profitability depends, in part, on our ability to anticipate and react to
changes in food and supply costs. Our purchasing staff negotiates prices for all
of our ingredients and supplies based upon current market prices with the
exception of the food production contract with FFG where we pay a fee based on
FFG's actual costs plus a profit factor. Various factors beyond our control,
including, for example, governmental regulations, rising energy costs and
adverse weather conditions, may cause our food and supply costs to increase. We
cannot assure you that we will be able to anticipate and react to changing food
and supply costs by adjusting our purchasing practices. Any failure to do so may
adversely affect our operating results.
If We Face Increased Labor Costs Or Labor Shortages, Our Growth And Operating
Results May Be Adversely Affected.
Labor is a primary component in the cost of operating our business. As of
December 28, 2003, we employed 45 full time salaried and 282 hourly employees.
We expend significant resources in recruiting and training our managers and
employees. If we face increased labor costs because of increases in competition
for employees, the minimum wage or employee benefits costs (including costs
associated with health insurance coverage), or unionization of our employees,
our operating expenses will likely increase and our growth may be adversely
affected. Additionally, any increases in employee turnover rates are likely to
lead to additional recruiting and training costs.
Our success depends upon our ability to attract, motivate and retain a
sufficient number of qualified employees, including cafe managers, to keep pace
with our growth strategy. Any inability to recruit and retain sufficient numbers
of employees may delay or prevent the anticipated openings of new cafes.
Competition In Our Markets May Result In Price Reductions, Reduced Margins Or
The Inability To Achieve Market Acceptance For Our Products.
The market for lunch and breakfast foods in the geographic markets where we
operate is intensely competitive and constantly changing. We may be unable to
compete successfully against our current and future competitors, which may
result in pricing reductions that will result in reduced margins and the
inability to achieve market acceptance for our products.
Many businesses provide services similar to ours. Our competitors include
sandwich shops, company cafeterias, delicatessens, pushcart vendors, fast food
chains and catering companies. Many of our competitors have significantly more
capital, research and development, manufacturing, distribution, marketing, human
and other resources than we do. As a result, they may be able to adapt more
quickly to market trends, devote greater resources to the promotion or sale of
their products, receive greater support and better pricing terms from
independent distributors, initiate or withstand substantial price competition,
or take advantage of acquisition or other opportunities more readily than we
can.
We May Be Subject To Product Liability Claims, Which May Adversely Affect Our
Operations.
We may be held liable or incur costs to settle liability claims if any of the
food products we, or SK Foods prepare or we sell cause injury or are found
unsuitable during preparation, sale or use. While SK Foods must indemnify us for
damages arising from its failure to provide us with food meeting state and
federal standards, we may not receive payment pursuant to this right in a timely
manner. As a result, we may be required to make substantial payments with
respect to any claims well in advance of any collection we may realize from SK
Foods. Although we currently maintain product liability insurance, where
appropriate, we cannot assure you that this insurance is adequate, and, at any
time, it is possible that such insurance coverage may cease to be available on
commercially reasonable terms, or at all. A product liability claim could result
in liability to us greater than our total assets or insurance coverage.
Moreover, product liability claims could have an adverse impact on our business
even if we have insurance coverage.
Changes In Consumer Preferences Or Discretionary Consumer Spending Could
Negatively Impact Our Results.
Our success depends, in part, upon the popularity of our food products and our
ability to develop new menu items that appeal to consumers. Shifts in consumer
preferences away from our cafes or away from our cuisine, our inability to
develop new menu items that appeal to consumers, or changes in our menu that
eliminate items popular with some consumers could harm our business. Also, our
success depends to a significant extent on numerous factors affecting
discretionary consumer spending, including economic conditions, disposable
consumer income and consumer confidence. Adverse changes in these factors could
reduce customer traffic or impose practical limits on pricing, either of which
could harm our business.
17
Inability To Obtain Regulatory Approvals, Or To Comply With Ongoing And Changing
Regulatory Requirements, For Our Remaining Central Kitchen, SK Foods' or Central
Kitchens Or Our Cafes Could Restrict Our Business And Operations.
Our remaining central kitchen, SK Foods' central kitchens, and our cafes are
subject to various local, state and federal governmental regulations, standards
and other requirements for food storage, preparation facilities, food handling
procedures, other good manufacturing practices requirements and product
labeling. In addition, license and permit requirements relating to health and
safety, building and land use and environmental protection apply to our
operations. If we, or SK Foods encounter difficulties in obtaining any necessary
licenses or permits or complying with these ongoing and changing regulatory
requirements:
o existing cafes or central kitchens, whether operated by
ourselves or a supplier, could be closed temporarily or
permanently; or
o our product offerings could be limited.
The occurrence of any of these problems could harm our operating results.
Risks Relating To Our Securities
Our Directors, Executive Officers And Significant Shareholders Hold A
Substantial Portion Of Our Stock, And DB, BV, Spinnaker, FFG, And Laurus Hold
Substantial Rights, Which May Lead To Conflicts With Other Shareholders Over
Corporate Governance.
Our directors, executive officers and current holders of 5% or more of our
outstanding common stock hold a substantial portion of our stock. Laurus holds
rights to purchase a substantial portion of our stock and debt with covenants
relating to corporate governance. In addition, DB, BV, Spinnaker and Delafield
hold shares of our Series F Convertible Preferred Stock that are convertible
into 76,438,410 shares of our common stock and Series G Convertible Preferred
Stock that are convertible into 7,090,970 shares of our common stock at an
initial conversion price of $0.10 per share, and hold debt with covenants
relating to corporate governance. We have also agreed to issue new and existing
management shares of Series F Convertible Preferred Stock that are initially
convertible into approximately 5.3 million shares of our common stock at a
conversion price of $0.10 per share (shares convertible into 4.5 million common
shares have been issued), and stock options that are exercisable for
approximately 5.4 million shares of our common stock at an exercise price equal
to fair market value on the date of grant (options for 5.4 million have been
granted). Such persons, acting together, and each acting alone, will be able to
significantly influence all matters requiring shareholder approval, including
the election of directors and significant corporate transactions, such as
mergers or other business combinations.
As part of the transaction in which DB, BV, and Spinnaker purchased the Series F
Convertible Preferred Stock, they were granted the right to select new executive
officers to be appointed by the Company and DB, BV, and Spinnaker were granted
the right, which has since been utilized, to designate up to five of our
directors, with two directors designated by DB, two directors designated by BV
and one director designated by Spinnaker. As a result, DB, BV and Spinnaker
exercise substantial control over our business. We believe that these entities
will continue to exert a large degree of control on the affairs of our
corporation. The control exercised by DB, BV, Spinnaker and other major
shareholders and debtholders may delay, deter or prevent a third party from
acquiring or merging with us, which in turn could reduce the market price of our
common stock.
Conversion of Our Outstanding Convertible Securities Could Substantially Dilute
Common Stock Prices Because the Conversion Prices Of Those Securities and/or the
Number of Shares of Common Stock Issuable Upon Conversion of Those Securities
Are Below Our Current Market Price or Subject to Adjustment.
We have issued and plan to issue in the future various securities that are
convertible or exercisable at prices that are lower than the current market
price of our common stock or are subject to adjustment due to a variety of
factors, including fluctuations in the market price of our common stock and the
issuance of securities at an exercise or conversion price less than the
then-current exercise or conversion price of those securities. For example, DB,
BV, Spinnaker and Delafield collectively hold shares of our Series F Convertible
Preferred Stock that are initially convertible into 76,438,410 shares of our
common stock and DB, and Victor D. Alhadeff hold shares of our of Series G
Preferred Stock initially convertible into 12,594,460 shares of our common stock
at an initial conversion price of $0.10 per share. Pursuant to the terms of our
agreement with DB, BV, Spinnaker and Delafield, we have also agreed to issue new
and existing management shares of Series F Convertible Preferred Stock that will
be initially convertible into approximately 5.3 million shares of our common
stock at an initial conversion price of $0.10 per share (shares convertible into
4.5 million common shares have been issued), and stock options that will be
initially exercisable for approximately 5.4 million shares of our common stock
at an exercise price equal to the fair market value at the time of grant
(options for 5.4 million have been granted). As of December 28, 2003, the
closing price of a share of our common stock on the OTC Bulletin Board was
$0.10. If we issue any additional shares of common stock or shares convertible
into shares of common stock (subject to customary exclusions) at an effective
price per share that is less than the Series F and G Convertible Preferred Stock
conversion price then in effect, the conversion price will be reduced on a
"weighted average" basis to eliminate the dilutive effect of such issuance on
the Series F and G Convertible Preferred Stock. Any adjustments to the
conversion price of the Series F and G Convertible Preferred Stock are
cumulative. The terms of the Series F and G Convertible Preferred Stock also
permit the holders thereof to convert their shares of Series F and G Convertible
Preferred Stock into shares of our common stock on a "cashless exercise" basis
in the event that the fair market value of the common stock exceeds the
conversion price on the date of conversion. In addition to the foregoing, we
have issued a note to Laurus that is convertible into shares of our common stock
at conversion prices of $0.10 or $0.30 per share, or in an event of default, at
a discount to market. Depending upon the market price in effect at the time of
any conversion of the note, such conversions could cause significant dilution to
existing shareholders. See the risk factor, "Any Unwaived Default in the
Repayment of the Convertible Note Held By Laurus Master Fund, Ltd. (Laurus)
Could Have a Material Adverse Affect on Our Business, Prospects, Results of
Operations or Financial Condition".
18
The value of our common stock could, therefore, experience substantial dilution
as a result of the conversion or exercise of our outstanding derivative
securities or as a result of any issuance of additional securities at prices
lower than the conversion prices of such securities. Also, as a result of
conversions of the principal or interest portion of our convertible note or
conversion of the Series F and G Convertible Preferred Stock and any related
sales of our common stock by the holders, the market price of our common stock
could be depressed.
If Our Security Holders Engage in Short Sales Of Our Common Stock, Including
Sales of Shares to Be Issued Upon Conversion of Debt Securities, the Price of
Our Common Stock May Decline.
Selling short is a technique used by a shareholder to take advantage of an
anticipated decline in the price of a security. A significant number of short
sales or a large volume of other sales within a relatively short period of time
can create downward pressure on the market price of a security. In an event of
default under the Laurus note, the decrease in market price would allow Laurus
to convert its debt securities into or for an increased number of shares of our
common stock. Further sales of common stock issued upon conversion of the Laurus
note or the Series F or G Convertible Preferred Stock could cause even greater
declines in the price of our common stock due to the number of additional shares
available in the market, which could encourage short sales that could further
undermine the value of our common stock. The common stock could, therefore,
experience a decline in value as a result of short sales of our common stock.
We are traded on the Over-the-Counter Bulletin Board And As A Result, Our
Shareholders May Experience Limited
Liquidity.
Our common stock was transferred to the OTC Bulletin Board in June 2003 because
we failed to meet the requirements for listing on the Nasdaq SmallCap Market.
Trading on the OTC Bulletin Board is generally less robust than on the Nasdaq
National or SmallCap Markets. As a result, an investor may find it more
difficult to sell our common stock or to obtain accurate quotations as to the
market value of our common stock.
Our Current Financial Arrangements Could Prevent Our Common Stock From Being
Listed on Nasdaq or Other Principal Markets
Nasdaq and other principal markets require that, to be eligible for inclusion in
the stock market, a company's common stock have a specified minimum bid price
per share. Convertible debt and preferred stock financings, especially those
with variable conversion prices with low or no low-price limits,
characteristically exert downward pressure on the market for a company's common
stock. Should we be listed again on Nasdaq or another principal market or seek
listing, this pressure, if applied against the market for our common stock, may
cause our common stock to be delisted on Nasdaq or other principal markets due
to low stock price or rejected for initial listing.
Our Stock Price May Be Volatile Because Of Factors Beyond Our Control.
19
The market price of our common stock may fluctuate significantly in response to
a number of factors, most of which are beyond our control, including:
o changes in securities analysts' recommendations or estimates
of our financial performance;
o changes in market valuations of similar companies; and
o announcements by us or our competitors of significant
contracts, new products, acquisitions, commercial
relationships, joint ventures or capital commitments.
In the past, companies that have experienced volatility in the market price of
their stock have been subject to securities class action litigation. A
securities class action lawsuit against us, regardless of its merit, could
result in substantial costs and divert the attention of our management from
other business concerns, which in turn could have a materially adverse impact on
our financial results.
Our Articles Of Incorporation, Bylaws, Certain Of Our Agreements And The
Washington Business Corporation Act Contain Anti-Takeover Provisions Which Could
Discourage Or Prevent A Takeover, Even If An Acquisition Would Be Beneficial To
Our Shareholders.
Provisions of our articles of incorporation and bylaws could make it more
difficult for a third party to acquire us, even if doing so would be beneficial
to our shareholders. These provisions include:
o authorizing the issuance of "blank check" preferred stock that
could be issued by our board of directors, without shareholder
approval, to increase the number of outstanding shares or
change the balance of voting control and thwart a takeover
attempt;
o prohibiting cumulative voting in the election of directors,
which would otherwise allow less than a majority of
shareholders to elect directors;
o limiting the ability of shareholders to call special meetings
of shareholders; and
o prohibiting shareholder action by non-unanimous written
consent and requiring all shareholder actions to be taken at a
meeting of our shareholders.
In addition, Chapter 23B.19 of the Washington Business Corporation Act and the
terms of our preferred stock and debt financings and our stock option plan may
discourage, delay or prevent a change in control which you may favor.
Item 2. Properties.
Cafes - At December 28, 2003, there were 40 BRIAZZ cafes operating in four
metropolitan areas. Of these cafes, approximately half were in amenity
locations. We had eleven cafes in Seattle, thirteen cafes in San Francisco,
eight cafes in Los Angeles and eight cafes in Chicago. We operate all of our
cafes in leased locations under terms of operating leases, which typically cover
five years some of which have options for an additional five-year term. Rents
are either fixed base amounts, variable amounts determined as a percentage of
sales, or a combination of base and percentage of sales. We also operate four
cafes inside Borders cafes in the Chicago area pursuant to a six month Food
Concession Agreement that will expire in June 2004 unless extended by mutual
agreement of both parties. Pursuant to an agreement with the landlord, we intend
to close 2 cafes in the Seattle market in March 2004.
Central kitchens and corporate headquarters - We currently have one central
kitchen in San Francisco. Our San Francisco central kitchen occupies 7,940
square feet under a lease that terminates on July 31, 2012. We intend to phase
out the San Francisco central kitchen in 2004.
Our Seattle location, including our corporate headquarters, together occupies
35,665 square feet under a lease that terminates on October 30, 2006. Following
the closure of our Seattle central kitchen in February 2003, we sublet
approximately 70% of this space for the remainder of the lease. We retained a
portion of the warehouse space and the space occupied by the corporate
headquarters.
We expect the facilities we are retaining will be adequate for our needs for the
foreseeable future.
20
Item 3. Legal Proceedings.
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.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5: Market for Registrant's Common Equity, Related Shareholder Matters, and
Issuer Purchases of Equity Securities.
Price Range of Common Stock - Our Common Stock was first quoted on the Nasdaq
National Market under the symbol "BRZZ" on May 2, 2001. Our Common Stock was
transferred from the Nasdaq National Market to the Nasdaq SmallCap Market
effective January 27, 2003, and was transferred to the OTC Bulletin Board on
June 2, 2003. The following table shows the high and low closing sale prices for
our common stock as reported on the applicable Market for the periods indicated:
HIGH LOW
---- ---
Year ended December 29, 2002
First quarter................................ $1.94 $0.84
Second quarter............................... $1.80 $0.97
Third quarter................................ $1.09 $0.30
Fourth quarter............................... $0.91 $0.25
Year ending December 28, 2003
First quarter................................ $0.35 $0.10
Second quarter............................... $0.39 $0.12
Third quarter................................ $0.20 $0.15
Fourth quarter............................... $0.20 $0.10
As of March 1, 2004, there were approximately 108 holders of record of the
Common Stock of BRIAZZ and 5,990,916 shares of the Common Stock outstanding.
Dividends - The Company has never paid dividends on the Common Stock and does
not intend to pay dividends on the Common Stock in the foreseeable future. Terms
of certain of the Company's borrowing agreements restrict and/or prohibit the
payment of dividends. The Company's board of directors intends to retain any
earnings to provide funds for the operation and expansion of the Company's
business.
Recent Sales of Unregistered Securities - During the fourth quarter of 2003, we
issued $1.0 million principal amount of Senior Notes and 1,259,446 shares of
Series G Preferred Stock to DB, and Victor D. Alhadeff, the Company's founder,
on December 8, 2003 for the consideration described in this report under
Financial Statements and Management's Discussion and Analysis of Financial
Condition and Results of Operations. The securities were issued to accredited
investors in reliance upon Section 4(2) and Rule 506 of Regulation D under the
Securities Act. The terms of the securities are more fully described elsewhere
in this report.
Item 6: Selected Financial Data.
The following selected financial data are qualified in their entirety by
reference to, and you should read them in conjunction with, BRIAZZ's financial
statements and the notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
Annual Report. The statement of operations data presented below for the years
ended December 28, 2003, December 29, 2002, and December 30, 2001 and the
selected balance sheet data at December 28, 2003 and December 29, 2002 are
derived from BRIAZZ's financial statements included in this Annual Report. The
statement of operations data presented below for the years ended December 31,
2000 and December 26, 1999, and the selected balance sheet data at December 29,
2001, December 30, 2000 and December 26, 1999, are derived from BRIAZZ's audited
financial statements that are not included in the Annual Report. Segment results
for each of the past three fiscal years are provided in the financial statements
included in this Annual Report.
21
Fiscal Year Ended
December 26, December 31, December 30, December 29, December 28,
1999 2000 2001 2002 2003
----------- ----------- ----------- ----------- -----------
(in thousands, except share and per share data)
Statement of Operations Data
Sales
Retail ..................................... $ 19,428 $ 23,624 $ 22,737 $ 22,327 $ 20,839
Branded Sales .............................. 6,170 10,068 9,292 8,266 6,100
----------- ----------- ----------- ----------- -----------
Total Sales ................................ 25,598 33,692 32,029 30,593 26,939
----------- ----------- ----------- ----------- -----------
Operating expenses
Cost of food and packaging ................. 11,520 13,597 12,480 11,850 13,614
Occupancy expenses ......................... 3,602 3,818 4,010 4,602 4,201
Labor expenses ............................. 9,506 11,186 11,098 10,925 6,661
Depreciation and amortization .............. 2,628 2,657 2,686 4,352 2,561
Other operating expenses ................... 2,419 1,921 1,849 2,434 1,809
General and administrative expenses ....... 6,033 6,581 6,837 7,546 5,309
Loss (gain) in loss on
disposal of assets ......................... -- -- -- 1,172 (111)
Provision for asset impairment
and store closure .......................... 779 63 26 2,256 1,169
----------- ----------- ----------- ----------- -----------
Total operating expenses ................... 36,487 39,823 38,986 45,137 35,213
----------- ----------- ----------- ----------- -----------
Loss from operations ....................... (10,889) (6,131) (6,957) (14,544) (8,274)
Other (expense) income ..................... (4,492) (156) 155 585 (1,326)
----------- ----------- ----------- ----------- -----------
Net loss ................................... (15,381) (6,287) (6,802) (15,129) (9,600)
Accretion of dividends, amortization of
discount and beneficial conversion feature
on preferred stock ......................... 2,421 3,319 4,318 -- 1,746
----------- ----------- ----------- ----------- -----------
Net loss attributable to common stockholders $ (17,802) $ (9,606) $ (11,120) $ (15,129) $ (11,346)
=========== =========== =========== =========== ===========
Basic and diluted net loss per share ....... $ (5,148.14) $ (2,455.68) $ (2.86) $ (2.59) $ (1.89)
=========== =========== =========== =========== ===========
Weighted average shares used in
computing net loss per share ............... 3,458 3,912 3,889,472 5,852,362 5,987,510
=========== =========== =========== =========== ===========
Other Financial Data:
Cash provided by (used in):
Operating activities ....................... $ (8,438) $ (2,233) $ (5,609) $ (5,279) $ (3,998)
Investing activities ....................... (1,591) (772) (3,755) (2,263) (198)
Financing activities ....................... 9,974 1,407 15,002 1,840 4,016
Balance Sheet Data:
Cash and cash equivalents .................. $ 2,153 $ 555 $ 6,193 $ 491 $ 311
Working capital (deficit) .................. (2,414) (2,620) 4,066 (4,909) (4,060)
Total assets ............................... 17,676 14,409 21,953 10,705 6,963
Current liabilities ........................ 5,955 4,869 3,702 7,042 5,437
Long-term liabilities ...................... 213 1,888 335 234 5,701
Mandatorily redeemable convertible
preferred stock ............................ 48,025 53,609 -- -- --
Total shareholders' equity (deficit) ....... $ (36,517) $ (45,957) $ 17,916 $ 3,429 $ (4,175)
22
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following management's discussion and analysis should be read in conjunction
with "Selected Financial Data," the financial statements and accompanying notes
and the other financial data included elsewhere in this Annual Report.
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 December 28, 2003, we operate a total of 40 cafes; in Seattle (11), San
Francisco (13), Chicago (8) and Los Angeles (8). During the year we closed six
under-performing locations, two each in San Francisco and Los Angeles, and one
each in Chicago and Seattle. We have closed two cafes in the Seattle market in
the first fiscal quarter of 2004 pursuant to the expiration of a license
agreement. At December 29, 2002, we operated 46 cafes in the Seattle, San
Francisco, Chicago and Los Angeles metropolitan areas, a net increase of three
cafes since December 30, 2001. During the fourth quarter of 2003 we began
operating four cafes on a test basis inside Borders Bookstores under a Food
Concession Agreement for a period of six months. This test agreement will expire
June 2004 unless extended with the mutual agreement of both parties.
In December 2002, we contracted with FFG to assemble and package substantially
all of our food products used at our cafe 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 market in December 2002 and in the Seattle
market at the end of February 2003. In Los Angeles, we closed our central
kitchen in December 2002. Pursuant to an agreement with FFG, FFG subcontracted
food production in the Los Angeles market to HEMA. Additionally, in January 2004
in the Seattle market, pursuant to an agreement with FFG, we discontinued
purchasing our product from FFG and completed an agreement with SK Foods whereby
SK Foods currently does substantially all of the food production for that
market. We believe that these efforts have allowed us to reduce our overhead in
our existing markets. During 2002, the Company recorded a loss on disposition
relating to the Los Angeles and Chicago central kitchen closures of
approximately $1.2 million, which includes the value of leasehold interests
transferred to landlords and of equipment transferred to FFG. There was no
significant loss recorded upon closure of the Seattle central kitchen and it is
not anticipated that there will be a significant loss recorded upon closure of
the San Francisco central kitchen, due to the relatively low net book value of
the related assets at the closure dates.
Currently, we are supporting FFG under an informal agreement to sell, service
and support Starbucks. Prior to establishing a business relationship with us,
FFG was and is a supplier to Starbucks in Chicago, New York and Los Angeles. It
is anticipated we will expand this arrangement to the San Francisco market in
the second quarter 2004. We are currently working together to supply Starbucks
branded sandwiches and salads to multiple Starbucks cafes in the Chicago, New
York, and other markets. We are negotiating definitive terms and conditions with
FFG and anticipate entering into a formal agreement in the second quarter of
2004.
In November 2003, we discontinued our branded sales operations in the Los
Angeles market in an effort to reduce costs and improve efficiencies. The
branded sales segment in the Los Angeles market was under-performing due to,
among other things, the large geographic size of the market.
As a result of central kitchen and cafe closures and reductions in corporate and
branded sales personnel, there was a decrease of 105 employees from the
beginning of 2002, or 23%, to 345 employees at December 29, 2002, 69 full-time
salaried and 276 hourly. At December 28, 2003, after the Seattle central kitchen
closure, cafe changes and other corporate and branded sales personnel
reductions, the number of employees had declined further to 327 employees; 45
full-time salaried and 282 hourly. This represents a decrease of 18 employees,
or 5%, from the beginning of 2003. Hourly employees increased in 2003 primarily
due to the opening of the Borders test cafes. These employee reductions have
resulted in 2003, and will continue to result in the future, in decreases in
labor expenses as compared to prior periods.
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, although we have not
operated our business in geographic segments. We have historically managed our
business through four reportable segments: Retail, Branded Sales, Kitchens, and
General & Administrative. Retail consists of sales generated through the
Company's cafes. Branded Sales consists of two subgroups: 1) box lunch, catering
and vending and 2) wholesale. 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).
23
Below is a comparison of sales in each market for fiscal years 2001, 2002 and
2003. 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 cafes, box lunches, catering, wholesale and other accounts.
Expenses for each market consist of occupancy expense, labor expense, general
and administrative expense, including general and administrative overhead
specifically identified to a market, 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 includes depreciation and amortization related to
corporate assets, corporate general and administrative totals will differ from
the General and Administrative segment financial information.
24
Geographic Markets
Fiscal Years Ended
------------------------------------------
December 28, December 29, December 30,
2003 2002 2001
------------ ------------ ------------
(in thousands, except cafe numbers)
Seattle
Sales:
Retail ............................... $ 5,494 $ 5,756 $ 5,997
Branded Sales ........................ 2,982 4,441 5,686
-------- -------- --------
Total sales ....................... $ 8,476 $ 10,197 $ 11,683
======== ======== ========
Cost of food and packaging:
Retail ............................... $ (2,803) $ (2,099) $ (2,211)
Branded Sales ........................ (1,938) (1,917) (2,565)
Unallocated cost of food and packaging (41) (100) (109)
-------- -------- --------
Total cost of food and packaging .. $ (4,782) $ (4,116) $ (4,885)
======== ======== ========
Income (loss) from operations ........... $ (471) $ (1,377) $ 88
======== ======== ========
Cafes ................................... 11 12 13
San Francisco
Sales:
Retail ............................... $ 7,120 $ 7,581 $ 8,051
Branded Sales ........................ 1,324 1,248 1,426
-------- -------- --------
Total sales ....................... $ 8,444 $ 8,829 $ 9,477
======== ======== ========
Cost of food and packaging:
Retail ............................... $ (2,852) $ (2,716) $ (2,822)
Branded Sales ........................ (518) (377) (462)
Unallocated cost of food and packaging (268) (177) (165)
-------- -------- --------
Total cost of food and packaging .. $ (3,638) $ (3,270) $ (3,449)
======== ======== ========
Income (loss) from operations ........... $ (1,252) $ (3,095) $ (11)
======== ======== ========
Cafes ................................... 13 15 12
Chicago
Sales:
Retail ............................... $ 3,948 $ 4,387 $ 4,812
Branded Sales ........................ 857 1,237 1,153
-------- -------- --------
Total sales ....................... $ 4,805 $ 5,624 $ 5,965
======== ======== ========
Cost of food and packaging:
Retail ............................... $ (1,961) $ (1,650) $ (1,835)
Branded Sales ........................ (534) (473) (411)
Unallocated cost of food and packaging -- (86) (64)
-------- -------- --------
Total cost of food and packaging .. $ (2,495) $ (2,209) $ (2,310)
======== ======== ========
Income (loss) from operations ........... $ (1,102) $ (2,005) $ (836)
======== ======== ========
Cafes ................................... 12 9 10
Los Angeles
Sales:
Retail ............................... $ 4,277 $ 4,603 $ 3,877
Branded Sales ........................ 937 1,340 1,027
-------- -------- --------
Total sales ....................... $ 5,214 $ 5,943 $ 4,904
======== ======== ========
Cost of food and packaging:
Retail ............................... $ (2,127) $ (1,671) $ (1,398)
Branded Sales ........................ (572) (522) (354)
Unallocated cost of food and packaging -- (62) (84)
-------- -------- --------
Total cost of food and packaging .. $ (2,699) $ (2,255) $ (1,836)
======== ======== ========
Income (loss) from operations ........... $ (871) $ (1,652) $ (652)
======== ======== ========
Cafes ................................... 8 10 8
All Markets
Sales:
Retail ............................... $ 20,839 $ 22,327 $ 22,737
Branded Sales ........................ 6,100 8,266 9,292
-------- -------- --------
Total sales ....................... $ 26,939 $ 30,593 $ 32,029
======== ======== ========
Cost of food and packaging:
Retail ............................... $ (9,594) $ (8,136) $ (8,266)
Branded Sales ........................ (3,562) (3,289) (3,792)
Unallocated cost of food and packaging (458) (425) (422)
-------- -------- --------
Total cost of food and packaging .. $(13,614) $(11,850) $(12,480)
======== ======== ========
Income (loss) from operations ........... $ (3,696) $ (8,129) $ (1,411)
Corporate general and administrative ... (4,578) (6,415) (5,546)
-------- -------- --------
Loss from operations ................... $ (8,274) $(14,544) $ (6,957)
======== ======== ========
25
Results of Operations - Our fiscal year ends on the last Sunday in December and
is based on a 52- or 53-week fiscal year. The following table sets forth
statement of operations data for the periods indicated as a percentage of net
revenues:
Fiscal Years ended
---------------------------------------
December 28, December 29, December 30,
2003 2002 2001
----- ----- -----
(As a percentage of sales, except
number of locations data)
Statement of Operations Data
Sales:
Retail ......................................... 77.4% 73.0% 71.0%
Branded Sales .................................. 22.6% 27.0% 29.0%
----- ----- -----
Total Sales ....................... 100.0% 100.0% 100.0%
Operating Expenses:
Cost of food and packaging ..................... 50.5% 38.7% 39.0%
Occupancy expenses ............................. 15.6% 15.0% 12.5%
Labor expenses ................................. 24.7% 35.7% 34.6%
Depreciation and amortization .................. 9.5% 14.2% 8.4%
Other operating expenses ....................... 6.7% 8.0% 5.8%
General and administrative expenses ............ 19.7% 24.7% 21.3%
Loss/(gain) on disposal of assets .............. -0.4% 3.8% 0.0%
Provision for asset impairment and store closure 4.3% 7.4% 0.1%
----- ----- -----
Total operating expenses .......... 130.7% 147.5% 121.7%
----- ----- -----
Loss from operations .................................... (30.7)% (47.5)% (21.7)%
Other (expense) income .................................. (4.9)% (1.9)% 0.5%
----- ----- -----
Net loss ................................................ (35.6)% (49.5)% (21.2)%
===== ===== =====
Selected Operations Data
Number of locations at period end:
Central kitchens ............................... 1 2 4
Cafes .......................................... 40 46 43
Borders test cafes ............................. 4 0 0
52-Week period ended December 29, 2002 compared with 52-Week period ended
December 28, 2003
Sales - Total sales decreased by $3.65 million, or 11.9%, from $30.59 million to
$26.94 million.
Retail sales decreased by $1.49 million, or 6.7%, from $22.33 million to $20.84
million. Same-store sales decreased by $1.78 million, or 8.4%, from $21.07
million to $19.29 million. The number of cafes at the end of the respective
fifty-two week periods decreased by six, or 13.0%, from 46 to 40. The decrease
in sales was primarily due to lower office occupancy rates in many of the
buildings in which we are located and, to a lesser extent, due to having closed
six under-performing cafes during 2003 and seven cafes since September 29, 2002,
partially offset by the opening of four new test cafes in Borders stores in
November of 2003.
Branded sales decreased by $2.17 million, or 26.2%, from $8.27 million to $6.10
million. This decrease was primarily due to our reorganization efforts and the
focus on more profitable accounts and the discontinuation of sales to grocery
customers. The wholesale and grocery subgroup of branded sales, which generally
has lower margins than our other distribution channels, had provided us with an
opportunity to more fully utilize the excess capacity of our since closed
central kitchens. The Company has evaluated the grocery segment of our wholesale
business and decided to withdraw from this distribution channel. In addition, we
decided to consolidate and shrink delivery areas and thus discontinued sales to
some accounts.
Operating expenses - Operating expenses consist of costs of food and packaging,
occupancy, labor, depreciation and amortization, other operating, general and
administrative, loss on disposal of assets, and provision for asset impairment
and store closure. Total operating expenses decreased by $9.93 million, or
22.0%, from $45.14 million to $35.21 million. As a percentage of sales, our
operating expenses decreased from 147.5% to 130.7%. The decrease in percentage
of sales was primarily due to the decrease in overall operating costs from
kitchen and store closures, reorganization and cost control measures and the
decrease in provision for asset impairment.
26
Cost of food and packaging increased by $1.76 million, or 14.9%, from $11.85
million to $13.61 million and as a percentage of sales from 38.7% to 50.5%. Cost
of food and packaging for retail sales increased by $1.45 million, or 17.8%,
from $8.14 million to $9.59 million. Cost of food and packaging for branded
sales increased by $0.27 million, from $3.29 million to $3.56 million. Cost of
food and packaging increased due to our food production being outsourced. These
increases were partially offset by decreases in labor, occupancy and
depreciation and amortization.
Occupancy expense consists of costs related to the leasing of retail space for
our cafes and our central kitchens. Occupancy expense decreased by $0.40
million, or 8.7%, from $4.60 million to $4.20 million. As a percentage of sales,
occupancy expenses increased from 15.0% to 15.6%, primarily due to decreased
sales offset in part by the closure of some cafes and the reduction of some base
rents. Our rents are primarily fixed in nature with some rents being variable
determined as a percentage of sales.
Labor expenses consist of wages and salaries paid to employees. Labor expenses
decreased by $4.27 million, or 39.1%, from $10.93 million to $6.66 million. As a
percentage of sales, labor expenses decreased from 35.7% to 24.7%. These
decreases were primarily due to decreased labor expenses from outsourcing food
production in three markets and thus eliminating central kitchen labor in those
markets, and, to a lesser extent, realization of certain cost control actions
and efficiencies.
Depreciation and amortization relates to leasehold improvements, equipment and
vehicles. Depreciation and amortization expense decreased by $1.79 million, or
41.1%, from $4.35 million to $2.56 million. As a percentage of sales,
depreciation and amortization decreased from 14.2% to 9.5%. These decreases were
due primarily to having closed 3 central kitchens and to a lesser extent the
impact of asset impairment provisions previously recorded.
Other operating expenses consist of direct operating, marketing, repair and
maintenance expense. Other operating expenses decreased by $0.62 million, or
25.5%, from $2.43 million to $1.81 million. As a percentage of sales, other
operating expenses decreased from 8.0% to 6.7%. These decreases were primarily
due to realization of certain cost control actions and efficiencies.
General and administrative expenses relate to the support functions performed by
our corporate office, such as finance, human resources, marketing, food
development and information systems. These expenses primarily consist of
salaries of senior management and staff, and our corporate office lease and
related office expenses. General and administrative expenses decreased by $2.24
million, or 29.7%, from $7.55 million to $5.31 million. As a percentage of
sales, general and administrative expenses decreased from 24.7% to 19.7%.
Primarily the decrease was due to a reduction in our corporate workforce and the
reduction in corporate operating expenses.
Pursuant to a plan to close our company-owned central kitchens and outsource
production of the our branded food products, the Los Angeles and Chicago central
kitchens were closed in late 2002 and the Seattle central kitchen was closed at
the end of February 2003. During the 52-weeks ended December 28, 2003, we
recorded a net gain on disposal of assets of $111,000 primarily relating to
sales of equipment from the Seattle central kitchen, closure of one of our cafes
in which we received a payment from the landlord, and adjustments to previously
recorded losses on the Chicago and Los Angeles central kitchens. Additionally,
the Company recorded an impairment write-down of approximately $1.17 million
related to certain cafe locations. These write-downs consisted primarily of
leasehold improvements and, to a lesser extent, equipment.
Other (Expense) Income - Other (expense) income includes interest and other
expense and interest and other income. Other (expense) income increased by $0.74
million, or 125.4%, from ($0.59) million to ($1.33) million. As a percentage of
sales, other expense increased from (1.9%) to (4.9%). These increases were due
to the interest expense, including amortization of debt issue costs and
discounts, from increased borrowings.
Net Loss - Net loss decreased by $5.53 million, or 36.5%, from $15.13 million to
$9.60 million and as a percentage of sales, net loss decreased from 49.5% to
35.6%, primarily due to decreased costs and the decrease in provision for asset
impairment. The Company recognized no tax benefit from its losses in 2002 or
2003.
27
Year ended December 29, 2002 Compared to Year Ended December 30, 2001
Sales - Total sales decreased by $1.4 million, or 4.5%, from $32.0 million to
$30.6 million.
Retail sales decreased by $0.4 million, or 1.8%, from $22.7 million to $22.3
million. This decrease was primarily due to reduced same store sales which more
than offset the sales from cafes opened in 2001 and 2002. Same-store sales
decreased by $2.7 million, or 12.2%, from $21.8 million to $19.1 million.
Same-store sales consist only of sales from cafes, and do not include Branded
sales. The decrease in same-store sales was primarily due to the decrease in
occupancy rates of many of the buildings in which we are located.
Branded sales decreased by $1.0 million, or 11.0%, from $9.3 million to $8.3
million. This decrease was primarily due to a decrease in sales to Tully's and
QFC.
The wholesale and grocery subgroup of Branded sales, which generally has lower
margins than our other distribution channels, has provided us with an
opportunity to more fully utilize the excess capacity of our central kitchens.
The Company has evaluated the grocery segment of our wholesale business and
decided to withdraw from this distribution channel. The Company remains
committed to growing profitable wholesale accounts. Additionally, the Company is
working with FFG in Chicago and New York markets to supply Starbucks branded
sandwiches and salads to Starbucks stores.
Operating expenses - Operating expenses consist of cost of food and packaging,
occupancy, labor, depreciation and amortization, other operating, general and
administrative, loss on disposal of assets, and provision for asset impairment
and store closure. Total operating expenses increased by $6.1 million, or 15.8%,
from $39.0 million to $45.1 million. As a percentage of sales, our operating
expenses increased from 121.7% to 147.5%. Included in total operating expense in
2002 is $3.4 million of loss on disposal of assets and provision for asset
impairment. Excluding these losses, as a percentage of sales, our operating
expenses were 136.3%. The increase in operating expense as a percentage of sales
was primarily due to the costs related to being a public company, occupancy
expenses for new retail locations and decreased sales.
Cost of food and packaging decreased by $0.6 million, or 5.0%, from $12.5
million to $11.9 million due to lower sales volume. Cost of food and packaging
decreased as a percentage of sales from 39.0% to 38.7%. We expect that cost of
food and packaging will increase in future periods as our food production is
outsourced.
Cost of food and packaging for retail sales decreased by $0.2 million, or 1.6%,
from $8.3 million to $8.1 million. Cost of food and packaging for branded sales
decreased by $0.5 million, or 13.3%, from $3.8 million to $3.3 million. The
decrease for both retail sales and branded sales was due to the lower sales
volumes. Unallocated cost of food and packaging for kitchens remained the same
at $0.4 million.
Occupancy expense consists of costs related to the leasing of retail space for
our cafes and our central kitchens. Occupancy expense increased by $0.6 million,
or 14.8%, from $4.0 million to $4.6 million. This increase was due to the
opening of five additional cafes during the fiscal year 2001 and five cafes in
the first half of 2002, offset by the closure of two cafes in 2002. As a
percentage of sales, occupancy expense increased from 12.5% to 15.0%, primarily
due to decreased sales. Our rents are fixed or variable determined as a
percentage of sales, or a combination of both. We expect that occupancy expense
will decrease in 2003 as our central kitchens are closed and those leases are
either terminated or sublet.
Labor expenses consist of wages and salaries paid to employees. Labor expenses
decreased by $0.2 million, or 1.6%, from $11.1 million to $10.9. This decrease
was primarily due to the workforce reductions undertaken in 2002. As a
percentage of sales, labor expenses increased from 34.6% to 35.7%. This increase
was primarily due to decreased sales. In the future, as products are purchased
from outside suppliers, such as FFG, labor expense will decrease as a result of
our central kitchen labor decreasing.
Depreciation and amortization relates to leasehold improvements, equipment and
vehicles. Depreciation and amortization expense increased by $1.7 million, or
62.0%, from $2.7 million to $4.4 million, primarily as a result of opening new
cafes. Depreciation in 2002 also includes an additional $0.9 million in expense
due to shortening the lives of the Seattle and San Francisco kitchens. As a
percentage of sales, depreciation and amortization increased from 8.4% to 14.2%.
Other operating expenses consist of direct operating, marketing, repair and
maintenance expense. Other operating expenses increased by $0.6 million, or
31.6%, from $1.8 million to $2.4 million, primarily as a result of opening new
cafes. As a percentage of sales, other operating expenses increased from 5.8% to
8.0%. This increase was primarily due to decreased sales.
28
General and administrative expenses relate to the support functions performed by
our corporate office, such as finance, human resources, marketing, food
development and information systems. This expense primarily consists of salaries
of our corporate executives, senior management and staff, and our corporate
office lease and related office expenses. General and administrative expenses
increased by $0.7 million, or 10.4%, from $6.8 million to $7.5 million. The
increase was primarily due to expenses relating to being a public company such
as additional legal and accounting expenses. As a percentage of sales, general
and administrative expenses increased from 21.3% to 24.7%, primarily due to
decreased sales. As a result of reductions in corporate personnel, general and
administrative expenses are expected to decrease in 2003.
Pursuant to a plan to close its four company-owned central kitchens and
outsource production of the Company's branded food products, the Los Angeles and
Chicago central kitchens were closed in late 2002. The Company recorded a loss
on disposition for these facilities of approximately $1.2 million. During 2002,
the Company recorded an impairment write-down of long-lived assets of
approximately $2.3 million, primarily related to certain cafe locations. These
write-downs consisted primarily of leasehold improvements and, to a lesser
extent, equipment. We performed an impairment analysis of our cafe locations and
remaining kitchens by comparing the carrying amount of the long-term assets to
their associated undiscounted cash flows. Because the carrying amount exceeded
the associated undiscounted cash flows we recorded an impairment charge. The
impairment charge reflects the fair value of the cafes based upon discounted
cash flows versus the next book value of the assets.
Other (Expense) Income - Other (expense) income includes interest and other
expense and interest and other income. Other (expense) income decreased by $0.8
million from $0.2 million of income to $0.6 million of expense. This decrease
was due to interest expense associated with new borrowings obtained during 2002
and lower interest income in 2002 resulting from lower cash and cash
equivalents. As a percentage of sales, other (expense) income decreased from
0.5% to (1.9%).
Net Loss - Net loss increased by $8.3 million, or 122.4%, from $6.8 million to
$15.1 million. This increase was primarily due to decreased sales and increased
operating expenses, including increased depreciation expense, loss of disposal
of assets and impairment provision. As a percentage of sales, net loss increased
from 21.2% to 49.5%. The Company recognized no tax benefit from its losses in
2002 or 2001.
Liquidity And Capital Resources
Net cash used in operating activities during the fiscal years ended December 28,
2003 and December 29, 2002 was $4.0 million and $5.3 million respectively. Net
cash used in operating activities in each period resulted primarily from net
loss before non-cash charges and changes in working capital.
Net cash used in investing activities for the fiscal years ended December 28,
2003 and December 29, 2002 was $0.2 million and $2.3 million respectively. Net
cash used in investing activities resulted from capital additions primarily
related to opening additional cafes during the 2002 period.
Net cash provided by financing activities for the fiscal years ended December
28, 2003 and December 29, 2002 was $4.0 million and $1.8 million. The financing
activities during 2003 consisted primarily of cash received from the net
proceeds of $7.0 million in debt financing from DB, BV, Spinnaker, and the
Company's founder, which were offset by debt issue costs and repayment of other
borrowings. The financing activities during 2002 consisted primarily of cash
received from the net proceeds of $2.8 million in debt financing ($1.0 million
from FFG, $1.2 million from Laurus, $0.5 million from bank borrowings, and $0.1
million from a revolving line of credit), which was offset by $0.4 million in
repayment of notes, $0.6 million from the change in checks issued in excess of
bank deposits, and $0.2 million from debt issue costs.
Net cash used in operating activities during the fiscal years ended December 29,
2002 and December 30, 2001 was $5.3 million and $5.6 million, respectively. Net
cash used in operating activities in each year resulted primarily from net loss
before non-cash charges.
Net cash used in investing activities for the fiscal years ended December 29,
2002 and December 30, 2001 was approximately $2.3 million and $3.8 million,
respectively. Net cash used in investing activities resulted from capital
additions primarily related to opening additional cafes and, in 2001,
improvements to the central kitchens.
Net cash provided by financing activities for the fiscal years ended December
30, 2001 and December 29, 2002 was $15.0 million and $1.8 million, respectively.
The financing activities during 2002 consisted primarily of cash received from
the net proceeds of $2.8 million in debt financing ($1.0 million from FFG, $1.2
million from Laurus, $0.5 million from bank borrowings, and $0.1 million from a
revolving line of credit), which was offset by $0.4 million in repayment of
notes, $0.6 million from the change in checks issued in excess of bank deposits,
and $0.2 million from debt issue costs. Net cash provided by financing
activities for the year ended December 30, 2001 was $15.0 million resulting
primarily from the issuance of capital stock, which was partially offset by
financing costs, and the repayment of a line of credit of $2.0 million. In
January and February 2001, net cash provided from the issuance of additional
shares of Series C preferred stock was $3.0 million. In May 2001, net cash
provided from our initial public offering was approximately $13.6 million.
29
The Company has no material contractual commitments for capital expenditures.
The Company has no other material contractual commitments except for its
agreements with FFG and SK Foods. The Company is subject to various legal and
regulatory proceedings, audits and claims that arise in the ordinary course of
business. At December 28, 2003, we had contractual cash obligations as set forth
in the table below (in thousands):
Less than 1
Contractual Obligations Total year 1-3 years 4-5 years
------- ------- ------- -------
Line of Credit Borrowings ........ $ -- $ -- $ -- $ --
Notes Payable .................... 7,643 $ 643 7,000 --
Operating Leases ................. 7,439 2,008 $ 3,583 $ 1,848
Capital Lease Obligations ........ 334 139 166 29
------- ------- ------- -------
Total Contractual Cash Obligations $15,416 $ 2,790 $10,749 $ 1,877
======= ======= ======= =======
Since inception we have financed our operations primarily through the issuance
of capital stock and debt. In the near term, operating losses are expected to
continue despite actions taken to reduce negative cash flow from operations.
Actions taken to reduce negative cash flow from operations, including improving
operational efficiencies, cost controls and cutbacks, workforce reductions and
closing of certain under-performing cafes, continued during 2003.
In March 2003, certain terms of the note with Laurus were amended to, among
other things, change the fixed conversion price to $0.10 per share. The
amendment to the note suspended our obligation to make monthly payments of
principal until the first business day of the month following the earlier of
June 30, 2003 or the closing on an investment by DB or any of its affiliates,
suspended the right of Laurus to demand conversion under the note until the
earlier of June 30, 2003 or the closing on an investment by DB or any of its
affiliates which occurred on August 1, 2003, and restructured the repayment
schedule. 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 DB. In July
2003, the terms of the note were further amended to provide that, among other
things, upon completion of the financing with DB, we would make a $300,000
principal payment, and pay the remaining principal amount and accrued interest,
plus a $75,000 fee, in 12 equal installments beginning in September 2003, and to
revise conversion terms. On October 1, 2003, the Company was in arrears on its
interest and principal payments to Laurus. Subsequently, in October 2003 the
Company received a waiver from Laurus in which Laurus agreed to waive any
defaults resulting from the late payment of the monthly amount due October 1,
2003. In addition, Laurus agreed to postpone all payments that would have become
due and payable under the note between October 1, 2003 and November 15, 2003 to
November 16, 2003 and waived any defaults and penalties resulting from such
postponement of payments. The current principal balance of this note is
approximately $574,400, the amount currently due in fees is approximately
$68,750 and the past due interest as of December 28, 2003 is approximately
$92,000. We have not made any payments due under the note since October 24, 2003
and as a result we are currently in default under the note with Laurus. Laurus
may accelerate the payment due under the note or take other action to enforce
their rights with respect to the amounts due. Such actions could include
foreclosure on our assets or causing the Company to enter in to involuntarily
reorganization. In some circumstances, the note is convertible into shares of
our common stock. The conversion price is $0.10 per share for the first $350,700
converted into shares and $0.30 per share for any additional amounts converted.
In September 2002, we entered into a $500,000 note payable borrowing from U.S.
Bank. The note was secured by a certificate of deposit owned by the Company's
founder. The note was initially due June 30, 2003, which was extended to June
30, 2004. In December 2003, the note was paid by the Company's founder, and in
connection therewith, the Company issued a $500,000 note payable to the
Company's founder and 630,000 shares of Series G Preferred Stock.
In March 2003, we completed the offer and sale of $2.0 million in secured
promissory notes, Series D Preferred Stock and warrants to purchase common stock
to BV pursuant to which we issued a $2.0 million secured promissory note in
consideration for approximately $0.55 million in cash and conversion of the
$1.45 million principal amount of outstanding demand notes issued to FFG and its
affiliates, $450,000 of which was borrowed by the Company during January and
February 2003. BV is controlled by a principal executive officer of FFG.
30
Proceeds from the offering were used for working capital. We also issued a
five-year warrant exercisable for 1,193,546 shares of our common stock at a
price per share of $0.50, and 100 shares of Series D Preferred Stock, and
granted registration rights covering the shares of common stock issuable upon
conversion of the preferred stock and exercise of the warrant. The Company
agreed to cause up to one person designated by FFG to be appointed to the
Company's Board of Directors, subject to increase upon receiving shareholder
approval. We agreed that, if we received shareholder approval, we would cause up
to five persons designated by BV to be appointed to our Board of Directors, in
accordance with the rules and regulations of Nasdaq or any exchange on which our
common stock is listed. The promissory note was secured by all of our assets and
bore interest at 10% per year. Interest was payable monthly in arrears, in cash.
The note was to mature, and all principal and accrued and unpaid interest was to
become due, on March 6, 2004. The terms of the notes included 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.
In April 2003, the Company completed the offer and sale of $550,000 in secured
promissory notes, Series E Preferred Stock and warrants to Spinnaker. 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
were substantially similar to the terms of the note, warrant and Series D
Preferred Stock issued to BV in March 2003. 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 were used for working capital, after
deduction of expenses and a $50,000 management fee payable to Spinnaker Capital
Partners, L.L.C. In connection with the financing, Spinnaker, Laurus, BV and
FFG, 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.
In July 2003, the Company's shareholders approved both the conversion of the
Series D and Series E Preferred Stock held by BV and Spinnaker and the proposed
financing with the Investors. As a result of this approval, the Series D and
Series E Preferred Stock became convertible into shares of the Company's common
stock and the warrants issued to BV and Spinnaker were terminated.
In August 2003, the Company issued $6.0 million of senior secured
non-convertible promissory notes ("Senior Notes") to DB ($3.4 million), BV ($2.0
million), Spinnaker ($0.5 million), and Delafield ($0.1 million). The Senior
Notes are due two years from issuance, bear interest, payable quarterly, at
LIBOR plus 1%, and are collateralized by a security interest in all of the
Company's assets pursuant to an inter-creditor agreement among the note holders
and Laurus. The Senior Notes are not convertible, but the conversion price of
the Series F Preferred Stock may be satisfied by the holder surrendering a
portion of the notes for cancellation. The Company issued to the Investors and
Delafield an aggregate of 7,643,841 shares of Series F Preferred Stock that are
initially convertible into 76,438,410 shares of common stock at an initial
conversion price $0.10 per share of common stock. In the event that the fair
market price of the common stock exceeds the conversion price, the Series F
Preferred Stock may also be converted pursuant to a cashless exercise feature.
The Company also granted registration rights covering the shares of common stock
issuable upon conversion of the Series F Preferred Stock and the right to name
new executive officers to be appointed by the Company, and the right to
designate up to five of the Company's directors to DB (2), BV (2) and Spinnaker
(1).
The Company recorded a debt discount of approximately $1.5 million relating to
the issuance of the Series F Preferred Stock. The market price of the Company's
common stock exceeded the conversion price of the Series F Preferred Stock on
the date of issuance. As a result, the Company also recorded a beneficial
conversion feature in accordance with EITF 00- 27 "Application of Issue 98-5 to
Certain Convertible Instruments" upon issuance of the Series F Preferred Stock
at its estimated fair value of $1.5 million. The beneficial conversion feature
is analogous to a non-cash dividend and was immediately recognized as a return
to the preferred shareholders. This beneficial conversion feature increased the
net loss to common shareholders.
The securities issued to DB, BV, and Spinnaker were issued in consideration of
(i) $3.4 million of cash from DB, (ii) cancellation of the Series D Preferred
Stock and $2 million of the note held by BV, and (iii) cancellation of the
Series E Preferred Stock and $0.55 million of the note held by Spinnaker,
respectively. The Company issued the securities to Delafield, made a cash
payment to Delafield of $100,000 at closing, and in October paid Delafield an
additional $100,000 in full satisfaction of a change of control fee previously
owed by the Company to Delafield. The Company used a portion of the $3.4 million
of new funds raised, to repay certain existing indebtedness, including $300,000
of the amounts due to Laurus pursuant to its 14% convertible note, the
aforementioned payments of $200,000 to Delafield, $530,000 of professional fees,
including fees related to this transaction, and payment of $1.0 million owed to
FFG pursuant to the food production agreement.
31
In addition, in connection with the financing transaction, the Company's
articles of incorporation were amended to increase the authorized shares of
common stock to 250 million shares, a new stock incentive plan was adopted that
authorizes the issuance of 12 million shares of common stock upon exercise of
stock options or upon the grant of restricted stock, and the Company agreed to
issue to certain new and existing members of the Company management shares of
Series F Preferred Stock convertible into approximately 5.3 million shares of
Company common stock and stock options exercisable for approximately 5.4 million
shares of Company common stock. In November 2003, 4.5 million shares of Series F
Preferred Stock were approved for issuance to members of Company management.
In November 2003, the Company entered into a Food Service Concession Agreement
("Borders Agreement") with Borders, Inc. to manage and operate the cafe portion
of eight cafes on a test basis for a period of six months after the last test
store is opened. We will retain all receipts generated from these cafes and be
responsible for substantially all of the costs resulting from the operations of
these cafes. In exchange, the Company will pay Borders an amount equal to
$60,000 for each cafe opened, or a total amount of $480,000, for improvements
made to the cafes. In addition, we will pay a base rent of $8,073 per month for
each store operated. To date, the Company has opened four test cafes in the
Chicago market and has no plans to open additional cafes prior to the end of the
test period. We have paid Borders $240,000 for improvements to these cafes as
provided for in the agreement.
To date, we have only opened 4 of the 8 stores provided for in the test
agreement. In January, 2004, we have agreed with Borders to limit the test to
only these stores. Borders has incurred costs associated with the anticipated
opening of the four remaining stores provided for in the agreement. It is
anticipated that the Company will be required to reimburse Borders for some or
all of these costs in the first half of 2004. It is estimated that this
reimbursement may be between $50,000 and $125,000.
In December 2003, the Company issued $1 million of Senior Notes to DB ($0.5
million), and the Company's founder ($0.5 million). The Company issued an
aggregate of 1,259,446 shares of Series G Preferred Stock that are initially
convertible into 12,594,460 shares of common stock at an initial conversion
price $0.10 per share of common stock. In addition, the Senior Notes are due two
years from issuance, bear interest, payable quarterly, at LIBOR plus 1%, and are
collateralized by a security interest in all of the Company's assets pursuant to
an inter-creditor agreement among note holders and Laurus. The Senior Notes are
not convertible, but the conversion price of the Series G Preferred Stock may be
satisfied by the holder surrendering a portion of the notes for cancellation. In
the event that the fair market price of the common stock exceeds the conversion
price, the Series G Preferred Stock may also be converted pursuant to a cashless
exercise feature. The Company also granted registration rights covering the
shares of common stock issuable upon conversion of the Series G Preferred Stock.
The securities issued to DB and the Company's founder were issued in
consideration of (i) $500,000 of cash from DB and (ii) $500,000 repayment by the
Company's founder of amounts owed by the Company pursuant to its note payable to
US Bank.
The Company recorded a debt discount of approximately $246,000 relating to the
issuance of the Series G Preferred Stock. The market price of the Company's
common stock exceeded the conversion price of the Series G Preferred Stock on
the date of issuance. As a result, the Company also recorded a beneficial
conversion feature in accordance with EITF 00- 27 "Application of Issue 98-5 to
Certain Convertible Instruments" upon issuance of the Series G Preferred Stock
at its estimated fair value of $246,000. The beneficial conversion feature is
analogous to a non-cash dividend and was immediately recognized as a return to
the preferred shareholders. This beneficial conversion feature increased the net
loss to common shareholders.
Subsequently, in March 2004 the Company received a waiver from DB, BV, FFG,
Spinnaker, Delafield, and Victor D. Alhadeff in which they agreed to waive any
defaults with respect to non-payment of interest until June 30, 2004 and agreed
to delay payment of any and all accrued but unpaid interest to July 5, 2004, and
waived any defaults and penalties resulting from the postponement of payments.
On January 15, 2004, Briazz, Inc. entered into an Amended and Restated
Securities Purchase Agreement (the "Securities Purchase Agreement") with DB
Advisors, LLC, Flying Food Group, LLC, Dorsey & Whitney, LLP, and Victor
Alhadeff, the Company's Chairman, (collectively, the "Investors") for a
financing totaling $1.73 million, which includes $1.1 million of cash and $0.63
million conversion of accounts payable. Pursuant to the Securities Purchase
Agreement, the Company has agreed to sell a senior secured non-convertible two
year notes in the amount of $365,000 and 467,464 shares of Series G convertible
preferred stock to DB Advisors, LLC for cash proceeds of approximately $365,000.
Additionally the Company's Chairman Victor Alhadeff purchased a $235,000 senior
secured non-convertible two year note and 301,088 shares of Series G convertible
preferred stock for cash proceeds of approximately $235,000. In this same
offering, Dorsey & Whitney LLP, the Company's legal counsel agreed to convert
$130,000 of its accounts receivable for legal services to a $130,000 senior
secured non-convertible two year note and 23,964 shares of Series G convertible
preferred stock. These notes have a maturity date of January 15, 2006. Pursuant
to the same Securities Purchase Agreement, the Company sold to Flying Food
Group, LLC and DB Advisors, LLC each a $500,000 senior secured non-convertible
note that matures on March 31, 2004 unless extended by either party at their
option and 612 shares of Series G convertible preferred stock. Either party,
upon mutual agreement with the Company, has the right to extend the maturity of
such parties note to January 15, 2006. If and when either of these notes is
extended the Company will issue an additional 640,000 shares of Series G
convertible preferred stock for each note converted. All notes discussed above
will bear interest at one month LIBOR rate plus 1%, and are secured by a
security interest in the Company's assets. The Series G convertible preferred
stock is convertible into shares of common stock at an exercise price of $0.10
per common share.
32
The Company has incurred substantial operating losses and negative cash flows
from operations since inception, had an accumulated deficit of $81.5 million and
a working capital deficit of $4.1 million at December 28, 2003, and is in
default on its current and long term note payable. We have received waivers from
all of our note holders with the exception of Laurus. As disclosed in the report
of independent accountants on our annual financial statements included in this
annual report, these matters raise substantial doubt about the Company's ability
to continue as a going concern. We have financed our operations principally
through the net proceeds from debt and equity offerings. Our ability to continue
as a going concern is dependent upon numerous factors, including our ability to
obtain additional financing, our ability to increase our level of future
revenues and our 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.
At December 28, 2003, the Company had cash and cash equivalents of approximately
$0.3 million. We have used a combination of cash and cash equivalents, operating
revenues and proceeds of additional financing to meet our immediate cash needs;
however, additional cash will be needed by the end of the first quarter of 2004
in order to continue operating. The Company is attempting to conserve cash by
reducing expenses and by delaying or deferring payments to some of our suppliers
and on some of the our leases. Poor financial results, inability to comply with
the terms of borrowings, unanticipated expenses or unanticipated opportunities
that require financial commitments could give rise to additional financing
requirements sooner than expected. In addition to the $1.73 million raised in
the first quarter of 2004, we will need to raise additional cash to finance our
operations, respond to competitive pressures and repay borrowings when they
become due. If we raise additional funds through the issuance of equity or
convertible debt securities, the percentage ownership of existing shareholders
would be reduced, and these securities may have rights, preferences or
privileges senior to those of our common stock. There can be no assurance that
we will be able to obtain additional financing at terms favorable to us, or at
all, reduce expenses or successfully complete other steps to continue as a going
concern. If the Company is unable to obtain sufficient funds to satisfy our cash
requirements within the required timeframe on acceptable terms, we may be forced
to curtail operations, dispose of assets, or seek extended payment terms. Such
events would materially and adversely affect our financial position and results
of operations. In the event that such steps are not sufficient, or that Company
directors and management believe that such actions will not be sufficient, we
may be required to discontinue our operations.
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. The provisions of SFAS No. 143 are effective for fiscal
years beginning after June 15, 2002, with early application permitted. The
adoption of SFAS No. 143 did not have a material impact on the Company's results
of operations, financial position or cash flows.
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 our results of
operations, financial position or cash flows.
In November 2002, the FASB issued Interpretation No. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Guarantees of Indebtedness
of Others an Interpretation of FASB Statement No. 5, 57 and 107 and Rescission
of FASB Interpretation No. 34 ("FIN 45"). This interpretation expands on the
existing accounting guidance and disclosure requirements for most guarantees. It
requires that at the time a company issues a guarantee, the company must
disclose that information in its interim and annual financial statements. The
provisions for initial recognition and measurement of the liability will be
applied on a prospective basis to guarantees issued or modified after December
31, 2002. The Company has not guaranteed indebtedness of others. The adoption of
FIN 45 did not have a material impact on the Company's results of operations,
financial position or cash flows.
33
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure. SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation. SFAS No. 148 requires accounting policy
note disclosures to provide the method of stock option accounting for each year
presented in the financial statements and, for each year until all years
presented in the financial statements recognize the fair value of stock-based
compensation. The transition provisions and annual statement disclosure
requirements of SFAS No. 148 are effective for the fiscal years ending after
December 15, 2002. The adoption of SFAS No. 148 did not have significant impact
on the Company's results of operations, financial position, or cash flows.
In January 2003, the FASB issued FASB Interpretation No. 46 "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51." ("FIN 46"). FIN 46
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity under certain conditions. The Company does not have
any involvement in variable interest entities. The FASB has published a revision
to interpretation 46 ("46R") to clarify some of the provisions of FIN 46 and to
exempt some entities from its requirements. The adoption of FIN 46 did not have
a material impact on the Company's results of operations, financial position or
cash flows.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS No. 149"), which amends
and clarifies financial accounting and reporting for derivative instruments
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133. The Company does not own any derivative
instruments and is not engaged in hedging activities. The adoption of SFAS No.
149 did not have a material impact on the Company's results of operations,
financial position or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS No.
150"), which clarifies the accounting for certain financial instruments with
characteristics of both liabilities and equity and requires that those
instruments be classified as liabilities in statements of financial position.
Previously, many of these financial instruments were classified as equity. SFAS
No. 150 is effective for all financial instruments entered into or modified
after May 2003 and is otherwise effective at the beginning of the first interim
period after June 15, 2003. The adoption of SFAS No. 150 did not have a material
impact on the Company's results of operations, financial position or cash flows.
Critical Accounting Policies
We have identified the policies below as critical to our business operations and
the understanding of our results of operations. For further disclosure on the
application of these and other accounting policies, see Note 1 in the Notes to
Financial Statements included in this annual report. Our preparation of this
annual report requires us to make estimates and assumptions that affect the
reported amount of assets and liabilities, disclosure of contingent assets and
liabilities at the date of our financial statements, and the reported amounts of
revenue and expenses during the reporting periods. There can be no assurance
that actual results will not differ from those estimates.
Revenue Recognition - The Company recognizes revenue in accordance with SEC
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
("SAB 101"), as amended. SAB 101 requires that four basic criteria must be met
before revenue can be recognized: (1) persuasive evidence of an arrangement
exists; (2) delivery has occurred or services provided; (3) the fee is fixed and
determinable; and (4) collectibility is reasonably assured. Determination of
criteria (3) and (4) are based on management's judgments regarding the fixed
nature of the fee charged for services provided and products delivered and the
collectibility of those fees. Should changes in conditions cause management to
determine these criteria are not met for certain future transactions, revenue
recognized for any reporting period could be adversely affected. The Company has
concluded that its revenue recognition policy is appropriate and in accordance
with generally accepted accounting principles and SAB No. 101.
Valuation of Long-Lived Assets - We periodically review the carrying value of
our long-lived assets for possible impairment. This review is based upon our
projections of anticipated future cash flows. We record impairment losses on
long-lived assets used in operations when events and circumstances indicate that
the assets might be impaired and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amount of those items. Our
cash flow estimates are based on historical results adjusted to reflect our best
estimate of future market and operating conditions. While we believe that our
estimates of future cash flows are reasonable, different assumptions regarding
such cash flows could materially affect our evaluations. The net carrying value
of assets not recoverable are reduced to their estimated fair value. Our
estimates of fair value represent our best estimate based on either discounted
cash flows or appraised values, depending on the nature of the asset.
34
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We have no derivative financial instruments or derivative commodity investments.
We invest our excess cash in investment grade, highly liquid investments,
consisting of money market instruments, bank certificates of deposit and
short-term investments in commercial paper. We do not believe these investments
are subject to significant market risk.
All of our transactions are conducted, and our accounts are denominated, in
United States dollars. Accordingly, we are not exposed to foreign currency risk.
Many of the food products purchased by us are affected by commodity pricing and
are, therefore, subject to price volatility caused by weather, production
problems, delivery difficulties, energy costs and other factors that are outside
our control. We believe that substantially all of our food and supplies are
available from numerous sources, which helps to control food commodity risk;
however we are reliant upon our central kitchen producers to control food
commodity risk for those products we purchase from them. We believe we have the
ability to increase menu prices, or vary the menu items offered, if needed in
response to a food product price increase.
Item 8. Financial Statements and Supplementary Data.
BRIAZZ, INC.
INDEX TO FINANCIAL STATEMENTS
Page
------
Report of Independent Accountants 36
Balance Sheets as of December 28, 2003 and December 29, 2002 38
Statements of Operations for the years ended December 28, 2003,
December 29, 2002 and December 30, 2001 39
Statement of Stockholders' Equity (Deficit) for the years ended
December 28, 2003, December 29, 2002 and December 30, 2001 40
Statements of Cash Flows for the years ended December 28, 2003,
December 29, 2002 and December 30, 2001 41
Notes to Financial Statements 42
35
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
BRIAZZ, Inc.
We have audited the accompanying balance sheet of BRIAZZ, Inc as of December 28,
2003, and the related statements of operations, stockholders' equity (deficit)
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of BRIAZZ, Inc. as of December 28,
2003, and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 of the
financial statements, the Company has suffered recurring losses from operations,
which raise substantial doubt about its ability to continue as a going concern.
Management's plans in regards to these matters are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/GRANT THORNTON LLP
Seattle, Washington
March 5, 2004
36
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of BRIAZZ, Inc.:
In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of BRIAZZ, Inc.
at December 29, 2002 and the results of its operations and its cash flows for
each of the two years in the period ended December 29, 2002 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has reported operating losses and negative
cash flows from operations since inception. These are conditions that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
PricewaterhouseCoopers LLP
Seattle, Washington
March 11, 2003
37
BRIAZZ, INC.
BALANCE SHEETS
(in thousands, except share data)
December 28, December 29,
2003 2002
-------- --------
Assets
Current assets
Cash and cash equivalents ........................................... $ 311 $ 491
Accounts receivable, net of allowance of $38 (2003) and $136 (2002) . 211 428
Inventory ........................................................... 294 409
Prepaid expenses .................................................... 468 611
Other current assets ................................................ 49 154
Current portion of restricted certificates of deposit ............... 44 40
-------- --------
Total current assets .................................... 1,377 2,133
Property and equipment, net ............................................. 4,476 7,897
Restricted certificates of deposit, net of current portion .............. 423 423
Deferred debt issue cost, deposits and other assets ..................... 687 252
-------- --------
Total assets ............................................ $ 6,963 $ 10,705
======== ========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities
Line of credit borrowings ........................................... $ -- $ 129
Accounts payable .................................................... 1,761 2,537
Due to realted party ................................................ 999 200
Accrued compensation ................................................ 337 758
Accrued rents ....................................................... 648 515
Accrued interest .................................................... 258 --
Accrued taxes and other liabilities ................................. 691 379
Notes payable ....................................................... 643 1,390
Demand notes payable to related party ............................... -- 1,025
Current portion of capital lease obligations ........................ 100 109
-------- --------
Total current liabilities ............................... 5,437 7,042
Notes payable to related parties ........................................ 5,563 --
Capital lease obligations, net of current portion ....................... 138 234
-------- --------
Total liabilities ....................................... 11,138 7,276
-------- --------
Stockholders' equity (deficit)
Series F Convertible Preferred Stock, no par value; 10,000,000 shares
authorized, 8,093,841 (2003) shares issued and outstanding ......... 2,911 --
Series G Convertible Preferred Stock, no par value; 3,600,000 shares
authorized, 1,259,446 (2003) shares issued and outstanding ......... 509 --
Common stock and additional paid-in capital, no par value; 250,000,000
shares authorized; 5,990,916 (2003), and 5,880,173 (2002)
shares issued and outstanding ..................................... 74,103 73,819
Deferred stock-based compensation ................................... (116) (203)
Accumulated deficit ................................................. (81,582)
-------- --------
Total stockholders' equity (deficit) ................................ (4,175) 3,429
-------- --------
Total liabilities and stockholders' equity (deficit) ................ $ 6,963 $ 10,705
======== ========
The accompanying notes are an integral part of these financial statements.
38
BRIAZZ, INC.
STATEMENTS OF OPERATIONS
(in thousands, except share data)
Fiscal Years ended
-----------------------------------------------
December 28, December 29, December 30,
2003 2002 2001
----------- ----------- -----------
Sales
Retail .............................................. $ 20,839 $ 22,327 $ 22,737
Branded sales ....................................... 6,100 8,266 9,292
----------- ----------- -----------
Total sales .................................... 26,939 30,593 32,029
----------- ----------- -----------
Operating expenses
Cost of food and packaging .......................... 13,614 11,850 12,480
Occupancy expenses .................................. 4,201 4,602 4,010
Labor expenses ...................................... 6,661 10,925 11,098
Depreciation and amortization ....................... 2,561 4,352 2,686
Other operating expenses ............................ 1,809 2,434 1,849
General and administrative expenses ................. 5,309 7,546 6,837
Loss (gain) on disposal of assets ................... (111) 1,172 --
Provision for asset impairment and store closure .... 1,169 2,256 26
----------- ----------- -----------
Total operating expenses ....................... 35,213 45,137 38,986
----------- ----------- -----------
Loss from operations ...................................... (8,274) (14,544) (6,957)
----------- ----------- -----------
Other (expense) income
Interest expense .................................... (1,335) (637) (125)
Interest and other income ........................... 9 52 280
----------- ----------- -----------
(1,326) (585) 155
----------- ----------- -----------
Net loss .................................................. (9,600) (15,129) (6,802)
Accretion of dividends/amortization of discount and
beneficial conversion feature on preferred stock ......... 1,746 -- 4,318
----------- ----------- -----------
Net loss attributable to common stockholders .............. $ (11,346) $ (15,129) $ (11,120)
=========== =========== ===========
Basic and diluted net loss per share ...................... $ (1.89) $ (2.59) $ (2.86)
=========== =========== ===========
Weighted-average shares used in computing basic and diluted
net loss per share .................................... 5,987,510 5,852,362 3,889,472
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
39
BRIAZZ, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
COMMON STOCK AND
SERIES F AND G ADDITIONAL DEFERRED
PREFERRED STOCK PAID-IN CAPITAL STOCK-BASED ACCUMULATED
------------------- -------------------- COMPENSATION DEFICIT TOTAL
SHARES AMOUNT SHARES AMOUNT AMOUNT AMOUNT AMOUNT
----------------------------------------------------------------------------------
Balance at December 31, 2000 .................... -- $ -- 1 $ 2,076 $ (1,060) $(46,973) $(45,957)
Issuance of common stock, net of issuance cost .. -- -- 2,000 13,583 -- -- 13,583
Accretion of mandatorily redeemable ............. --
preferred stock ................................ -- -- -- -- -- (1,283) (1,283)
Conversion of preferred stock to common stock ... 3,816 58,081 -- -- 58,081
Beneficial conversion feature on preferred stock -- 3,034 -- -- 3,034
Amortization of discount on preferred stock ..... -- -- -- (3,034) -- -- (3,034)
Common stock issued upon exercise of stock
options ........................................ -- -- 4 6 -- -- 6
Common stock issued upon exercise of stock
warrants ....................................... -- -- 4 -- -- -- --
Deferred compensation related to the grant of
stock options .................................. -- -- -- 209 (209) -- --
Amortization of deferred compensation ........... -- -- -- -- 288 -- 288
Net loss ........................................ -- -- -- -- -- (6,802) (6,802)
----------------------------------------------------------------------------------
Balance at December 30, 2001 .................... -- -- 5,825 73,955 (981) (55,058) 17,916
Amortization of deferred compensation ........... -- -- -- -- 356 -- 356
Reversal of deferred compensation for options
forfeited ...................................... -- -- -- (422) 422 -- --
Employee stock purchase plan .................... -- -- 45 38 -- -- 38
Issuance of stock warrants ...................... -- -- -- 132 -- -- 132
Beneficial conversion feature on convertible debt -- -- -- 113 -- -- 113
Issuance of shares for convertible debt ......... -- -- 10 3 -- -- 3
Net loss ........................................ -- -- -- -- -- (15,129) (15,129)
----------------------------------------------------------------------------------
Balance at December 29, 2002 .................... -- -- 5,880 73,819 (203) (70,187) 3,429
Issuance of shares for convertible debt ......... -- -- 40 8 -- -- 8
Issuances of stock warrants and modifications of
stock warrants and convertible notes to reduce
exercise and conversion price .................. -- -- -- 145 -- -- 145
Deferred compensation related to grant of stock
options ........................................ -- -- -- 114 (114) -- --
Amortization of deferred compensation ........... -- -- -- -- 201 -- 201
Employee stock purchase plan .................... -- -- 71 17 -- -- 17
Issuance of preferred stock, net of issue costs . 9,353 1,625 -- -- -- -- 1,625
Beneficial conversion feature on preferred stock -- 1,795 -- -- -- (1,795) --
Net loss ........................................ -- -- -- -- -- (9,600) (9,600)
----------------------------------------------------------------------------------
Balance at December 28, 2003 .................... 9,353 $ 3,420 5,991 $ 74,103 $ (116) $(81,582) $ (4,175)
==================================================================================
The accompanying notes are an integral part of this financial statement.
40
BRIAZZ, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
December 28, December 29, December 30,
2003 2002 2001
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ................................................................. $ (9,600) $(15,129) $ (6,802)
Adjustments to reconcile net loss to net cash used in operating activities
Deferred compensation expense .......................................... 201 356 288
Depreciation and amortization .......................................... 2,561 4,352 2,686
Loss (gain) on disposal of assets ...................................... (111) 1,172 --
Provision for asset impairment and store closure ....................... 1,169 2,256 26
Non-cash interest expense .............................................. 1,174 304 --
Changes in operating assets and liabilities:
Accounts receivable ................................................... 217 44 75
Inventory ............................................................. 115 98 1
Prepaid expenses and other current assets ............................ 254 (318) 43
Accounts payable including amounts due to related party ............... 23 1,460 (1,880)
Accrued compensation .................................................. (421) (238) 92
Accrued and other liabilities ......................................... 445 402 (161)
Other ................................................................. -- (38) 23
-------- -------- --------
Net cash used in operating activities ................................ (3,973) (5,279) (5,609)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment ..................................... (331) (2,322) (3,755)
Other ................................................................... 133 59 --
--------
Net cash used in investing activities ................................. (198) (2,263) (3,755)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of preferred stock, net of issuance costs ............ -- -- 3,034
Proceeds from sale of common stock, net of issuance costs ............... -- -- 13,583
Proceeds from (repayment of) line-of-credit borrowings .................. (129) 129 (2,000)
Proceeds from notes payable and warrants, net of issuance costs ......... 6,103 2,574 --
Payments for debt transaction costs ..................................... (1,015) -- --
Proceeds from exercise of stock options ................................. -- -- 6
Employee stock purchase plan ............................................ 17 38 --
(Increase) decrease in restricted certificate of deposit ................ (4) 139 (126)
Change in checks in excess of bank deposits ............................. -- (597) 754
Repayment of capital lease obligation ................................... (105) (93) (95)
Repayment of notes payable .............................................. (876) (350) (154)
-------- -------- --------
Net cash provided by financing activities ............................. 3,991 1,840 15,002
-------- -------- --------
Net (decrease) increase in cash and cash equivalents .................... (180) (5,702) 5,638
Cash and cash equivalents
Beginning of period .................................................... 491 6,193 555
-------- -------- --------
End of period .......................................................... $ 311 $ 91 $ 6,193
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest ................................................. $ 84 $ 05 $ 114
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Conversion of mandatorily redeemable preferred stock to common stock ..... $ -- $ -- $ 58,081
======== ======== ========
Additions to property and equipment financed with capital
lease obligations ....................................................... $ -- $ -- $ 530
======== ======== ========
Debt converted to common stock ........................................... $ 8 -- --
======== ======== ========
Accretion of dividends, amortization of discount and
beneficial conversion feature on preferred stock ........................ $ 1,625 $ -- 4,318
======== ======== ========
The accompanying notes are an integral part of these financial statements.
41
BRIAZZ, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1. Summary of operations and significant accounting policies
Operations - BRIAZZ, INC. ("BRIAZZ" or the "Company") sells 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 cafes, 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 also close. Upon closure of the
central kitchens, the Company has contracted for the production of its products.
The Company is currently in process of moving substantially all of the
production of its products into its cafes and expects to complete this process
in the first quarter of 2004.
Fiscal Years - The Company's fiscal year ends on the last Sunday of December,
and consists of 52-or 53-weeks. There were fifty-two weeks in 2003, 2002 and
2001.
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.
Cash and cash equivalents - The Company considers all highly liquid investments
purchased with a remaining maturity of three months or less to be cash
equivalents. Restricted cash balances are not included as a component of cash
and cash equivalents.
Concentration of credit risk - Cash, cash equivalents and restricted cash are
invested in deposits with financial institutions that may, at times, exceed
federally insured limits. The Company has been dependent on a small number of
suppliers and distributors for the Company's products, including suppliers of
meat, produce, breads and soups. Additionally, the Company has been dependent on
a related-party supplier for substantially all of its products in each of the
markets where the Company's central kitchen has been closed. During the year
ended December 28, 2003, this supplier provided approximately 61% of our cost of
food and packaging.
Fair value of financial instruments - Carrying amounts reported in the balance
sheet for cash and cash equivalents, accounts receivable, restricted
certificates of deposit, accounts payable and accrued liabilities approximate
fair value because of their immediate or short-term nature. The fair value of
long-term borrowings is not considered to be significantly different than its
carrying amount because the stated rates for substantially all such debt
reflects current market rates and conditions.
Inventory - Inventory, which consists primarily of food and packaging products,
is stated at the lower of cost or market. Cost is determined by the first-in,
first-out method.
Accounts receivable - The majority of the Company's accounts receivable are due
from wholesale accounts. Credit is extended based on evaluation of a customers'
financial condition and, generally, collateral is not required. Accounts
receivable are due within 15 days and are stated at amounts due from customers
net of an allowance for doubtful accounts. Accounts outstanding longer than the
contractual payment terms are considered past due. The Company determines its
allowance by considering a number of factors, including the length of time trade
accounts receivable are past due and the Company's previous loss history. The
Company writes-off accounts receivable when they become uncollectible, and
payments subsequently received on such receivables are credited to the allowance
for doubtful accounts.
Property and equipment - Property and equipment is stated at cost. Additions and
improvements that significantly add to the productive capacity or extend the
life of an asset are capitalized. Maintenance and repairs are expensed as
incurred. Upon disposition of property and equipment, gains or losses are
reflected in the statement of operations. Depreciation is computed using the
straight-line method over five to seven years for furniture, fixtures, equipment
and vehicles, and over three years for computer software and hardware. Leasehold
improvements are amortized over the shorter of the lease term or 10 years.
Depreciable lives for specific assets are adjusted if actual lives are
determined to be shorter.
42
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 discounted future net cash flows at the lowest level for which there
are identifiable cash flows, which is at the store, 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 on undiscounted anticipated future 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 December 28, 2003 and December 29, 2002 is $0 and $157,000
respectively, representing the excess of outstanding checks over cash on deposit
at the bank on which the checks were drawn.
Income taxes - Deferred tax liabilities and assets are determined based on the
differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. A valuation allowance is established when
necessary to reduce deferred tax assets to the amounts expected to be realized.
Revenue recognition - Revenues are recognized at the point of sale at retail
locations or upon delivery of the product for box lunch, catering and wholesale
sales.
Pre-operating costs - Costs associated with opening new locations are expensed
as incurred.
Financing costs - Direct costs associated with obtaining equity financing are
recorded as a reduction of proceeds. Direct costs associated with obtaining debt
financing are deferred and charged to interest expense using the effective
interest rate method over the debt term.
Advertising and promotion - Advertising and promotion costs are expensed as
incurred. Approximately $1.0 million, $1.2 million and $480,000 were expensed in
fiscal 2003, 2002 and 2001, respectively.
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 quoted market 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 options 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 options, compensation expense is adjusted quarterly as the market
price of the Company's common stock changes when prices are in excess of the
exercise price.
Because the determination of the fair value of the Company's options is based on
assumptions such as interest rates, volatility, life, dividend yield, additional
options granted will likely be made in future periods, and due to the full
acceleration of vested and outstanding options in 2003, this pro forma
information is not likely to be representative of the pro forma effects on
reported net income or loss for future periods. 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):
43
Fiscal Years ended
-----------------------------------------------
December 28, December 29, December 30,
2003 2002 2001
--------- --------- ---------
Net loss attributable to common stockholders, as reported ..... $(11,346) $(15,129) $(11,120)
Add:
Total compensation cost included in net loss ............. 218 356 288
Deduct:
Total stock-based employee compensation expense determined
under fair value based method for all awards ......... (278) (700) (705)
-------- -------- --------
Proforma Net Loss ............................................. $(11,406) $(15,473) $(11,537)
-------- -------- --------
Loss per share:
Basic and diluted - as reported .......................... $ (1.89) $ (2.59) $ (2.86)
======== ======== ========
Basic and diluted - pro forma ............................ $ (1.90) $ (2.64) $ (2.97)
======== ======== ========
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force
No. 96-18, "Accounting for Equity Instruments that are Issued to Other Than
Employees for Acquiring or in Conjunction with Selling Goods or Services."
Compensation expense related to equity instruments issued to non-employees is
recognized as the equity instruments vest. At each reporting date, the Company
revalues the compensation. As a result, stock-based compensation expense related
to unvested equity instruments issued to non-employees fluctuates as the fair
value of the Company's common stock fluctuates.
Stock warrants - Stock warrants issued together with debt securities are
recorded as original issue discount and additional paid-in capital based on the
quoted market value at the date of issuance. The original issue discount is
reported as a reduction of the related debt on the balance sheet and is
amortized utilizing the effective interest method over the debt term. Series F
and G preferred stock have rights similar to that of stock warrants and,
accordingly, are accounted for in a similar manner.
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 for the year ended December (in thousands, except per share data):
Fiscal Years ended
-----------------------------------------------
December 28, December 29, December 30,
2003 2002 2001
--------- --------- ---------
Net loss attributable to common stockholders ... $ (11,346) $ (15,129) $ (11,120)
========= ========= =========
Weighted-average shares used in computing basic
and diluted net loss per share ........ 5,987 5,852 3,889
========= ========= =========
Basic and diluted net loss per share ........... $ (1.89) $ (2.59) $ (2.86)
========= ========= =========
Shares excluded from loss per share computation:
Options to purchase common stock .......... 6,524 1,050 908
Convertible preferred stock ............... 93,533 -- --
Convertible debt .......................... 1,113 1,869 --
Warrants to purchase common stock ......... 400 1,330 931
--------- --------- ---------
Total shares excluded ............. 101,570 4,249 1,839
========= ========= =========
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. The adoption of
SFAS No. 143 did not have a significant effect on the Company's results of
operations, financial position or cash flows.
44
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 significant impact on the Company's
results of operations, financial position or cash flows.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements of Guarantees, Including Guarantees of Indebtedness
of Others - an Interpretation of FASB Statements 5, 57, and 107 and Rescission
of FASB Interpretation No. 34" ("FIN 45"). This interpretation expands on the
existing accounting guidance and disclosure requirements for most guarantees.
The Company has not guaranteed indebtedness of others. The adoption of FIN 45
did not have a significant impact on the Company's results of operations,
financial position or cash flows.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 148 requires accounting
policy note disclosures to provide the method of stock option accounting for
each year presented in the financial statements and, for each year until all
years presented in the financial statements recognize the fair value of
stock-based compensation. The transition provisions and annual statement
disclosure requirements of SFAS No. 148 were effective for fiscal years ending
after December 15, 2002. The adoption of SFAS No. 148 did not have a significant
impact on the Company's results of operations, financial position, or cash
flows.
In January 2003, the FASB issued FASB Interpretation No. 46 "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51." ("FIN 46"). FIN 46
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity under certain conditions. The Company does not have
any involvement in variable interest entities. The FASB has published a revision
to interpretation 46 ("46R") to clarify some of the provisions of FIN 46 and to
exempt some entities from its requirements. The adoption of FIN 46 did not have
a significant impact on the Company's results of operations, financial position
or cash flows.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS No. 149"), which amends
and clarifies financial accounting and reporting for derivative instruments
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133. The Company does not own any derivative
instruments and is not engaged in hedging activities. The adoption of SFAS No.
149 did not have a significant impact on the Company's results of operations,
financial position or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS No.
150"), which clarifies the accounting for certain financial instruments with
characteristics of both liabilities and equity and requires that those
instruments be classified as liabilities in statements of financial position.
Previously, many of these financial instruments were classified as equity. SFAS
No. 150 is effective for all financial instruments entered into or modified
after May 2003 and is otherwise effective at the beginning of the first interim
period after June 15, 2003. The adoption of SFAS No. 150 did not have a
significant impact on the Company's results of operations, financial position or
cash flows.
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 $81.6 million
and a working capital deficit of $4.1 million at December 28, 2003 and is in
default on its current and long term notes payable. The Company has received
waives from all of its note holders with the exception of Laurus. The Company
must raise additional cash to continue to fund its operations. 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
revenues or 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.
While the Company has raised $1.1 million additional cash subsequent to December
28, 2003 from the sale of its debt and equity securities, it is in need of
raising additional cash by the end of the first quarter of 2004. At December 28,
2003, the Company had cash and cash equivalents of approximately $0.3 million.
The Company has used a combination of cash and cash equivalents, operating
revenues and proceeds of borrowings to meet its immediate cash needs. The
Company is attempting to conserve cash by reducing expenses and by delaying or
deferring payments to some of the Company's suppliers and on some of the
Company's leases. Poor financial results, inability to comply with the terms of
borrowings, unanticipated expenses or unanticipated opportunities that require
financial commitments could give rise to additional financing requirements
sooner than expected. The Company will need to raise additional cash to finance
its operations, as well as to enhance operations, fund any expansion, respond to
competitive pressures and repay borrowings when they become due. If the Company
raises additional funds through the issuance of equity or convertible debt
securities, the percentage ownership of existing shareholders would be reduced,
and these securities may have rights, preferences or privileges senior to those
of the Company's common stock. There can be no assurance that the Company will
be able to obtain additional financing at terms favorable to the Company, or at
all, 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 within the required timeframe on acceptable terms, the Company may
be forced to curtail operations, dispose of assets, or seek extended payment
terms. Such events would materially and adversely affect the Company's financial
position and results of operations. In the event that such steps are not
sufficient, or that Company directors and management believe that such actions
will not be sufficient, the Company may be required to discontinue its
operations.
45
Note 3. Property and equipment
Property and equipment consist of the following (in thousands):
December 28, December 29,
2003 2002
-------- --------
Leasehold improvements .................. $ 9,202 $ 9,953
Furniture, fixtures, and equipment ...... 9,940 10,810
Vehicles ................................ 1,698 1,885
-------- --------
Total property and equipment ....... 20,840 22,648
Accumulated depreciation and amortization (16,364) (14,751)
-------- --------
Property and equipment, net ............. $ 4,476 $ 7,897
======== ========
Substantially all of the Company's assets have been pledged as collateral
pursuant to terms of the Company's borrowing agreements.
Pursuant to a plan to close its four company owned central kitchens and
outsource production of the Company's branded food products, the Los Angeles and
Chicago central kitchens were closed in late 2002. The Company recorded a loss
on disposition of these facilities of approximately $1.2 million. During 2003,
the Company recorded an impairment write-down of long-lived assets of
approximately $1.2 million primarily related to certain cafe locations. These
write-downs consisted primarily of leasehold improvements and, to a lesser
extent, equipment. As a result of shortening the estimated remaining lives of
central kitchens, the Company recorded additional depreciation expense of
approximately $0.9 million in 2002.
Note 4. Notes payable to Laurus
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 at exercise prices ranging
from $1.43 to $1.95. The 14% convertible note is collateralized by all of the
Company's assets and was initially convertible into 1,041,667 shares of common
stock. In December 2002, certain terms of the 14% convertible note were amended
to, among other things, change the Fixed Conversion Price to $0.50 per share and
defer principal payments until March 2003. Additionally, in December 2002, the
Company issued to Laurus a warrant to purchase 150,000 shares of common stock at
an exercise price of $0.50 per share. In January 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. In July 2003, the terms of the note were
further amended to provide that, upon completion of a financing agreement with
Deutsche Bank London Ag ("DB"), an affiliate of Deutsche Bank, the Company would
make a $300,000 principal payment, and pay the remaining principal amount and
accrued interest, plus a $75,000 fee relating to the $300,000 prepayment, in 12
equal installments beginning in September 2003. In August 2003, the DB financing
was completed and the Company made the $300,000 payment. On October 1, 2003, the
Company was in arrears on its interest and principal payments to Laurus.
Subsequently, in October 2003 the Company received a waiver from Laurus in which
Laurus agreed to waive any defaults resulting from the late payment of the
monthly amount due October 1, 2003. In addition, Laurus agreed to postpone all
payments that would have become due and payable under the note between October
1, 2003 and November 15, 2003 to November 16, 2003 and waived any defaults and
penalties resulting from such postponement of payments. The Company has not made
any payments due under the note since October 24, 2003 and as a result the
Company is currently in default under the note with Laurus. Laurus may
accelerate the payment due under the note or take other action to enforce their
rights with respect to the amounts due. Such actions could include foreclosure
on the Company's assets or causing the Company to enter in to involuntarily
reorganization.
46
Note 5. Notes payable to shareholders and Series F and G Preferred Stock
In March 2003, the Company sold $2.0 million in secured promissory notes, Series
D Convertible Preferred Stock ("Series D Preferred Stock") and warrants to
purchase common stock to Briazz Venture, L.L.C. ("BV") pursuant to which the
Company issued a $2.0 million secured promissory note in consideration for
approximately $0.55 million in cash and conversion of the $1.45 million
principal amount of outstanding demand notes issued to Flying Food Group L.L.C.
("FFG") and its affiliates, $450,000 of which was borrowed by the Company during
January and February 2003. BV is controlled by a principal executive officer of
FFG. Proceeds from the offering were used for working capital. The Company also
issued a five-year warrant exercisable for 1,193,546 shares of its common stock
at a price per share of $0.50, and 100 shares of Series D Preferred Stock, and
granted registration rights covering the shares of common stock issuable upon
conversion of the preferred stock and exercise of the warrant. The Company
recorded the estimated fair value of warrants issued, which approximated
$20,000, as original issue discount to be amortized over the warrant term. In
August 2003, upon issuance of Series F preferred stock, the warrants were
cancelled and the unamortized balance was expensed. The Company agreed to cause
up to one person designated by FFG to be appointed to the Company's Board of
Directors, subject to increase upon receiving shareholder approval. The Company
agreed that, if the Company received shareholder approval, the Company would
cause up to five persons designated by BV to be appointed to its Board of
Directors, in accordance with the rules and regulations of Nasdaq or any
exchange on which the Company's common stock is listed. The promissory note was
secured by all of the Company's assets and bore interest at 10% per year.
Interest was payable monthly in arrears, in cash. The notes were to mature, and
all principal and accrued and unpaid interest was to become due, on March 6,
2004. The terms of the notes included certain covenants, including, among
others, restrictions on the payment of dividends, limitation on additional
indebtedness, and compliance with financial covenants.
In April 2003, the Company sold $550,000 in secured promissory notes, Series E
Convertible Preferred Stock ("Series E Preferred Stock") and warrants to
purchase common stock to Spinnaker Investment Partners L.P. ("Spinnaker"). 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
were substantially similar to the terms of the note, warrant and Series D
Preferred Stock issued to BV in March 2003. . The Company recorded the estimated
fair value of warrants issued, which approximated $17,000, as original issue
discount to be amortized over the warrant term. In August 2003, upon issuance of
Series F preferred stock, the warrants were cancelled and the unamortized
balance was expensed. 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 were used for working capital, after deduction of
expenses and a $50,000 management fee payable to Spinnaker Capital Partners,
L.L.C. In connection with the financing, Spinnaker, Laurus, BV and FFG, 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.
In May 2003, the Company entered into an agreement with DB, BV, Spinnaker
(collectively, the "Investors"), and Delafield Hambrecht, Inc. ("Delafield")
providing for the issuance of an aggregate of $6.0 million of senior secured
non-convertible promissory notes ("Senior Notes") and shares of Series F
Convertible Preferred Stock ("Series F Preferred Stock") to the Investors. In
July 2003, the Company's shareholders approved both the conversion of the Series
D and Series E Preferred Stock held by BV and Spinnaker and the proposed
financing with the Investors. As a result of this approval, the Series D and
Series E Preferred Stock became convertible into shares of the Company's common
stock and the warrants issued to BV and Spinnaker were terminated.
In August 2003, the Company issued $6.0 million of Senior Notes to DB ($3.4
million), BV ($2.0 million), Spinnaker ($.5 million), and Delafield ($0.1
million). The Company also issued to the Investors and Delafield an aggregate of
7,643,841 shares of Series F Preferred Stock that are initially convertible into
76,438,410 shares of common stock at an initial conversion price $0.10 per share
of common stock. The Series F preferred stock has no dividends or liquidation
preferences. The Senior Notes are due two years from issuance, bear interest,
payable quarterly, at LIBOR plus 1%, and are collateralized by a security
interest in all of the Company's assets pursuant to an inter-creditor agreement
among note holders and Laurus. The Senior Notes are not convertible, but the
conversion price of the Series F Preferred Stock may be satisfied by the holder
surrendering a portion of the notes for cancellation. In the event that the fair
market price of the common stock exceeds the conversion price, the Series F
Preferred Stock may also be converted pursuant to a cashless exercise feature.
The Company also granted registration rights covering the shares of common stock
issuable upon conversion of the Series F Preferred Stock, the right to name new
executive officers to be appointed by the Company, and the right to designate up
to five of the Company's directors to DB (2), BV (2) and Spinnaker (1).
47
The securities issued to DB, BV, and Spinnaker were issued in consideration of
(i) $3.4 million of cash from DB, (ii) cancellation of the Series D Preferred
Stock and $2 million of the note held by BV, and (iii) cancellation of the
Series E Preferred Stock and $0.55 million of the note held by Spinnaker,
respectively. The Company issued the securities to Delafield, made a cash
payment to Delafield of $100,000 at closing, and in October paid Delafield an
additional $100,000 in full satisfaction of a change of control fee previously
owed by the Company to Delafield. The Company used a portion of the $3.4 million
of new funds raised to repay certain existing indebtedness, including $300,000
of the amounts due to Laurus pursuant to the 14% convertible note, the
aforementioned payments of $200,000 to Delafield, $530,000 of professional fees,
including fees related to the transaction, and payment of $1.0 million owed to
FFG pursuant to the food production agreement.
The Company recorded a debt discount of approximately $1.5 million relating to
the issuance of the Series F Preferred Stock, such value being determined based
upon the estimated relative fair value of the debt and Series F Preferred Stock.
The market price of the Company's common stock exceeded the conversion price of
the Series F Preferred Stock on the date of issuance. As a result, the Company
also recorded a beneficial conversion feature in accordance with EITF 00- 27
"Application of Issue 98-5 to Certain Convertible Instruments" upon issuance of
the Series F Preferred Stock at its estimated fair value of $1.5 million. The
beneficial conversion feature is analogous to a non-cash dividend and was
immediately recognized as a return to the preferred shareholders. This
beneficial conversion feature increased the net loss to common shareholders.
In December 2003, the Company issued $1 million of Senior Notes to DB ($0.5
million), and to the Company's founder ($0.5 million). The Company also issued
an aggregate of 1,259,446 shares of Series G Preferred Stock that are initially
convertible into 12,594,460 shares of common stock at an initial conversion
price $0.10 per share of common stock. Terms of the Series G preferred stock are
substantially the same as Series F. The Senior Notes are due two years from
issuance, bear interest, payable quarterly, at LIBOR plus 1%, and are
collateralized by a security interest in all of the Company's assets pursuant to
an inter-creditor agreement among note holders and Laurus. The Senior Notes are
not convertible, but the conversion price of the Series G Preferred Stock may be
satisfied by the holder surrendering a portion of the notes for cancellation. In
the event that the fair market price of the common stock exceeds the conversion
price, the Series G Preferred Stock may also be converted pursuant to a cashless
exercise feature. The Company also granted registration rights covering the
shares of common stock issuable upon conversion of the Series G Preferred Stock.
The securities issued to DB and the Company's founder were issued in
consideration of (i) $500,000 of cash from DB and (ii) $500,000 repayment by the
Company's founder of amounts owed by the Company pursuant to its former note
payable to US Bank.
The Company recorded a debt discount of approximately $246,000, its estimated
relative fair value, relating to the issuance of the Series G Preferred Stock.
The market price of the Company's common stock exceeded the conversion price of
the Series G Preferred Stock on the date of issuance. As a result, the Company
also recorded a beneficial conversion feature in accordance with EITF 00- 27
"Application of Issue 98-5 to Certain Convertible Instruments" upon issuance of
the Series G Preferred Stock at its estimated relative fair value of $246,000.
The beneficial conversion feature is analogous to a non-cash dividend and was
immediately recognized as a return to the preferred shareholders. This
beneficial conversion feature increased the net loss to common shareholders.
Subsequently, in March 2004 the Company received a waiver from DB, BV, FFG,
Spinnaker, Delafield, and Victor D. Alhadeff in which they agreed to waive any
defaults with respect to non-payment of interest until June 30, 2004 and agreed
to delay payment of any and all accrued but unpaid interest to July 5, 2004, and
waived any defaults and penalties resulting from the postponement of payments.
48
Notes payable consist of the following (in thousands):
December 28, December 29,
2003 2002
-------- --------
Demand notes payable to related party . $ -- $1,025
14% convertible notes ................. 643 890
Senior notes payable to related parties 5,563 --
Note payable to bank .................. -- 500
-------- --------
Total notes payble .................... $6,206 $2,415
======== ========
The senior notes payable to related parties is all due in the fiscal year ended
2005.
Note 6. Mandatorily redeemable convertible preferred stock and stockholders'
equity
The Company's initial public offering of 2 million shares of common stock was
effective May 1, 2001, and the offering closed on May 7, 2001. Net proceeds
after deduction of expenses totaled approximately $13.6 million.
Immediately prior to the closing date of the initial public offering, all of the
redeemable convertible preferred stock outstanding automatically converted into
common stock at their respective conversion rates. The conversion resulted in
the issuance of approximately 3,816,000 shares of common stock. Mandatorily
redeemable convertible preferred stock activity from January 1, 2001 through May
7, 2001, the closing date of the Company's initial public offering was as
follows (in thousands):
Series A Series B Series C
---------------------------- ----------------- -------------------
Shares Amount Shares Amount Shares Amount Total
-------- -------- -------- -------- -------- -------- --------
Balance at January 1, 2001 ................................. 2 $ 10,984 3 $ 23,104 3,121 $ 19,521 $ 53,609
Issuance of Series C preferred stock, net of issuance costs -- -- -- -- 508 3,034 3,034
Issuance of Series C preferred stock for services ......... -- -- -- -- 19 154 154
Accretion of mandatorily redeemable preferred stock ........ -- 226 -- 493 -- 565 1,284
Conversion of preferred stock to common stock .............. (2) (11,210) (3) (23,597) (3,648) (23,274) (58,081)
-------- -------- -------- -------- -------- -------- --------
Balance at December 30, 2001 ............................... -- $ -- -- $ -- -- $ -- $ --
======== ======== ======== ======== ======== ======== ========
In connection with a $3 million private placement offering of shares of Series C
preferred stock in January and February 2001, the Company issued approximately
500,000 shares at $6.00 per share. At the dates of such issuances, the Company
determined that the fair value of its common stock exceeded the conversion price
of the convertible preferred stock. As a result, the Company recorded a
beneficial conversion feature in accordance with EITF 00- 27 "Application of
Issue 98-5 to Certain Convertible Instruments" upon issuance of the preferred
stock as the difference between conversion price and the fair value of common
stock multiplied by the number of shares into which the security was
convertible. The beneficial conversion feature is analogous to a dividend and
was being recognized as a return to the preferred shareholders over the period
from date of issuance to the redemption date using the effective interest
method. As of May 1, 2001, the beneficial conversion feature of approximately $3
million was fully amortized upon conversion of Series C preferred stock to
common stock. This beneficial conversion feature was recognized as a dividend,
increasing the net loss attributable to common stockholders.
Warrants outstanding to purchase 907,240 shares of Series C preferred stock were
converted into warrants to purchase 947,817 shares of common stock on May 7,
2001. In February 2001, the Company modified the warrants to remove the
automatic expiration date upon an initial public offering, thereby allowing the
warrant holders the ability to exercise the warrants through the original
expiration date. This modification initially resulted in a non-cash charge to
expense of approximately $635,000 at the time of the initial public offering,
related to approximately 100,000 warrants held by an officer of the Company.
This charge to expense was reversed later during 2001 when the market price of
the Company's common stock dropped to a level below the exercise price of $5.74.
Through December 28, 2003, the market price of Company's stock remained below
the exercise price and no additional expense has been recorded. During 2003, all
of these outstanding warrants expired.
49
Note 7. 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, 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. Option expiration dates range from January 2006 to November 2012.
The following summarizes stock option activity for the three fiscal years ended
December 28, 2003 (shares in thousands, except exercise price):
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
------ --------------
Options outstanding, January 1, 2001 ................. 521 $8.83
Options granted ................................. 465 4.13
Options exercised ............................... (4) 1.56
Options forfeited ............................... (74) 5.45
------ -----
Options outstanding, December 30, 2001 ............... 908 7.00
Options granted ................................. 235 1.01
Options forfeited ............................... (93) 3.63
------ -----
Options outstanding, December 29, 2002 ............... 1,050 5.96
Options granted ................................. 5,918 .16
Options forfeited ............................... (444) 1.46
------ -----
Options outstanding, December 28, 2003 ............... 6,524 $ .86
The fair value of options granted were estimated using an option-price model
with the following assumptions:
2003 2002 2001
------- -------- --------
Risk-free interest rate ...... 3.7% 4.0-5.2% 4.7-5.3%
Expected lives ............... 7 years 7 years 7 years
Expected volatility .......... 45% 45% 45%
Weighted-average fair value and exercise price of options granted were as
follows during years ended December:
WEIGHTED-AVERAGE
-------------------------------------------------------------------------------
EXERCISE PRICE FAIR VALUE
----------------------------------------- ------------------------------------
2003 2002 2001 2003 2002 2001
-------- -------- -------- -------- -------- --------
Exercise price at grant
Lower than market $ -- $ -- $ 4.67 $ -- $ -- $ 7.42
Equal to market $ 0.16 $ 1.01 $ 4.10 $ 0.08 $ 0.55 $ 2.25
The following table summarizes information about options outstanding at December
28, 2003 (shares in thousands):
50
Options outstanding Options exercisable
--------------------------------------------- ------------------------------------
Weighted- Weighted-
Remaining average average
contractual exercise exercise
Exercise Price Shares life price Shares price
- ----------------- ------------ ------------- ---------------- ------------ ----------------------
$ 0.16 5,918 9.9 $ 0.16 708 $ 0.16
0.69 52 8.6 0.69 52 0.69
0.95 - 1.00 8 7.9 0.97 8 0.97
1.26 58 8.3 1.26 58 1.26
1.50 - 1.66 227 5.6 1.51 227 1.51
2.34 2 7.6 2.34 2 2.34
4.70 - 6.00 257 7.4 4.95 257 4.95
$600 - $3,900 2 2.6 - 5.1 1,819.95 2 1,819.95
----------- ------------
6,524 1,314
============ ============
During fiscal 2001 and 2000, the Company granted stock options to employees
(which originally 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.
Deferred stock compensation is being amortized generally over a four-year
vesting period, until March 2003, when the Company accelerated the vesting of
these stock options and the remaining deferred stock compensation was
recognized. As a result of these grants, the Company recorded deferred stock
compensation of approximately $218,000, $356,000 and $209,000 in fiscal 2003,
2002 and 2001, respectively.
In July 2003, the Company's Articles of Incorporation were amended to increase
the authorized shares of common stock to 250 million shares, a new stock
incentive plan was adopted that authorizes the issuance of 12 million shares of
common stock upon exercise of stock options or upon the grant of restricted
stock, and the Company agreed to issue to certain new and existing members of
Company management shares of Series F Preferred Stock convertible into
approximately 5.3 million shares of Company common stock and stock options
exercisable for approximately 5.4 million shares of Company common stock. As of
December 28, 2003, the Company had issued to certain new and existing members of
Company management shares of Series F Preferred Stock convertible into 4.5
million shares of Company common stock and stock options exercisable for
approximately 5.4 million shares of Company common stock.
Note 8. Leases
The Company leases cafes, central kitchens and office facilities and certain
office equipment under terms of operating leases, which typically cover five
years, some of which have options for an additional five year term. Rents are
either fixed base amounts, variable amounts determined as a percentage of sales,
or a combination of base and percentage of sales. Lease provisions also require
additional payments for maintenance and other expenses. Rent is expensed on a
straight-line basis over the term of the lease. Differences between the amount
paid and expensed is recorded as a deferred credit. Accrued rent includes
$476,000 and $391,000 of deferred rent at December 28, 2003 and December 29,
2002, respectively. Rent expense approximated $2.7 million, $3.1 million and
$2.6 million, during fiscal 2003 and 2002 and 2001, respectively. The Company
also leases certain of its vehicles pursuant to capital leases. Minimum annual
commitments for leases at December 28, 2003 are as follows (in thousands):
Operating Capital
-------------- -------------
2004 $ 2,008 $ 139
2005 1,990 113
2006 1,593 53
2007 1,039 29
2008 810 -
------------- -------------
$7,440 334
==============
Less: amount representing interest (96)
---------------------------------------------------------------------
Present value of future minimum lease payments 238
Current (100)
-------------
Non-current $ 138
=============
51
Note 9. Income taxes
No provision for income taxes has been recorded in fiscal 2003, 2002 and 2001
due to losses incurred. A valuation allowance has been recorded against deferred
tax assets as of December 28, 2003 and December 29, 2002, as it has not been
determined that it is more likely than not that these deferred tax assets will
be realized. As of December 28, 2003, the Company has net operating loss
carryforwards of approximately $64 million for federal income tax purposes,
which expire beginning 2011 through 2023. As a result of ownership changes, the
Company may be subject to annual limitations on the amount of net operating loss
which can be utilized in any tax year.
The income tax provision reconciled to the tax computed at the statutory federal
rate was as follows (in thousands):
December 28, December 29, December 30,
2003 2002 2001
-----------------------------------------------
Tax benefit at statutory rate $ (3,264) $ (5,144) $ (2,313)
State income tax benefit (288) (472) (204)
Non-deductible and other expenses 2 250 0
Other 177 - (569)
Increase in valuation allowance 3,373 5,366 3,086
-----------------------------------------------
$ - $ - $ -
===============================================
Deferred income taxes consist of the following (in thousands):
December 28, December 29,
2003 2002
-------------------------------
Excess book depreciation and amortization over tax $ 1,656 $ 1,689
Impairment provision 1,235 835
Stock compensation expense 462 381
Net operating loss carryforwards 23,068 20,077
Other 156 222
-------------------------------
26,577 23,204
Less: Valuation allowance (26,577) (23,204)
-------------------------------
Net deferred tax assets $ - $ -
===============================
Note 9. Segment information
The Company has managed its business through four reportable segments: Retail,
Branded Sales, Kitchens and General and Administrative. Retail consists of sales
generated through the Company's cafes. 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
reportable segment (amounts in thousands):
52
FISCAL YEARS ENDED
------------------------------------------
DECEMBER 28, DECEMBER 29, DECEMBER 30,
2003 2002 2001
------------ ------------ ------------
Retail
Net Sales ................................................................. $ 20,839 $ 22,327 $ 22,737
Cost of food and packaging ................................................ (9,743) (8,136) (8,266)
-------- -------- --------
11,096 14,191 14,471
Cost of operations ........................................................ (12,205) (14,413) (12,117)
Provision for asset impairment, store closure and loss on disposal ........ (1,102) (2,342) (26)
-------- -------- --------
Income (loss) from operations ............................................. $ (2,211) $ (2,564) $ 2,328
======== ======== ========
BRANDED SALES
BOX LUNCH, CATERING AND VENDING
Net Sales ........................................................ $ 3,310 $ 4,864 $ 5,471
Cost of food and packaging ....................................... (1,524) (1,510) (1,875)
-------- -------- --------
1,786 3,354 3,596
-------- -------- --------
WHOLESALE AND GROCERY
Net Sales ........................................................ 2,790 3,402 3,821
Cost of food and packaging ....................................... (2,037) (1,779) (1,917)
-------- -------- --------
753 1,623 1,904
-------- -------- --------
TOTAL BRANDED SALES
Net Sales ........................................................ 6,100 8,266 9,292
Cost of food and packaging ....................................... (3,561) (3,289) (3,792)
-------- -------- --------
2,539 4,977 5,500
Cost of operations ............................................... (2,361) (4,346) (4,231)
Provision for asset impairment, store closure and loss on disposal 2 (13) --
-------- -------- --------
Income from operations ........................................... $ 155 $ 618 $ 1,269
======== ======== ========
KITCHENS
Unallocated cost of food and packaging .................................... $ (310) $ (425) $ (422)
Unallocated cost of operations ............................................ (827) (4,685) (3,295)
Provision for asset impairment, store closure and loss on disposal ........ (7) (1,073) --
-------- -------- --------
Loss from operations ...................................................... $ (1,144) $ (6,183) $ (3,717)
======== ======== ========
GENERAL AND ADMINISTRATIVE
Loss from operations ...................................................... $ (5,148) $ (6,415) $ (6,837)
======== ======== ========
TOTAL
Net Sales ................................................................. $ 26,939 $ 30,593 $ 32,029
Cost of food and packaging ................................................ (13,614) (11,850) (12,480)
-------- -------- --------
13,325 18,743 19,549
Cost of operations ........................................................ (20,541) (29,859) (26,480)
Provision for asset impairment, store closure and loss on disposal ........ (1,058) (3,428) (26)
-------- -------- --------
Loss from operations ...................................................... $ (8,274) $(14,544) $ (6,957)
======== ======== ========
Note 11. Commitments and contingencies
The Company is subject to various legal proceedings and claims that arise in the
ordinary course of business. Company management and legal counsel 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.
Note 12. Related Parties
As further described in Note 5, in March and April 2003, the Company issued
securities to BV and Spinnaker, such that, subject to shareholder approval, FFG
and Spinnaker could own approximately 66.7% and 16.7% respectively of the
Company's common stock on a fully-diluted, post conversion basis. Further, as
described in Note 5, in August 2003, the Company cancelled securities previously
issued to BV and Spinnaker and issued new securities to DB, BV, and Spinnaker.
Additionally, in December 2003, as described in Note 5, the Company issued new
securities to DB such that DB, BV, and Spinnaker could own approximately 48%,
25%, and 6%, respectively, of the Company's common stock on a fully-diluted,
post conversion basis.
53
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 by either party if the other party becomes insolvent.
Purchases from FFG approximated $8.30 million and $.45 million for the fiscal
years ended December 28, 2003 and December 29, 2002, respectively. Included in
accounts payable due to related party at December 28, 2003 and December 29, 2002
is $995,000 and $200,000, respectively due to FFG.
Note 13. Subsequent Events
On January 15, 2004, Briazz, Inc. entered into an Amended and Restated
Securities Purchase Agreement (the "Securities Purchase Agreement") with DB
Advisors, LLC, Flying Food Group, LLC, Dorsey & Whitney, LLP, and Victor
Alhadeff, the Company's Chairman, (collectively, the "Investors") for a
financing totaling $1.73 million, which includes $1.1 million of cash and $0.63
million conversion of accounts payable. Pursuant to the Securities Purchase
Agreement, the Company has agreed to sell a senior secured non-convertible two
year notes in the amount of $365,000 and 467,464 shares of Series G convertible
preferred stock to DB Advisors, LLC for cash proceeds of approximately $365,000.
Additionally the Company's Chairman Victor Alhadeff purchased a $235,000 senior
secured non-convertible two year note and 301,088 shares of Series G convertible
preferred stock for cash proceeds of approximately $235,000. In this same
offering, Dorsey & Whitney LLP, the Company's legal counsel agreed to convert
$130,000 of its accounts receivable for legal services to a $130,000 senior
secured non-convertible two year note and 23,964 shares of Series G convertible
preferred stock. These notes have a maturity date of January 15, 2006. Pursuant
to the same Securities Purchase Agreement, the Company sold to Flying Food
Group, LLC and DB Advisors, LLC each a $500,000 senior secured non-convertible
note that matures on March 31, 2004, unless extended by either party at their
option, and 612 shares of Series G convertible preferred stock. Either party,
upon mutual agreement with the Company, has the right to extend the maturity of
such party's note to January 15, 2006. If and when either of these notes is
extended the Company will issue an additional 640,000 shares of Series G
convertible preferred stock for each note converted. All notes discussed above
will bear interest at one month LIBOR rate plus 1%, and are secured by a
security interest in the Company's assets. The Series G convertible preferred
stock is convertible into shares of common stock at an exercise price of $0.10
per common share.
On March 22, 2004, pursuant to the expiration of a license agreement, the
Company closed two cafes in the Seattle market.
Note 14. Quarterly financial information (unaudited)
Summarized quarterly financial information in fiscal years 2003 and 2002 is as
follows (in thousands except per share data):
- ------------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth
- ------------------------------------------------------------------------------------------------------------------------------
2003
Sales $ 6,961 $ 6,839 $ 6,645 $ 6,494
Loss from operations (b) (2,391) (3,335) (1,458) (1,090)
Net loss (2,543) (3,646) (1,954) (1,455)
Net loss per common share - basic and diluted $ (0.43) $ (0.61) $ (0.58) $ (0.27)
- ------------------------------------------------------------------------------------------------------------------------------
2002
Sales $ 7,438 $ 8,109 $ 7,774 $ 7,272
Loss from operations (a) (2,207) (2,410) (4,650) (5,278)
Net loss (2,185) (2,527) (4,762) (5,656)
Net loss per common share - basic and diluted $ (0.37) $ (0.43) $ (0.81) $ (0.96)
- ------------------------------------------------------------------------------------------------------------------------------
(a) The third quarter of 2002 includes a $2.2 million provision primarily
for asset impairment relating to cafes. The fourth quarter of 2002
includes a $1.2 million loss on disposal for the closure of Los Angeles
and Chicago central kitchens, as well as a $0.9 million depreciation
expense as a result of shortening the lives of Seattle and San
Francisco kitchens.
(b) The second quarter of 2003 includes a $1.1 million provision, primarily
for asset impairment relating to certain cafes.
54
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
On December 17, 2003, Briazz, Inc. (the "Company") dismissed
PricewaterhouseCoopers LLP ("PwC") as the independent accountants for the
Company, advising PwC that the Audit Committee of the Company's Board of
Directors approved the selection of Grant Thornton LLP as the independent
accountants of the Company on December 17, 2003.
The reports of PwC on the Company's financial statements for the years ended
December 29, 2002 and December 30, 2001 contained no adverse opinion or
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope, or accounting principle, except that the report issued by PwC in
connection with the Company's financial statements for the these years included
an explanatory paragraph that contained a reference to the substantial doubt
that existed regarding the Company's ability to continue as a going concern.
In connection with its audits of the Company's financial statements as of
December 29, 2002 and December 30, 2001 and for the years then ended and through
December 17, 2003, there have been no disagreements with PwC on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements if not resolved to the satisfaction of
PwC would have caused them to make reference thereto in their report on the
Company's financial statements for such years.
Other than as noted in the next two paragraphs, during the years ended December
29, 2002 and December 30, 2001 and through December 17, 2003, there have been no
reportable events (as defined in Regulation S-K Item 304(a)(1)(v)).
On May 13, 2003, PwC advised management and the Audit Committee that a
reportable condition existed. This reportable condition was the result of a
significant deficiency as defined in Statement on Auditing Standards No. 60,
Communication of Internal Control Related Matters Noted in an Audit.
The significant deficiency is the result of an aggregation of factors including
the following:
o The Company was operating without a full time CFO and an experienced
public company controller, which resulted in an accounting staff that
did not have the level of experience necessary for a public Company.
The Company was relying on third party contractors to provide the
necessary expertise to prepare GAAP and SEC reports thus resulting in
no member of management having adequate skills for effective control
mechanisms. In addition, the Company internally lacked an adequate
number of accounting personnel to allow for better segregation of
duties and to adequately review worked performed.
o The routine financial closes were slower than most public companies and
the timing for quarterly review and filing is tight.
o The Sarbanes-Oxley 302 compliance process is not well supported by
sub-certifications or well documented policies and procedures.
o The Company does not have an internal audit function, which increases
the burden on management and the board of directors.
Management and the Audit Committee have considered this communication and steps
are being taken to address the points raised. These steps include increasing the
amounts and frequencies of account reconciliations, the hiring of qualified
external financial consultants to evaluate and recommend enhancements to the
Company's internal control system and a closer monitoring of the Company's
financial results by the Audit Committee of the Board of Directors. In addition,
the Company has implemented a more formal budgeting process that allows for more
effective monitoring of the Company's operations and financial results. PwC has
informed the Company that the existence of the reportable condition means
internal controls necessary to develop reliable financial statements did not
exist at that time.
The Company requested that PwC furnish it with a letter addressed to the
Securities and Exchange Commission stating whether or not it agrees with the
above statements and such letter of agreement was filed as Exhibit 16 to
Amendment No. 1 to Form 8-K filed on January 8, 2004.
Item 9a. Controls and Procedures
Evaluation of Disclosure Controls and Procedures - Under the supervision and
with the participation of the Company's management, including the Company's
Chief Executive Officer and Chief Financial Officer, the Company evaluated the
effectiveness of the Company's disclosure controls and procedures (as defined in
Rule 13a-14(c) under the Exchange Act) as of December 28, 2003 (the "Evaluation
Date"). Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that, as of the Evaluation Date, the Company's
disclosure controls and procedures were effective in timely alerting them to the
material information relating to the Company required to be included in the
reports that the Company files or submits under the exchange act. A control
system, no matter how well designed, cannot provide absolute assurance that the
objectives of the control system are met, and no evaluation of controls can
provide absolute assurance that all control issues of fraud, if any, within a
company have been detected.
Changes in Internal Controls - There were no significant changes made in the
Company's internal controls during the fourth fiscal quarter of 2003 or, to the
Company's knowledge, in other factors that could significantly affect these
controls subsequent to the Evaluation Date.
55
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information with respect to our directors and executive officers is hereby
incorporated by reference from our proxy statement, under the caption "Election
of Directors and Management Information," for our 2003 annual meeting of
shareholders to be filed pursuant to Regulation 14A promulgated by the
Securities and Exchange Commission under the Securities Exchange Act of 1934,
which proxy statement is anticipated to be filed no later than 120 days after
the end of our fiscal year ended December 28, 2003.
In March of 2004, the Company adopted a code of ethics for its Chief Executive
and Senior Financial officers. This code of ethics is attached hereto as an
exhibit.
Item 11. Executive Compensation.
There is incorporated herein by reference the information required by this Item
to be included in the 2003 Proxy Statement under the caption "Executive
Compensation" which will be filed with the Securities and Exchange Commission no
later than 120 days after the close of the fiscal year ended December 28, 2003.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
There is incorporated herein by reference the information required by this Item
to be included in the 2003 Proxy Statement under the caption "Voting Securities
and Principal Shareholders" which will be filed with the Securities and Exchange
Commission no later than 120 days after the close of the fiscal year ended
December 28, 2003.
Item 13. Certain Relationships and Related Transactions and Related Shareholder
Matters.
There is incorporated herein by reference the information required by this Item
to be included in the 2003 Proxy Statement under the caption "Certain
Relationships and Related Transactions" which will be filed with the Securities
and Exchange Commission no later than 120 days after the close of the fiscal
year ended December 28, 2003.
Item 14. Principal Accountant Fees and Services
There is incorporated herein by reference the information required by this Item
to be included in the 2003 Proxy Statement under the caption "Principal
Accountant Fees and Services" which will be filed with the Securities and
Exchange Commission no later than 120 days after the close of the fiscal year
ended December 28, 2003.
56
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Financial Statements. The following financial statements of Registrant and
the Report of Independent Accountants thereon are included herewith in Item
8 above.
Page
------
Report of Independent Accountants 36
Balance Sheets as of December 28, 2003 and December 29, 2002 38
Statements of Operations for the years ended December 28, 2003,
December 29, 2002 and December 30, 2001 39
Statement of Stockholders' Equity (Deficit) for the years ended
December 28, 2003, December 29, 2002 and December 30, 2001 40
Statements of Cash Flows for the years ended December 28, 2003,
December 29, 2002 and December 30, 2001 41
Notes to the Financial Statements 42
(b) Reports on Form 8-K
The Company filed a Form 8-K on December 11, 2003 to report borrowings from DB
and Victor D. Alhadeff.
The Company filed a Form 8-K on December 24, 2003 to report a change in the
Company's Certified Public Accountants.
(c) Exhibits
Exhibit
Number Description
- ------ -----------
3.1(2) Amended and Restated Articles of Incorporation.
3.1.1(5) Articles of Amendment filed March 5, 2003 (including designation
of Series D Convertible Preferred Stock).
3.1.2(6) Articles of Amendment filed April 10, 2003 (including designation
of Series E Convertible Preferred Stock).
3.1.3(9) Articles of Amendment filed July 30, 2003 (including designation
of Series F Convertible Preferred Stock).
3.1.4 Articles of Amendment filed December 10, 2003 (including
designation of Series G Convertible Preferred Stock).
3.2(5) Amended and Restated Bylaws.
4.1(2) Specimen Stock Certificate for Common Stock.
4.2(9) Specimen Stock Certificate for Series F Convertible Preferred
Stock.
5.1 Opinion of counsel. 10.1(1)(2) 1996 Amended Stock Option Plan.
10.2(1)(2) Form of Option Agreement (1996 Plan - Fresh Options prior to
February 2001).
10.3(1)(2) Form of Option Agreement (1996 Plan - other options prior to
February 2001).
10.4(1)(2) 2001 Employee Stock Purchase Plan.
10.5(2) Form of Warrant (Series C Convertible Preferred Stock financing).
10.6(1)(2) Employment Agreement between BRIAZZ and Charles William Vivian
dated July 14, 1999.
10.8(2) Form of Registration Rights Agreement between BRIAZZ and certain
of our shareholders dated 10.7(2) August 15, 1997, as amended.
Agreement between BRIAZZ and Stusser Realty Group Limited
Partnership dated January 1998.
10.9(2) Sublease between BRIAZZ and Stusser Electric Company regarding
3901 7th Avenue South, Seattle, WA dated February 6, 1998.
10.10(2) Sublease Amendment between BRIAZZ and Stusser Electric Company
regarding 3901 7th Avenue South, Seattle, WA dated August 28,
2000.
10.11(9) Sublease Agreement between BRIAZZ and Norstar Specialty Foods
Inc. regarding 3901 7th Avenue South, Seattle, WA dated March 7,
2003.
10.12(2) Lease between BRIAZZ and Mission-Taylor Properties regarding 225
Mendell St., San Francisco, CA dated June 28 1996.
10.13(2) Amendment to Lease between BRIAZZ and Mission-Taylor Properties
regarding 225 Mendell St., San Francisco, CA dated May 25, 2000.
10.14(2) Lease between BRIAZZ and Time Realty Investments, Inc. regarding
200 Center St., El Segundo, CA dated December 15, 1997.
10.15(5) Surrender of Possession and Termination of Lease Agreement dated
December, 2002 regarding lease between BRIAZZ and Time Realty
Investments, Inc. regarding 200 Center St., El Segundo, CA dated
December 15, 1997.
10.16(2) Industrial Building Lease between BRIAZZ and Walnut Street
Properties, Inc. regarding 1642 Lake Street, Chicago, IL dated
April 7, 1997.
10.17(1)(2) Form of Option Agreement (1996 Plan - all options since February
2001).
10.18(2) Noncompetition Agreement between BRIAZZ and Victor D. Alhadeff
dated October 18, 1996.
10.19(3) Convertible Note made by BRIAZZ in favor of Laurus Master Fund,
Ltd. dated June 18, 2002 in the principal amount of $1,250,000.
10.20(3) Common Stock Purchase Warrant issued by BRIAZZ to Laurus Master
Fund, Ltd. dated June 18, 2002.
10.21(3) Security Agreement made by BRIAZZ in favor of Laurus Master Fund,
Ltd. dated June 18, 2002.
10.22(5) Allonge dated December 2, 2002 to the Convertible Note issued by
the Company to Laurus Master Fund, Ltd. on June 18, 2002.
10.24(5) Common Stock Purchase Warrant issued by BRIAZZ to Laurus Master
Fund, Ltd. dated December 2, 2002.
10.25(5) Allonge dated January, 2003 to the Convertible Note issued by
BRIAZZ to Laurus Master Fund, Ltd. on June 18, 2002.
10.26(5) Allonge dated as of February 26, 2003 to the Convertible Note
issued by BRIAZZ to Laurus Master Fund, Ltd. on June 18, 2002.
10.27(5) Allonge dated as of February 26, 2003 to the Warrant issued by
BRIAZZ to Laurus Master Fund, Ltd. on June 18, 2002.
10.28(9) Letter Agreement dated as of July 31, 2003 between BRIAZZ and
Laurus Master Fund, Ltd. Amendment dated as of July 31, 2003 to
the Convertible Note issued by BRIAZZ to Laurus
10.29(9) Master Fund, Ltd. on June 18, 2002.
10.30(4) Form of Secured Convertible Demand Note used in October 2002.
10.31(5) Form of Secured Convertible Demand Note used in December 2002 and
January 2003.
10.32(5) Food Production Agreement between BRIAZZ and Flying Food Group,
L.L.C. dated December 1, 2002
10.33(5) Amended Security Agreement between BRIAZZ, Flying Food Group,
L.L.C. and New Management, Ltd., dated December 3, 2002.
10.34(5) Amended and Restated Purchase Agreement between BRIAZZ and Briazz
Venture, L.L.C., dated March 5, 2003.
10.35(5) $2,000,000 Senior Secured Note issued by BRIAZZ in favor of
Briazz Venture, L.L.C., dated March 6, 2003.
10.36(5) Warrant to purchase 1,193,546 shares of Common Stock issued by
BRIAZZ to Briazz Venture, L.L.C. dated March 6, 2003.
10.37(5) Amendment dated March 6, 2003 between BRIAZZ and Briazz Venture,
L.L.C. to Security Agreement dated December 3, 2002.
10.38(5) Voting Agreement between Briazz Venture, L.L.C. and Victor D.
Alhadeff, dated as of March 6, 2003.
10.39(5) Registration Rights Agreement between BRIAZZ and Briazz Venture,
L.L.C., dated March 6, 2003.
10.40(6) Purchase agreement between BRIAZZ and Spinnaker Investment
Partners, L.P., dated April 10, 2003
10.41(6) $550,000 Senior Secured Note issued by BRIAZZ in favor of
Spinnaker Investment, L.P., dated April 10, 2003
10.42(6) Warrant to purchase 1,193,546 shares of Common Stock issued by
BRIAZZ to Spinnaker Investment Partners, L.P., dated April 10,
2003
57
10.43(6) Amended and Restated Security Agreement by and among BRIAZZ,
Briazz Venture, L.L.C. and Spinnaker Investment Partners, L.P.,
dated April 10, 2003
10.44(6) Amended and Restated Agreement Between Creditors by and among
BRIAZZ, Laurus Master Fund, Ltd., Spinnaker Investment Partners,
L.P. and Flying Food Group L.L.C. and any of its affiliates,
including but not limited to Briazz Venture, L.L.C., dated April
10, 2003
10.45(6) Amended and Restated Registration Rights Agreement by and among
BRIAZZ, Spinnaker Investment Partners, L.P. and Flying Food Group
L.L.C. and any of its affiliates, including but not limited to
Briazz Venture, L.L.C., dated April 10, 2003
10.46.1(7) Securities Purchase Agreement by and among BRIAZZ, Deutsche Bank
London Ag, Briazz Venture, L.L.C., Spinnaker Investment Partners,
L.P. and Delafield Hambrecht, Inc. dated May 28, 2003.
10.46.2(8) Amendment date August 1, 2003 to Securities Purchase Agreement by
and among BRIAZZ, Deutsche Bank London Ag, Briazz Venture,
L.L.C., Spinnaker Investment Partners, L.P. and Delafield
Hambrecht, Inc., dated May 28, 2003
10.47(8) Form of Note issued on August 1, 2003 to each of Deutsche Bank
London, Ag, Briazz Venture, L.L.C., Spinnaker Investment
Partners, L.P. and Delafield Hambrecht, Inc.
10.48(8) Security Agreement dated August 1, 2003 among BRIAZZ, Deutsche
Bank London Ag and Flying Food Group, L.L.C.
10.49(8) Intercreditor Agreement dated August 1, 2003, among BRIAZZ,
Laurus Master Fund, Ltd., Deutsche Bank London Ag, Flying Food
Group, L.L.C., Briazz Venture, L.L.C., Spinnaker
10.50(8) Registration Right Agreement dated August 1, 2003 among BRIAZZ,
Laurus Master Fund, Ltd., Deutsche Bank London Ag, Briazz
Venture, L.L.C., Spinnaker Investment Partners, L.P., and
Delafield Hambrecht, Inc.
10.51(8) Letter Agreement dated August 1, 2003 between BRIAZZ and
Delafield Hambrecht, Inc.
10.52(9) 2003 Stock Plan
10.53.1 Securities Purchase Agreement by and among BRIAZZ, DB Advisors,
LLC, and Victor D. Alhadeff dated December 10, 2003.
10.53.2 Amendment date January 15, 2004 to Securities Purchase Agreement
by and among BRIAZZ, DB Advisors, LLC, Flying Food Group, LLC,
Victor D. Alhadeff, Dorsey & Whitney LLP dated December 10, 2003
10.54.1 Form of Note issued on December 10, 2003 to each of DB Advisors,
LLC, and Victor D. Alhadeff and on January 15, 2004 to each of DB
Advisors, LLC, Flying Food Group, LLC, Dorsey & Whitney LLP
10.54.2 Form of Note issued on January 15, 2004 to each of DB Advisors,
LLC, and Flying Food Group, LLC,
10.55 First Amendment to Security Agreement dated August 1, 2003, by
and between BRIAZZ, Deutsche Bank London Ag, Briazz Venture,
L.L.C., and Spinnaker Investment Partners, L.P. dated December
10, 2003.
10.56 First Amendment to Intercreditor Agreement dated August 1, 2003,
by and between BRIAZZ, Laurus Master Fund, Ltd., Deutsche Bank
London Ag, Flying Food Group, L.L.C., Briazz Venture, L.L.C.,
Spinnaker dated December 10, 2003
10.57 First Amendment to Registration Right Agreement dated August 1,
2003 by and between BRIAZZ, and Deutsche Bank London Ag, dated
December 10, 2003
14.1 Code of Conduct For Chief Executive and Senior Financial Officers
16.1(10) Letter from certifying accountants dated February 12, 2004
23.1 Consent of Independent Accountants
23.2 Consent of Independent Accountants
31.1 Certification of Chief Executive Officer required by Rule
13a-14(a) or Rule 15d-14(a)
31.2 Certification of Chief Financial Officer required by Rule
13a-14(a) or Rule 15d-14(a)
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C
Section 1350 as adopted Pursuant to section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C
Section 1350 as adopted Pursuant to section 906 of the
Sarbanes-Oxley Act of 2002
58
(1) Indicates management contract.
(2) Incorporated by reference to our registration statement on Form S-1
(No. 333-54922).
(3) Incorporated by reference to our Form 8-K filed on July 20, 2002.
(4) Incorporated by reference to our Form 10-Q for the quarter ended
September 29, 2002.
(5) Incorporated by reference to our Form 10-K for the year ended December
29, 2002.
(6) Incorporated by reference to our Form 8-K filed on April 14, 2003.
(7) Incorporated by reference to our Schedule 14A filed on June 26, 2003.
(8) Incorporated by reference to out Form 8-K filed on August 11, 2003.
(9) Incorporated by reference to our Form 10-Q for the quarter ended June
29, 2003.
(10) Incorporated by reference to our Form 8-K filed on December 24, 2003.
59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, BRIAZZ, Inc. has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
BRIAZZ, INC.
Date: March 29, 2004. By: /s/ Milton Liu
---------------------------
Chief Executive Officer
60
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
to be signed by the following persons on behalf of the registrant in the
capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Milton Liu Chief Executive Officer March 29, 2004
- ----------------------------
Milton Liu
/s/ Victor Alhadeff Chairman of Board of Directors, Chief Financial March 25, 2004
- ---------------------------- Officer and Secretary
Victor Alhadeff
/s/ Paul Bigler Director March 29, 2004
- ----------------------------
Paul Bigler
/s/ David Cotton Director March 29, 2004
- ----------------------------
David Cotton
/s/ Sue L. Gin Director March 29, 2004
- ----------------------------
Sue L. Gin
/s/ Glenn MacMullin Director March 29, 2004
- ----------------------------
Glenn MacMullin
/s/ Charles C. Matteson Jr. Director March 29, 2004
- ----------------------------
Charles C. Matteson Jr.