Attached files
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EX-31.2 - EX-31.2 - COSI INC | c54579exv31w2.htm |
EX-31.1 - EX-31.1 - COSI INC | c54579exv31w1.htm |
EX-32.1 - EX-32.1 - COSI INC | c54579exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 28, 2009
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
to
Commission File No. 000-50052
COSÌ, INC.
(Exact name of registrant as specified in its charter)
Delaware | 06-1393745 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1751 Lake Cook Road
Deerfield, Illinois 60015
(Address of principal executive offices) (Zip Code)
Deerfield, Illinois 60015
(Address of principal executive offices) (Zip Code)
(847) 597-8800
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Number of shares of Common Stock, $.01 par value, outstanding at November 04, 2009: 40,866,474.
COSI, INC.
Index to Form 10-Q
For the nine month period ended September 28, 2009
For the nine month period ended September 28, 2009
Page Number | ||||||||
Item 1. | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
7-13 | ||||||||
Item 2. | 14-27 | |||||||
Item 3. | 27 | |||||||
Item 1. | 27 | |||||||
Item 1A. | 28 | |||||||
Item 6. | 28 | |||||||
SIGNATURES | 29 | |||||||
EXHIBIT INDEX | 30 | |||||||
CERTIFICATIONS | 31-33 | |||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 |
2
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Cosi, Inc.
Consolidated Balance Sheets
As of September 28, 2009 and December 29, 2008
(dollars in thousands, except share and per share data)
Consolidated Balance Sheets
As of September 28, 2009 and December 29, 2008
(dollars in thousands, except share and per share data)
September 28, | December 29, | |||||||
2009 | 2008 | |||||||
(Unaudited) | (Note 1) | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 4,589 | $ | 5,589 | ||||
Accounts receivable, net |
708 | 916 | ||||||
Inventories |
955 | 998 | ||||||
Prepaid expenses and other current assets |
859 | 3,650 | ||||||
Total current assets |
7,111 | 11,153 | ||||||
Furniture and fixtures, equipment and leasehold improvements, net |
24,681 | 29,779 | ||||||
Intangibles, security deposits and other assets, net |
1,687 | 1,849 | ||||||
Total assets |
$ | 33,479 | $ | 42,781 | ||||
Liabilities and Stockholders Equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 2,253 | $ | 3,378 | ||||
Accrued expenses |
8,387 | 9,835 | ||||||
Deferred franchise revenue |
18 | 149 | ||||||
Current liabilities of discontinued operations |
| 4 | ||||||
Current portion of other long-term liabilities |
468 | 668 | ||||||
Total current liabilities |
11,126 | 14,034 | ||||||
Deferred franchise revenue |
2,606 | 2,545 | ||||||
Other long-term liabilities, net of current portion |
6,540 | 7,176 | ||||||
Total liabilities |
20,272 | 23,755 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Common stock $.01 par value; 100,000,000 shares
authorized, 40,866,474 and 40,663,164 shares issued, respectively |
409 | 407 | ||||||
Additional paid-in capital |
277,429 | 276,593 | ||||||
Treasury stock, 239,543 shares at cost |
(1,198 | ) | (1,198 | ) | ||||
Accumulated deficit |
(263,433 | ) | (256,776 | ) | ||||
Total stockholders equity |
13,207 | 19,026 | ||||||
Total liabilities and stockholders equity |
$ | 33,479 | $ | 42,781 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
3
Table of Contents
Cosi, Inc.
Consolidated Statements of Operations
For the Three and Nine Month Periods Ended September 28, 2009 and September 29, 2008
(dollars in thousands, except share and per share data)
Consolidated Statements of Operations
For the Three and Nine Month Periods Ended September 28, 2009 and September 29, 2008
(dollars in thousands, except share and per share data)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 28, | September 29, | September 28, | September 29, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Revenues: |
||||||||||||||||
Restaurant net sales |
$ | 29,528 | $ | 33,975 | $ | 88,667 | $ | 102,641 | ||||||||
Franchise fees and royalties |
505 | 955 | 1,668 | 2,203 | ||||||||||||
Total revenues |
30,033 | 34,930 | 90,335 | 104,844 | ||||||||||||
Costs and expenses: |
||||||||||||||||
Cost of food and beverage |
6,858 | 7,611 | 20,011 | 23,408 | ||||||||||||
Restaurant labor and related benefits |
11,086 | 11,540 | 32,592 | 34,557 | ||||||||||||
Occupancy and other restaurant operating expenses |
9,312 | 10,485 | 27,324 | 30,169 | ||||||||||||
27,256 | 29,636 | 79,927 | 88,134 | |||||||||||||
General and administrative expenses |
3,484 | 5,429 | 11,186 | 16,537 | ||||||||||||
Depreciation and amortization |
1,701 | 2,152 | 5,444 | 6,319 | ||||||||||||
Restaurant pre-opening expenses |
13 | | 13 | 100 | ||||||||||||
Provision for losses on asset impairments
and disposals |
| 800 | 238 | 1,067 | ||||||||||||
Closed store costs |
| 6 | 45 | 53 | ||||||||||||
Lease termination expense |
| 55 | 207 | 298 | ||||||||||||
Total costs and expenses |
32,454 | 38,078 | 97,060 | 112,508 | ||||||||||||
Operating loss |
(2,421 | ) | (3,148 | ) | (6,725 | ) | (7,664 | ) | ||||||||
Interest income |
| 18 | 2 | 90 | ||||||||||||
Interest expense |
(1 | ) | (2 | ) | (4 | ) | (5 | ) | ||||||||
Other income |
60 | 37 | 70 | 39 | ||||||||||||
Loss from continuing operations |
(2,362 | ) | (3,095 | ) | (6,657 | ) | (7,540 | ) | ||||||||
Discontinued operations: |
||||||||||||||||
Loss from discontinued operations |
| | | (312 | ) | |||||||||||
Net loss |
$ | (2,362 | ) | $ | (3,095 | ) | $ | (6,657 | ) | $ | (7,852 | ) | ||||
Per Share Data: |
||||||||||||||||
Loss per share, basic and diluted |
||||||||||||||||
Continuing operations |
$ | (0.06 | ) | $ | (0.08 | ) | $ | (0.16 | ) | $ | (0.19 | ) | ||||
Discontinued operations |
$ | | $ | | $ | | $ | (0.01 | ) | |||||||
Net loss |
$ | (0.06 | ) | $ | (0.08 | ) | $ | (0.16 | ) | $ | (0.20 | ) | ||||
Weighted average shares outstanding: |
40,521,231 | 40,103,956 | 40,387,960 | 40,021,556 | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
4
Table of Contents
Cosi, Inc.
Consolidated Statement of Stockholders Equity
For the Nine Months Ended September 28, 2009
(unaudited)
(dollars in thousands, except share data)
Consolidated Statement of Stockholders Equity
For the Nine Months Ended September 28, 2009
(unaudited)
(dollars in thousands, except share data)
Common Stock | Treasury Stock | |||||||||||||||||||||||||||
Additional | ||||||||||||||||||||||||||||
Number of | Paid In | Number of | Accumulated | |||||||||||||||||||||||||
Shares | Amount | Capital | Shares | Amount | Deficit | Total | ||||||||||||||||||||||
Balance, December 29, 2008 |
40,663,164 | $ | 407 | $ | 276,593 | 239,543 | $ | (1,198 | ) | $ | (256,776 | ) | $ | 19,026 | ||||||||||||||
Net issuances of
restricted stock |
203,310 | 2 | (2 | ) | | | | | ||||||||||||||||||||
Stock-based compensation |
| | 838 | | | | 838 | |||||||||||||||||||||
Net loss |
(6,657 | ) | (6,657 | ) | ||||||||||||||||||||||||
Balance, September 28, 2009 |
40,866,474 | $ | 409 | $ | 277,429 | 239,543 | $ | (1,198 | ) | $ | (263,433 | ) | $ | 13,207 | ||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
Table of Contents
Cosi, Inc.
Consolidated Statements of Cash Flows
For the Nine Month Periods Ended September 28, 2009 and September 29, 2008
(dollars in thousands)
Consolidated Statements of Cash Flows
For the Nine Month Periods Ended September 28, 2009 and September 29, 2008
(dollars in thousands)
September 28, | September 29, | |||||||
2009 | 2008 | |||||||
(Unaudited) | (Unaudited) | |||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (6,657 | ) | $ | (7,852 | ) | ||
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities |
||||||||
Depreciation and amortization |
5,444 | 6,324 | ||||||
Non-cash portion of asset impairments and disposals |
238 | 1,155 | ||||||
Non-cash portion of store closing costs |
| 24 | ||||||
Provision for bad debts |
78 | 2 | ||||||
Stock-based compensation expense |
838 | 1,294 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
130 | (206 | ) | |||||
Inventories |
43 | 65 | ||||||
Prepaid expenses and other current assets |
2,793 | 1,227 | ||||||
Other assets |
162 | 64 | ||||||
Accounts payable and accrued expenses |
(2,651 | ) | 1,227 | |||||
Deferred franchise revenue |
(70 | ) | (613 | ) | ||||
Other long-term liabilities |
(795 | ) | (545 | ) | ||||
Net cash (used in) provided by operating activities |
(447 | ) | 2,166 | |||||
Cash flows from investing activities: |
||||||||
Capital expenditures |
(553 | ) | (2,389 | ) | ||||
Proceeds from sale of assets |
| 30 | ||||||
Net refunds of security deposits |
| 10 | ||||||
Net cash used in investing activities |
(553 | ) | (2,349 | ) | ||||
Cash flows from financing activities: |
||||||||
Net proceeds from exercise of stock options |
| 53 | ||||||
Net cash provided by financing activities |
| 53 | ||||||
Net decrease in cash and cash equivalents |
(1,000 | ) | (130 | ) | ||||
Cash and cash equivalents, beginning of period |
5,589 | 6,309 | ||||||
Cash and cash equivalents, end of period |
$ | 4,589 | $ | 6,179 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid for: |
||||||||
Corporate franchise and income taxes |
$ | 168 | $ | 90 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
6
Table of Contents
COSI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 Basis of Presentation
We have prepared the accompanying unaudited condensed consolidated financial statements in
accordance with the requirements of Form 10-Q and, therefore, they do not include all
information and footnotes necessary for a fair presentation of financial position, results of
operations, and cash flows in conformity with accounting principles generally accepted in the
United States of America (U.S. GAAP). In our opinion, the financial statements reflect all
adjustments that are necessary for a fair presentation of the results of operations for the
periods shown. All such adjustments are of a normal recurring nature. In preparing financial
statements in conformity with accounting principles generally accepted in the United States
of America, we must make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues, expenses, and related disclosures at the date of the financial
statements and during the reporting period. Actual results could differ from those estimates.
As used in this quarterly report on Form 10-Q, unless the context requires otherwise, the
terms we, our, Company or Cosi refer to Cosi, Inc. and its consolidated subsidiaries.
The balance sheet at December 29, 2008 has been derived from audited financial statements at
that date but does not include all of the information and footnotes required by U.S. GAAP for
complete financial statements.
The results for the three and nine month periods ended September 28, 2009 and September 29,
2008 are not indicative of the results for the full fiscal year.
This report should be read in conjunction with our Annual Report on Form 10-K for the fiscal
year ended December 29, 2008, as filed with the Securities and Exchange Commission (SEC).
Note 2 Summary of Significant Accounting Policies
Effective September 28, 2009, we adopted Financial Accounting Standards Board (FASB)
Accounting Standards Codification (ASC or the Codification) 105-10 Generally Accepted
Accounting Principles (formerly Statement of Financial Accounting Standards (SFAS) No. 168,
The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles a replacement of FASB Statement 162), which provides for the
Codification to become the single official source of authoritative, nongovernmental U.S.
GAAP. The Codification does not change U.S. GAAP, but combines all authoritative standards
into a comprehensive, topically organized online database. The adoption of ASC 105-10-05
impacted all the Companys financial statements disclosures, as all references to
authoritative accounting literature will be in accordance with the Codification.
As of September 28, 2009, we adopted all provisions of ASC 820-10 Fair Value Measurements and
Disclosures (formerly SFAS 157, Fair Value Measures, SFAS 157-2,Effective Date of FASB
Statement No. 157, SFAS 157-3, Determining the Fair Value of a Financial Asset When The
Market for That Asset Is Not Active, SFAS 157-4 Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly), which establishes a framework for measuring fair value
and enhances disclosures about fair value measures required under other accounting
pronouncements, provides guidance in determining the fair value of a financial asset when the
market for that financial asset is inactive, and also provides additional guidance for
estimating fair value when the volume and level of activity for the asset or liability have
significantly decreased. The application of this standard did not have a material impact on
our consolidated financial statements.
Effective June 30, 2009, we adopted ASC 855-10 Subsequent Events (formerly SFAS 165,
Subsequent Events), which establishes general standards of accounting for and disclosure of
events that occur after the balance sheet date, but before financial statements are issued or
are available to be issued. We have evaluated for subsequent events through the issuance date
of the Companys financial statements. See Note 13.
7
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COSI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) continued
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) continued
Effective December 30, 2008, we adopted ASC 805-10 Business Combinations (formerly SFAS
141R, Business Combinations), which establishes principles and requirements for how the
acquirer of a business recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree.
The statement also provides guidance for recognizing and measuring goodwill acquired in the
business combination and determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the business
combination. We have adopted this standard and its impact can not be determined until an
acquisition is consummated.
Effective December 30, 2008, we adopted ASC 810-10 Consolidation (formerly SFAS 160,
Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB 51),
which amends previously issued guidance to establish accounting and reporting standards for
the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It
clarifies that a noncontrolling interest in a subsidiary, which is sometimes referred to as a
minority interest, is an ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements. Among other requirements, ASC
810-10 requires that the consolidated net income attributable to the parent and the
noncontrolling interest be clearly identified and presented on the face of the consolidated
income statement. The adoption of this standard did not have an impact on our consolidated
financial statements.
Effective December 30, 2008, we adopted ASC 815-10 Derivatives and Hedging (formerly SFAS
161, Disclosures about Derivative Instruments and Hedging Activities), which amends and
expands previously existing guidance on derivative instruments to require tabular disclosure
of the fair value of derivative instruments and their gains and losses. It also requires
disclosure regarding the credit-risk related contingent features in derivative agreements,
counterparty credit risk, and strategies and objectives for using derivative instruments. The
adoption of this standard did not have an impact on our consolidated financial statements.
There have been no other material changes to our significant accounting policies and
estimates from the information provided in Note 1 of our consolidated financial
statements included in our Form 10-K for the fiscal year ended December 29, 2008.
Note 3 Stock-Based Compensation Expense
A summary of non-cash, stock-based compensation expense is as follows:
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
September 28, | September 29, | September 28, | September 29, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Stock option compensation expense |
$ | 10 | $ | 33 | $ | 38 | $ | 135 | ||||||||
Restricted stock compensation expense, net of forfeitures |
244 | 267 | 800 | 1,159 | ||||||||||||
Total non-cash, stock-based compensation expense,
net of forfeitures |
$ | 254 | $ | 300 | $ | 838 | $ | 1,294 | ||||||||
As of September 28, 2009, there was approximately $0.01 million of total unrecognized
compensation expense related to stock options granted under the Companys various incentive
plans which will be recognized over the remaining vesting period of the options through
fiscal 2010. In addition, as of September 28, 2009, there was approximately $0.7 million of
total unrecognized compensation expense related to restricted stock shares and units granted
under the Cosi, Inc. 2005 Omnibus Long-Term Incentive Plan (the 2005 Plan). The expense
related to these grants is being recognized on a straight-line basis from the date of each
grant through fiscal 2013.
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COSI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) continued
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) continued
During the three month periods ended September 28, 2009 and September 29, 2008, there were no
issuances of restricted stock grants. During the first nine months of fiscal 2009 and fiscal 2008,
pursuant to the 2005 Plan and in accordance with the terms and conditions prescribed by the
Compensation Committee of our Board of Directors, we granted and issued 10,000 and 50,000
shares, respectively, of our authorized but unissued common stock to key employees. The
vesting of these shares will occur as follows: (i) 20% of the shares vested on the grant
date, and (ii) an additional 20% of the shares will vest on each anniversary of the grant
date provided that at each such date the employee continues to be employed by the Company.
The value of the shares for the grants made during the first nine months of fiscal 2009 and
2008, based on the closing price of our common stock on the date of the grants, was
approximately $0.01 million and $0.1 million, respectively.
Stock-based compensation expense, net of forfeitures, relating to restricted stock grants of
approximately $0.2 million and $0.3 million, is included in the accompanying consolidated
statement of operations for the quarters ended September 28, 2009 and September 29, 2008,
respectively. For the nine month periods ended September 28, 2009 and September 29, 2008,
stock-based compensation expense, net of forfeitures, relating to restricted stock grants is
$0.8 million and $1.3 million, respectively.
During the third quarter of fiscal 2009, there were no forfeitures of restricted stock.
During the third quarter of fiscal 2008, 139,500 shares of previously issued restricted
common stock were forfeited. The value of the forfeited shares, based on the closing price of
our common stock on the date of the grants, was approximately $0.8 million. During the nine
month periods ended September 28, 2009 and September 29, 2008, 2,000 and 152,150 shares,
respectively, of previously issued restricted common stock were forfeited. The value of the
forfeited shares, based on the closing price of our common stock on the date of the grants,
was approximately $0.02 million and $0.9 million, respectively. The accompanying consolidated
statement of operations for the nine month periods ended September 28, 2009 and September 29,
2008 reflect the reversal of approximately $0.01 million and $0.2 million, respectively, of
previously amortized costs related to these forfeited shares.
In addition, during the first nine months of fiscal 2009 and 2008,
we issued 195,310 and 46,820 shares, respectively, of restricted common stock to members of the Board of Directors
pursuant to the 2005 Plan and the Cosi Non-Employee Director Stock Incentive Plan. These shares had an aggregate value of approximately $0.1 million and vested upon issuance.
NOTE 4 Warrants
There were no warrants outstanding as of September 28, 2009. During the three and nine month
periods ended September 29, 2008, we sold 129 shares of our common stock for nominal
consideration pursuant to the exercise of warrants, all of which were settled under the net
exercise method. Warrants, issued in conjunction with previous equity and debt securities, to
purchase 29,189 shares of our common stock were outstanding as of September 29, 2008. These
warrants had an exercise price of $0.01 per share and all expired at varying dates through
October 2008.
NOTE 5 Earnings Per Share
Basic and diluted loss per common share is calculated by dividing the net loss by the
weighted average common shares outstanding during the period. As of September 28,
2009, there were 105,700 unvested restricted shares of common stock outstanding and
there were no stock options that were in-the-money. As of September 29, 2008, there
were outstanding in-the-money stock options and warrants to purchase an aggregate of
29,786 shares of common stock, plus 543,550 unvested restricted shares. These stock
options, warrants and unvested restricted shares outstanding were not included in the
computation of diluted earnings per share because we incurred a net loss in all
periods presented and, hence, the impact would be anti-dilutive.
Out-of-the-money stock options to purchase an aggregate of 690,149 shares were
outstanding at September 28, 2009. Out-of-the-money stock options and warrants to
purchase an aggregate 1,399,960 shares of common stock were outstanding at September
29, 2008.
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COSI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) continued
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) continued
NOTE 6 Asset impairments
We did not record any impairment charges during the third quarter of fiscal 2009.
During the nine month period ended September 28, 2009, we recorded impairment charges
of approximately $0.2 million related to one underperforming location in the Chicago
area. During the three month period ended September 29, 2008, we recorded impairment
charges of $0.8 million related to two underperforming locations. During the nine
month period ended September 29, 2008, we recorded impairment charges of
approximately $1.1 million related to three underperforming locations in the
Philadelphia area. In addition, during the nine month period ended September 29,
2008, we also recorded impairment charges of approximately $0.09 million related to
three locations in the Seattle market which are reported in discontinued operations.
We evaluate possible impairment at the individual restaurant level periodically and
record an impairment loss whenever we determine impairment factors are present. We
consider a history of poor financial operating performance to be the primary
indicator of potential impairment for individual restaurant locations. We determine
whether a restaurant location is impaired based on expected undiscounted cash flows,
generally for the remainder of the lease term, and then determine the impairment
charge based on discounted cash flows for the same period. Restaurants are not
considered for impairment during the period before they enter the comparable
restaurant base, unless specific circumstances warrant otherwise.
NOTE 7 Lease Termination Costs
During the third quarter of fiscal 2009, we did not incur any lease termination charges.
During the third quarter of fiscal 2008, we recorded a termination charge of $0.1 million
related to one underperforming location that we closed during the third quarter of fiscal
2008. During the first nine months of fiscal 2009, we recorded a lease termination charge of
approximately $0.2 million related to an underperforming location in the Midwest region where
we reached a lease termination agreement with the landlord. During the first nine months of
fiscal 2008, we recorded lease termination charges of approximately $0.3 million related to
one underperforming location that we closed during the third quarter of fiscal 2008 and a
location where we made a decision, subsequent to entering into a lease, not to build a
restaurant and reached an agreement with the landlord to terminate the lease.
Future store closings, if any, may result in additional lease termination charges. The
incurrence of additional lease termination costs will be dependent on our ability to improve
operations in those restaurants. If unsuccessful, lease termination costs will be determined
through negotiating acceptable terms with our landlords to terminate the leases for those
restaurants or on our ability to locate sub-tenants or assignees for the leases at those
locations.
NOTE 8 Discontinued Operations
In 2008, we sold the assets of three underperforming Company-owned locations that operated in
the Seattle market to a local restaurant development company. Under the terms of the
agreement, we transferred rights to the assets and leasehold improvements for minimal cash
consideration and the new owner assumed the tenant obligations under the real estate
operating leases and is operating those locations under a different brand.
The Seattle locations qualify as discontinued operations, and accordingly, we have reported
the results of operations of this group in discontinued operations in the accompanying
consolidated financial statements for all periods presented.
There were no liabilities associated with discontinued operations as of September 28,
2009. The only liabilities as of December 29, 2008 associated with discontinued
operations were approximately $0.004 million of other current liabilities.
10
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COSI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) continued
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) continued
The following table shows the results of discontinued operations.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 28, | September 29, | September 28, | September 29, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||
Revenues |
||||||||||||||||
Restaurant net sales |
$ | | $ | | $ | | $ | 373 | ||||||||
Costs and expenses |
||||||||||||||||
Cost of food and beverage |
| | | 107 | ||||||||||||
Restaurant labor and related benefits |
| | | 188 | ||||||||||||
Occupancy and other restaurant operating expenses |
| | | 181 | ||||||||||||
| | | 476 | |||||||||||||
Depreciation and amortization |
| | | 5 | ||||||||||||
Closed store costs |
| | | 116 | ||||||||||||
Asset impairments |
| | | 88 | ||||||||||||
Total costs and expenses |
| | | 685 | ||||||||||||
Loss from discontinued operations |
$ | | $ | | $ | | $ | (312 | ) | |||||||
During the first nine months of fiscal 2008, we recorded a charge of
approximately $0.09 million related to the impairment of assets at three Seattle
locations.
NOTE 9 Contingencies
From time to time we are a defendant in litigation arising in the ordinary course of our
business including, but not limited to, claims resulting from slip and fall accidents,
claims under federal and state laws governing access to public accommodations or other
federal and state laws applicable to our business operations, employment-related claims,
property damages, claims from guests alleging illness, injury or other food quality, health
or operational concerns, and enforcement of intellectual property rights.
NOTE 10 Income Taxes
We have recorded a full valuation allowance to reduce our deferred tax assets related
primarily to net operating loss carryforwards. Our determination of the valuation allowance
is based on an evaluation of whether it is more likely than not that we will be able to
utilize the net operating loss carryforwards based on the Companys operating results. A
positive adjustment to income will be recorded in future years if we determine that we could
realize these deferred tax assets.
As of December 29, 2008, we had net operating loss (NOL) carryforwards of approximately
$175,966,219 for U.S. federal income tax purposes. Under the Internal Revenue Code, an
ownership change with respect to a corporation can significantly limit the amount of
pre-ownership change NOLs and certain other tax assets that the corporation may utilize after
the ownership change to offset future taxable income, possibly reducing the amount of cash
available to the corporation to satisfy its obligations. An ownership change generally should
occur if the aggregate stock ownership of holders of at least 5% of our stock increases by
more than 50 percentage points over the preceding 3 year period. The purchase of shares of
our common stock pursuant to the rights offering may trigger an ownership change with respect
to our stock.
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COSI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) continued
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) continued
We have adopted ASC 740-10, Income Taxes, which prescribes a comprehensive financial
statement model of how a company should recognize, measure, present and disclose uncertain
tax positions that the company has taken or expects to take in its income tax returns. The
standard requires that only income tax benefits that meet the more
likely than not recognition threshold be recognized or continue to be recognized on the
effective date. Initial recognition amounts would have been reported as a cumulative effect
of a change in accounting principle.
No adjustment was made to the beginning retained earnings balance, as the ultimate
deductibility of all tax positions is highly certain but there is uncertainty about the
timing of such deductibility. No interest or penalties have been accrued relative to tax
positions due to the Company having either a tax loss or net operating loss carryforwards to
offset any taxable income in all subject years. As a result, no liability for uncertain tax
positions has been recorded.
Should the Company need to accrue interest or penalties on uncertain tax positions, it would
recognize the interest as interest expense and the penalties as a general and administrative
expense.
NOTE 11 Litigation
On February 23, 2009, the Company commenced an action in the United States District
Court for the Southern District of New York to recover, under Section 16(b) of the Securities
Exchange Act of 1934, as amended, short-swing profits realized by a stockholder of the
Company in connection with certain purchases and sales of the Companys common stock by the
stockholder. On July 7, 2009, the parties entered into an agreement to settle the claims,
which agreement was subject to court approval. On August 13, 2009, the court declined to
approve the settlement. Although the parties continue settlement discussions, discovery in
the action has commenced, and is scheduled to be completed in December 2009.
NOTE 12 New Accounting Pronouncements
In August 2009, the FASB issued ASC Update No. 2009-05 (Update 2005-5) to provide guidance
on measuring the fair value of liabilities under ASC 820 Fair Value Measurements and
Disclosures (formerly SFAS 157, Fair Value Measures). We will adopt Update 2005-5 in the
fourth quarter of fiscal 2009. We do not anticipate that its adoption will have a significant
impact on our consolidated financial statements.
Other accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date are not expected to
have a material impact on our consolidated financial statements upon adoption.
Note 13 Subsequent Events
On September 30, 2009, we filed a registration statement on Form S-3 with the Securities and
Exchange Commission for a rights offering to our existing stockholders. We plan to make the
rights offering through the distribution of non-transferable subscription rights to purchase shares of our common stock, par value $0.01 per share, at a subscription price to be
determined and subject to an aggregate ownership limitation equal to 19.9% of our common
stock. Assuming the rights offering is fully subscribed, we expect to receive gross proceeds
of approximately $5 million. We are planning to commence a rights offering in order to raise
equity capital in a cost-effective manner that provides all of our stockholders the
opportunity to participate.
The proposed rights offering will also include an over-subscription privilege, which will
entitle each rights holder that exercises all of its basic subscription privilege in full the
right to purchase additional shares of common stock that remain unsubscribed at the
expiration of the rights offering, subject to the availability and pro rata allocation of shares among persons exercising this over-subscription right.
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COSI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) continued
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) continued
In conjunction with the rights offering, all of our executive officers and outside directors
have agreed to purchase shares that are subject to their basic subscription privilege, at the same subscription
price offered to shareholders, for an aggregate commitment of $141,501 (which, except for one outside director, constitutes the
full extent of the basic subscription privileges of the executive officers and directors). In
addition, all of our executive officers and one of our outside directors have agreed to
purchase, at the same subscription price offered to shareholders, shares that would otherwise
be available for purchase by them pursuant to the exercise of their over-subscription
privileges in an aggregate amount of up to $337,211. The total amount of commitments by the
directors and executive officers is $478,712.
A registration statement relating to these securities has been filed with the SEC but has not
yet become effective. The securities may not be sold nor may offers to buy be accepted prior
to the time the registration statement becomes effective. The rights will be issued to all
shareholders as of a record date which has yet to be determined. The subscription price also
has yet to be determined. We will provide notice of the record date and subscription price in
the future at such time as they are determined.
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Item 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations
for the fiscal quarters ended September 28, 2009 and September 29, 2008 should be read in
conjunction with Selected Consolidated Financial Data and our audited consolidated
financial statements and the notes to those statements that are in our 2008 Annual Report on
Form 10-K. Our discussion contains forward-looking statements based upon current
expectations that involve risks and uncertainties, such as our plans, objectives,
expectations and intentions. Actual results and the timing of events could differ materially
from those anticipated in these forward-looking statements as a result of a number of
factors, including those set forth under Cautionary Note Regarding Forward-Looking
Statements below and elsewhere in this Quarterly Report.
OVERVIEW
System-wide restaurants:
For the Three Months Ended | ||||||||||||||||||||||||
September 28, 2009 | September 29, 2008 | |||||||||||||||||||||||
Company- | Company- | |||||||||||||||||||||||
Owned | Franchise | Total | Owned | Franchise | Total | |||||||||||||||||||
Restaurants at beginning of period |
98 | 44 | 142 | 102 | 43 | 145 | ||||||||||||||||||
New restaurants opened |
1 | 1 | 2 | | | | ||||||||||||||||||
Restaurants permanently closed |
| | | 1 | | 1 | ||||||||||||||||||
Restaurants at end of period |
99 | 45 | 144 | 101 | 43 | 144 | ||||||||||||||||||
For the Nine Months Ended | ||||||||||||||||||||||||
September 28, 2009 | September 29, 2008 | |||||||||||||||||||||||
Company- | Company- | |||||||||||||||||||||||
Owned | Franchise | Total | Owned | Franchise | Total | |||||||||||||||||||
Restaurants at beginning of period |
101 | 50 | 151 | 107 | (a) | 34 | 141 | |||||||||||||||||
New restaurants opened |
2 | 4 | 6 | 1 | 10 | 11 | ||||||||||||||||||
Restaurants permanently closed |
4 | 9 | 13 | 7 | 1 | 8 | ||||||||||||||||||
Restaurants at end of period |
99 | 45 | 144 | 101 | 43 | 144 | ||||||||||||||||||
(a) | Includes three locations that are classified as discontinued operations. |
There are currently 99 Company-owned and 46 franchised premium convenience restaurants,
including one new franchised restaurant that opened subsequent to the third quarter in the
Dulles International Airport in the same location as a franchised restaurant that had closed during
the second quarter of fiscal 2009, operating in 18 states, the District of Columbia, and the United
Arab Emirates (UAE). During the third quarter of fiscal 2009, we opened one new Company-owned
restaurant in the Kohl Childrens Museum located in Illinois and one new franchised Cosi restaurant
opened in the Reagan National Airport in the same location as a franchised restaurant that had closed
during the second quarter of fiscal 2009. During the first nine months of fiscal 2009, four new franchised
restaurants opened which included one location in the UAE, one location in Boston, one location in the District
of Columbia, and location at Reagan National Airport. During the first nine months of fiscal 2009, we also opened
one new
Company-owned restaurant in the Kohl Childrens Museum located in Illinois and we
purchased one franchised restaurant in Minnesota and are now operating it as a Company-owned location.
In addition, during the first nine months of fiscal 2009, we closed four underperforming Company-owned and
nine franchised restaurants, which included three locations in
the Chicago area, two in Pennsylvania, two in New Jersey, two in the District of Columbia market, one in Florida,
two in the UAE, and one that was purchased from a franchisee and is now operated as a Company-owned location.
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Our restaurants offer innovative, savory, made-to-order products featuring our authentic
hearth-baked crackly crust signature Cosi bread and fresh distinctive ingredients. We
maintain a pipeline of new menu offerings that are introduced seasonally through limited time
offerings to keep our products relevant to our target customers.
Our menu features high-quality sandwiches, freshly tossed salads, Cosi bagels, Flatbread
pizzas, Smores and other desserts. We feature our authentic hearth-baked crackly crust
signature Cosi bread in two varieties, our original Rustic and our Etruscan Whole Grain. Our
beverage menu features a variety of house coffees and other specialty coffee drinks, soft
drinks, bottled beverages including premium still and sparkling water and teas. We also offer
beer and wine at most of our locations and an additional limited selection of alcoholic
beverages at some of our locations. Our restaurants offer lunch and afternoon coffee in a
counter service format, with most offering breakfast and/or dinner and dessert menus as well.
We operate our Company-owned restaurants in two formats: Cosi and Cosi Downtown. Cosi
Downtown restaurants, which are located in nonresidential central business districts, close
for the day in the early evening, while Cosi restaurants offer dinner and dessert in a fast
casual dining atmosphere. All our restaurants offer our catering services which include
breakfast baskets, lunch buffets, dessert and fruit platters, and many of our core menu
offerings.
We are currently eligible to offer franchises in 47 states and the District of Columbia. We
offer franchises to area developers and individual franchise operators. The initial
franchise fee, payable to us, for both an area developer and an individual franchise
operator, is $40,000 for the first restaurant and $35,000 for each additional restaurant.
We expect that Company-owned restaurants (restaurants that we own as opposed to franchised
restaurants) will always be an important part of our new restaurant growth; however, our
franchising and area developer models will be key components of our growth strategy. We
believe that our concept, growth potential and unit-level economics will enable us to attract
experienced well-capitalized area developers. By franchising, we believe we will be able to
increase the presence of our restaurants in various markets throughout the country and
generate additional revenue without the large upfront capital commitments and risk associated
with opening Company-owned restaurants.
We also continue to explore strategic opportunities with our Cosi Pronto (our grab-and-go
concept) and full-service concepts in educational establishments, airports, train stations
and other public venues that meet our operating and financial criteria.
Recent Developments
On September 30, 2009, we filed a registration statement on Form S-3 with the Securities and
Exchange Commission for a rights offering to our existing stockholders. We plan to make the
rights offering through the distribution of non-transferable subscription rights to purchase
shares of our common stock, par value $0.01 per share, at a subscription price to be
determined and subject to an aggregate ownership limitation equal to 19.9% of our common
stock. Assuming the rights offering is fully subscribed, we expect to receive gross proceeds
of approximately $5 million. We are planning to commence a rights offering in order to raise
equity capital in a cost-effective manner that provides all of our stockholders the
opportunity to participate.
The proposed rights offering will also include an over-subscription privilege, which will
entitle each rights holder that exercises all of its basic subscription privilege in full the
right to purchase additional shares of common stock that remain unsubscribed at the
expiration of the rights offering, subject to the availability and pro rata allocation of
shares among persons exercising this over-subscription right.
In conjunction with the rights offering, all of our executive officers and outside directors
have agreed to purchase shares that are subject to their basic subscription privilege, at the
same subscription price offered to shareholders, for an aggregate commitment of $141,501
(which, except for one outside director, constitutes the full extent of the basic
subscription privileges of the executive officers and directors). In addition, all of our
executive officers and one of our outside directors have agreed to purchase, at the same
subscription price offered to shareholders, shares that would otherwise be available for
purchase by them pursuant to the exercise of their over-subscription privileges in an
aggregate amount of up to $337,211. The total amount of commitments by the directors and
executive officers is $478,712.
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A registration statement relating to these securities has been filed with the SEC but has not
yet become effective. The securities may not be sold nor may offers to buy be accepted prior
to the time the registration statement becomes effective. The rights will be issued to all
shareholders as of a record date which has yet to be determined. The subscription price also
has yet to be determined. We will provide notice of the record date and subscription price in
the future at such time as they are determined.
CRITICAL ACCOUNTING POLICIES
The preparation of the consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America (GAAP) requires the
appropriate application of certain accounting policies, many of which require us 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 revenue and expenses during the reporting period. Actual results may
differ from those estimates.
We believe the application of our accounting policies, and the estimates inherently required
therein, are reasonable and generally accepted for companies in the restaurant industry. We
believe that the following addresses the more critical accounting policies used in the
preparation of our consolidated financial statements and require managements most difficult
and subjective judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain.
Long Lived Assets: ASC 360-10-35 Property, Plant, & Equipment requires management judgments
regarding the future operating and disposition plans for marginally-performing assets, and
estimates of expected realizable values for assets to be sold. The application of this
standard has affected the amount and timing of charges to operating results that have been
significant in recent years. We evaluate possible impairment at the individual restaurant
level periodically and record an impairment loss whenever we determine impairment factors are
present. We consider a history of poor financial operating performance to be the primary
indicator of potential impairment for individual restaurant locations. We determine whether a
restaurant location is impaired based on expected undiscounted cash flows, generally for the
remainder of the lease term, and then determine the impairment charge based on discounted
cash flows for the same period. Restaurants are not considered for impairment during the
period before they enter the comparable restaurant base, unless specific circumstances
warrant otherwise.
Lease Termination Charges: ASC 820-30 Exit or Disposal Cost Obligations requires companies to
recognize costs associated with exit or disposal activities when they are incurred, rather
than at the end of a commitment to an exit or disposal plan. For all exit activities, we
estimate our likely liability under contractual leases for restaurants that have been closed.
Such estimates have affected the amount and timing of charges to operating results and are
impacted by managements judgments about the time it may take to find a suitable subtenant or
assignee, or the terms under which a termination of the lease agreement may be negotiated
with the landlord.
Accounting for Lease Obligations: In accordance with ASC 840-25 Leases, we recognize rent
expense on a straight-line basis over the lease term commencing on the date we take
possession. We include any rent escalations, rent abatements during the construction period
and any other rent holidays in our straight-line rent expense calculation.
Landlord Allowances: In accordance with ASC 840-25 Leases, we record landlord allowances as
deferred rent in other long-term liabilities on the consolidated balance sheets and amortize
them on a straight-line basis over the term of the related leases.
Income Taxes: We have recorded a full valuation allowance to reduce our deferred tax assets
related primarily to net operating loss carryforwards. Our determination of the valuation
allowance is based on an evaluation of whether it is more likely than not that we will be
able to utilize the net operating loss carryforwards based on the Companys operating
results. A positive adjustment to income will be recorded in future years if we determine
that we could realize these deferred tax assets.
We have adopted the provisions of ASC 740-10 Income Taxes. No adjustment was made to the
beginning retained earnings balance, as the ultimate deductibility of all tax positions is
highly certain but there is uncertainty about the
16
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timing of such deductibility. No interest or penalties have been accrued relative to tax
positions due to the Company having either a tax loss or net operating loss carry-forwards to
offset any taxable income in all subject years. As a result, no liability for uncertain tax
positions has been recorded.
REVENUE
Restaurant Net Sales. Our Company-owned and operated restaurant sales are composed almost
entirely of food and beverage sales. We record revenue at the time of the purchase of our
products by our customers.
Franchise Fees and Royalties. Franchise fees and royalties includes fees earned from
franchise agreements entered into with area developers and franchise operators as well as
royalties received based on sales generated at franchised restaurants. We recognize the
franchise fee in the period in which a franchise location opens or when fees are forfeited as
a result of a termination of an area development agreement. We recognize franchise royalties
in the period in which sales are made by our franchise operators.
Gift Card Sales. We offer our customers the opportunity to purchase gift cards at our
restaurants and through our website. Customers can purchase these cards at varying dollar
amounts. At the time of purchase by the customer, we record a gift card liability for the
face value of the card purchased. We recognize the revenue and reduce the gift card liability
when the gift card is redeemed. We do not reduce our recorded liability for potential non-use
of purchased gift cards.
COMPARABLE RESTAURANT SALES
In calculating comparable restaurant sales, we include a restaurant in the comparable
restaurant base after it has been in operation for 15 full months. We remove from the
comparable restaurant base any restaurant that is temporarily shut down for remodeling for a
complete period in the period that it is shut down. At September 28, 2009 and at September
29, 2008, there were 97 and 98 restaurants in our comparable restaurant base, respectively.
COSTS AND EXPENSES
Cost of Food and Beverage. Cost of food and beverage is comprised of food and beverage costs.
Food and beverage costs are variable and increase with sales volume.
Restaurant Labor and Related Benefits. The costs of labor and related benefits include direct
hourly and management wages, bonuses, payroll taxes, health insurance and all other fringe
benefits.
Occupancy and Other Restaurant Operating Expenses. Occupancy and other operating expenses
include direct restaurant level operating expenses, including the cost of paper and
packaging, supplies, restaurant repairs and maintenance, utilities, rents and related
occupancy costs.
General and Administrative Expenses. General and administrative expenses include all
corporate and administrative functions that support our restaurants and provide an
infrastructure to operate our business. Components of these expenses include executive
management costs; supervisory and staff salaries; non-field stock-based compensation expense;
non-field bonuses and related taxes and employee benefits; travel; information systems;
training; support center rent and related occupancy costs; and professional and consulting
fees. The salaries, bonuses and employee benefits costs included as general and
administrative expenses are generally more fixed in nature and do not vary directly with the
number of restaurants we operate. Stock-based compensation expense includes the charges
related to recognizing the fair value of stock options and restricted stock as compensation
for awards to certain key employees and non-employee directors, except the costs related to
stock-based compensation for restaurant employees which are included in restaurant labor and
related benefits.
Depreciation and Amortization. Depreciation and amortization consists principally of
depreciation and amortization of restaurant assets.
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Restaurant Pre-opening Expenses. Restaurant pre-opening expenses, which are expensed as
incurred, include the costs of recruiting, hiring and training the initial restaurant work force, travel, the
cost of food and labor used during the period before opening, the cost of initial quantities
of supplies and other direct costs related to the opening or remodeling of a restaurant.
Pre-opening expenses also include rent expense recognized on a straight-line basis from the
date we take possession through the period of construction, renovation and fixturing prior to
opening the restaurant.
RESULTS OF OPERATIONS
Our operating results for the three and nine month periods ended September 28, 2009
and September 29, 2008, expressed as a percentage of total revenues (except where
otherwise noted), were as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 28, | September 29, | September 28, | September 29, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Revenues: |
||||||||||||||||
Restaurant net sales |
98.3 | % | 97.3 | % | 98.2 | % | 97.9 | % | ||||||||
Franchise fees and royalties |
1.7 | 2.7 | 1.8 | 2.1 | ||||||||||||
Total revenues |
100.0 | 100.0 | 100.0 | 100.0 | ||||||||||||
Cost and expenses: |
||||||||||||||||
Cost of food and beverage (1) |
23.2 | 22.4 | 22.6 | 22.8 | ||||||||||||
Restaurant labor and related benefits (1) |
37.5 | 34.0 | 36.8 | 33.7 | ||||||||||||
Occupancy and other restaurant operating expenses (1) |
31.5 | 30.8 | 30.8 | 29.4 | ||||||||||||
92.2 | 87.2 | 90.2 | 85.9 | |||||||||||||
General and administrative expenses |
11.6 | 15.5 | 12.4 | 15.8 | ||||||||||||
Depreciation and amortization |
5.7 | 6.2 | 6.0 | 6.0 | ||||||||||||
Restaurant pre-opening expenses |
| | | 0.1 | ||||||||||||
Provision for losses on asset impairments
and disposals |
| 2.3 | 0.3 | 1.0 | ||||||||||||
Closed store costs |
| | | 0.1 | ||||||||||||
Lease termination expense |
| 0.2 | 0.2 | 0.3 | ||||||||||||
Total costs and expenses |
108.1 | 109.0 | 107.4 | 107.3 | ||||||||||||
Operating loss |
(8.1 | ) | (9.0 | ) | (7.4 | ) | (7.3 | ) | ||||||||
Interest income |
| 0.0 | | 0.1 | ||||||||||||
Interest expense |
| | | | ||||||||||||
Other income |
0.2 | 0.1 | | | ||||||||||||
Loss from continuing operations |
(7.9 | ) | (8.9 | ) | (7.4 | ) | (7.2 | ) | ||||||||
Discontinued operations: |
||||||||||||||||
Loss from discontinued operations |
| | | (0.3 | ) | |||||||||||
Net loss |
(7.9 | ) | (8.9 | ) | (7.4 | ) | (7.5 | ) | ||||||||
(1) | These are expressed as a percentage of restaurant net sales versus all other items expressed as a percentage of total revenues. |
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Restaurant Net Sales
Restaurant net sales | ||||||||
as a % of total | ||||||||
(in thousands) | revenues | |||||||
Quarter ended September 28, 2009 |
$ | 29,528 | 98.3 | % | ||||
Quarter ended September 29, 2008 |
$ | 33,975 | 97.3 | % |
as a % of total | ||||||||
(in thousands) | revenues | |||||||
Nine months ended September 28,
2009 |
$ | 88,667 | 98.2 | % | ||||
Nine months ended September 29,
2008 |
$ | 102,641 | 97.9 | % |
Restaurant net sales. Restaurant net sales decreased 13.1%, or approximately $4.4
million, during the third quarter of fiscal 2009 as compared to the third quarter of fiscal
2008. This was due primarily to the decrease of 11.9%, or approximately $3.9 million, in net
sales in our comparable restaurant base and $0.8 million of net sales related to
Company-owned restaurants closed during and subsequent to the third quarter of fiscal 2008,
partially offset by $0.3 million of net sales at new restaurants not yet in their sixteenth
month of operation as of September 28, 2009. For comparable restaurants, during the third
quarter of fiscal 2009, our average guest check decreased 2.4% and our transaction count
decreased 9.5% compared to the third quarter of fiscal 2008.
During the first nine months of fiscal 2009, restaurant net sales decreased 13.6%, or
approximately $14.0 million, as compared to the first nine months of fiscal 2008. This was
due primarily to the decrease of 12.0%, or approximately $11.9 million, in net sales in our
comparable restaurant base and $3.0 million of net sales related to Company-owned restaurants
closed during and subsequent to the third quarter of fiscal 2008, partially offset by $0.9
million of net sales at new restaurants not yet in their sixteenth month of operation as of
September 28, 2009. For comparable restaurants, during the first nine months of fiscal 2009,
our average guest check decreased 2.4% and our transaction count decreased 9.6% compared to
the first nine months of fiscal 2008.
Franchise Fees and Royalties
Franchise fees and royalties | ||||||||
as a % of total | ||||||||
(in thousands) | revenues | |||||||
Quarter ended September 28, 2009 |
$ | 505 | 1.7 | % | ||||
Quarter ended September 29, 2008 |
$ | 955 | 2.7 | % |
as a % of total | ||||||||
(in thousands) | revenues | |||||||
Nine months ended September 28,
2009 |
$ | 1,668 | 1.8 | % | ||||
Nine months ended September 29,
2008 |
$ | 2,203 | 2.1 | % |
Franchise fees and royalties. Franchise fees and royalties decreased by 47.1%, or
approximately $0.5 million, to approximately $0.5 million in the third quarter of fiscal
2009, as compared to the third quarter of fiscal 2008, due primarily to a $0.5 million
decrease in franchise fees resulting from the termination of one area development agreement
in the third quarter of fiscal 2008 partially offset by a slight increase in royalties during
the third quarter of fiscal 2009.
During the first nine months of fiscal 2009, franchise fees and royalties decreased by 24.3%,
or approximately $0.5 million, as compared to the first nine months of fiscal 2008, due
primarily to a $0.6 million decrease in franchise fees resulting from the termination of one
area development agreement in the second quarter of fiscal 2008, fewer store openings in
fiscal 2009, and a 3.8% decrease in royalties during the first nine months of fiscal 2009.
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Costs and Expenses
Cost of food and beverage | ||||||||
as a % of restaurant | ||||||||
(in thousands) | net sales | |||||||
Quarter ended September 28, 2009 |
$ | 6,858 | 23.2 | % | ||||
Quarter ended September 29, 2008 |
$ | 7,611 | 22.4 | % |
as a % of total | ||||||||
(in thousands) | revenues | |||||||
Nine months ended September 28,
2009 |
$ | 20,011 | 22.6 | % | ||||
Nine months ended September 29,
2008 |
$ | 23,408 | 22.8 | % |
Cost of food and beverage. The increase in food and beverage costs as a percentage of
net sales during the third quarter of fiscal 2009, as compared to the third quarter of fiscal
2008, is due primarily to the impact of higher costs associated with our limited time lobster
promotional menu offering during the fiscal 2009 third quarter as well as the addition of a
new steak product to our menu offerings, partially offset by lower year-over-year costs for
certain commodities, primarily wheat and dairy products.
The decrease in food and beverage costs as a percentage of net sales during the first nine
months of fiscal 2009, as compared to the first nine months of fiscal 2008, is due primarily
to lower year-over-year costs for certain commodities, primarily wheat and dairy products,
and the favorable impact of negotiations that resulted in lower pricing for certain protein
items partially offset by higher costs associated with our limited time lobster promotional
menu offering as well as the addition of a new steak product to our menu during the third
quarter of fiscal 2009 as compared to the same period last year.
Restaurant labor and related benefits | ||||||||
as a % of restaurant | ||||||||
(in thousands) | net sales | |||||||
Quarter ended September 28, 2009 |
$ | 11,086 | 37.5 | % | ||||
Quarter ended September 29, 2008 |
$ | 11,540 | 34.0 | % |
as a % of total | ||||||||
(in thousands) | revenues | |||||||
Nine months ended September 28,
2009 |
$ | 32,592 | 36.8 | % | ||||
Nine months ended September 29,
2008 |
$ | 34,557 | 33.7 | % |
Restaurant labor and related benefits. The increase in restaurant labor and related
benefits as a percentage of restaurant net sales during the third quarter and first nine
months of fiscal 2009, as compared to the third quarter and first nine months of fiscal 2008,
is due to the impact of the decrease in sales in our comparable restaurant base on our fixed
manager salaries and hourly labor.
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Occupancy and other restaurant | ||||||||
operating expenses | ||||||||
as a % of restaurant | ||||||||
(in thousands) | net sales | |||||||
Quarter ended September 28, 2009 |
$ | 9,312 | 31.5 | % | ||||
Quarter ended September 29, 2008 |
$ | 10,485 | 30.8 | % |
as a % of total | ||||||||
(in thousands) | revenues | |||||||
Nine months ended September 28,
2009 |
$ | 27,324 | 30.8 | % | ||||
Nine months ended September 29,
2008 |
$ | 30,169 | 29.4 | % |
Occupancy and other restaurant operating expenses. The increase in occupancy and other
restaurant operating expenses as a percentage of restaurant net sales, during the third
quarter and first nine months of fiscal 2009 as compared to the third quarter and first nine
months of fiscal 2008, is due primarily to the deleveraging of occupancy costs against
decreased sales at our comparable restaurant base and slightly higher marketing and
promotional costs as a percent to sales, partially offset by a decrease in costs for repairs
and maintenance.
General and administrative expenses | ||||||||
as a % of total | ||||||||
(in thousands) | revenues | |||||||
Quarter ended September 28, 2009 |
$ | 3,484 | 11.6 | % | ||||
Quarter ended September 29, 2008 |
$ | 5,429 | 15.5 | % |
as a % of total | ||||||||
(in thousands) | revenues | |||||||
Nine months ended September 28,
2009 |
$ | 11,186 | 12.4 | % | ||||
Nine months ended September 29,
2008 |
$ | 16,537 | 15.8 | % |
General and administrative expenses. The decrease in general and administrative costs
during the third quarter of fiscal 2009, as compared to the same period in fiscal 2008, is
due primarily to lower legal costs resulting from a litigation legal reserve recorded in the
third quarter of fiscal 2008, savings in labor and related benefits resulting from
administrative workforce reductions, lower audit costs and lower third-party professional
fees.
The decrease in general and administrative costs during the first nine months of fiscal 2009,
as compared to the first nine months of fiscal 2008, is due primarily to savings in labor and
related benefits resulting from administrative workforce reductions, lower legal costs
resulting from a litigation legal reserve recorded in the third quarter of fiscal 2008 and
lower costs related to the support and maintenance of our system infrastructure, partially
offset by costs associated with the process of reviewing strategic alternatives.
Depreciation and amortization | ||||||||
as a % of total | ||||||||
(in thousands) | revenues | |||||||
Quarter ended September 28, 2009 |
$ | 1,701 | 5.7 | % | ||||
Quarter ended September 29, 2008 |
$ | 2,152 | 6.2 | % |
as a % of total | ||||||||
(in thousands) | revenues | |||||||
Nine months ended September 28,
2009 |
$ | 5,444 | 6.0 | % | ||||
Nine months ended September 29,
2008 |
$ | 6,319 | 6.0 | % |
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Depreciation and amortization. The lower depreciation and amortization costs during the
third quarter and first nine months of fiscal 2009, as compared to the third quarter and
first nine months of fiscal 2008, is due primarily to the impact of impairments recorded
subsequent to the third quarter of fiscal 2008 and the continued depreciation and
amortization of our comparable restaurant base.
Restaurant pre-opening expenses | ||||||||
as a % of total | ||||||||
(in thousands) | revenues | |||||||
Quarter ended September 28, 2009 |
$ | 13 | 0.0 | % | ||||
Quarter ended September 29, 2008 |
$ | | 0.0 | % |
as a % of total | ||||||||
(in thousands) | revenues | |||||||
Nine months ended September 28,
2009 |
$ | 13 | 0.0 | % | ||||
Nine months ended September 29,
2008 |
$ | 100 | 0.1 | % |
Restaurant pre-opening expenses. Restaurant pre-opening expenses during the third
quarter and first nine months of fiscal 2009 are related to one new Company-owned restaurant
that opened during the third quarter of fiscal 2009. Restaurant pre-opening expenses during
the first nine months of fiscal 2008 were related to one new Company-owned restaurant that
opened during the second quarter of fiscal 2008. We did not incur any pre-opening occupancy
costs during fiscal 2009. During the first nine months of fiscal 2008, approximately 49.5% of
restaurant pre-opening expenses were for occupancy costs incurred prior to the opening of the
restaurant.
Provision for losses on asset impairments | ||||||||
and disposals | ||||||||
as a % of total | ||||||||
(in thousands) | revenues | |||||||
Quarter ended September 28, 2009 |
$ | | 0.0 | % | ||||
Quarter ended September 29, 2008 |
$ | 800 | 2.3 | % |
as a % of total | ||||||||
(in thousands) | revenues | |||||||
Nine months ended September 28,
2009 |
$ | 238 | 0.3 | % | ||||
Nine months ended September 29,
2008 |
$ | 1,067 | 1.0 | % |
Provision for losses on asset impairments and disposals. There were no impairment
charges during the third quarter of fiscal 2009. Impairment charges during the third quarter
of fiscal 2008 related to two underperforming locations.
During the first nine months of fiscal 2009 we recorded an asset impairment charge of
approximately $0.2 million related to one underperforming location in the Chicago area.
Impairment charges booked during the first nine months of fiscal 2008 related to three
underperforming locations.
Closed store costs | ||||||||
as a % of total | ||||||||
(in thousands) | revenues | |||||||
Quarter ended September 28, 2009 |
$ | | 0.0 | % | ||||
Quarter ended September 29, 2008 |
$ | 6 | 0.0 | % |
as a % of total | ||||||||
(in thousands) | revenues | |||||||
Nine months ended September 28,
2009 |
$ | 45 | 0.0 | % | ||||
Nine months ended September 29,
2008 |
$ | 53 | 0.1 | % |
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Closed store costs. We did not incur any closed store costs during the third quarter of
fiscal 2009. The closed store costs for the first nine months of fiscal 2009 relate to three
underperforming locations where we negotiated early exit agreements with the landlords and
closed those locations during the first quarter of fiscal 2009, and one underperforming
location that closed at the expiration of the operating lease. The closed store costs for the
third quarter of fiscal 2008 relate to one underperforming location that closed during the
quarter. The closed store costs during the first nine months of fiscal 2008 relate to two
under performing locations that closed during the first quarter of fiscal 2008 at the
expiration of their leases and two additional underperforming locations that closed, one
each, during the second and third quarters of fiscal 2008.
In addition, during the first nine months of fiscal 2008, we recorded approximately $0.1
million in closed store costs related to three Seattle locations which is reported in
discontinued operations.
Lease termination expense | ||||||||
as a % of total | ||||||||
(in thousands) | revenues | |||||||
Quarter ended September 28, 2009 |
$ | | 0.0 | % | ||||
Quarter ended September 29, 2008 |
$ | 55 | 0.2 | % |
as a % of total | ||||||||
(in thousands) | revenues | |||||||
Nine months ended September 28, 2009
|
$ | 207 | 0.2 | % | ||||
Nine months ended September 29, 2008
|
$ | 298 | 0.3 | % |
Lease termination expense. We did not record any lease termination charges during the third
quarter of fiscal 2009. The lease termination charges during the first nine months of fiscal
2009 relate to an underperforming location in the Midwest region where we reached an early
exit agreement with the landlord. Lease termination charges recorded during the third quarter
of fiscal 2008 relate to one underperforming location that closed during the quarter. The
lease termination charges during the first nine months of fiscal 2008 relate to a location
where we made a decision, subsequent to entering into a lease, not to build a restaurant and
reached an agreement with the landlord to terminate the lease and to one underperforming
location closed during the third quarter of fiscal 2008.
Loss from continuing operations | ||||||||
as a % of total | ||||||||
(in thousands) | revenues | |||||||
Quarter ended September 28, 2009 |
$ | (2,362 | ) | (7.9 | %) | |||
Quarter ended September 29, 2008 |
$ | (3,095 | ) | (8.9 | %) |
as a % of total | ||||||||
(in thousands) | revenues | |||||||
Nine months ended September 28,
2009 |
$ | (6,657 | ) | (7.4 | %) | |||
Nine months ended September 29,
2008 |
$ | (7,540 | ) | (7.2 | %) |
Loss from continuing operations. The decrease in our loss from continuing operations during
the third quarter and for the first nine months of fiscal 2009, as compared to the third
quarter and first nine months of fiscal 2008, is due
primarily to the decrease in general and administrative expenses and lower charges for asset
impairments, partially offset by an erosion in restaurant operating margins resulting from a
decrease in sales in our comparable restaurant base and lower franchise fees.
Discontinued operations. During the first quarter of fiscal 2008, we sold the assets of three
underperforming Company-owned locations that operated in the Seattle market to a local
restaurant development company. Under the terms of the agreement, Cosi transferred rights to
the assets and leasehold improvements for minimal cash
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consideration and the new owner
assumed the tenant obligations under the real estate operating leases and will operate those
locations under a different brand. We ceased operating these restaurants as of the end of the
first quarter of fiscal 2008.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were approximately $4.6 million on September 28, 2009, compared
with $5.6 million on December 29, 2008. We had negative working capital of $4.0 million at
September 28, 2009, compared with negative working capital of $2.9 million at December 29,
2008. The decrease in working capital was primarily a function of funding the operating loss
for the period. Our principal requirements for cash in 2009 will be for working capital needs
and routine maintenance of our existing restaurants.
Net cash used in operating activities during the nine month period ended September 28, 2009
was approximately $0.4 million, compared to $2.2 million of net cash provided by operating
activities in the nine month period ended September 29, 2008. The increase in cash used in
operating activities during fiscal 2009 was primarily the result of the payment of
approximately $0.9 million for certain lease termination and legal settlement obligations.
Total cash used in investing activities was $0.6 million during the first nine months of
fiscal 2009, compared to cash used in investing activities of $2.3 million during the first
nine months of fiscal 2008. The year-over-year decrease was due primarily to lower capital
expenditures in fiscal 2009 as compared to fiscal 2008. The capital expenditures for fiscal
2009 were primarily for the capital maintenance of our existing Company-owned restaurants.
The capital expenditures for fiscal 2008 included the construction of one new Company-owned
restaurant that opened during the second quarter of fiscal 2008.
There was no cash provided by financing activities during the first nine months of fiscal
2009. Cash provided by financing activities of approximately $0.05 million during the first
nine months of fiscal 2008 was from proceeds associated with the exercise of stock options.
We currently do not expect to open any new Company-owned restaurants during the remainder of
fiscal 2009. During fiscal 2008, we opened one Company-owned restaurant. We also do not
expect to incur any significant remodeling capital costs during the remainder of fiscal 2009.
However, we do expect to incur capital maintenance costs on existing Company-owned
restaurants. As we currently have no credit facility or available line of credit, we expect
to fund any required capital maintenance costs on existing Company-owned locations from cash
and cash equivalents on hand, and expected cash flows generated from operations.
We believe that our current cash and cash equivalents and expected cash flows from
Company-owned restaurant operations and franchise fees and royalties will be sufficient to
fund our cash requirements for working capital needs and maintenance of existing restaurant
locations for the remainder of this fiscal year. Our conclusion is based on our expected
performance for the remainder of fiscal 2009 which includes a sensitivity analysis that
projects varying levels of consumer demand for 2009. The range of levels selected was based
on our reasonable expectation of demand given the seasonality of our historical performance
and the potential adverse impact the current economic environment may have on consumer
spending. In analyzing our capital cash outlays during fiscal 2008, 42.0% of our capital cash
outlay was spent on construction of new Company-owned restaurants and another 46.1% of our
cash outlay was spent on maintenance costs associated with existing Company-owned locations.
Due to having spent significant capital over the last three years to remodel and refresh
existing locations as well as a number of the locations having only been opened within the
last three years, we currently do not anticipate significant levels of cash outlays for
maintenance capital expenditures during the remainder of fiscal 2009.
If our Company-owned restaurants do not generate the cash flow levels that we expect, if new
franchised restaurants do not open according to our expectations, if we do not generate the
franchise fees and royalties that we currently expect, if we incur significant unanticipated
cash requirements beyond our normal liquidity needs, or if we experience other unforeseen
circumstances then, in order to fund our cash requirements, we may have to effect further
labor reductions in general and administrative support functions, seek to sell certain
Company-owned locations to franchisees and/or other third parties or seek other sources of
debt or equity financing or take other actions necessitated by the impact of such
unanticipated circumstances.
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There can be no assurance that we will be able to obtain such debt or equity financing or
sell Company-owned locations to franchisees or other third parties or that we will be able to
do so in a timely manner to meet our requirements. If the prevailing instability in the
credit and financial markets continues, it may be more difficult for the Company to obtain
additional financing and for franchisees to obtain financing necessary to open restaurants or
to acquire Company-owned locations. An inability to access additional sources of liquidity to
fund our cash needs could materially adversely affect our financial condition and results of
operations.
We have entered into agreements that create contractual obligations. These obligations will
have an impact on future liquidity and capital resources. The table below presents a summary
of these obligations as of September 28, 2009:
Payments Due by Period | ||||||||||||||||||||
(in thousands) | ||||||||||||||||||||
Due | Due | Due | ||||||||||||||||||
Total | Due | Fiscal 2010 | Fiscal 2012 | After | ||||||||||||||||
Description | Obligations | Fiscal 2009 | to Fiscal 2011 | to Fiscal 2013 | Fiscal 2013 | |||||||||||||||
Long-term debt (1) |
$ | 75 | $ | 25 | $ | 50 | $ | | $ | | ||||||||||
Operating leases (2) |
73,612 | 3,773 | 29,833 | 21,805 | 18,201 | |||||||||||||||
Other long-term liabilities (3) |
1,111 | 83 | 945 | 83 | ||||||||||||||||
Total contractual cash
obligations |
$ | 74,798 | $ | 3,881 | $ | 30,828 | $ | 21,888 | $ | 18,201 | ||||||||||
(1) | Amounts shown include aggregate scheduled interest payments of $0.01 million. The pricipal amount of the debt, net of interest obligations, is included in the other long-term liabilities, in the attached consolidated balance sheets. This obligation is related to a trademark infringement settlement. | |
(2) | Amounts shown are net of an aggregate $0.1 million of sub-lease rental income due under non-cancelable subleases and include aggregate accrued contractual lease increases of approximately $4.5 million, which are included in other long-term liabilities in the attached consolidated balance sheets. | |
(3) | These obligations are related to contractual obligations for lease termination agreements and for an obligation related to a legal settlement. These obligations are non-interest bearing and are included in other long-term liabilities in the attached consolidated balance sheets. |
We are obligated under non-cancelable operating leases for our restaurants and our
administrative offices. Lease terms are generally ten years with renewal options and
generally require us to pay a proportionate share of real estate taxes, insurance and common
area and other operating costs. Some restaurant leases provide for contingent rental payments
which are not included in the above table.
PURCHASE COMMITMENTS
Currently, we do not have any long-term contracts with suppliers other than the agreements
noted above. However, we do have an agreement with Distribution Market Advantage, Inc.
(DMA) that provides us access to a national network of independent distributors. Under this
agreement which expires in November 2010, the independent
distributors will supply us with approximately 77% of our food and paper products, primarily
under pricing agreements that we negotiate directly with the suppliers.
We have a long-term beverage marketing agreement with the Coca-Cola Company. We received a
marketing allowance under this agreement, which is being recognized as a reduction to expense
ratably based on actual products purchased. Although we are eligible to receive additional
amounts under the agreement if certain purchase levels are achieved, no additional amounts
have been received as of September 28, 2009.
We purchase all contracted coffee products through a single supplier, Coffee Bean
International, Inc. (Coffee Bean International), under an agreement that expires in June
2010. In the event of a business interruption, Coffee Bean International is required to
utilize the services of a third-party roaster to fulfill its obligations. If the services of
a third-
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party roaster are used, Coffee Bean International will guarantee that the product
fulfillment standards stated in our contract will remain in effect throughout such business
interruption period. Either party may terminate the agreement by written notice in accordance
with and subject to the terms of the agreement.
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
We caution that any forward-looking statements (as such term is defined in the Private
Securities Litigation Reform Act of 1995) contained or incorporated by reference in this Form
10-Q or made by our management involve risks and uncertainties and are subject to change
based on various important factors, many of which may be beyond our control. Accordingly, our
future performance and financial results may differ materially from those expressed or
implied in any such forward-looking statements. For these statements, we claim the protection
of the safe harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995. Any such forward-looking statements are subject to risks and
uncertainties, including those described in Item 1A of our Annual Report on Form 10-K for the
fiscal year ended December 29, 2008. If any of these risks or uncertainties actually occurs,
our business, financial condition or operating results could be materially and adversely
affected, and the trading price of our common stock could decline. We do not undertake to
publicly update or revise our forward-looking statements even if our future changes make it
clear that any projected results expressed or implied therein will not be realized. Listed
below are just some of the factors that would impact our forward-looking statements:
| the cost of our principal food products and supply and delivery shortages or interruptions; | ||
| labor shortages or increased labor costs; | ||
| changes in demographic trends and consumer tastes and preferences, including changes resulting from concerns over nutritional or safety aspects of beef, poultry, produce or other foods or the effects of food-borne illnesses such as mad cow disease and avian influenza or bird flu; | ||
| public health issues such as the H1N1 influenza A virus, commonly referred to as the swine flu that cause people to stay home from work or away from public places; | ||
| competition in our markets, both in our business and locating suitable restaurant sites; | ||
| our operation and execution in new and existing markets; | ||
| expansion into new markets, including foreign countries; | ||
| our ability to attract and retain qualified franchisees; | ||
| our ability to locate suitable restaurant sites in new and existing markets and negotiate acceptable lease terms; | ||
| the rate of our internal growth, and our ability to generate increased revenue from our existing restaurants; | ||
| our ability to generate positive cash flow from existing and new restaurants; | ||
| fluctuations in our quarterly results due to seasonality; | ||
| increased government regulation and our ability to secure required governmental approvals and permits; | ||
| our ability to create customer awareness of our restaurants in new markets; | ||
| the reliability of our customer and market studies; | ||
| cost effective and timely planning, design and build-out of new restaurants; | ||
| our ability to recruit, train and retain qualified corporate and restaurant personnel and management; | ||
| market saturation due to new restaurant openings; |
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| inadequate protection of our intellectual property; | ||
| the availability and terms of financing and capital and the general volatility of the securities markets, | ||
| adverse weather conditions which impact customer traffic at our restaurants; and | ||
| adverse economic conditions that cause individuals or businesses to decrease their discretionary spending. |
The words believe, may, will, should, anticipate, estimate, expect,
intend, objective, seek, plan, strive, project or similar words, or the
negatives of these words, identify forward-looking statements. We qualify any
forward-looking statements entirely by these cautionary factors.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Our market risk exposures primarily relate to our cash and cash equivalents. We have no
market investments or derivative financial instruments or derivative commodity instruments.
All of our transactions are conducted, and our accounts are denominated, in United States
dollars. Accordingly, we are not exposed to foreign currency risk.
The primary inflationary factors affecting our business are food and labor costs. Some of our
food costs are subject to fluctuations in commodity prices. Volatility in the commodity
markets such as the wheat and dairy markets can have an adverse impact on our results from
operations. Some of our hourly personnel at our restaurants are paid at rates based on the
applicable minimum wage, and increases in the minimum wage will directly affect our labor
costs. Many of our leases require us to pay taxes, maintenance, repairs, insurance, and
utilities, all of which are generally subject to inflationary increases. Historically,
inflation has not had a material impact on our results of operation.
Item 4. Controls and Procedures
Our management, with the participation of both our Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures
(as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of
1934, as amended (the Exchange Act), as of the end of the period covered by this report.
Based on such evaluation, both our Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of such period, our disclosure controls and procedures are
effective (i) to ensure that information required to be disclosed by us in the reports that
we file or submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and forms and (ii) to ensure that
information required to be disclosed by us in the reports that we submit under the Exchange
Act is accumulated and communicated to our management, including our principal executive and
principal financial officers, or persons performing similar functions, as appropriate, to
allow timely decisions regarding required disclosure.
There have been no changes in our internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the third fiscal
quarter to which this report relates that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
Part II. OTHER INFORMATION
Item 1: LEGAL PROCEEDINGS
From time to time, we are a defendant in litigation arising in the ordinary course of our
business, including but not limited to, claims resulting from slip and fall accidents,
claims under federal and state laws governing access to public accommodations or other
federal and state laws applicable to our business operations, employment-related claims,
property damages, claims from guests alleging illness, injury or other food quality, health
or operational concerns, and enforcement of intellectual property rights.
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On February 23, 2009, the Company commenced an action in the United States District
Court for the Southern District of New York to recover, under Section 16(b) of the Securities
Exchange Act of 1934, as amended, short-swing profits realized by a stockholder of the
Company in connection with certain purchases and sales of the Companys common stock by the
stockholder. On July 7, 2009, the parties entered into an agreement to settle the claims,
which agreement was subject to court approval. On August 13, 2009, the court declined to
approve the settlement. Although the parties continue settlement discussions, discovery in
the action has commenced, and is scheduled to be completed in December 2009.
Item 1A: RISK FACTORS
During the nine months ended September 28, 2009, there were no material changes to the risk
factors previously disclosed in our Annual Report on Form 10-K for the year ended December
29, 2008 and our Quarterly Reports on Form 10-Q for the quarters ended March 30, 2009 and
June 29, 2009. For a discussion of our risk factors, see Item 1A of such Annual Report on
Form 10-K and such Quarterly Reports on Form 10-Q.
Item 6: EXHIBITS
(a) Exhibits:
Exhibit Number | Description | |
Exhibit 10.1
|
Form of Purchase Agreement, dated as of September 28, 2009, for Jim Hyatt, Bill Koziel, Vicki Baue, Paul Bower, Becky Iliff, Maggie Martensen, Bob Merritt, Creed Ford, Mark Demilio and Mike ODonnell (Incorporated by reference to Exhibit 10.1 to the Companys Registration Statement on Form S-3 (Commission File No. 333-162233)). | |
Exhibit 31.1
|
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
Exhibit 31.2
|
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
Exhibit 32.1
|
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant
has duly caused this Report to be signed on its behalf by the undersigned thereunto
duly authorized.
COSI, INC. |
||||
Date: November 09, 2009 | By: | /s/ JAMES HYATT | ||
James Hyatt | ||||
President, Chief Executive Officer, and Director |
||||
Date: November 09, 2009 | By: | /s/ WILLIAM KOZIEL | ||
William Koziel | ||||
Chief Financial Officer (chief accounting officer) Treasurer and Secretary |
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EXHIBIT INDEX
Exhibit 10.1
|
Form of Purchase Agreement, dated as of September 28, 2009, for Jim Hyatt, Bill Koziel, Vicki Baue, Paul Bower, Becky Iliff, Maggie Martensen, Bob Merritt, Creed Ford, Mark Demilio and Mike ODonnell (Incorporated by reference to Exhibit 10.1 to the Companys Registration Statement on Form S-3 (Commission File No. 333-162233)). | |
Exhibit 31.1
|
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
Exhibit 31.2
|
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
Exhibit 32.1
|
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
30