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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 30, 2001
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.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WASHINGTON 91-1672311
(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
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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. [ ]
Aggregate market value of the registrant's Common Stock held by
non-affiliates as of March 12, 2002 was $5,089,313. The number of shares of the
registrant's Common Stock outstanding as of March 12, 2002, was 5,847,310.
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 on
June 5, 2002 are incorporated by reference into Part III.
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BRIAZZ, INC.
DECEMBER 30, 2000
TABLE OF CONTENTS
Page
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PART I.
ITEM 1. Business................................................................ 3
ITEM 2. Properties..............................................................19
ITEM 3. Legal Proceedings.......................................................20
ITEM 4. Submission of Matters to a Vote of Security Holders.....................20
PART II.
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters...20
ITEM 6. Selected Financial Data.................................................22
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................24
ITEM 7A.Quantitative and Qualitative Disclosures About Market Risk..............33
ITEM 8. Financial Statements and Supplementary Data.............................34
ITEM 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure............................................52
PART III.
ITEM 10.Directors and Executive Officers of the Registrant......................53
ITEM 11.Executive Compensation..................................................53
ITEM 12.Security Ownership of Certain Beneficial Owners and Management 53
ITEM 13.Certain Relationships and Related Transactions..........................53
PART IV.
ITEM 14.Exhibits, Financial Statements and Reports on Form 8-K..................54
SIGNATURES......................................................................56
Unless the context indicates otherwise, the terms "we," "us," "our," the
"Company," or "BRIAZZ" refer to BRIAZZ, INC., a Washington corporation.
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 the Company's industry, to differ materially from the anticipated results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors include the risks and uncertainties described under
"Business--Risk Factors" in Part I of this Annual Report. Certain of the
forward-looking statements contained in this Report are identified with
cross-references to this section and/or to specific risks identified under
"Business--Risk Factors." We undertake no obligation to update these
forward-looking statements to reflect events or circumstances occurring after
the date of this Annual Report.
PART I
ITEM 1. BUSINESS.
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.
We currently operate a total of 43 cafes in Seattle, San Francisco, Chicago and
Los Angeles. Our growth strategy is to open new cafes in our existing markets
and, when appropriate, enter into new markets by concurrently opening a central
kitchen and at least four to six cafes and initiating delivery of box lunch and
catering services.
Our target customer is the office worker. 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.
Our central kitchens prepare, assemble and distribute substantially all of our
food products. Establishing a central kitchen in each of our geographic
locations enables us to deliver consistently high-quality, affordable food at an
attractive unit cost.
COMPETITIVE STRENGTHS
Subject to available funding, we intend to expand our presence in our existing
markets and expand into new markets. To achieve our planned expansion goals, we
intend to leverage the following strengths:
Well-defined business concept. Over the past six years, we have refined our menu
selections and cafe presentation, redesigned product workflow within our central
kitchens and established strict real estate guidelines for new locations. These
efforts have allowed us to increase customer traffic at existing locations and
expand the number of stores we operate.
The following are central factors in our business strategy:
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o Extensive, high-quality product offerings. We offer an extensive
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 diverse product selection, ranging
from traditional foods, such as Cobb salads and tuna sandwiches, to
gourmet foods, such as tarragon chicken sandwiches, attracts new
customers and increases the frequency of visits by repeat customers.
o Frequent menu changes. Our goal is to introduce new food selections
to our customers approximately every six to eight weeks. We also
adjust our menu seasonally, for instance, by offering a larger
variety of hot soups and sandwiches during the winter months and a
larger variety of salads during the summer months.
o 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,
because our cafe employees are not preparing most of the food
products, they can focus their attention on customer service.
o Range of prices. Our entrees range in price from $2.99 to $5.99,
allowing customers with different budgets to enjoy our products. 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 particular budgets.
o Multiple distribution channels. For the convenience of our corporate
customers, we deliver box lunches and catered platters for in-office
meetings through our fleet of trucks and vans. We also deliver to
selected wholesale customers.
Central kitchens. We currently operate central kitchens as hubs for food
preparation and distribution in each of our geographic markets. Central kitchens
help enable us to consistently provide customers with a broad assortment of
high-quality food products. This task is both more expensive and more difficult
to manage when food is prepared at the cafes. We believe central kitchens also
provide us with significant competitive advantages through economies of scale,
health and safety controls and product-waste minimization. In addition, the use
of central kitchens allows us to locate cafes on smaller sites and sites without
the ventilation required for an on-site kitchen.
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 growth in our business.
GROWTH STRATEGY
We believe that significant growth opportunities exist for us both in our
current markets and in new markets. Our key strategies to drive growth are:
Deepen our penetration in existing markets. Subject to available funding, our
expansion plans in our current markets, outside of the six cafes opened or to be
opened in 2002, 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
approximately 150 cafes in our existing geographic markets over the next five
years; however, the number of locations that could satisfy our selection
criteria is significantly larger. Increased market penetration and the resulting
increase in sales will allow us to take further advantage of the economies of
scale and distribution efficiencies provided by our central kitchens.
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Amenity locations. In selecting sites and opening new locations, we will pursue
a strategy of opening cafes primarily in amenity locations. We believe these
sites often have a built-in barrier to entry because there are typically no
other sites available in the building to potential competitors, or competition
within the building is limited.
Real estate initiatives. We opened five cafes in 2001 and one in the first
quarter of 2002. We closed a cafe during the first quarter of 2002. This closure
resulted from decreased sales as the cafe's building occupancy shifted from
normal office occupancy to a data-center. We plan to open five additional cafes
in the second quarter of 2002. It takes approximately eight months to open a new
cafe from the time we sign a letter of intent with the building owner or
manager, and we have signed letters of intent for all five planned cafes.
Distribution capabilities. We believe there is a significant market for our box
lunches and catered meals outside the highly competitive city centers. In city
centers, we are one of numerous food options for customers who need meals
delivered. Outside city centers, however, the options are more limited. Because
our food products are distributed through a central kitchen, our distribution
area for box lunches and catered meals is not limited to the geographic areas
where our cafes are located. Customers place orders directly with our branded
sales department by phone, fax or through our web site. We intend to expand our
fleet of delivery vans and hire additional sales representatives in all four
geographic markets to further penetrate the market beyond our cafe locations.
Central kitchen capacities. We estimate that our central kitchens in Seattle and
Los Angeles have the capacity to prepare and assemble up to 25,000 entree items
per day and our central kitchens in Chicago and San Francisco have the capacity
to prepare and assemble up to 15,000 entree items per day. In Seattle, we
estimate we are using approximately 80% of the kitchen's capacity. In San
Francisco, we estimate we are using approximately 60% of the kitchen's capacity.
In Chicago, we estimate we are using 20% or less of the kitchen's capacity. In
Los Angeles, we estimate we are using approximately 30% of the kitchen's
capacity. In order to take advantage of the competitive strength of the central
kitchens created by economies of scale, we intend to increase our central
kitchen use to full capacity.
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, as well as certain international cities, are suitable for potential
expansion of BRIAZZ operations and brand. It generally takes up to 18 months to
establish a new central kitchen once the location has been identified. When
appropriate, and subject to available funding, we intend to enter into new
markets by concurrently opening a central kitchen and at least four to six cafes
and initiating delivery of box lunch and catering services.
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 planning a number of
marketing initiatives in 2002 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: decreasing time for lunch and breakfast and 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, we opened the first BRIAZZ
cafe in Seattle, Washington. We expanded our operations into San Francisco in
1996, Chicago in 1997 and Los Angeles in 1998 and now operate 43 cafes.
CAFE-LEVEL ECONOMICS
Our average capital expense for the five most recently opened cafes that have
been open for at least one year was approximately $267,637. For fiscal 2001,
these cafes averaged approximately $551,060 in sales and generated an average
cafe-level pre-tax profit of 14.5%. Cafe-level pre-tax profit consists of all
sales less all expenses related to
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each cafe, including occupancy expense, labor expense, general and
administrative expense, other operating expense, depreciation and amortization,
and direct central kitchen costs including cost of food and packaging, labor
expense and food delivery expense. Cafe-level expenses exclude corporate general
and administrative expense and other central kitchen expenses.
OUR MENU
We offer 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 24 hours. 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 every six to eight weeks for our cafes and approximately four
times each year for our non-cafe distribution channels. New food items are
introduced based on factors including food trends, customer input and test
marketing in a limited number of cafes. From time to time, we remove seasonal
and less popular items from our menu. In response to customer requests, we now
offer hot panini sandwiches in each of our geographic markets. Cafes with this
new design generate approximately 40-48 percent of hot food sales compared to a
company average of approximately 35 percent. In cafes with the new design, we
average higher sales per building occupant than in our other cafes. As we move
forward in 2002, we anticipate all new cafes will be designed with a
merchandising focus on hot food. In addition, we currently offer hot subs in our
cafes in Chicago, two of our cafes in San Francisco and one of our cafes in
Seattle. Due to the popularity of the hot sub offerings, some of our cafes will
be retrofitted to give them the ability to offer hot subs. 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 derive approximately 60% of our cafe sales from sandwiches, salads and soups.
Our sandwiches and salads are prepared by our central kitchens and our soups are
prepared by Stockpot Soups, a division of the Campbell Soup Co. In the morning
and after lunch, the majority of cafe sales consist of beverages and fresh baked
goods. Our beverage selection includes Starbucks coffee, fresh juices and other
brand-name beverages. Our baked goods include bagels, muffins, pound cakes,
scones and cookies. The cookies are baked in ovens in our cafes, providing fresh
cookies to our customers and filling the cafes with the aroma of baking cookies.
To broaden our menu during the breakfast hours, we now offer a selection of
breakfast egg sandwiches on an English muffin or bagel that are served hot and
sold with other pre-packaged items for takeaway.
To ensure the BRIAZZ brand is synonymous with high quality and consistency, our
carefully developed and tested recipes call for fresh produce, premium
ingredients and breads from local bakeries. We carefully select suppliers in
each market based upon reputation, references, reliability, cost and other
criteria.
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. Our
multiple distribution channels allow us to generate product volume in an effort
to fully use the central kitchen within a geographic market.
6
CAFES
Of our 43 company-owned cafes, approximately half are amenity locations. The
size of our cafes ranges from 173 square feet in the Wrigley Building in Chicago
to 3,816 square feet in the 525 Market building in San Francisco. Our cafes sell
an extensive 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 less than five minutes inside our cafes, even during the lunch
hour rush. Our cafes in amenity locations, together with our larger cafes,
processed an average of 242 transactions between 11:00 a.m. and 2:00 p.m. during
the four-week period beginning October 29, 2001. 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 our 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.
BOX LUNCHES AND CATERED PLATTERS
We deliver box lunches and catered platters in each of our four geographic
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 the participants in their in-house business meetings.
We receive box lunch or catering orders on a daily basis by telephone, fax and
through our web site. We developed the web site in late 1999 in response to
requests from corporate customers for online ordering capabilities.
Substantially all of our orders are filled at a central kitchen and delivered
directly to the customers.
WHOLESALE ACCOUNTS
In October 1998, we began distributing sandwiches and salads in Seattle through
Quality Food Centers, Inc., a regional grocery store chain. Currently, our
products are being sold at over 51 QFC stores. We are also currently in a test
with Target stores to selectively sell our product. The current test
incorporates Target stores in our existing four markets. We have selectively
offered our products to other wholesale accounts, including Tully's Coffee and
Kozmo.com. However, Kozmo.com ceased operations in April 2001. Wholesale
accounts represent an opportunity to generate additional production volume and
build the BRIAZZ brand without incurring the capital expenditures associated
with building new cafes.
DISTRIBUTION LOGISTICS
Most of our products originate at a central kitchen and are transferred to
various distribution points by our fleet of approximately 56 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 through America's Second Harvest, a hunger relief
organization, or their affiliates.
7
OPERATIONS
We operate with a team-based management system. We believe this helps us to
rapidly resolve issues and spread successful developments through our
organization. Our operations are structured by "triad teams" of retail, sales
and manufacturing divisions in each geographic market. Most operating issues are
solved locally through organized efforts of these teams. At the corporate level,
local teams are supported by the "executive triad," composed of the division
heads and the director of operations services. Issues which cannot be solved by
the local triad teams are resolved by the executive triad. Similarly, if a
successful practice is developed in one market, it can be rapidly implemented in
the other markets by the triad teams.
CENTRAL KITCHENS
Our central kitchens in each geographic area function as food preparation,
assembly and distribution hubs. 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. For example, large, refrigerated preparation and
assembly rooms eliminate the need to rotate products through coolers during the
production process. Moreover, high unit-production volumes generated by the
central kitchens justify the use of automated equipment such as product wrapping
and packaging machines.
A key element of our brand-building strategy is to maintain consistent product
quality through our comprehensive quality assurance programs. Central kitchen
managers compile and analyze 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 Hazard Analysis Critical Control Point 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 kitchens, all delivery vehicles used to
deliver food requiring refrigeration are refrigerated for food safety.
In 1999, we retained Strategic Restaurant Engineering, Inc., an industrial
engineering firm focused on the food service industry, for an analysis of our
central kitchen operations. Based on its analysis, we are implementing a series
of changes in the management and operations of our central kitchens to reduce
our operating costs, particularly with respect to unit labor costs.
We outsource some food preparation to third parties in order to reduce
production costs. For example, Stockpot Soups makes all soups served in our
cafes, local bakeries provide us with artisan bread and pastries in each market
and all our cookie dough is produced by a third party.
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 one or two managers supported by senior hourly "lead"
employees. Each hourly employee is trained to facilitate speed and quality of
service, performing such functions as cashiering, limited food preparation,
coffee and other drink preparation, greeting customers and bussing tables.
With the guidance of a district manager, each cafe manager or lead employee is
responsible for ordering the appropriate products and quantities from the
central kitchen. 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.
EMPLOYEE TRAINING AND DEVELOPMENT
We have developed a comprehensive program to train employees in customer
service, operations and product knowledge. We provide product and customer
service training to all employees.
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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.
Our central kitchen employees are trained in food preparation in order to ensure
food safety, quality and consistency.
PURCHASING
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. Whenever practical, our purchasing staff
seeks to consolidate purchases with one distributor, such as Marriott
Distribution Services, which procures approximately 32% of our ingredients and
packaging products.
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. Pret a Manger has successfully
executed a similar concept in Great Britain and has recently opened six stores
in New York City. In addition, Pret a Manger recently announced that it has
received a significant equity investment from McDonald's Corporation. Although
Pret a Manger is not a current competitor in any of our existing geographic
markets, we may compete directly with them in the future or Pret a Manger may
serve as a model for other companies to establish restaurants with a concept
similar to ours in markets in which we currently operate or expect to expand.
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." We are
attempting to have ownership of the domain name terminated or transferred to us,
but we cannot assure you we will be successful. 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.
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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 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.
INFORMATION SYSTEMS
We currently maintain four separate information systems. We maintain a point of
sales system for recording sales and the rate of sales within our cafes. We
maintain an order entry system/billing system for orders taken outside our
cafes. In our kitchens, we maintain a food costing system to enable us to track
actual food costs by recipe. Within our corporate offices, we utilize AccPac, an
accounting system.
During 2001, we began the process of upgrading our information systems with a
new retail point of sale system and labor management system. These systems have
been upgraded in one existing store and in the one store that opened in the
first quarter of 2002. All new stores will also have the upgraded retail point
of sale system and the upgraded labor management system, and we will begin
upgrading the other existing stores in 2003. The timing of these upgrades will
depend on the availability of funding.
In December 2001, we implemented a new branded sales order entry system with web
integration. Our AccPac accounting system was previously upgraded during fall
1999.
EMPLOYEES
As of December 30, 2001, BRIAZZ employed 100 full-time salaried employees and
350 hourly employees. Of these employees, 144 were involved in our central
kitchens, 59 were involved in our box lunch, catering and wholesale operations,
188 were involved in cafe operations, and 59 were involved in
administrative/corporate functions, including senior management. We believe our
relationship with our employees is good. None of our employees is a party to a
collective bargaining agreement or is represented by a labor union.
EXECUTIVE OFFICERS
Victor D. Alhadeff, (55), Chief Executive Officer and Chairman of the Board. Mr.
Alhadeff has served as our Chairman of the Board since founding BRIAZZ in 1995,
and as our Chief Executive Officer since 1996. Mr. Alhadeff also served as our
President from 1995 to 1996, as our Secretary from 1995 to 2001 and as our
Treasurer from 1996 to 2001. In 1983, Mr. Alhadeff founded Egghead, Inc., a
specialty retailer of personal computer software and accessories. Mr. Alhadeff
served as Chairman of Egghead until 1990, when he purchased Egghead University,
the software training division of Egghead. Egghead University was renamed
Catapult, and Mr. Alhadeff served as its Chairman and Chief Executive Officer
until 1993, when IBM purchased Catapult. Prior to founding Egghead, Mr. Alhadeff
founded Equities Northwest Inc. (ENI), a corporation that formed, marketed and
operated oil and gas partnerships, in 1971, and served as its Chief Executive
Officer until the company was sold in 1983. While Mr. Alhadeff served at Egghead
and ENI, each company, and Mr. Alhadeff, along with other officers and directors
of each company, were the subjects of shareholder lawsuits. All shareholder
lawsuits were settled and dismissed. From 1969 to 1971, Mr. Alhadeff served as a
First Lieutenant in the United States Army. Mr. Alhadeff received a B.A. in
Business Administration from the University of Washington in 1968.
10
C. William Vivian, President, (50), Chief Operating Officer and Director. Mr.
Vivian joined us in January 1999 as President and Chief Operating Officer. In
January 1999, he also began serving as a director. From 1997 to 1998, Mr. Vivian
was a Senior Vice President of the Cucina Presto division of Cucina! Cucina!, a
restaurant chain. From 1995 to 1997, Mr. Vivian was a Regional Vice President
for Noah's Bagels, a chain of retail bagel bakeries. From 1994 to 1995, Mr.
Vivian was a Zone Director of Operations for Taco Bell, a fast food restaurant
chain. During 1993, Mr. Vivian was Vice President of Operations for Rally's, a
drive-in restaurant chain. Mr. Vivian serves as a director of Food Lifeline, an
affiliate of America's Second Harvest, a redistributor of food products. Mr.
Vivian received a B.A. from the University of California, San Diego in 1973 and
a Master in Hotel Administration from Cornell University in 1978.
Tracy L. Warner, (39), Vice President Finance, Chief Financial Officer,
Treasurer and Secretary. Ms. Warner has served as our Vice President Finance
since August 1999, as our Chief Financial Officer since August 2000 and as our
Treasurer and Secretary since January 2001. From June 1999 to August 1999, Ms.
Warner served as our Controller. Prior to joining BRIAZZ, Ms. Warner served as
Corporate Controller for The Armco Group, a property management company, from
1998 and 1999; Director of Finance/Controller for Oberto Sausage Company, a
manufacturer of meat snacks, from 1997 and 1998; Assistant Treasurer/Controller
for Philip Services, an international recycling and disposal company, from 1993
to 1997; and Senior Auditor for Coopers & Lybrand, a public accounting firm,
from 1987 to 1993. Ms. Warner received a B.A. in Business Economics from the
University of California, Santa Barbara in 1987.
Nancy Lazara, (46), Vice President Food. Ms. Lazara has served as our Vice
President Food since joining BRIAZZ in 1998. Ms. Lazara is responsible for menu
strategy, product development, and quality assurance. Prior to joining us, Ms.
Lazara was Vice President of Product Development for H-E-B Grocery Company, a
San Antonio-based supermarket chain, from 1989 to 1996; and Vice President, Food
Services for Larry's Markets, a Seattle-based supermarket chain, from 1984 to
1989. Ms. Lazara received a Grande Diplome from Le Cordon Bleu Cooking School in
France in 1975.
Joel Sjostrom, (41), Vice President Retail Operations. Mr. Sjostrom has served
as our Vice President Retail Operations since January 2000. Mr. Sjostrom was
previously our Regional Vice President, California from 1998 to January 2000,
and our California Market Manager from 1997 to 1998. From 1986 to 1997, Mr.
Sjostrom served as a Regional Manager at Baker's Square, a restaurant chain. Mr.
Sjostrom received a B.A. in Marketing and Management from the University of
Minnesota in 1986.
J. Montgomery Chellis, (37), Vice President Branded Sales. Mr. Chellis has
served as our Vice President Branded Sales since joining BRIAZZ in August of
2001. Since April 2001, Mr. Chellis has been the Regional Director West for the
newly formed Kraft/Nabisco organization. Prior to that, Mr. Chellis was with
Nabisco since 1996, where he was the Northwest Region Sales Manager. Mr. Chellis
received his degree his B.A. from Central Washington University in 1988.
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, catering and vending and
2), wholesale and grocery. Branded Sales subgroups 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 & Administrative consists of all cost incurred by
the corporate office as well as those administrative costs incurred by retail,
branded sales and the kitchens. Segment results for each of the Company's past
three fiscal years are provided in the financial statements included in Item 8.
For each of the our past three fiscal years, all sales have been attributed to
the United States, and all of our long-lived assets have been located in the
United States.
11
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.
RISK FACTORS
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.
We incurred losses of $1.3 million during the fiscal year ended December 29,
1996, $5.1 million during the fiscal year ended December 28, 1997, $12.5 million
during the fiscal year ended December 27, 1998, $15.4 million during the fiscal
year ended December 26, 1999, $6.3 million during the fiscal year ended December
31, 2000 and $6.8 million during the fiscal year ended December 30, 2001. We had
accumulated losses of $48.1 million as of December 30, 2001. These matters raise
substantial doubt about our ability to continue as a going concern. Our ability
to continue as a going concern is dependant upon numerous factors, including our
ability to obtain additional financing, our ability to increase our level of
future revenues or 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.
There can be no assurance that we will be able to obtain additional financing,
reduce expenses or successfully complete other steps to continue as a going
concern. If we is unable to obtain sufficient funds to satisfy its cash
requirements, it may be forced to curtail operations, dispose of assets, or seek
extended payment terms from its vendors. Such events would materially and
adversely affect our financial position and results of operations.
OUR GROWTH STRATEGY REQUIRES US TO OPEN A SIGNIFICANT NUMBER OF NEW CAFES IN OUR
EXISTING MARKETS. IF WE ARE NOT ABLE TO ACHIEVE THIS PLANNED EXPANSION, OUR
BUSINESS MAY SUFFER AND WE MAY BE UNABLE TO ACHIEVE OR SUSTAIN PROFITABILITY.
The success of our growth strategy will depend in large part on our ability to
open new cafes and to operate these cafes profitably. Our current growth plan
requires us to open five cafes by the end of the third quarter. In 2001, we
12
postponed certain cafe openings due to lower than expected office occupancy
rates and poor market conditions in Seattle, San Francisco and Los Angeles. We
cannot assure you that we will be able to achieve our current expansion goals,
that we will operate profitably, or, if we do achieve profitability, that we
will be able to sustain or increase profitability on a quarterly or annual
basis. We estimate that a central kitchen must supply at least four to six cafes
and generate non-cafe sales to achieve positive cash flow. Any inability to
achieve our expansion goals may adversely affect our financial results or stock
price.
The success of our planned expansion will depend upon numerous other factors,
many of which are beyond our control, including our ability to:
o hire, train and retain qualified operating personnel;
o identify and obtain suitable cafe sites at favorable lease terms;
o timely develop new cafes, including our ability to obtain available
construction materials and labor;
o manage construction and development costs of new cafes;
o develop sufficient sales volumes through our cafes and other
distribution channels to support our central kitchens;
o secure required governmental approvals and permits, and comply with
ongoing and changing regulatory requirements; and
o compete successfully in our markets.
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. The
closing of a significant number of cafes would have an adverse impact on our
reputation, operations and financial results.
WE MAY NOT BE SUCCESSFUL IN IMPLEMENTING OUR BUSINESS STRATEGY, WHICH WOULD
IMPEDE OUR GROWTH AND OPERATING RESULTS.
Our business strategy is to focus our retail expansion on cafes in amenity
locations (i.e., office buildings where the competition is limited or where we
are the only food supplier), maintain our current cafe locations and expand our
box lunch and catering distribution capabilities to serve locations outside the
core metropolitan areas in which we operate. Our ability to implement this
business strategy depends on our ability to:
o identify and lease amenity locations suitable for new cafes;
o increase our brand recognition in our existing markets; and
o manage growth in administrative overhead and distribution costs
likely to result from the planned expansion of our retail and
non-retail distribution channels.
Any inability to implement our business strategy would have a material adverse
impact on our operating results.
Any inability to manage our growth effectively could adversely affect our
operating results.
Failure to manage our growth effectively could harm our business. We have grown
significantly since our inception and intend to grow substantially in the
future. We have increased the number of our cafes from two cafes as of December
31, 1996 to 43 cafes currently and, subject to available funding, we anticipate
opening several new cafes in 2002. 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. For instance, we began the process of upgrading some of our
information systems in 2001, which is potentially disruptive and will require
additional training of our personnel. 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
13
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.
IF WE ARE UNABLE TO CONTINUE LEASING OUR RETAIL LOCATIONS OR OBTAIN ACCEPTABLE
LEASES FOR NEW CAFES, OUR BUSINESS MAY SUFFER.
All of our 43 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 RESTAURANT EXPANSION STRATEGY FOCUSES PRIMARILY ON FURTHER PENETRATION OF
EXISTING MARKETS. THIS STRATEGY COULD CAUSE SALES IN SOME OF OUR EXISTING CAFES
TO DECLINE.
In accordance with our expansion strategy, we intend to open new cafes primarily
in our existing markets. Many of our cafes are situated in concentrated downtown
areas. As a result, the presence of additional cafes in existing markets may
result in diminished sales performance and customer counts for cafes near the
area in which a new cafe opens, 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 could 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 could
negatively impact the operations of our cafes located in office buildings due to
the reduction in the number of potential customers in the building. 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.
OUR BUSINESS DOES NOT GENERATE THE CASH NEEDED TO FINANCE OUR OPERATIONS, AND WE
MAY NEED ADDITIONAL FINANCING IN THE FUTURE, WHICH WE MAY BE UNABLE TO OBTAIN.
Our business does not currently generate the cash needed to finance our
operations. We will need additional funds to finance our operations, as well as
to enhance our operations, fund our expansion and respond to competitive
pressures. We may be unable to obtain financing on terms favorable to us, if at
all. Poor financial results, unanticipated expenses or unanticipated
opportunities that require financial commitments could give rise to additional
financing requirements sooner than we expect. If we raise additional funds
through the issuance of equity or convertible debt securities, the percentage
ownership of our existing shareholders would be reduced, and these securities
might have rights, preferences or privileges senior to those of our common
stock. If adequate funds are not available or are not available on acceptable
terms, our ability to enhance our operations, fund our expansion, respond to
competitive pressures or take advantage of business opportunities would be
significantly limited, and we may need to restrict our operations significantly.
IF ANY OF OUR CENTRAL KITCHENS WERE TO CLOSE FOR ANY REASON, WE WILL BE UNABLE
TO SUPPLY OUR CAFES IN THAT GEOGRAPHIC MARKET AND OUR BUSINESS WILL SUFFER.
Our central kitchens 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
our 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.
Our four existing central kitchens are geographically dispersed and none could
supply another market if a central kitchen were to close. Any closure of a
central kitchen, even for a short period of time, would have a material adverse
effect on our operating results.
14
THE LOSS OF ONE OF OUR MAJOR WHOLESALE CUSTOMERS COULD NEGATIVELY IMPACT OUR
RESULTS.
For the fiscal year ended December 30, 2001, approximately 29.0% of our revenue
resulted from branded sales. Our wholesale and other sales of which 11.9%
consist of wholesale and grocery sales. Our wholesale and grocery sales are made
to a relatively small number of companies, including, for example, Quality Food
Centers, Inc., a regional grocery store chain, and Tully's Coffee Corporation, a
specialty coffee retailer. In 2001, Quality Food Centers accounted for 9% of our
total revenue. Until Kozmo.com, Inc., an Internet-based consumer delivery
service, ceased operations in April 2001, it was also a wholesale customer which
accounted for 1.8% of our total sales in 2000 and approximately 1.0% of our
total sales in the 13-week period ended April 1, 2001. We cannot assure you that
the remainder of our major wholesale and grocery customers will continue to
maintain accounts or that they will successfully maintain or expand their
product offerings. Furthermore, we cannot assure you that our major wholesale
customers will not exit our existing markets. The loss of any of our other major
wholesale customers could harm our business.
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 suppliers of meat, breads and soups, and Marriott
Distribution Services, a distributor owned by Marriott International, which
procures from our suppliers and delivers to us approximately 32% of our
ingredients and packaging products. Pacific Coast Fruit Company, provides
approximately 6.6% of our total cost of food and packaging, while Stockpot, Inc.
provides approximately 5.7%. Any failure or delay by any of these suppliers or
distributors to deliver products to our central kitchens, 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.
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 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.
IF OUR CUSTOMERS DO NOT PERCEIVE PRE-PACKAGED SANDWICHES AND SALADS AS FRESH AND
DESIRABLE, OR IF THEY WOULD PREFER MADE-TO-ORDER FOOD ITEMS, OUR OPERATING
RESULTS WILL SUFFER.
Our business strategy focuses on pre-packaged food items. All of our salads and
most of our sandwiches are prepared and assembled in our 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 we prepare most of our food products for
each geographic market 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
customers 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.
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 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. In addition, 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. 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 MAY BE UNSUCCESSFUL IN DEVELOPING NEW PRODUCT LINES OR NEW DISTRIBUTION
CHANNELS FOR OUR PRODUCTS, WHICH MAY HARM OUR BUSINESS.
We frequently review and evaluate new product lines and new distribution
channels for our products. We may, however, be unable to successfully implement
any new product lines or distribution channels after having dedicated
considerable management time and financial resources to them. In the past, we
distributed our products through Safeway, Ralph's and Dominick's grocery 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
16
discontinued. Inability to successfully develop new product lines or new
distribution channels in the future could slow our growth and divert
management's attention from other areas of our business.
WE DEPEND ON THE EXPERTISE OF KEY PERSONNEL. IF ANY OF THESE INDIVIDUALS WERE TO
LEAVE, OUR BUSINESS MAY SUFFER.
We are dependent to a large degree on the services of Victor D. Alhadeff, our
Chairman of the Board and Chief Executive Officer, and C. William Vivian, our
President and Chief Operating Officer and a director. Our operations may suffer
if we were to lose the services of either of these individuals, either of whom
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.
TWO OF OUR CUSTOMERS ACCOUNT FOR A SIGNIFICANT PORTION OF OUR ACCOUNTS
RECEIVABLE BALANCE. THE FAILURE OF ANY OF THESE CUSTOMERS TO PAY ITS ACCOUNT MAY
HARM OUR OPERATING RESULTS.
One of our customers, QFC, accounted for an aggregate of approximately 42.4% of
our accounts receivable balance as of December 30, 2001. We anticipate that we
will continue to extend credit to QFC and other customers. The failure of any
one of these customers to pay its account, now or in the future, may harm our
operating results.
RISKS RELATING 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. 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 30, 2001, we employed 100 salaried and 350 hourly employees. We expend
significant resources in recruiting and training our managers and employees.
Employee turnover for fiscal 2001 was approximately 137% for hourly employees
and 39% for salaried employees. If we face increased labor costs because of
increases in competition for employees, the federal 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. In addition, 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 and kitchen
staff, to keep pace with our growth strategy. Qualified persons to fill these
positions are in short supply in the markets in which we operate. Any inability
to recruit and retain sufficient numbers of employees may delay or prevent the
anticipated openings of new cafes or central kitchens.
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, 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. Pret a Manger has successfully executed a
17
concept similar to ours in Great Britain and has recently opened six stores in
New York City. In addition, during 2001 Pret a Manger announced that it has
received a significant equity investment from McDonald's Corporation. Pret a
Manger may expand its operations to markets in which we operate or expect to
enter and it may serve as a model for other competitors to enter into markets in
which we operate or expect to enter. 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 prepare or sell cause injury or are found unsuitable during
preparation, sale or use. Although we currently maintain product liability
insurance, 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 adequate 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.
INABILITY TO OBTAIN REGULATORY APPROVALS, OR TO COMPLY WITH ONGOING AND CHANGING
REGULATORY REQUIREMENTS, FOR OUR CENTRAL KITCHENS OR CAFES COULD RESTRICT OUR
BUSINESS AND OPERATIONS.
Our 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. We are also subject
to license and permit requirements relating to health and safety, building and
land use and environmental protection. If we encounter difficulties in obtaining
any necessary licenses or permits or complying with these ongoing and changing
regulatory requirements:
o the opening of new cafes or central kitchens could be delayed;
o existing cafes or central kitchens 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, 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. These
shareholders, acting together, and Victor D. Alhadeff, 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. This control may delay, deter or
18
prevent a third party from acquiring or merging with us, which in turn could
reduce the market price of our common stock.
OUR STOCK PRICE MAY BE VOLATILE BECAUSE OF FACTORS BEYOND OUR CONTROL, AND YOU
MAY LOSE ALL OR A PART OF YOUR INVESTMENT.
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 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 amended and restated 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 stock option plan may discourage, delay or prevent a change in
control which you may favor.
ITEM 2. PROPERTIES.
CAFE LOCATIONS AND OTHER PROPERTIES
CAFES.
Currently there are 43 BRIAZZ cafes operating in four metropolitan areas. Of
these cafes, approximately half are in amenity locations. We have thirteen cafes
in Seattle, twelve cafes in San Francisco, ten cafes in Chicago and eight cafes
in Los Angeles. We operate all of our cafes in leased locations. Currently half
of our leases are for five- or ten-year terms and include options to extend the
terms. The remainder of our leases vary from terms of two years to nine years.
Approximately 45% of our cafe leases provide for fixed rent payments
exclusively, 35% of our cafe leases contain both minimum rent and
percentage-of-sales rent provisions and 20% of our cafe leases contain
percentage-of-sales rent provisions exclusively. To implement our growth
strategy, we will require additional cafe sites which we believe will be
available on commercially reasonable terms, although we have not identified
properties or signed letters of intent with regard to all of the space necessary
for our intended growth.
19
CENTRAL KITCHENS AND CORPORATE HEADQUARTERS.
We currently have one central kitchen in each of our four geographic markets.
Our Seattle central kitchen, with our corporate headquarters, occupies 35,665
square feet under a lease that terminates on October 30, 2006. Our San Francisco
central kitchen occupies 7,940 square feet under a lease that terminates on
October 31, 2006, with an option to renew for one five-year period. Our Chicago
central kitchen occupies 11,557 square feet under a lease that terminates on
March 31, 2006, with options to renew for up to two four-year periods. Our Los
Angeles central kitchen occupies 14,500 square feet under a lease that
terminates on February 28, 2007, with options to renew for up to two five-year
periods. We expect these facilities will be adequate for our needs for the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS.
BRIAZZ is not currently a party to any material legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK
Our Common Stock (the "Common Stock") has been quoted on the Nasdaq National
Market under the symbol "BRZZ" since May 2, 2001. Prior to that time, there was
no public market for our common stock. The following table shows the high and
low closing sale prices for our common stock as reported on the Nasdaq National
Market for the periods indicated:
HIGH LOW
---- ---
YEAR ENDED DECEMBER 30, 2001
Second quarter*............................. $8.25 $2.60
Third quarter............................... $2.80 $0.99
Fourth quarter.............................. $1.44 $0.68
*Beginning on May 2, 2001.
As of March 12, 2002, there were approximately 121 holders of record of the
Common Stock of BRIAZZ and 5,847,310 shares of the Common Stock outstanding.
DIVIDENDS
No cash dividends were declared or paid in fiscal 2001. 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. 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
In June 2001, we granted options to purchase an aggregate of approximately
321,000 shares of Common Stock, at an exercise price of $4.70, to employees
under our stock option plan, subject to the filing of a Form S-8 registration
20
statement. In July 2001 the board of directors approved a grant of approximately
102,000 stock options to employees at an exercise price of $2.34. In November
2001, the board of directors approved a grant of options of approximately 4,000
shares of common stock to employees with exercise prices of $0.95 per share.
Since the exercise price was the fair value at the date of grant, no deferred
compensation was recognized on either the June, July and November 2001 grants.
We filed a registration statement on Form S-8 on October 29, 2001 with respect
to the shares of Common Stock underlying such options. The issuance of such
options was exempt from Securities Act registration pursuant to Section 4(2)
under the Securities Act, on the basis that these options were granted to our
employees or directors for compensatory purposes and not in a public offering.
In June 2001, we granted options to purchase an aggregate of 11,167 shares of
Common Stock, at an exercise price of $1.50, to employees under our stock option
plan. The sale and issuance of such securities was exempt from Securities Act
registration pursuant to Section 4(2) of the Securities Act, on the basis that
these options were granted in connection with a written compensatory benefit
plan or contract and not part of a public offering.
In April 2001, we issued 18,917 shares of Series C preferred stock to two
consultants for services rendered at an aggregate fair value of $155,000. The
sale and issuance of such securities were exempt from Securities Act
registration pursuant to Rule 701 under the Securities Act, on the basis that
these securities were offered and sold in accordance with a written compensatory
contract. All investors received historical and projected financial data and had
the opportunity to ask questions of our officers. No underwriters were used in
connection with these sales and issuances.
In January and February 2001, we issued 507,701 shares of Series C preferred
stock to 29 investors at $6.00 per share, or net proceeds of $3,034,384, after
deduction of issuance costs. The sale and issuance of such securities were
exempt from Securities Act registration pursuant to Rule 506 of Regulation D
under the Securities Act, as all investors were "accredited investors" as
defined in Rule 501(a) of Regulation D. All investors received historical and
projected financial data and had the opportunity to ask questions of our
officers. No underwriters were used in connection with these sales and
issuances.
In January 2001, we granted options to purchase an aggregate of 26,585 shares of
Common Stock, at an exercise price of $6.00, to employees under our stock option
plan. The sale and issuance of such securities was exempt from Securities Act
registration pursuant to Rule 701 under the Securities Act, on the basis that
these options were offered and sold in accordance with a written compensatory
benefit plan or contract.
USE OF PROCEEDS
On May 1, 2001, the Securities and Exchange Commission declared effective our
registration statement on Form S-1 (Commission File No. 333-54922). On May 7,
2001 we closed our initial public offering of 2,000,000 shares of our common
stock at an initial public offering price of $8.00 per share. The managing
underwriter in the initial public offering was WR Hambrecht+Co, LLC. Net
proceeds to BRIAZZ, after deduction of $2.4 million in underwriting discounts,
commissions and other expenses from the initial public offering totaled $13.6
million. Our expenses for the offering consisted of approximately $0.96 million
in underwriting discounts and commissions and $1.46 million in other expenses.
None of the expenses incurred in the offering were direct or indirect payments
to affiliates, directors, officers or persons owning ten percent or more of any
class of our equity securities. In the period from the closing of the initial
public offering through December 30, 2001, we used $2.0 million for the
repayment of line-of-credit borrowings and scheduled principal repayments
primarily relating to delivery vehicle financing. The remaining initial public
offering funds will be used to finance growth and on-going operations. In 2001,
of the total $3.8 million spent on capital purchases, we spent $0.9 million on
our new point of sale system, order entry system and our internet web site. In
2001, we also spent $2.1 million on the build-out of new cafes and the last $0.8
million was for general operations. Until the proceeds are used they are
invested in short-term commercial paper.
21
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 26, 1999, December 31, 2000 and December 30, 2001 and the
selected balance sheet data at December 30, 2001 and December 31, 2000 are
derived from BRIAZZ's financial statements that have been audited by
PricewaterhouseCoopers LLP, independent auditors. The statement of operations
data presented below for the years ended December 28, 1997 and December 27,
1998, and the selected balance sheet data at December 28, 1997, December 27,
1998 and December 26, 1999 are derived from BRIAZZ's financial statements that
have also been audited by PricewaterhouseCoopers LLP and 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 Item 8.
22
YEARS ENDED
--------------------------------------------------------
DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
STATEMENT OF OPERATIONS
Sales
Retail ....................................................... $ 22,737 $ 23,624 $ 19,428 $ 11,913 $ 4,723
Branded Sales ................................................ 9,292 10,068 6,170 3,452 1,781
-------- -------- -------- -------- --------
Total Sales ............................................... 32,029 33,692 25,598 15,365 6,504
Operating
Cost of food and packaging ................................... 12,480 13,597 11,520 6,979 3,079
Occupancy expenses ........................................... 4,010 3,818 3,602 2,393 916
Labor expenses (including amortization of deferred stock
of $186 for 2001 and $81 for 2000) ........................ 11,098 11,186 9,506 6,690 2,866
Depreciation and amortization ................................ 2,686 2,657 2,628 1,785 625
Other operating expenses ..................................... 1,849 1,921 2,419 2,501 1,135
General and administrative expenses (including amortization
stock compensation of $102 for 2001 and $41 for 2000)...... 6,837 6,581 6,033 6,492 3,404
Provision for asset impairment and store closure ............. 26 63 779 1,169 --
-------- -------- -------- -------- --------
Total operating expenses .................................. 38,986 39,823 36,487 28,009 12,025
-------- -------- -------- -------- --------
Loss from operations ............................................. (6,957) (6,131) (10,889) (12,644) (5,521)
Other (expense) income ........................................... 155 (156) (4,492) 193 449
-------- -------- -------- -------- --------
Net loss ......................................................... (6,802) (6,287) (15,381) (12,451) (5,072)
-------- -------- -------- -------- --------
Accretion of dividends/amortization of discount on preferred stock 4,318 3,319 2,421 1,951 1,068
-------- -------- -------- -------- --------
Net loss attributable to common stockholders ..................... $(11,120) $ (9,606) $(17,802) $(14,402) $ (6,140)
======== ======== ======== ======== ========
Basic and diluted net loss per share ............................. $ (2.86) $(2,455.68) $(5,148.14) $4,264.87 $1,819.26
======== ======== ======== ======== ========
Weighted-average shares used in computing basic
net loss per share ........................................... 3,889,472 3,912 3,458 3,377 3,375
======== ======== ======== ======== ========
OTHER FINANCIAL DATA
EBITDA (1) ....................................................... $ (4,271) $ (3,413) $ (8,153) $(10,459) $ (4,306)
-------- -------- -------- -------- --------
Cash provided by (used in)
Operating activities ......................................... (5,609) (2,233) (8,438) (8,309) (3,112)
Investing activities ......................................... (3,755) (772) (1,591) (10,956) (5,727)
Financing activities ......................................... $ 15,002 $ 1,407 $ 9,974 $ 5,227 $ 18,666
DECEMBER 30, DECEMBER 31, DECEMBER 26, DECEMBER 27, DECEMBER 28,
2001 2000 1999 1998 1997
------------ ------------ ------------ ----------- -----------
(IN THOUSANDS)
BALANCE SHEET DATA
Cash and cash equivalents......................... $ 6,193 $ 555 $ 2,153 $ 2,208 $ 16,246
Working capital .................................. 4,066 (2,620) (2,414) (5,554) 13,948
Total assets ..................................... 21,953 14,409 17,676 19,958 25,301
Current liabilities .............................. 3,702 4,869 5,955 9,507 2,956
Long-term liabilities ............................ 335 1,888 213 474 317
Mandatorily redeemable convertible preferred Stock -- 53,609 48,025 30,148 28,197
Total shareholders' equity (deficit) ............. $ 17,916 $(45,957) $(36,517) $(20,171) $ (6,169)
(1) EBITDA represents earnings before interest expense, income taxes, and
depreciation and amortization for 2000 and before. In 2001 interest income
was also excluded. EBITDA data is included because management understands
that such information is considered by certain investors as and additional
basis on which to evaluate a company's ability to pay interest, repay debt
and make capital expenditures. Because all companies do not calculate EBITDA
identically, the presentation of EBITDA in this Annual Report is not
necessarily comparable to similarly entitled measures of other companies.
EBITDA is not intended to represent and should not be considered more
meaningful than, or and alternative to, measures of operating performance as
determined in accordance with generally accepted accounting principles.
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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.
We currently operate 43 cafes in Seattle, San Francisco, Chicago and Los
Angeles. The 43 cafes include a cafe we closed during the first quarter of 2002.
This closure resulted from decreased sales as the cafe's building occupancy
shifted from normal office occupancy to a data-center. In 2002, costs associated
with this cafe closure are estimated to be $16,000 and we plan to transfer the
assets and fully depreciate the remaining net book value that is approximately
$26,000. Our growth strategy is to open new cafes in our existing markets and,
when appropriate, enter into new markets by concurrently opening a central
kitchen and at least four to six cafes and initiating delivery of box lunch and
catering services.
From fiscal 1995 through 2000, we measured our operational results based on 13
four-week periods. There were fifty-two weeks in 1999, fifty-three weeks in 2000
and fifty-two weeks in 2001. In fiscal 2001 we converted to four 13-week periods
with a 52-or 53-week fiscal year. Adjustments were made to 2000 results to
express the results in four 13-week periods comparable to 2001.
Our second quarter results will be restated to reflect the reversal of a
deferred compensation charge. This charge originally resulted from the
remeasurement of our outstanding warrants held by an employee who's exercise
price was less than the current stock price at the time of the remeasurement. At
the end of the second quarter this charge should have been reversed as the stock
price at end of the second quarter was below the warrant exercise price. The
impact of this change will be to decrease our net loss for the thirteen and
twenty-six week period ended July 1, 2001 by approximately $635,000. The audited
financial statements for the year ended December 30, 2001 already reflect this
reversal.
GEOGRAPHIC MARKETS
We currently operate in four markets: Seattle, San Francisco, Chicago and Los
Angeles. Each market is supported by its own central kitchen. We have presented
our sales results here by geographic market to help you understand our business,
but we do not operate our business in geographic segments. We manage our
business through four reportable segments: Retail, Branded Sales, Kitchens, and
General & Administrative. Retail consists of sales generated through the
Company's cafes. Branded Sales consists of two subgroups: 1) box lunch, catering
and vending and 2), wholesale and grocery. Branded Sales subgroups 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
all cost incurred by the corporate office as well as those administrative costs
incurred by Retail. Management evaluates segment performance primarily based on
sales and segment operating income (loss).
Below is a comparison of sales in each market for fiscal years 1999, 2000 and
2001. Market pre-tax profit (loss) consists of all sales less all expenses
related to each market other than corporate general and administrative expense.
Sales include sales from cafes, box lunches, catering, vending, wholesale,
grocery and other accounts. Expenses for each market consist of occupancy
expense, labor expense, general and administrative expense, other operating
expense, depreciation and amortization and provision for asset impairment and
store closure. Each of these items are described in more detail in "Results of
Operations." Because corporate general and administrative included depreciation
and amortization related to corporate assets corporate general and
administrative totals will differ from the General and Administrative segment
financial information.
24
Geographic Markets
Years ended
--------------------------------------------
December 30, December 31, December 26,
2001 2000 1999
------------ ------------ ------------
(In thousands, except cafe numbers)
SEATTLE
Sales:
Retail ............................... $ 5,997 $ 6,607 $ 5,997
Branded Sales ........................ 5,686 5,915 4,054
-------- -------- --------
Total sales ..................... 11,683 12,522 10,051
-------- -------- --------
Cost of food and packaging:
Retail ............................... 2,211 2,447 2,385
Branded Sales ........................ 2,565 2,792 2,008
Unallocated cost of food and packaging 109 85 289
-------- -------- --------
Total cost of food and packaging 4,885 5,324 4,682
-------- -------- --------
Pre-tax profit (loss) .................... $ 88 $ 550 $ (1,121)
-------- -------- --------
Cafes .................................... 13 11 11
SAN FRANCISCO
Sales:
Retail ............................... $ 8,051 $ 9,053 $ 7,755
Branded Sales ........................ 1,426 2,270 1,077
-------- -------- --------
Total sales ..................... 9,477 11,323 8,832
-------- -------- --------
Cost of food and packaging:
Retail ............................... 2,822 3,214 3,004
Branded Sales ........................ 462 911 370
Unallocated cost of food and packaging 165 115 231
-------- -------- --------
Total cost of food and packaging 3,449 4,240 3,605
-------- -------- --------
Pre-tax profit (loss) .................... $ (11) $ 1,029 $ (402)
-------- -------- --------
Cafes .................................... 12 11 11
CHICAGO
Sales:
Retail ............................... $ 4,812 $ 4,430 $ 3,734
Branded Sales ........................ 1,153 1,094 584
-------- -------- --------
Total sales ..................... 5,965 5,524 4,318
-------- -------- --------
Cost of food and packaging:
Retail ............................... 1,835 1,774 1,609
Branded Sales ........................ 411 444 199
Unallocated cost of food and packaging 64 85 290
-------- -------- --------
Total cost of food and packaging 2,310 2,303 2,098
-------- -------- --------
(Pre-tax profit (loss) ................... $ (836) $ (1,114) $ (1,733)
-------- -------- --------
Cafes .................................... 10 9 9
LOS ANGELES
Sales:
Retail ............................... $ 3,877 $ 3,534 $ 1,942
Branded Sales ........................ 1,027 789 455
-------- -------- --------
Total sales ..................... 4,904 4,323 2,397
-------- -------- --------
Cost of food and packaging:
Retail ............................... 1,398 1,324 770
Branded Sales ........................ 354 311 242
Unallocated cost of food and packaging 84 95 123
-------- -------- --------
Total cost of food and packaging 1,836 1,730 1,135
-------- -------- --------
(Pre-tax profit (loss) ................... $ (652) $ (592) $ (1,344)
-------- -------- --------
Cafes .................................... 8 7 5
ALL MARKETS
Sales:
Retail ............................... $ 22,737 $ 23,624 $ 19,428
Branded Sales ........................ 9,292 10,068 6,170
-------- -------- --------
Total sales ..................... 32,029 33,692 25,598
-------- -------- --------
Cost of food and packaging:
Retail ............................... 8,266 8,759 7,768
Branded Sales ........................ 3,792 4,458 2,819
Unallocated cost of food and packaging 422 380 933
-------- -------- --------
Total cost of food and packaging 12,480 13,597 11,520
-------- -------- --------
(Pre-tax profit (loss) ................... $ (1,411) $ (127) $ (4,600)
Corporate general and administrative ..... (5,546) (6,004) (6,289)
-------- -------- --------
Loss from operations ..................... $ (6,957) $ (6,131) $(10,889)
-------- -------- --------
Total cafes .............................. 43 38 36
25
RESULTS OF OPERATIONS
The following discussion of our results of operations should be read in
conjunction with "Selected Financial Data," the consolidated financial
statements and accompanying notes and the other financial data included
elsewhere in this Annual Report. 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:
YEARS ENDED
------------------------------------------
DECEMBER 30, DECEMBER 31, DECEMBER 26,
2001 2000 1999
------------ ------------ ------------
(AS A PERCENTAGE OF SALES, EXCEPT
NUMBER OF LOCATIONS DATA)
STATEMENT OF OPERATIONS DATA
Sales:
Retail .......................................................... 71.0% 70.1% 75.9%
Branded Sales ................................................... 29.0% 29.9% 24.1%
----- ----- -----
Total Sales .............................................. 100.0% 100.0% 100.0%
Operating Expenses:
Cost of food and packaging ............................................ 39.0% 40.4% 45.0%
Occupancy expenses .................................................... 12.5% 11.3% 14.1%
Labor expenses (including amortization of deferred stock compensation
of $186 for 2001 and $81 for 2000) ................................ 34.6% 33.2% 37.1%
Depreciation and amortization ......................................... 8.4% 7.9% 10.3%
Other operating expenses .............................................. 5.8% 5.7% 9.4%
General and administrative expenses (including amortization of deferred
stock compensation of $102 for 2001 and $41 for 2000) .............. 21.3% 19.5% 23.6%
Provision for asset impairment and store closure ...................... 0.1% 0.2% 3.0%
----- ----- -----
Total operating expenses ................................. 121.7% 118.2% 142.5%
----- ----- -----
Loss from operations .................................................. -21.7% -18.2% -42.5%
Other (expense) income ................................................ 0.5% -0.5% -17.5%
----- ----- -----
Net loss .............................................................. -21.2% -18.7% -60.1%
===== ===== =====
SELECTED OPERATIONS DATA
Number of locations at period end:
Central kitchens ................................................ 4 4 4
Cafes ........................................................... 43 38 36
YEAR ENDED DECEMBER 30, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
SALES
Total sales decreased by $1.7 million, or 4.9%, from $33.7 million to $32.0
million.
Retail sales decreased by $0.9 million, or 3.8%, from $23.6 million to $22.7
million. Of this decrease, $0.5 million was attributable to the closing of one
cafe in Seattle during 2001. The remainder of this decrease was a result of a
decrease in the occupancy rates of many of the buildings we are located in.
Same-store sales decreased by $1.3 million, or 5.6%, from $23.1 million to $21.8
million. Same-store sales consist only of sales from cafes, and do not include
sales from box lunches or catered meals. 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.
26
Branded sales decreased by $0.8 million, or 7.7%, from $10.1 million to $9.3
million. This decrease was primarily attributable to the loss of three
customers. Kozmo.com, an Internet-based consumer delivery service ceased
operations in April 2001. Our relationship with Costco and Safeway also ended in
2001 due to unprofitable sales. We do not expect the closing of Kozmo.com to
have a material adverse impact on branded sales in the future. In June 2000, we
began providing Tully's Coffee with food products for selected retail cafes
located in Seattle and San Francisco.
OPERATING EXPENSES
Operating expenses consist of costs of food and packaging, occupancy, labor,
depreciation and amortization, other operating, general and administrative, and
provision for asset impairment and store closure. Total operating expenses
decreased $0.8 million, or 2.1%, from $39.8 million to $39.0 million. As a
percentage of sales, our operating expenses increased from 118.2% to 121.7%.
This increase was primarily due to decreased sales.
Cost of food and packaging decreased by $1.1 million, or 8.2%, from $13.6
million to $12.5 million. Cost of food and packaging decreased as a percentage
of sales from 40.4% to 39.0%.
Cost of food and packaging for retail sales decreased by $0.5 million, or 5.2%,
from $8.8 million to $8.3 million. This decrease was primarily due to decreased
retail sales.
Cost of food and packaging for branded sales decreased by $0.7 million, or
15.0%, from $4.5 million to $3.8 million. This decrease was primarily due to
decreased branded sales.
Occupancy expense consists of costs related to the leasing of retail space for
our cafes and our central kitchens. Occupancy expense increased by $0.2 million,
or 5.0%, from $3.8 million to $4.0 million. This increase was primarily due to
the opening of five additional cafes. As a percentage of sales, occupancy
expense increased from 11.3% to 12.5%, primarily due to decreased sales. Our
rents are fixed or variable determined as a percentage of sales, or a
combination of both.
Labor expense consists of wages and salaries paid to employees. Labor expense
decreased by $0.1 million, or 0.8%, from $11.2 million to $11.1 million. As a
percentage of sales, labor expense increased from 33.2% to 34.6%. This increase
was due to a decrease in sales.
Depreciation and amortization consists of the periodic expensing of leasehold
improvements, equipment and vehicles. Depreciation and amortization was
unchanged. As a percentage of sales, depreciation and amortization increased
from 7.9% to 8.4%. This increase was primarily due to decreased sales.
Other operating expenses consist of direct operating, marketing, administrative,
repair and maintenance and site termination expenses. Other operating expenses
decreased by $0.1 million, or 3.7%, from $1.9 million to $1.8 million. As a
percentage of sales, other operating expenses increased from 5.7% to 5.8%
because of the decrease in sales.
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 $0.2 million, or 3.9%, from $6.6 million to $6.8 million, primarily
due to wage and salary increases, offset by increased efficiencies at the
corporate level. As a percentage of sales, general and administrative expenses
increased from 19.5% to 21.3%, primarily due to decreased sales.
Provision for asset impairment and store closure relates to the writedown of
leasehold improvements at some cafe locations. Provision for asset impairment
and store closure decreased by $0.03 million, or 58.7%, from $0.06 million to
$0.03 million. As a percentage of sales, asset impairment and store closure
decreased from 0.2% to 0.1%.
27
OTHER (EXPENSE) INCOME
Other (expense) income includes interest expense, interest and other income.
Other (expense) income decreased $0.3 million, or 199.4%, from ($0.16) million
to $0.16 million. This change was due to the interest income generated from the
proceeds associated with the Series C financing that closed February 1, 2001 and
the initial public offering that closed on May 7, 2001. This was complemented by
a lower interest expense due to the repayment of the line of credit in May 2001.
As a percentage of sales, other (expense) income increased from (0.5%) to 0.5%.
NET LOSS
Net loss increased by $0.5 million, or 8.2%, from $6.3 million to $6.8 million.
This increase was primarily due to decreased sales and increased occupancy,
labor and general and administrative expenses. As a percentage of sales, net
loss increased from 18.7% to 21.2%.
EBITDA represents earnings (loss) before interest expense, income taxes, and
depreciation and amortization. EBITDA for the fiscal year ended December 30,
2001 and 2000 was ($4.3) million and ($3.5) million, respectively.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 26, 1999
SALES
Total sales increased by $8.1 million, or 31.6%, from $25.6 million to $33.7
million.
Retail sales increased by $4.2 million, or 21.6%, from $19.4 million to $23.6
million. Of this increase, $1.0 million was attributable to the three new cafes
opened in Los Angeles in late 1999 and 2000. The remainder of this increase was
primarily due to our new food introduction program, in which we update our
product offerings approximately every six to eight weeks, and our new inventory
system, which captured same-store sales growth by allowing us to manage the
availability of items for sale in our cafes in a more efficient manner.
Same-store sales increased by $2.5 million, or 13.7%, from $18.3 million to
$20.8 million. Same-store sales consist only of sales from cafes. The increase
in same-store sales was primarily due to our new food introduction program and
our new inventory system.
Branded sales increased by $3.9 million, or 63.2%, from $6.2 million to $10.1
million. This increase was primarily attributable to new relationships with
three customers. In 1999 we entered into a wholesale account relationship with
Kozmo.com, an Internet-based consumer delivery service which ceased operations
in April 2001. Kozmo.com accounted for 12.6% of branded sales in 2000. In April
2000, we provided some Charles Schwab Inc. offices with box lunches and catered
platters on a daily basis. In addition, as our brand awareness has matured in
each geographic region, we have been able to grow our box lunch and catering
sales. In June 2000, we began providing Tully's Coffee with food products for
selected retail cafes located in Seattle and San Francisco.
OPERATING EXPENSES
Operating expenses consist of costs of food and packaging, occupancy, labor,
depreciation and amortization, other operating, general and administrative and
provision for asset impairment and store closure. Total operating expenses
increased $3.3 million, or 9.1%, from $36.5 million to $39.8 million. As a
percentage of sales, our operating expenses decreased from 142.5% to 118.2%.
This decrease was primarily due to increased sales. We expect operating expenses
to continue to increase as energy costs in three of the four geographic markets
in which we operate our cafes and central kitchens continue to increase.
Cost of food and packaging increased by $2.1 million, or 18.0%, from $11.5
million to $13.6 million. Cost of food and packaging decreased as a percentage
of sales from 45.0% to 40.4%.
Cost of food and packaging for retail sales increased by $1.0 million, or 12.7%,
from $7.8 million to $8.8 million. This increase was primarily due to increased
retail sales. In addition, we implemented a just-in-time inventory and order
guide that helped us to reduce waste.
28
Cost of food and packaging for branded sales increased by $1.7 million, or
58.7%, from $2.8 million to $4.5 million. This increase was primarily due to
increased branded sales.
Cost of food and packaging as a percentage of total sales for each of retail
sales and branded sales decreased primarily due to implementation of a new
purchasing process, which improved our ability to source low cost ingredients.
As part of the new purchasing process, we entered into a relationship with
Marriott Distribution Services, under which they procure and deliver to our
central kitchens approximately 32% of our ingredients and packaging products.
Occupancy expense consists of costs related to the leasing of retail space for
our cafes and our central kitchens. Occupancy expense increased by $0.2 million,
or 6.0%, from $3.6 million to $3.8 million. This increase was primarily due to
the opening of three additional cafes. As a percentage of sales, occupancy
expense decreased from 14.1% to 11.3%, primarily due to increased sales. Our
rents are fixed or variable determined as a percentage of sales, or a
combination of both. In April 2001 we issued Series C preferred stock with a
value of approximately $0.2 million to a consultant for services rendered in
connection with leasing activities, which will be recognized over the lease
terms of generally five to seven years.
Labor expense consists of wages and salaries paid to employees. Labor expense
increased by $1.7 million, or 17.7%, from $9.5 million to $11.2 million. This
increase was primarily due to the opening of three additional cafes and the
amortization of deferred compensation of $0.08 million relating to option grants
to employees with exercise prices below the deemed fair market value. As a
percentage of sales, labor expense decreased from 37.1% to 33.2%. This decrease
was due to an increase in sales. This decrease was also due to the introduction
of a software program to enable us to more efficiently schedule personnel, both
in the central kitchens as well as our cafes.
Depreciation and amortization consists of the periodic expensing of leasehold
improvements, equipment and vehicles. Depreciation and amortization increased by
$ 0.03 million, or 1.1%, from $2.63 million to $2.66 million. As a percentage of
sales, depreciation and amortization decreased from 10.3% to 7.9%. This decrease
was primarily due to increased sales.
Other operating expenses consist of direct operating, marketing, administrative,
repair and maintenance and site termination expense. Other operating expenses
decreased by $0.5 million, or 20.6%, from $2.4 million to $1.9 million because
of the store closures in 1999. As a percentage of sales, other operating
expenses decreased from 9.4% to 5.7%.
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 expense
increased by $0.6 million, or 9.1%, from $6.0 million to $6.6 million, primarily
due to wage and salary increases, offset by increased efficiencies at the
corporate level. As a percentage of sales, general and administrative expense
decreased from 23.6% to 19.5%, primarily due to increased sales.
Provision for asset impairment and store closure relates to the writedown of
leasehold improvements at some cafe locations. Provision for asset impairment
and store closure decreased by $0.7 million, or 91.9%, from $0.8 million to $0.1
million. As a percentage of sales, asset impairment and store closure decreased
from 3.0% to 0.2%. Based on the facts surrounding an asset's impairment, we
recorded either a loss in the amount of the remaining book value or of the
excess of the remaining net book value over discounted projected cash flows
OTHER (EXPENSE) INCOME
Other (expense) income includes interest expense, interest and other income.
Other (expense) income decreased by $4.3 million, or 96.5%, from ($4.5) million
to ($0.2) million. This net expense decrease was primarily related to noncash
charges in 1999 related to the issuance of preferred stock as a conversion
premium on senior debt of $3.0 million and noncash charges of $0.9 million due
to the amortization of deferred debt issue costs related to the value of
warrants issued with the 15% senior bridge notes and 10% subordinated
convertible bridge notes. Prior to the conversion of the debt and the related
interest to redeemable preferred stock in 1999, the debt accrued interest of
29
$0.5 million during the year. No such debt was outstanding in 2000. As a
percentage of sales, other (expense) income decreased from 17.5% to 0.5%.
During April 1999, we issued $3.0 million of 15% senior bridge notes and
warrants. On August 31, 1999, the notes, together with accrued interest,
converted into shares of Series C preferred stock. Additionally, senior note
holders received 500,000 shares of Series C preferred stock as a conversion
premium, the estimated fair value of which was $3.0 million and which has been
recorded as a senior notes financing cost and is included in interest expense.
During December 1998, we issued $4.9 million of 10% subordinated convertible
bridge notes and warrants. On August 31, 1999, the notes, together with accrued
interest, converted into shares of Series C preferred stock.
Costs associated with the borrowings were amortized into interest expense over
the life of the borrowing.
NET LOSS
Net loss decreased by $9.1 million, or 59.1%, from $15.4 million to $6.3
million. This decrease was primarily due to an increase in total sales and a
decrease in net expense from other (expense) income. As a percentage of sales,
net loss decreased from 60.1% to 18.7%.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities during the fiscal years ended December 30,
2001 and 2000 was $5.6 million and $2.2 million, respectively. Net cash used in
operating activities in each period resulted primarily from net loss before
non-cash charges. In addition, fiscal year 2001 had decreases in accounts
payable.
Net cash used in investing activities for the fiscal years ended December 30,
2001 and 2000 was approximately $3.8 million and $0.8 million, respectively. Net
cash used in investing activities resulted from capital additions primarily
related to opening additional cafes and improvements to the central kitchens.
Net cash provided by financing activities for the fiscal years ended December
30, 2001 and 2000 was $15.0 million and $1.4 million, respectively. Net cash
provided by financing activities in fiscal year 2001 resulted primarily from the
issuance of capital stock, which was partially offset by financing costs, the
repayment of the line of credit of $2.0 million in May 2001 and scheduled
principal repayments primarily relating to delivery vehicle financing. 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.
We have opened five cafes in 2001 and one in the first quarter of 2002. We
closed a cafe during the first quarter of 2002. This closure resulted from
decreased sales as the cafe's building occupancy shifted from normal office
occupancy to a data-center. In 2002, costs associated with this cafe closure are
estimated to be $16,000 and we plan to transfer the assets and fully depreciate
the remaining net book value that is approximately $26,000. We plan to open five
additional cafes in the second and third quarters of 2002. These five additional
cafes to be opened in 2002 will require approximately $1.4 million of additional
funds in 2002 for leasehold improvements and equipment.
Since inception we have financed our operations primarily through the issuance
of capital stock and debt. Since inception, we have raised cash of approximately
$62.9 million from sales of preferred stock, convertible debt and common stock.
In addition to funding capital expenditures, which have approximated $25.7
million since inception, cash provided by financing activities has funded our
initiatives in business and market development and related operating losses.
Since inception through fiscal year end 2001, we have reported net losses of
approximately $48.1 million. In the near term, operating losses may continue
despite actions taken to reduce negative cash flow from operations. Actions
taken to reduce negative cash flow from operations, including improving
operational
30
efficiencies, cost controls and cutbacks and closing of certain unprofitable
operating properties, continued during 2001.
The accompanying financial statements have been prepared assuming that we 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. We have incurred substantial
operating losses and negative cash flows from operations since inception and had
an accumulated deficit of $55.1 million at December 30, 2001. These matters
raise substantial doubt about our ability to continue as a going concern. To
date, we have financed its operations principally through the net proceeds from
debt and equity offerings. Our ability to continue as a going concern is
dependant upon numerous factors, including our ability to obtain additional
financing, our ability to increase our level of future revenues or our ability
to reduce operating expenses.
At December 30, 2001, we had cash and cash equivalents of approximately $6.2
million. We believe our current cash and cash equivalents, will be sufficient to
meet our anticipated cash needs for working capital and capital expenditures for
at least the next 12 months. Thereafter, we may need to raise additional capital
to finance our operations, as well as to enhance our operations, fund our
expansion and respond to competitive pressures. 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 we are unable to obtain sufficient funds to satisfy its cash
requirements, we may be forced to curtail operations, dispose of assets, or seek
extended payment terms from its vendors. Such events would materially and
adversely affect our financial position and results of operations.
Poor financial results, unanticipated expenses or unanticipated opportunities
that require financial commitments could give rise to additional financing
requirements sooner than we expect. If we raise additional funds through the
issuance of equity or convertible debt securities, the percentage ownership of
our existing shareholders would be reduced, and these securities may have
rights, preferences or privileges senior to those of our common stock. If
adequate funds are not available or are not available on acceptable terms, our
ability to enhance our services, fund our expansion, respond to competitive
pressures or take advantage of business opportunities would be significantly
limited, and we might need to significantly restrict our operations.
EQUITY-BASED COMPENSATION
Deferred stock compensation
During fiscal 2000, the Company granted stock options to employees and directors
at exercise prices deemed to be below the fair value of the underlying stock on
the date of grant. As a result of these grants, the Company recorded deferred
stock compensation of approximately $1.2 million. The deferred stock
compensation is being amortized generally over a four-year vesting period. On
January 31, 2001, the Company issued approximately 27,000 stock options to
employees with an exercise price of $6.00. The grant of these options resulted
in a deferred stock compensation charge of approximately $173,000 in the first
quarter of fiscal year 2001. On June 7, 2001, the Company issued approximately
11,000 stock options to employees with an exercise price of $1.50. The grant of
these options resulted in a deferred stock compensation charge of approximately
$36,000 in the second quarter of fiscal 2001.
Deferred stock compensation is being amortized generally over a four-year
vesting period. During fiscal 2001, $288,000 of deferred stock compensation was
amortized.
Stock options
In January 2001, the board of directors approved an amendment to the Company's
1996 stock option plan to increase the number of shares of common stock reserved
for issuance under the plan to one million shares (post-reverse split.) The
amendment was approved by the Company's shareholders in March 2001.
31
In June 2001, the board of directors approved a grant of options of
approximately 321,000 shares of common stock to employees with exercise price of
$4.70 per share. Since the exercise price was equal to the fair value at the
date of grant, no deferred compensation was recognized.
In July 2001, the board of directors approved a grant of options of
approximately 102,000 shares of common stock to employees with exercise prices
of $2.34 per share. Since the exercise price was equal to the fair value at the
date of grant, no deferred compensation was recognized.
In November 2001, the board of directors approved a grant of options of
approximately 4,000 shares of common stock to employees with exercise prices of
$0.95 per share. Since the exercise price was equal to the fair value at the
date of grant, no deferred compensation was recognized.
Preferred stock
In April 2001, 18,917 shares of Series C preferred stock, with an approximate
fair value of $155,000, were issued to two consultants for services to be
rendered in connection with leasehold improvements and food development. This
amount will be expensed over future periods.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Financial
Instruments and for Hedging Activities" ("SFAS No. 133"), which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. SFAS No. 133 was amended by SFAS No. 137,
deferring the effective date to fiscal years beginning after June 15, 2000. In
June 2000, SFAS No. 138 was issued, which amends provisions of SFAS No. 133. The
adoption of these standards as of January 1, 2001 did not have a material impact
on our results of operations or financial position as we hold no derivative
financial instruments and do not currently engage in hedging activities.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" ("SFAS No. 141"). SFAS No. 141 addresses financial
accounting and reporting for business combinations. SFAS No. 141 is effective
for all business combinations for which the date of acquisition is July 1, 2001
or later. The adoption of SFAS No. 141 is not expected to have a material impact
on our results of operations or financial position.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 142,
"Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS No. 142 addresses
financial accounting and reporting for acquired goodwill and other intangible
assets. The provisions of SFAS No. 142 will be effective for fiscal years
beginning after December 15, 2001, except that certain provisions of SFAS No.
142 shall be applied to goodwill and other acquired intangible assets for which
the acquisition date is after June 30, 2001. The adoption of SFAS No. 142 is not
expected to have a material impact on our results of operations or financial
position.
In July 2001, the Financial Accounting Standards Board 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 will be effective for
fiscal years beginning after June 15, 2002, however early application is
permitted. We are currently evaluating the implications of adoption of SFAS No.
143.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No.
144"). This Statement addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. This Statement supersedes FASB
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions
of APB Opinion No. 30, Reporting the Results of Operations--Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and
32
Transactions, for the disposal of a segment of a business. The provisions of
SFAS No. 144 will be effective for fiscal years beginning after December 15,
2001. The adoption of SFAS No. 144 is not expected to have a material impact on
our results of operations or financial position.
CRITICAL ACCOUNTING POLICIES
We have identified the policies below as critical to our business operations and
the understanding of our results of operations. The impact and any associated
risks related to these policies on our business operations is discussed
throughout management's Discussion and Analysis of Financial Condition and
Results of Operations where such policies affect our reported and expected
financial results. For a detailed discussion on the application of these and
other accounting policies, see Note 1 in the Notes to the Consolidated Financial
Statements in Item 8 of this Annual Report on Form 10-K, beginning on page 41.
Note that our preparation of this Annual Report on Form 10-K 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 period. 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 by
SAB 101A and 101B. 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 rendered; (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 rendered 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 continued
appropriateness. 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 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We have no derivative financial instruments or derivative commodity investments.
We invest our excess cash, including the net proceeds from our initial public
offering, 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.
Under our revolving credit facility, we could be exposed to market risk from
changes in interest rates on borrowings which bear interest at the lending
bank's prime rate plus a fixed percentage or LIBOR plus a fixed percentage. We
currently have no borrowings outstanding under the revolving line of credit.
33
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, utility 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.
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
AUDITED FINANCIAL STATEMENTS: Page
----
Report of Independent Accountants............................................... 35
Balance Sheet................................................................... 36
Statement of Operations......................................................... 37
Statement of Mandatorily Redeemable Convertible Preferred Stock and
Stockholders' Equity (Deficit)............................................ 38
Statement Of Cash Flows......................................................... 40
Notes to Financial Statements................................................... 41
34
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Briazz, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, mandatorily redeemable convertible preferred stock and stockholders'
equity (deficit) and cash flows present fairly, in all material respects, the
financial position of Briazz, Inc. at December 30, 2001 and December 31, 2000
and the results of its operations and its cash flows for the three years in the
period ended December 30, 2001 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 audit 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 audit 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 since inception
and needs to raise additional capital to fund future operating losses and
planned growth. 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.
/s/ PricewaterhouseCoopers LLP
Seattle, Washington March 12, 2002
35
BRIAZZ, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
YEARS ENDED
----------------------------
DECEMBER 30, DECEMBER 31,
2001 2000
------------ ------------
ASSETS
Current assets
Cash and cash equivalents ............................................... $ 6,193 $ 555
Accounts receivable, net of allowance of $104 (2001) and $63 (2000) ..... 472 547
Inventory ............................................................... 507 508
Prepaid expenses and other current assets ............................... 447 490
Current portion of restricted certificates of deposit ................... 149 149
-------- --------
Total current assets ........................................ 7,768 2,249
Property and equipment, net .................................................. 13,555 11,632
Restricted certificates of deposit, net of current portion ................... 453 328
Deposits and other assets .................................................... 177 200
-------- --------
Total assets ................................................ $ 21,953 $ 14,409
======== ========
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Line of credit borrowings, current ...................................... $ -- $ 160
Bank overdraft .......................................................... 754 --
Current portion of long-term debt ....................................... 138 144
Accounts payable ........................................................ 1,322 3,008
Accrued compensation .................................................... 996 904
Accrued and other liabilities ........................................... 492 653
-------- --------
Total current liabilities ................................... 3,702 4,869
-------- --------
Line of credit borrowings, net of current portion ............................ -- 1,840
Long-term debt, net of current portion ....................................... 335 48
-------- --------
Commitments and contingencies
Mandatorily redeemable convertible preferred stock, no par;
50,000,000 shares authorized
Series A, 35,000 designated; 0 (2001) and 2,061 (2000) shares
issued and outstanding; liquidation value of $0 (2001) and $11,058 (2000) -- 10,984
Series B, 34,450 designated; 0 (2001) and 3,211 (2000) shares issued and
outstanding; liquidation value of $0 (2001) and $23,239 (2000) .......... -- 23,104
Series C, 30,000,000 designated; 0 (2001) and 3,120,788 (2000) shares
issued and outstanding; liquidation value of $0 (2001) and $19,605 (2000) -- 19,521
-------- --------
Total mandatorily redeemable convertible preferred stock .... -- 53,609
-------- --------
Stockholders' equity (deficit)
Common stock, no par; 100,000,000 shares authorized; 5,824,993 (2001)
and 920 (2000) shares issued and outstanding .......................... 73,746 2,076
Additional paid-in capital .............................................. 209 --
Deferred stock compensation ............................................. (981) (1,060)
Accumulated deficit ..................................................... (55,058) (46,973)
-------- --------
Total stockholder' equity (deficit) ......................... 17,916 (45,957)
-------- --------
Total liabilities and stockholders' equity .................. $ 21,953 $ 14,409
======== ========
The accompanying notes are an integral part of these financial statements.
36
BRIAZZ, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
Years ended
--------------------------------------------
December 30, December 31, December 26,
2001 2000 1999
------------ ------------ ------------
Sales
Retail ................................................................ $ 22,737 $ 23,624 $ 19,428
Branded Sales ......................................................... 9,292 10,068 6,170
----------- ----------- -----------
Total Sales ...................................................... 32,029 33,692 25,598
----------- ----------- -----------
Operating Expenses
Cost of food and packaging ............................................ 12,480 13,597 11,520
Occupancy expenses .................................................... 4,010 3,818 3,602
Labor expenses (including amortization of deferred stock compensation
of $186 for 2001 and $81 for 2000) ................................. 11,098 11,186 9,506
Depreciation and amortization ......................................... 2,686 2,657 2,628
Other operating expenses .............................................. 1,849 1,921 2,419
General and administrative expenses (including amortization of deferred
stock compensation of $102 for 2001 and $41 for 2000) .............. 6,837 6,581 6,033
Provision for asset impairment and store closure ...................... 26 63 779
----------- ----------- -----------
Total operating expenses ......................................... 38,986 39,823 36,487
----------- ----------- -----------
Loss from operations ........................................................ (6,957) (6,131) (10,889)
Other (expense) income
Interest and other expense ............................................ (125) (217) (4,600)
Interest and other income ............................................. 280 61 108
----------- ----------- -----------
155 (156) (4,492)
----------- ----------- -----------
Net loss .................................................................... (6,802) (6,287) (15,381)
Accretion of dividends/amortization of discount on preferred stock .......... 4,318 3,319 2,421
----------- ----------- -----------
Net loss attributable to common stockholders ................................ $ (11,120) $ (9,606) $ (17,802)
=========== =========== ===========
Basic and diluted net loss per share ........................................ $ (2.86) $ (2,455.68) $ (5,148.14)
=========== =========== ===========
Weighted-average shares used in computing basic and diluted
net loss per share ...................................................... 3,889,472 3,912 3,458
=========== =========== ===========
The accompanying notes are an integral part of these financial statements
37
BRIAZZ, INC.
STATEMENT OF MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
MANDATORILY REDEEMABLE PREFERRED STOCK
---------------------------------------------------------------------
SERIES A SERIES B SERIES C
----------------- ----------------- -----------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT TOTAL
------- ------- ------- ------- ------- ------- -------
Balance at December 27, 1998 .............................. 5 9,732 5 20,416 -- -- 30,148
Issuance of stock warrants with convertible debt .......... -- -- -- -- -- -- --
Issuance of Series C preferred stock, net of issuance costs -- -- -- -- 834 4,917 4,917
Issuance of Series C preferred stock upon
convertible notes, including accrued interest ......... -- -- -- -- 1,907 10,539 10,539
Accretion of mandatorily redeemable preferred stock ....... -- 637 -- 1,366 -- 418 2,421
Issuance of common stock for services ..................... -- -- -- -- -- -- --
Net loss .................................................. -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Balance at December 26, 1999 .............................. 5 10,369 5 21,782 2,741 15,874 48,025
Issuance of Series C preferred stock, net of issuance costs -- -- -- -- 375 2,235 2,235
Issuance of Series C preferred stock for services ......... -- -- -- -- 5 30 30
Accretion of mandatorily redeemable preferred stock ....... -- 615 -- 1,322 -- 1,382 3,319
Common stock issued upon exercise of stock options ....... -- -- -- -- -- -- --
Change in unearned compensation ........................... -- -- -- -- -- --
Deferred compensation related to grant of stock options ... -- -- -- -- -- --
Amortization of deferred compensation ..................... -- -- -- -- -- --
Stock repurchased or redeemed ............................. (3) -- (2) -- -- -- --
Net loss .................................................. -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Balance at December 31, 2000 .............................. 2 10,984 3 23,104 3,121 19,521 53,609
Issuance of common stock, net of issuance costs ........... -- -- -- -- -- -- --
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)
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 ....... -- -- -- -- -- -- --
Common stock issued upon exercise of stock warrants ...... -- -- -- -- -- -- --
Deferred compensation related to the grant of stock options -- -- -- -- -- -- --
Amortization of deferred compensation ..................... -- -- -- -- -- -- --
Stock repurchased or redeemed ............................. -- -- -- -- -- -- --
Net loss .................................................. -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Balance at December 30, 2001 .............................. 0 0 0 0 0 0 0
The accompanying notes are an integral part of these financial
38
BRIAZZ, INC.
STATEMENT OF MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
STOCKHOLDERS' EQUITY (DEFICIT)
-----------------------------------------------------------------------
COMMON STOCK ADDITIONAL DEFERRED
------------------ PAID-IN STOCK ACCUMULATED
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT TOTAL
------ -------- ---------- ------------ ----------- --------
Balance at December 27, 1998 .......................... 3 $ 2,075 $ -- $ -- $(22,246) $(20,171)
Issuance of stock warrants with convertible ........... -- -- -- -- 1,446 1,446
Issuance of Series C preferred stock, net of issuance
cost ............................................. -- -- -- -- -- --
Issuance of Series C preferred stock upon conversion of
convertible notes, including accrued interest..... -- -- -- -- -- --
Accretion of mandatorily redeemable preferred stock.... -- -- -- -- (2,421) (2,421)
Issuance of common stock for service .................. -- -- -- -- 10 10
Net loss .............................................. -- -- -- -- (15,381) (15,381)
----- -------- -------- -------- -------- --------
Balance at December 26, 1999 .......................... 3 2,075 -- -- (38,592) (36,517)
Issuance of Series C preferred stock, net of issuance . -- -- -- -- -- --
Issuance of Series C preferred stock for .............. -- -- -- -- -- --
Accretion of mandatorily redeemable preferred stock.... -- -- -- -- (3,320) (3,320)
Common stock issued upon exercise of stock options.... 1 1 -- -- -- 1
Change in unearned compensation ....................... -- -- -- -- 44 44
Deferred compensation related to grant of stock
options .......................................... -- -- -- (1,182) 1,182 --
Amortization of deferred compensation.................. -- -- -- 122 -- 122
Stock repurchased or redeemed ......................... (3) -- -- -- -- --
Net loss .............................................. -- -- -- -- (6,287) (6,287)
----- -------- -------- -------- -------- --------
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
Issuance of Series C preferred stock, net of issuance
cost ............................................. -- -- -- -- -- --
Issuance of Series C preferred stock for service....... -- -- -- -- -- --
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 options.... -- -- (3,034) -- -- (3,034)
Common stock issued upon exercise of stock warrants... 4 6 -- -- -- 6
Common stock issued upon exercise of stock options ... 4 -- -- -- -- --
Deferred compensation related to the grant of stock
options........................................... -- -- 209 (209) -- --
Amortization of deferred compensation.................. -- -- -- 288 -- 288
Stock repurchased or redeemed ......................... -- -- -- -- --
Net loss .............................................. -- -- -- -- (6,802) (6,802)
----- -------- -------- -------- -------- --------
Balance at December 30, 2001 .......................... 5,825 $ 73,746 $ 209 $ (981) $(55,058) $ 17,916
===== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
39
BRIAZZ, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED
----------------------------------------
DECEMBER 30, DECEMBER 31, DECEMBER 26,
2001 2000 1999
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ........................................................................ $ (6,802) $ (6,287) $(15,381)
Adjustments to reconcile net loss to net cash used in operating activities
Amortization of deferred compensation ...................................... 288 122 --
Depreciation and amortization .............................................. 2,686 2,657 2,628
Provision for asset impairment and store closure ........................... 26 63 779
Non-cash expense related to issuance of additional shares of
Series C preferred stock upon payment of Senior Bridge borrowings .. -- -- 3,000
Non-cash interest expense .................................................. -- -- 1,224
Non-cash expense related to issuance of common stock and options ........... -- 44 10
Changes in operating assets and liabilities:
Accounts receivable .................................................... 75 (42) (258)
Inventory .............................................................. 1 71 (16)
Prepaid expenses and other current assets .............................. 43 (274) 212
Deposits and other assets .............................................. 23 (57) 197
Accounts payable ....................................................... (1,880) 1,591 (634)
Accrued compensation ................................................... 92 (204) 208
Accrued and other liabilities .......................................... (161) 83 (407)
-------- -------- --------
Net cash used in operating activities .................... (5,609) (2,233) (8,438)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment ............................................. (3,755) (747) (1,563)
Other ........................................................................... -- (25) (28)
-------- -------- --------
Net cash used in investing activities .................... (3,755) (772) (1,591)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of preferred stock, net of issuance costs .................... 3,034 2,235 4,917
Proceeds from sale of common stock, net of issuance costs ....................... 13,583 -- --
Proceeds from (repayment of) line-of-credit borrowings .......................... (2,000) -- 2,000
Proceeds from convertible debentures ............................................ -- -- 3,000
Proceeds from long-term debt .................................................... -- -- 25
Proceeds from exercise of stock options ......................................... 6 1 --
(Increase) decrease in restricted certificate of deposit ........................ (126) 53 301
Change in bank overdraft ........................................................ 754 (579) --
Repurchase of preferred and common stock ........................................ -- (1) --
Repayment of capital lease obligation ........................................... (95) -- --
Repayment of long-term debt ..................................................... (154) (302) (269)
-------- -------- --------
Net cash provided by financing activities ................ 15,002 1,407 9,974
-------- -------- --------
Net (decrease) increase in cash and cash equivalents ................................ 5,638 (1,598) (55)
Cash and cash equivalents
Beginning of period ............................................................. 555 2,153 2,208
-------- -------- --------
End of period ................................................................... $ 6,193 $ 555 $ 2,153
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest .......................................................... $ 114 $ 213 $ 376
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Conversion of mandatorily redeemable preferred stock to common stock ............ $ 58,081 $ -- $ --
======== ======== ========
Debt to equity conversion ....................................................... $ -- $ -- $ 10,539
======== ======== ========
Additions to property and equipment financed with capital lease obligations...... $ 530 $ -- $ --
======== ======== ========
Additions to property and equipment accrued at year end ......................... $ 194 $ -- $ --
======== ======== ========
Additions to property and equipment through issuance of common stock ........... $ 130 $ -- $ --
======== ======== ========
Preferred stock issued for services ............................................. $ 154 $ 30 $ --
======== ======== ========
Accretion of dividends/amortization of discount on preferred stock .............. $ 4,318 $ 3,319 $ 2,421
======== ======== ========
The accompanying notes are an integral part of these financial statements.
40
BRIAZZ, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS
BRIAZZ, Inc. ("Briazz" or the "Company") manufactures and distributes branded
lunch and breakfast foods through multiple points of distribution in urban and
suburban locations. The Company commenced operations in 1995 in Seattle and
opened new markets in San Francisco in 1996, Chicago in 1997 and Los Angeles in
1998. The Company's business strategy is to solidify its current markets and as
funding becomes available, build Briazz into a national brand by expanding in
major metropolitan areas across the United States. The Company's retail
distribution network includes Briazz cafes, as well as box lunch delivery. The
Company also distributes its products through select strategic wholesale
alliances. Each market operates a central kitchen, which prepares meals daily.
FISCAL YEARS
From fiscal 1995 through 2000, the Company measured its operational results
based on 13 four-week periods. There were fifty-two weeks in 1999, fifty-three
weeks in 2000 and fifty-two weeks in 2001. In fiscal 2001 the Company converted
to four 13-week periods with a 52-or 53-week fiscal year.
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.
RECLASSIFICATIONS
Reclassifications of certain prior year amounts have been made to conform to
current year classifications. The reclassifications has no effect on
stockholders' equity (deficit) or net loss.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original 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 not experienced any losses on its deposits of cash, cash equivalents
and restricted cash.
The Company had one customer which accounted for 9% of its revenue for fiscal
2001. This same customer accounted for 42% of the Company's accounts receivable
balance at December 30, 2001 and 27% at December 31, 2000.
41
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.
REVENUE RECOGNITION
Revenues are generally recognized at the point of sale at retail locations or
upon delivery of the product for box lunch, catering and wholesale sales. For
some wholesale products, where a right of return exists, revenue is recognized
after return rights have lapsed.
PRE-OPERATING COSTS
Costs associated with opening new locations are expensed as incurred.
ADVERTISING AND PROMOTION
Advertising and promotion costs are expensed as incurred, and approximated
$425,000, $316,000 and $480,000 in fiscal 1999, 2000 and 2001 respectively.
BANK OVERDRAFT
Bank overdraft represents checks issued and outstanding in excess of the related
bank balance.
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.
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 No. 123
("SFAS No. 123"), "Accounting for Stock-Based Compensation." Under APB No. 25,
compensation expense is based on the difference, if any, on the date of grant,
between the deemed fair value of the Company's stock and the exercise price of
the option. Unearned compensation is being amortized on a straight-line basis
over the vesting period of the individual options.
Certain warrants granted to employees contain provisions which result in the
application of variable plan accounting in accordance with the provisions of
FASB Interpretation No. 44. For those warrants, compensation expense is adjusted
quarterly as the market price of the Company's common stock changes.
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123 and Emerging Task Force Issue 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.
42
STOCK SPLITS
In March of 2001, the Company's board of directors and shareholders approved a
one-for-six reverse stock split of the Company's capital stock. The financial
statements and accompanying notes have been restated for all periods presented
to reflect this change.
STOCK WARRANTS
Stock warrants issued together with debt securities are considered a cost of
financing and are recorded as original issue discount and additional paid in
capital based on the estimated fair value at date of issuance. The original
issue discount is amortized over the life of the debt and is reported as a
reduction of the related debt on the balance sheet.
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 and amortization is computed using the straight-line
method over the following estimated useful lives:
Computer equipment.................................... 3 years
Furniture, fixtures and equipment..................... 5 - 7 years
Leasehold improvements................................ Shorter of lease term or 10 years
Vehicles.............................................. 5 - 7 years
IMPAIRMENT OF LONG-LIVED ASSETS
The Company accounts for long-lived assets under Statement of Financial
Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which requires
the Company to review for impairment of long-lived assets, whenever events or
changes in circumstances indicate that the carrying amount of an asset might not
be recoverable. When such an event occurs, management determines whether there
has been an impairment by comparing the anticipated undiscounted future net cash
flows at the lowest level for which there are identifiable cash flows, which is
at the store level, to the related asset's carrying value. If an asset is
considered impaired, the asset is written down to fair value, which is
determined based either on discounted cash flows or appraised values, depending
on the nature of the asset.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts reported in the balance sheet for cash and cash equivalents,
accounts receivable, restricted certificates of deposit and accounts payable
approximate fair value because of their immediate or short-term nature. The fair
value of line of credit borrowings approximated its carrying amount because the
stated rate of the debt reflected current market conditions at December 31,
2000. The fair value of long-term debt 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Financial
Instruments and for Hedging Activities" ("SFAS No. 133"), which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. SFAS No. 133 was amended by SFAS No. 137,
deferring the effective date to fiscal years beginning after June 15, 2000. In
June 2000, SFAS No. 138 was issued, which amends provisions of SFAS No. 133. The
adoption of these standards as of January 1, 2001 did not have a material impact
on the Company's results of operations or financial position as the Company
holds no derivative financial instruments and does not currently engage in
hedging activities.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" ("SFAS No. 141"). SFAS No. 141 addresses financial
accounting and reporting for business combinations. SFAS No. 141 is
43
effective for all business combinations for which the date of acquisition is
July 1, 2001 or later. The adoption of SFAS No. 141 is not expected to have a
material impact on the Company's results of operations or financial position.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 142,
"Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS No. 142 addresses
financial accounting and reporting for acquired goodwill and other intangible
assets. The provisions of SFAS No. 142 will effective for fiscal years beginning
after December 15, 2001, except that certain provisions of SFAS No. 142 shall be
applied to goodwill and other acquired intangible assets for which the
acquisition date is after June 30, 2001. The adoption of SFAS No. 142 is not
expected to have a material impact on the Company's results of operations or
financial position.
In July 2001, the Financial Accounting Standards Board 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 will be effective for
fiscal years beginning after June 15, 2002, however early application is
permitted. The Company is currently evaluating the implications of adoption of
SFAS No. 143.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No.
144"). This Statement addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. This Statement supersedes FASB
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions
of APB Opinion No. 30, Reporting the Results of Operations--Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, for the disposal of a segment of
a business. The provisions of SFAS No. 144 will be effective for fiscal years
beginning after December 15, 2001. The adoption of SFAS No. 144 is not expected
to have a material impact on the Company's results of operations or financial
position.
2. FINANCIAL CONDITION AND BASIS OF CONCENTRATION
The accompanying financial statements have been prepared assuming 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. The Company
has incurred substantial operating losses and negative cash flows from
operations since inception and had an accumulated deficit of $55.1 million at
December 30, 2001. These matters raise substantial doubt about the Company's
ability to continue as a going concern. To date, 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.
There can be no assurance that the Company will be able to obtain additional
financing, reduce expenses or successfully complete other steps to continue as a
going concern. If the Company is unable to obtain sufficient funds to satisfy
its cash requirements, it may be forced to curtail operations, dispose of
assets, or seek extended payment terms from its vendors. Such events would
materially and adversely affect the Company's financial position and results of
operations.
3. 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.
The Company has excluded 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. Prior to the conversion of all
outstanding shares of Series C mandatory redeemable convertible preferred stock
immediately prior to the closing of the Company's initial public offering, the
warrants to purchase
44
Series C stock were subject to the anti-dilution provisions of the Series C
Stock. Those warrants were adjusted in fiscal 2001 after the initial public
offering to reflect the anti-dilution adjustments of the Series C stock prior to
the conversion of the Series C Stock. (See Note 4) Upon completion of the
initial public offering, the warrants were converted pursuant to their terms
into warrants to purchase common stock.
The following table presents the calculation of basic and diluted net loss per
share (in thousands, except share and per share data):
YEARS ENDED
------------------------------------------
DECEMBER 30, DECEMBER 31, DECEMBER 26,
2001 2000 1999
------------ ------------ ------------
Net loss attributable to common stockholders... $ (11,120) $ (9,606) $ (17,802)
Weighted-average shares used in computing basic
and diluted net loss per share .......... 3,889,472 3,912 3,458
Basic and diluted net loss per share .......... $ (2.86) $ (2,455.68) $ (5,148.14)
Options to purchase common stock .............. 908,129 520,952 404,625
Redeemable convertible preferred stock ........ -- 3,126,060 2,750,792
Warrants to purchase redeemable convertible
Preferred stock ......................... -- 907,240 907,240
Warrants to purchase common stock.............. 930,404 -- --
4. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(DEFICIT)
At various times throughout fiscal year 2001 and 2000, the Company triggered the
anti-dilution provisions of the Series A, B and C mandatorily redeemable
convertible preferred stock. As a result, in January 2001 the rates at which
preferred stock converted to common stock became 1.0634, 1.0635 and 1.0447 for
Series A, B, and C, respectively.
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 time of issuance of the Series C
preferred stock, 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" at the time of
issuance of the preferred stock. Accordingly, the beneficial conversion feature
was calculated as of January 29, 2001, the commitment date, as the difference
between the conversion price and the fair value of the common stock multiplied
by the number of shares into which the security was convertible (intrinsic
value). The Company recorded a beneficial conversion feature of approximately $3
million. 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 (October 2005) using the effective
interest yield method. As of May 1, 2001, the beneficial conversion feature of
$3.0 million was fully amortized upon the conversion of Series C preferred stock
to common stock (Note 7). This beneficial conversion feature was recognized as a
dividend, increasing net loss attributable to common stockholders.
The warrants outstanding to purchase Series C preferred stock of 907,240
(947,817 as adjusted for anti-dilution) were converted into warrants to purchase
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 as of July 1, 2001 when the market
price of the Company's common stock dropped to a level below the exercise price.
45
5. COMMITMENTS AND CONTINGENCIES
The Company is subject to various legal proceedings and claims that arise in the
ordinary course of business. Company management currently believes that
resolution of such legal matters will not have a material adverse impact on the
Company's financial position, results of operations or cash flows.
6. SEGMENT INFORMATION
The Company has changed its segment disclosures from previous period
disclosures, to more closely match how it currently manages its business. In
previous periods, the Company disclosed two reportable segments: Retail and
Wholesale and Other. Beginning in the fourth quarter of fiscal 2001, 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 unallocated costs of operations. Management evaluates
segment performance primarily based on sales and segment operating income
(loss). Prior periods have been restated to reflect the new classifications.
The following table presents certain financial information for each segment
(amounts in thousands):
46
YEARS ENDED
----------------------------------------
DECEMBER 30, DECEMBER 31, DECEMBER 26,
2001 2000 1999
------------ ------------ ------------
RETAIL
Net Sales ............................ $ 22,737 $ 23,624 $ 19,428
Cost of food and packaging ........... (8,266) (8,759) (7,768)
-------- -------- --------
Subtotal ............................. 14,471 14,865 11,660
Cost of operations ................... (12,143) (12,039) (12,593)
-------- -------- --------
Income (loss) from operations ........ $ 2,328 $ 2,826 $ (933)
======== ======== ========
EBITDA ............................... $ 3,740 $ 4,507 $ 759
======== ======== ========
BRANDED SALES
BOX LUNCH & CATERING
Net Sales ........................ $ 5,471 $ 5,381 $ 3,592
Cost of food and packaging ....... (1,875) (1,963) (1,276)
-------- -------- --------
Subtotal ......................... 3,596 3,418 2,316
-------- -------- --------
WHOLESALE & GROCERY
Net Sales ........................ 3,821 4,687 2,578
Cost of food and packaging ....... (1,917) (2,495) (1,543)
-------- -------- --------
Subtotal ......................... 1,904 2,192 1,035
-------- -------- --------
TOTAL BRANDED SALES
Net Sales ........................ 9,292 10,068 6,170
Cost of food and packaging ....... (3,792) (4,458) (2,819)
-------- -------- --------
Subtotal ......................... 5,500 5,610 3,351
Cost of operations ............... (4,231) (3,939) (2,901)
-------- -------- --------
Income from operations ........... $ 1,269 $ 1,671 $ 450
======== ======== ========
EBITDA ........................... $ 1,472 $ 1,856 $ 620
======== ======== ========
KITCHENS
Unallocated cost of food and packaging $ (422) $ (380) $ (933)
Unallocated cost of .................. (3,295) (3,667) (3,440)
-------- -------- --------
Loss from operations ................. $ (3,717) $ (4,047) $ (4,373)
======== ======== ========
EBITDA ............................... $ (3,136) $ (3,410) $ (3,734)
======== ======== ========
GENERAL & ADMINISTRATIVE
Cost of operations ................... $ (6,837) $ (6,581) $ (6,033)
-------- -------- --------
EBITDA ............................... $ (6,382) $ (6,366) $ (5,798)
======== ======== ========
TOTAL
Net Sales ............................ $ 32,029 $ 33,692 $ 25,598
Cost of food and packaging ........... (12,480) (13,597) (11,520)
-------- -------- --------
Subtotal ............................. 19,549 20,095 14,078
Cost of operations ................... (26,506) (26,226) (24,967)
-------- -------- --------
Loss from operations ................. $ (6,957) $ (6,131) $(10,889)
======== ======== ========
EBITDA ............................... $ (4,306) $ (3,413) $ (8,153)
-------- -------- --------
47
7. INITIAL PUBLIC OFFERING AND STOCKHOLDERS' EQUITY
The Company's registration statement with respect to its initial public offering
was declared effective by the Securities and Exchange Commission on May 1, 2001.
The offering closed on May 7, 2001. 2,000,000 shares of common stock were
offered in this initial public offering at a price to the public of $8.00 per
share. 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 (Note 4). The conversion
resulted in the issuance of approximately 3,816,000 shares of common stock.
8. EQUITY-BASED COMPENSATION
DEFERRED STOCK COMPENSATION
During fiscal 2000, the Company granted stock options to employees and directors
at exercise prices deemed to be below the fair value of the underlying stock on
the date of grant. As a result of these grants, the Company recorded deferred
stock compensation of approximately $1.2 million. The deferred stock
compensation is being amortized generally over a four-year vesting period. On
January 31, 2001, the Company issued approximately 27,000 stock options to
employees with an exercise price of $6.00. The grant of these options resulted
in a deferred stock compensation charge of approximately $173,000 in the first
quarter of fiscal year 2001. On June 7, 2001, the Company issued approximately
11,000 stock options to employees with an exercise price of $1.50. The grant of
these options resulted in a deferred stock compensation charge of approximately
$36,000 in the second quarter of fiscal 2001.
Deferred stock compensation is being amortized generally over a four-year
vesting period. During fiscal 2001, $288,000 of deferred stock compensation was
amortized.
STOCK OPTIONS
In January 2001, the board of directors approved an amendment to the Company's
1996 stock option plan to increase the number of shares of common stock reserved
for issuance under the plan to one million shares (post-reverse split.) The
amendment was approved by the Company's shareholders in March 2001.
In June 2001, the board of directors approved a grant of options of
approximately 321,000 shares of common stock to employees with exercise price of
$4.70 per share. Since the exercise price was equal to the fair value at the
date of grant, no deferred compensation was recognized.
In July 2001, the board of directors approved a grant of options of
approximately 102,000 shares of common stock to employees with exercise prices
of $2.34 per share. Since the exercise price was equal to the fair value at the
date of grant, no deferred compensation was recognized.
In November 2001, the board of directors approved a grant of options of
approximately 4,000 shares of common stock to employees with exercise prices of
$0.95 per share. Since the exercise price was equal to the fair value at the
date of grant, no deferred compensation was recognized.
PREFERRED STOCK
In April 2001, 18,917 shares of Series C preferred stock, with an approximate
fair value of $154,000, were issued to two consultants for services to be
rendered in connection with leasehold improvements and food development. This
amount will be expensed over future periods.
48
9. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
DECEMBER 30, DECEMBER 31,
2001 2000
------------ ------------
Leasehold improvements .................. $ 11,485 $ 9,986
Furniture and fixtures .................. 12,272 9,910
Vehicles ................................ 1,952 1,180
-------- --------
Total property and equipment ........ 25,709 21,076
Accumulated depreciation and amortization (12,154) (9,444)
-------- --------
Property and equipment, net ............. $ 13,555 $ 11,632
-------- --------
10. LEASES
The Company leases cafe, central kitchen 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 expense
approximated $2.6 million, $2.6 million and $2.5 million, during fiscal 2001,
2000 and 1999, respectively.
Minimum annual commitments for leases at December 30, 2001 are as follows (in
thousands):
Operating Capital
------------------------- --------
Office
Equipment Facilities Vehicles
--------- ---------- --------
2002 ............................................. $ 43 $ 2,749 $ 139
2003 ............................................. 35 2,663 139
2004 ............................................. 26 2,589 139
2005 ............................................. 12 2,420 113
2006 ............................................. 6 1,815 53
Thereafter ....................................... 1 2,479 29
---- -------- -----
$123 $ 14,715 612
==== ======== -----
Less: amount representing interest ........................................... (177)
-----
Present value of future minimum lease payments ............................... $ 435
-----
11. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
DECEMBER 30, DECEMBER 31,
2001 2000
------------ ------------
GMAC ................................. $ 37 $ 192
Lease obligations (note 10) .......... 435 0
----- -----
473 192
Less current portion ................. (138) (144)
----- -----
Long-term debt, net of current portion $ 335 $ 48
===== =====
The Company financed delivery vehicles from GMAC during fiscal 2001 and 2000. At
December 30, 2001, there remained ten loans with GMAC all of which mature in
fiscal 2002.
The Company leases delivery vehicles from Ryder Truck Rental, Rollins Leasing
Corp, and Penske Truck Leasing. These leases are treated as capital leases. The
lease maturity dates are between 2005 and 2007.
Principal payments due on these notes as of December 30, 2001 are as follows (in
thousands):
49
FOR THE FISCAL YEAR:
2002............ $138
2003............ 101
2004............ 100
2005............ 79
2006............ 36
Thereafter...... 19
----
$473
====
The Company has a line of credit agreement with a bank pursuant to which the
Company and its founder are jointly and severally obligated. Borrowing under the
new agreement, which contain no financial covenants, are collateralized by all
Company property, equipment and inventory. On March 16, 2001, the line of credit
agreement was amended to extend to the maturity date of loans made pursuant to
the facility through April 15, 2002. Under the amendment monthly principal
payments are due of $10,000 per month from February through May 2001, $15,000
per month from June through September 2001, $20,000 per month from October 2001
through March 2002 and $1,780,000 due April 15, 2002. Interest on the line is
charged at prime rate plus 0.75% or 5.5% at December 31, 2001. The balance
outstanding at December 31, 2001 and 2000 was $0 and $2,000,000, respectively.
12. 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 approximately 1 million
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 to be 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.
WEIGHTED-AVERAGE
EXERCISE
SHARES PRICE
----------------
Options outstanding, December 28, 1997 1,760 $1,470.00
Options granted ................. 414 1,674.00
Options exercised ............... (83) 600.00
Options forfeited ............... (327) 1,356.00
-------
Options outstanding, December 27, 1998 1,764 1,584.00
Options granted ................. 404,086 5.70
Options forfeited ............... (1,225) 615.66
-------
Options outstanding, December 26, 1999 404,625 11.52
Options granted ................. 144,576 1.50
Options exercised ............... (836) 1.50
Options forfeited ............... (27,413) 9.54
-------
Options outstanding, December 31, 2000 520,952 8.83
Options granted ................. 464,550 4.13
Options exercised ............... (3,897) 1.56
Options forfeited ............... (73,476) 5.45
-------
Options outstanding, December 30, 2001 908,129 $ 7.00
=======
Option prices range from $0.95 to $3,900.00, with a weighted-average exercise
price of $7.00. The expiration dates range from January 2006 to November 2011.
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):
50
YEARS ENDED
------------------------------------------------
DECEMBER 30, DECEMBER 31, DECEMBER 26,
2001 2000 1999
------------ ------------ ------------
As reported:
Net loss attributable to common stockholders $(11,120) $ (9,606) $ (17,802)
Net loss per share, basic .................. $ (2.86) $(2,455.68) $(5,148.14)
Pro forma:
Net loss attributable to common stockholders $(11,537) $ (9,780) $ (17,907)
Net loss per share, basic .................. $ (2.97) $(2,486.55) $(5,177.94)
The fair value of options granted were estimated using an option-price model
with the following assumptions:
YEARS ENDED
-----------------------------------------------
DECEMBER 30, DECEMBER 31, DECEMBER 26,
2001 2000 1999
------------ ------------ ------------
Risk-free interest rate ................ 4.71-5.30% 5.77-6.52% 4.70-6.90%
Expected lives ......................... 7 years 7 years 7-10 years
Expected volatility (employee grants) .. 0% 0% 0%
Expected volatility (nonemployee grants) 45% 45% 45%
The weighted-average fair value and exercise price options granted were as
follows during the years ended December:
Weighted-average
----------------------------------------------------------------------
Exercise price Fair value
------------------------------- -------------------------------
2001 2000 1999 2001 2000 1999
----- ----- ----- ----- ----- -----
Exercise price at grant
Lower than market . $4.67 $1.50 $ -- $7.42 $9.66 $ --
Equal to market ... $4.10 $ -- $5.70 $2.25 $ -- $0.60
Greater than market $ -- $ -- $ -- $ -- $ -- $ --
The following table summarizes information about options outstanding at December
30, 2001:
Options outstanding Options exercisable
---------------------------------- ----------------------
Weighted- Weighted-
Remaining average average
contractual exercise exercise
Exercise Price Shares life price Shares price
- -------------- ------- ----------- --------- ------- ---------
$ 0.95 4,211 9.9 $ 0.95 4,211 $0.95
1.50 419,029 7.6 1.50 220,660 1.50
2.34 102,000 9.6 2.34 -- 2.34
4.70 308,136 9.4 4.70 40,000 4.70
6.00 72,770 8.3 6.00 50,048 6.00
600.00 301 4.6 600.00 301 600.00
1,632.00 681 6.0 1,632.00 660 1,632.00
1,800.00 759 7.1 1,800.00 585 1,800.00
3,900.00 242 5.6 3,900.00 242 3,900.00
------- --- -------- ------- --------
908,129 8.6 7.00 316,707 12.88
------- --- -------- ------- --------
13. RETIREMENT SAVINGS PLAN
On November 1, 1999, the Company established a retirement savings plan that
qualifies under Section 401(k) of the Internal Revenue Code. The Plan is a
standard defined contribution plan and covers all qualified employees.
Contributions to this plan are made at the discretion of the employee. The
Company does not match employee contributions.
51
14. INCOME TAXES
No provision for income taxes was recorded for fiscal 2001, 2000 or 1999 due to
losses incurred during these periods. A valuation allowance has been recorded
against deferred tax assets for all periods as it has not been determined that
it is more likely than not that these deferred tax assets will be realized.
As of December 30, 2001, the Company has net operating loss carryforwards of
approximately $42 million for federal income tax purposes, which expire
beginning 2011 through 2021. The Company may be subject to annual limitations on
the amount of net operating loss which can be utilized in any tax year.
Deferred income taxes consist of the following (in thousands):
December 30, December 31,
2001 2000
------------ ------------
Net operating loss carryforwards ... $ 15,673 $ 13,673
Provision for asset impairment 1,203 873
Other ........................ 507 206
-------- --------
17,838 14,752
Less: Valuation allowance .......... (17,838) (14,752)
-------- --------
Net deferred tax assets ............ $ 0 $ 0
======== ========
The valuation allowance increased approximately $3.1 million, $3.4 million and
$5.2 million during 2001, 2000 and 1999, respectively.
15. EMPLOYEE STOCK PURCHASE PLAN
The Company's 2001 employee stock purchase plan was adopted by the board of
directors in January 2001 and was approved by the Company's shareholders in
March 2001. A total of 200,000 shares of common stock are reserved for issuance
under the 2001 employee stock purchase plan, none of which have been issued.
16. SUBSEQUENT EVENTS
STOCK OPTIONS
Subsequent to December 30, 2001 the Company issued approximately 33,000 stock
options to employees with an exercise price of $1.66. Since the exercise price
was equal to the fair value at the date of grant, no deferred compensation was
recognized.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
52
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT.
Information with respect to our directors is hereby incorporated by reference
from our proxy statement, under the caption "Election of Directors," for our
2002 annual meeting of stockholders 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 end December 30, 2001.
Information with respect to executive officers is included under Item 4 (A) of
Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION.
There is incorporated herein by reference the information required by this Item
to be included in the 2002 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 30, 2001.
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 2002 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 30, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
There is incorporated herein by reference the information required by this Item
to be included in the 2002 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 30, 2001.
53
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-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
----
Reports of Independent Accountants.................................. 35
Balance Sheet as of December 31, 2000 and December 30, 2001......... 36
Statement of Operations for the years ended December 26, 1999,
December 31, 2000 and December 30, 2001......................... 37
Statement of Mandatory Redeemable Convertible Preferred Stock
and Stockholders' Equity (Deficit) for the years ended
December 26, 1999, December 31, 2000 and December 30, 2001...... 38
Statement of Cash Flows for the years ended December 26, 1999,
December 31, 2000 and December 30, 2001......................... 40
Notes to the Financial Statements................................... 41
(b) Reports on Form 8-K
None
(c) Exhibits.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1(2) Amended and Restated Articles of Incorporation.
3.2(2) Bylaws.
4.1(2) Specimen Stock Certificate.
10.1(1)(2) 1996 Amended Stock Option Plan.
10.2(1)(2) Form of Option Agreement (Fresh Options prior to February 2001)
10.3(1)(2) Form of Option Agreement (other options prior to February 2001)
10.4(1)(2) 2001 Employee Stock Purchase Plan.
10.5(2) Form of Warrant.
10.6(1)(2) Employment Agreement between BRIAZZ and Charles William Vivian
dated July 14, 1999.
10.7(2) Retail Lease between BRIAZZ and Benaroya Capital Company
regarding 1100 Olive Way, Seattle, WA dated November 6, 1998.
10.8(2) Form of Registration Rights Agreement among BRIAZZ and certain
of our shareholders dated August 15, 1997, as amended.
10.9(2) Agreement between BRIAZZ and Stusser Realty Group Limited Partnership
dated January 1998.
10.10(2) Sublease between BRIAZZ and Stusser Electric Company regarding
3901 7th Avenue South, Seattle, WA dated February 6, 1998.
10.11(2) Sublease Amendment between BRIAZZ and Stusser Electric Company
regarding 3901 7th Avenue South, Seattle, WA dated August 28, 2000.
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.
54
10.15(2) Industrial Building Lease between BRIAZZ and Walnut Street Properties,
Inc. regarding 1642 Lake Street, Chicago, IL dated April 7, 1997.
10.16(2) Promissory Note made by BRIAZZ and Victor Alhadeff in favor of U.S. Bank
National Association in the principal amount of $2,000,000 dated
December 30, 1999.
10.17(2) Commercial Security Agreement among BRIAZZ, Victor Alhadeff and U.S.Bank
National Association dated December 30, 1999.
10.18(2) Noncompetition Agreement between BRIAZZ and Victor D. Alhadeff dated
October 18, 1996.
10.19(1)(2) Form of Option Agreement (all options since February 2001)
10.20(2) Extension or Revision Agreement between BRIAZZ and Victor Alhadeff and
U.S. Bank National Association dated March 26, 2001.
23.1 Consent of Independent Accountants
- ----------
(1) Indicates management contract
(2) Incorporated by reference to our registration statement on Form S-1 (No.
333-54922)
55
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.
March 29, 2002. By:
-----------------------------
Victor D. Alhadeff
Chief Executive Officer and
Chairman of the Board
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
--------- ----- ----
- -------------------------------------------- Chief Executive Officer and Chairman March 29, 2002
Victor D. Alhadeff of the Board (principal executive officer)
- -------------------------------------------- President, Chief Operating Officer and March 29, 2002
C. William Vivian Director
Chief Financial Officer, Vice President March 29, 2002
- -------------------------------------------- Finance, Treasurer and Secretary (principal
Tracy Warner financial and accounting officer)
- -------------------------------------------- Director March 29, 2002
Richard Fersch
- -------------------------------------------- Director March 29, 2002
Dan Kourkoumelis
- -------------------------------------------- Director March 29, 2002
Charles C. Matteson, Jr
56
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1(2) Amended and Restated Articles of Incorporation.
3.2(2) Bylaws.
4.1(2) Specimen Stock Certificate.
10.1(1)(2) 1996 Amended Stock Option Plan.
10.2(1)(2) Form of Option Agreement (Fresh Options prior to February 2001)
10.3(1)(2) Form of Option Agreement (other options prior to February 2001)
10.4(1)(2) 2001 Employee Stock Purchase Plan.
10.5(2) Form of Warrant.
10.6(1)(2) Employment Agreement between BRIAZZ and Charles William Vivian
dated July 14, 1999.
10.7(2) Retail Lease between BRIAZZ and Benaroya Capital Company
regarding 1100 Olive Way, Seattle, WA dated November 6, 1998.
10.8(2) Form of Registration Rights Agreement among BRIAZZ and certain
of our shareholders dated August 15, 1997, as amended.
10.9(2) Agreement between BRIAZZ and Stusser Realty Group Limited Partnership
dated January 1998.
10.10(2) Sublease between BRIAZZ and Stusser Electric Company regarding
3901 7th Avenue South, Seattle, WA dated February 6, 1998.
10.11(2) Sublease Amendment between BRIAZZ and Stusser Electric Company
regarding 3901 7th Avenue South, Seattle, WA dated August 28, 2000.
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(2) Industrial Building Lease between BRIAZZ and Walnut Street Properties,
Inc. regarding 1642 Lake Street, Chicago, IL dated April 7, 1997.
10.16(2) Promissory Note made by BRIAZZ and Victor Alhadeff in favor of U.S. Bank
National Association in the principal amount of $2,000,000 dated
December 30, 1999.
10.17(2) Commercial Security Agreement among BRIAZZ, Victor Alhadeff and U.S.Bank
National Association dated December 30, 1999.
10.18(2) Noncompetition Agreement between BRIAZZ and Victor D. Alhadeff dated
October 18, 1996.
10.19(1)(2) Form of Option Agreement (all options since February 2001)
10.20(2) Extension or Revision Agreement between BRIAZZ and Victor Alhadeff and
U.S. Bank National Association dated March 26, 2001.
23.1 Consent of Independent Accountants
- ----------
(1) Indicates management contract
(2) Incorporated by reference to our registration statement on Form S-1 (No.
333-54922)