Cosi, Inc. Form 10-K Draft 3/29/03
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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Form 10-K
(Mark One)
x Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the fiscal year ended
December 30, 2002, or
or
Transition report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to
Commission file number 000-50052
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Cosi, Inc.
(Exact name of registrant as specified in its charter)
Delaware 06-1393745
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
242 West 36th St. 10018
New York, NY (Zip code)
(Address of principal executive offices)
(212) 653-1600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 and 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. No [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12 b-2). Yes No x
1
The aggregate market value of the registrant's Common Stock held by
non-affiliates as of December 30, 2002 was approximately $ 67.2 million. The
Company did not have publicly traded securities as of July 1, 2002.
Number of shares outstanding of the registrant's common stock, as of March
28, 2003: Common Stock, $.01 par value: 16,573,553 shares.
The Company intends to file a definitive proxy statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended December 30,
2002. Portions of such proxy statement are incorporated by reference in response
to Part III, Items 10, 11, 12, and 13.
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2
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 14. CONTROLS AND PROCEDURES
ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
ITEM 16. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
SIGNATURES
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3
PART I
ITEM 1. BUSINESS
GENERAL
We own and operate 94 fast casual restaurants in eleven states and the
District of Columbia. Our Cosi restaurants are all-day cafes that feature
signature bread and coffee products in an environment we adjust appropriately
throughout the day. Our Cosi restaurants offer breakfast, lunch, afternoon
coffee, dinner, and dessert menus full of creative, cravable foods and
beverages.
We operate our restaurants in two formats: Cosi and Cosi Downtown. All of
our restaurants offer breakfast, lunch and afternoon coffee in a counter service
format. After 5 p.m., our Cosi restaurants add table service and offer dinner
and dessert in a casual dining format. Cosi Downtown restaurants, which are
located in non-residential central business districts close, for the day, in the
early evening. All of our restaurants are designed to be welcoming and
comfortable, featuring oversized sofas, chairs and tables, and faux painted
walls. The atmosphere of Cosi is appropriately managed for each daypart by
changing the music, both style and volume, and lighting throughout the day. The
design scheme of our counters and bars, menu boards as well as condiment
counters and server stations incorporate warm colors and geometric patterns,
intended to create a visual vocabulary that can be easily identified by our
customers.
Our restaurants are located in a wide range of markets and trade areas,
including business districts and residential communities in both urban and
suburban locations. We believe that we have created significant brand equity in
our markets and that we have demonstrated the appeal of our concept to a wide
variety of customers. We opened 17 restaurants in 2001, 25 restaurants in 2002
and expect to open six restaurants in 2003, all of which have been opened as of
March 31, 2003. In 2003 we announced our intention to incorporate a franchising
and area developer model into our business strategy. We expect that Company
owned restaurants will always be an important part of our new restaurant growth,
and we believe that incorporating a franchising and area developer model into
our strategy will position us to maximize the market potential for the Cosi
brand and concept consistent with our available capital and thus maximize
shareholder value.
HISTORY
Cosi was created through the October 1999 merger of two restaurant
concepts, Cosi Sandwich Bar, Inc. and Xando, Incorporated. Each company served a
similar customer, but focused on different parts of the day.
Cosi Sandwich Bar. The Cosi Sandwich Bar concept was created in Paris in the
early 1990's and brought to the United States by us in 1996. Cosi Sandwich Bar's
signature "crackly crust" flatbread, derived from a generations-old Italian
recipe, was prepared daily at each restaurant where fresh loaves were baked
throughout the day. Cosi Sandwich Bar focused on selling sandwiches in
high-density central business districts in New York, Washington DC, Boston and
Philadelphia.
Xando Coffee and Bar. Xando Coffee and Bar, founded in 1994, was an
innovative concept that went beyond the traditional specialty coffee bar. Xando
Coffee and Bar locations were open for five dayparts. The 5 p.m. "unveiling" of
a full liquor bar featured coffee cocktails and was intended to create a dynamic
evening environment. The atmosphere of Xando Coffee and Bar was adjusted
appropriately for each daypart by changing the music and lighting throughout the
day. The evening environment was completed by the addition of table service.
Since the merger, we have added Cosi Sandwich Bar products to the Xando
Coffee and Bar five daypart platform. We believe we have created a restaurant
concept that satisfies our customers' needs from Wake Up Call to Last Call(R).
4
CONCEPT AND BUSINESS STRATEGY
Our objective is to build a nationwide system of distinctive restaurants
that generate attractive unit economics by appealing to a broad range of
customers across five dayparts: breakfast, lunch, afternoon coffee, dinner and
dessert.
Our strategy is to offer a differentiated menu featuring our signature bread
and coffee products in a comfortable, warm and inclusive atmosphere. We believe
that our menu offering of proprietary products distinguishes us from our
competition. Our menu items do not require extensive preparation on site. Our
restaurants are located in a wide range of markets and trade areas, which
include business districts and residential communities in both urban and
suburban locations. Additionally, a wide range of our products is available
outside of the four walls of our restaurants through our catering services.
PEOPLE
At the end of fiscal 2002 we had 3,055 employees, 93 of which served in
administrative or executive capacities, 258 of which served as restaurant
management personnel, and 2,704 of which were hourly restaurant personnel. See
Recent Developments for a description of reductions we have made to our
Executive and General and Administrative staffing subsequent to December 30,
2002.
None of our employees are covered by collective bargaining agreements, and
we have never experienced an organized work stoppage or strike. We believe that
our working conditions and compensation packages are competitive and consider
relations with our employees to be good.
SYSTEMS INFRASTRUCTURE
We use an ASP model, which allows us to have the latest in technology and up
to the minute information without continually having to re-invest in hardware
and personnel. Our strategy includes utilizing web technology to put information
into the hands of the people who need to make decisions in a timely manner.
Our point of sale, back-office modules, and our Oracle financials systems
are fully integrated. This integration allows us to all be working with the
same, accurate data with minimal staffing. All information relating to
restaurant operations is uploaded onto a secure web site five times a day for
review and pre-selected reports are distributed to our operations team via
wireless and e-mail solutions.
We have a redundancy and back-up plan in place for all data as well as a
disaster recovery plan. The plan encompasses daily back up, weekly off-site
storage, and redundant facilities.
PURCHASING
We have relationships with some of the country's leading food and paper
providers to provide our restaurants with high quality proprietary food items at
competitive prices. We source and negotiate prices directly with these suppliers
and distribute these products to our restaurants through one distributor. Cosi
does not utilize a commissary system. Our inventory control system allows each
restaurant to place orders electronically with our master distributor and then
transmit the invoice electronically to our accounts payable system. Our scalable
system eliminates duplicate work, and we believe gives our management tight
control of costs while ensuring quality and consistency across all restaurants.
We purchase coffee through a single supplier. In the event of a business
interruption, our supplier is required to utilize the services of a third party
roaster to fulfill its obligations. If the services of a third party roaster are
used, our supplier will guarantee that the pricing formula and product
fulfillment standards stated in our contract will remain in effect throughout
such business interruption period. We may terminate our agreement with this
supplier upon 180 days notice.
During fiscal year 2002, we entered into a beverage marketing agreement with
the Coca-Cola Company. Under the agreement, we are obligated to purchase
approximately 2.0 million gallons of fountain syrups at the then-current
annually published national chain account prices.
5
During 2002, we received $600,000 in allowances from food and beverage
suppliers, which is being recognized ratably based on actual product purchased.
We may receive additional amounts if certain purchase levels are achieved.
Our primary suppliers and master distributor, Maines Food and Paper Service,
Inc., have parallel facilities and systems to minimize the risk of any
disruption of our supply chain.
COMPETITION
The restaurant industry is intensely competitive and we compete with many
well-established food service companies, including other sandwich retailers,
specialty coffee retailers, bagel shops, fast food restaurants, delicatessens,
cafes, bars, take-out food service companies, supermarkets and convenience
stores. The principal factors on which we compete are taste, quality and price
of product offered, customer service, atmosphere, location and overall guest
experience. Our competitors change with each of the five dayparts, ranging from
coffee bars and bakery cafes in the morning daypart, to fast food restaurants
and cafes during the lunch and afternoon dayparts, to casual dining chains
during the dinner and dessert dayparts. Many of our competitors or potential
competitors have substantially greater financial and other resources than we do
which may allow them to react to changes in pricing, marketing and the quick
service restaurant industry better than we can. We also compete with other
employers in our markets for hourly workers and may be subject to higher labor
costs. We believe that our concept, attractive price-value relationship and
quality of products and service allow us to compete favorably with our
competitors.
INTELLECTUAL PROPERTY
We have the following US Trademark registrations: "COSI," "Totally Toasted
Almond Mocha," "Mocha Kiss," "Squagels," "Xando," our sun and moon logo, "Wake
Up Call to Last Call," "Symphony Blend," "King of Hearts Blend," "Xandwich,"
"Generation XO," "Screamers," "Cosi Corners," and "Warm `n Cosi Melts". We have
a US Trademark application pending for: "Cosi Downtown." "Arctic" is an
unregistered trademark.
We have registered the trademark "COSI" in seven foreign jurisdictions with
respect to goods and services. We also have applications pending for
registration for the trademark "COSI" in four other foreign jurisdictions.
GOVERNMENT REGULATION
Our restaurants are subject to regulation by federal agencies and to
licensing and regulation by state and local health, sanitation, building,
zoning, safety, fire and other departments relating to the development and
operation of restaurants. These regulations include matters relating to
environmental, building, construction and zoning requirements and the
preparation and sale of food and alcoholic beverages. Our facilities are
licensed and subject to regulation under state and local fire, health and safety
codes.
Many of our restaurants are required to obtain a license to sell alcoholic
beverages on the premises from a state authority and, in certain locations,
county and/or municipal authorities. Typically, licenses must be renewed
annually and may be revoked or suspended for cause at any time. Alcoholic
beverage control regulations relate to numerous aspects of the daily operations
of each of our restaurants, including minimum age of patrons and employees,
hours of operation, advertising, wholesale purchasing, inventory control and
handling, and storage and dispensing of alcoholic beverages. We have not
encountered any material problems relating to alcoholic beverage licenses to
date. The failure to receive or retain a liquor license in a particular location
could adversely affect that restaurant and our ability to obtain such a license
elsewhere.
We are subject to "dram shop" statutes in the states in which our
restaurants are located. These statutes generally provide a person injured by an
intoxicated person the right to recover damages from an establishment that
wrongfully served alcoholic beverages to the intoxicated individual. We carry
liquor liability coverage as part of our existing comprehensive general
liability insurance, which we believe is consistent with coverage carried by
other entities in the restaurant industry. Although we are covered by insurance,
a judgment against us under a dram-shop statute in excess of our liability
coverage could have a material adverse effect on us.
Our operations are also subject to federal and state laws governing such
matters as wages, working conditions, citizenship requirements and overtime.
Some states have set minimum wage requirements higher than the federal level.
Significant numbers of hourly personnel at our restaurants are paid at rates
related to the federal minimum wage and, accordingly, increases in the minimum
wage will increase labor costs. We are also subject to the Americans With
Disability Act of 1990, which, among other things, prohibits discrimination on
the basis of disability in public accommodations and employment. We are required
to comply with the Americans with Disabilities Act and regulations relating to
accommodating the needs of the disabled in connection with the construction of
new facilities and with significant renovations of existing facilities.
6
EXECUTIVE OFFICERS
The executive officers of the Company are set forth below. Each holds the
officers indicated until his or her successor is chosen and qualified at a
regular meeting of the Board of Directors.
Name Age Position
- ---- --- --------
Jay Wainwright 32 Chief Executive Officer, President and Director
Nick Marsh 34 Chief Operating Officer and Director
Kenneth S. Betuker 50 Chief Financial Officer, Treasurer and Secretary
David Orwasher 47 Chief Development Officer
Gilbert Melott 39 Vice President of People
James M. Riley, Jr. 39 Vice President of Store Development
Charles Gray 30 Vice President of Information Systems
Jay Wainwright, Chief Executive Officer and Director. Mr. Wainwright, a founder
of Cosi Sandwich Bar, Inc., served as Chairman and Chief Executive Officer of
that entity from its inception in 1996 until its merger with Xando, Incorporated
in 1999. Mr. Wainwright currently serves as Chief Executive Officer and
President. Mr. Wainwright received a Bachelor of Arts degree from Hamilton
College. Mr. Wainwright is the nephew of Eric Gleacher, one of our Directors.
Nick Marsh, Chief Operating Officer and Director. Mr. Marsh, a founder of Xando
Coffee and Bar, served as President of that entity from its incorporation in
1994 until the merger with Cosi Sandwich Bar, Inc. in 1999. Mr. Marsh currently
serves as Chief Operating Officer. Prior to founding Xando Coffee and Bar, Mr.
Marsh was a management consultant with the strategy firm of Marakon Associates
and was Vice President of Mergers and Acquisitions for Shawmut Bank in Hartford,
Connecticut, for two years. Mr. Marsh graduated from Princeton University, cum
laude, in 1990 with a Bachelor of Arts degree.
Kenneth S. Betuker, Chief Financial Officer. Mr. Betuker has served as Chief
Financial Officer of Cosi since May 2000. Prior to joining Cosi, Mr. Betuker was
the Chief Financial Officer at Noodle Kidoodle, Inc., from 1996 to May 2000, and
the Chief Financial and Administrative Officer of First National Supermarkets,
Inc. (a subsidiary of Royal Ahold, NV), from 1986 to 1996. Mr. Betuker graduated
from Cleveland State University, cum laude, with a Bachelor of Science degree,
and was awarded a Masters Degree in Business Administration, with Highest
Distinction, from Babson College.
David Orwasher, Chief Development Officer. Mr. Orwasher joined Cosi as Chief
Development Officer in December 2001. From 1996 to 2000, Mr. Orwasher served as
Vice President of Development and Asset Management for the Eastern U.S. for
Starbucks Corporation where he helped build the real estate development and
asset management organization and helped open over four hundred stores in
numerous markets in the Eastern U.S. Prior to joining Cosi, from 2000 to 2001,
he served as the Chief Development Officer for Zoots, a dry cleaning company
founded by Tom Stemberg and Todd Krasnow of Staples, Inc. Before joining
Starbucks, Mr. Orwasher spent five years as Associate Counsel and Director of
Leasing and Brokerage for the Breslin Realty Development Corp., in addition to
spending approximately five years with the real estate group at Marriott
International, Inc. and two years with the Hershey Foods Corporation, Friendly
Restaurant Division. Mr. Orwasher is a graduate of Vassar College, where he
received a Bachelor of Arts degree in Environmental Science, he earned a Juris
Doctor degree from Pace University. He is a licensed attorney and is admitted to
practice in the states of New York and Connecticut.
Gilbert Melott, Vice President of People. Mr. Melott has served as our Vice
President of Human Resources and Training since December 2001. From December
1995 to November 2001, he was with Bennigan's, as Executive Director of Training
and as Vice President of People, Process and Education. Prior to joining
Bennigan's, Mr. Melott was a Division Director of Human Resources at Sheraton
Holding Corporation in Boston and spent four years as Divisional Training and
Development Manager at TGI Friday's. Mr. Melott is a nationally recognized
expert in generational workplace studies and recipient of Industry of Choice
awards for achievement in training and education. Mr. Melott received a Bachelor
of Science degree in Marketing and Organizational Communication from Fordham
University in 1985.
James M. Riley, Jr., Vice President of Store Development. Mr. Riley has served
as our Vice President of Store Development since May 2000. Prior to joining
Cosi, he was Chief Development Officer for Corners, Inc. from January 1998 to
April 2000. Prior to joining Corners, Mr. Riley was with Boston Chicken, Inc.
and Einstein Bros. Bagels, where he participated in opening over 200 locations.
Mr. Riley has a Bachelor's degree in Construction Management and Architectural
Engineering from Wentworth Institute of Technology in Boston, Massachusetts.
7
Charles Gray, Vice President of Information Systems. Mr. Gray currently serves
as our Vice President of Information Systems, and has been with Cosi since
September 1998. Mr. Gray is a ten year veteran in the food service industry
having served as Director of Training for RANCH *1, Inc. from 1996 to 1998,
Director of Operation Services for Einstein Bros. Bagels from 1995 to 1996, and
Assistant Director of Training for Boston Market Corporation from 1992 to 1995.
Mr. Gray is a graduate of the State University of New York at Albany.
8
ITEM 2. PROPERTIES
All of our restaurants are located on leased properties. Each lease
typically has a 10 year base rent period, with various renewal options. Each
lease requires a base rent, and some locations provide for contingent rental
payments. At most locations, we reimburse the landlords for a proportionate
share of either the landlord's taxes or yearly increases in the landlord's
taxes.
The following table depicts existing restaurants, by region as of December
30, 2002:
STREET ADDRESS CITY DATE OPENED FORMAT
-------------------------- ---------------- -------------- --------
NORTHEAST:
103 Pratt Street.......... Hartford, CT October 1994 Cosi (a)
338 Elm Street............ New Haven, CT March 1996 Cosi
970 Farmington Avenue..... W. Hartford, CT August 1999 Cosi
133 Federal Street........ Boston, MA October 1998 Cosi Downtown
53 State Street........... Boston, MA May 1999 Cosi Downtown
14 Milk Street............ Boston, MA July 1999 Cosi Downtown
2160 Broadway............. New York, NY May 1997 Cosi
504 Avenue of the Americas New York, NY March 1998 Cosi
257 Park Avenue South..... New York, NY February 1999 Cosi
165 East 52nd Street...... New York, NY February 1996 Cosi Downtown
38 East 45th Street....... New York, NY February 1997 Cosi Downtown
11 West 42nd Street....... New York, NY June 1997 Cosi Downtown
60 East 56th Street....... New York, NY September 1997 Cosi Downtown
3 World Financial Center.. New York, NY January 1998 Cosi Downtown
55 Broad Street........... New York, NY March 1998 Cosi Downtown
54 Pine Street............ New York, NY May 1998 Cosi Downtown
1633 Broadway............. New York, NY July 1998 Cosi Downtown
61 West 48th Street....... New York, NY August 1998 Cosi Downtown
202 West 36th Street...... New York, NY November 1998 Cosi Downtown
3 East 17th Street........ New York, NY February 1999 Cosi Downtown
685 Third Avenue.......... New York, NY June 1999 Cosi Downtown
461 Park Avenue South..... New York, NY January 2000 Cosi
279 Main Street........... Huntington, NY February 2000 Cosi
50 Purchase Street........ Rye, NY March 2000 Cosi
38 East 51st Street....... New York, NY July 2000 Cosi Downtown
841 Broadway.............. New York, NY September 2000 Cosi
15 S. Moger Avenue........ Mt. Kisco, NY December 2000 Cosi
116 Montague Street....... Brooklyn, NY March 2001 Cosi
545 Washington Boulevard.. Jersey City, NJ May 2001 Cosi Downtown
369 Lexington Avenue...... New York, NY August 2001 Cosi Downtown
77 Quaker Ridge Road...... New Rochelle, NY November 2001 Cosi
1298 Boston Post Road..... Larchmont, NY December 2001 Cosi
471 Mount Pleasant Road... Livingston, NJ September 2002 Cosi
3 Quality Way............. Iselin, NJ November 2002 Cosi (b)
29 Washington St.......... Morristown, NJ December 2002 Cosi
498 7th Ave............... New York, NY December 2002 Cosi
385 West Main Street...... Avon, CT December 2002 Cosi
(a) Currently operating as a Xando Coffee and Bar location.
(b) Closed subsequent to December 30, 2002.
9
STREET ADDRESS CITY DATE OPENED FORMAT
- ------------------------------- ------------------ -------------- --------
MID-ATLANTIC:
235 South 15th Street......... Philadelphia, PA September 1996 Cosi
325 Chestnut Street........... Philadelphia, PA April 1997 Cosi
1128 Walnut Street............ Philadelphia, PA December 1997 Cosi
3601 Walnut Street............ Philadelphia, PA August 1998 Cosi
761 Lancaster Avenue.......... Bryn Mawr, PA September 1998 Cosi
215 Lombard Street............ Philadelphia, PA May 1999 Cosi
1700 Market Street............ Philadelphia, PA September 1999 Cosi Downtown
1720 Walnut Street............ Philadelphia, PA October 2000 Cosi
King of Prussia Mall.......... King of Prussia, November 2001 Cosi
PA
11909 Democracy Drive......... Reston, VA May 2001 Cosi
3003 N. Charles Street........ Baltimore, MD December 1998 Cosi (a)
1350 Connecticut Avenue....... Washington, DC September 1997 Cosi
1647 20th Street NW........... Washington, DC August 1998 Cosi
301 Pennsylvania Avenue SE.... Washington, DC March 1999 Cosi
2050 Wilson Boulevard......... Arlington, VA April 1999 Cosi
1700 Pennsylvania Avenue...... Washington, DC August 1999 Cosi Downtown
700 King Street............... Alexandria, VA May 2000 Cosi
700 11th Street............... Washington, DC May 2000 Cosi
4250 Fairfax Drive............ Arlington, VA June 2000 Cosi
1919 M Street................. Washington, DC September 2000 Cosi
1001 Pennsylvania Avenue NW... Washington, DC October 2000 Cosi Downtown
7251 Woodmont Avenue.......... Bethesda, MD December 2000 Cosi
1501 K Street NW.............. Washington, DC December 2001 Cosi Downtown
1875 K Street................. Washington, DC July 2002 Cosi Downtown
601 Pennsylvania Ave. NW...... Washington, DC September 2002 Cosi
1275 K Street................. Washington, DC September 2002 Cosi
295 Main St................... Exton, PA November 2002 Cosi
5252 Wisconsin Ave............ Washington, DC December 2002 Cosi
MID-WEST:
116 S. Michigan Avenue........ Chicago, IL September 2000 Cosi
57 E. Grand Street............ Chicago, IL October 2000 Cosi
230 W. Washington Street...... Chicago, IL November 2000 Cosi Downtown
1200 North State Parkway...... Chicago, IL February 2001 Cosi (b)
203 North LaSalle Street...... Chicago, IL May 2001 Cosi Downtown
230 West Monroe Street........ Chicago, IL May 2002 Cosi Downtown
1101 Lake Street.............. Oak Park, IL June 2001 Cosi
21-25 East Chicago Avenue..... Hinsdale, IL December 2001 Cosi
149 North Weber Road.......... Bolingbrook, IL May 2002 Cosi (b)
1402 Commons Drive............ Geneva, IL September 2002 Cosi
4074 The Strand West.......... Columbus, OH October 2001 Cosi
6390 Sawmill Road............. Columbus, OH September 2002 Cosi
2212 East Main Street......... Bexley, OH September 2002 Cosi
301 South State Street........ Ann Arbor, MI May 2001 Cosi
101 North Old Woodward Avenue. Birmingham, MI August 2001 Cosi
301 East Grand River Avenue... East Lansing, MI May 2002 Cosi
44951 Schoenherr Road......... Sterling Heights, May 2002 Cosi
MI
8775 N. Port Washington Road.. Fox Point, WI December 2001 Cosi
30995 Orchard Lake Road....... Farmington Hills, July 2002 Cosi
MI
84 N. Adams Road.............. Rochester Hills, September 2002 Cosi
MI
28674 Telegraph Rd............ Southfield, MI November 2002 Cosi
1478 Bethel Rd................ Columbus, OH November 2002 Cosi
233 North Michigan Ave........ Chicago, IL December 2002 Cosi Downtown
37652 Twelve Mile Road........ Farmington Hills, December 2002 Cosi
MI
12 East Wilson Bridge Road.... Worthington, OH December 2002 Cosi
15131 LaGrange Rd............. Orland Park, IL December 2002 Cosi
(a) Currently operating as a Xando Coffee and Bar location.
(b) Closed subsequent to December 30, 2002.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are a defendant in litigation arising in the ordinary
course of our business, including claims resulting from "slip and fall"
accidents, claims under federal and state laws governing access to public
accommodations, employment related claims and claims from guests alleging
illness, injury or other food quality, health or operational concerns. To date,
none of such litigation, some of which is covered by insurance, has had a
material adverse effect on our consolidated financial position, results of
operations or cash flows.
10
On February 5, 2003, a purported shareholder class action complaint was
filed in the United States District Court for the Southern District of New York
(the "Court"), alleging that the Company and various of its officers and
directors and the Underwriter violated Sections 11, 12(a)(2) and 15 of the
Securities Act of 1933, as amended, by misstating, and by failing to disclose,
certain financial and other business information (Sheel Mohnot v. Cosi, Inc., et
al., No. 03 CV 812). At least six additional class action complaints with
similar allegations were later filed (collectively, the "Securities Act
Litigation"). The Securities Act Litigation is brought on behalf of a purported
class of purchasers of the Company's stock allegedly traceable to its November
22, 2002 initial public offering (the "IPO"). The complaints in the Securities
Act Litigation generally claim that at the time of the IPO, the Company's
offering materials failed to disclose that the funds raised through the IPO
would be insufficient to implement the Company's expansion plan; that it was
improbable that the Company would be able to open 53 to 59 new stores in 2003;
that at the time of the IPO, Cosi had negative working capital and therefore did
not have available working capital to repay certain debts; and that the
principal purpose for going forward with the IPO was to repay certain existing
shareholders and members of the Board of Directors for certain debts and to
operate the Company's existing restaurants.
On February 21, 2003, a purported shareholder class action complaint was
filed in the Court alleging that the Company and certain of its officers and
directors violated Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, and Rule 10-b promulgated thereunder, by issuing a series of material
misrepresentations to the market between November 22, 2002 and February 4, 2003
(the "Class Period") (Georgette Pacia v. Cosi, Inc. et al., No. 03-CV-1156) (the
"Securities Exchange Act Litigation"). The emphasis of the allegations in the
complaint in the Securities Exchange Act Litigation is that the defendants
knowingly or recklessly caused misrepresentations and omissions to be made
regarding the Company's operating condition and future business prospects. Among
other things, plaintiffs in the Securities Exchange Act Litigation allege that
defendants failed to disclose that the funds raised by the IPO would be
insufficient to implement the Company's expansion plan; that at the time of the
IPO, defendants should have known that the costs of expansion would be greater
than the cash available to the Company, making it improbable that the Company
would be able to successfully continue to open new stores at the pace announced
by the Company; and that defendants failed to disclose that a reduction in the
offering price of the IPO would result in the Company being forced to abandon
its growth strategy.
The plaintiffs in the Securities Act Litigation and the Securities Exchange
Act Litigation (the "Litigations") generally seek to recover compensatory
damages, expert fees, attorneys' fees, costs of Court and pre- and post-judgment
interest. The Underwriter is seeking indemnification from the Company for any
damages assessed against it in the Securities Act Litigation. The Litigations
are at a preliminary stage, and the Company expects that these related lawsuits
will be consolidated into a single action. The Company believes that it has
meritorious defenses to these claims, and intends to vigorously defend against
them.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(A)
(I) MARKET INFORMATION.
On November 22, 2002 the Company's common stock began trading on The Nasdaq
National Market under the symbol "COSI". Prior to that time, there was no public
trading market for the Company's common stock. The following table sets forth
the high and low sale prices as reported by Nasdaq for the fiscal periods
indicated.
2002 High Low
------------------------------------------------------------
Fourth Quarter (beginning November 22) $10.93 $5.47
2003 High Low
-----------------------------------------------------------
First Quarter (through March 21) $6.08 $1.66
On March 21, 2003, the last sale price for the Common Stock, as reported on
the Nasdaq National Market System, was $2.09
(II) HOLDERS.
On March 28, 2003, the Company had 230 holders of record of its Common
Stock.
(III) DIVIDENDS.
The Company has never paid cash dividends on its capital stock and does not
intend to pay cash dividends in the foreseeable future.
(IV) RECENT SALES OF UNREGISTERED SECURITIES
(A) ISSUANCES OF SHARES OF SERIES C PREFERRED STOCK.
On February 23, 2002, the Company issued a total of 2,029,923 shares of Series C
to 72 investors, 69 of which were accredited investors (46 of which represented
to the Company that they were a natural person with a net worth over $1 million,
1 of which was a bank as defined in Section 3(a)(2) of the Securities Act, 1 of
which was an organization described in Section 501(c)(3) of the IRC, 5 of which
represented to the Company that they were a natural person with individual
income greater than $200,000, or, if married, combined income with spouse of
over $300,000, in 2 of the last 3 years, 4 of which were a trust with assets
exceeding $5 million, not formed for the specific purpose of acquiring the
securities offered, and 13 of which represented to the Company that they were an
entity in which all the equity owners are accredited investors) and 24 of which
were existing shareholders of the Company, for an aggregate purchase price of
$19,284,229.37, or $9.50 per share. Participating in this sale were 20
principals and 1 vice president of William Blair & Company, L.L.C.
(B) OPTION ISSUANCES TO, AND EXERCISES BY, EMPLOYEES, DIRECTORS AND CONSULTANTS.
On January 30, 2002, the Company sold 56,250 shares of its Common Stock to a
former director for aggregate consideration of $351,562.50, or approximately
$6.25 per share, pursuant to the exercise of outstanding stock options granted
prior to January 2, 2001.
12
On February 11, 2002, the Company sold 41 shares of its Common Stock to an
employee for aggregate consideration of $287, or approximately $7.00 per share,
pursuant to the exercise of stock options granted prior to January 2, 2001.
(C) ISSUANCES AND EXERCISES OF WARRANTS.
On January 18, 2002, the Company issued a stock purchase warrant to purchase
8,785 shares of Common Stock at $0.01 per share to two investors, pursuant to a
Note and Warrant Purchase Agreement.
On June 3, 2002, the Company sold 2,198 shares of its Common Stock to an
existing shareholders for an aggregate consideration of $21.98 pursuant to the
exercise of outstanding warrants.
On July 17, 2002, the Company sold 220 shares of its Common Stock to two
existing shareholders for an aggregate consideration of $3.84 pursuant to the
exercise of outstanding warrants.
On August 1, 2002, the Company sold 144 shares of its Common Stock to two
existing shareholders for an aggregate consideration of $2.52 pursuant to the
exercise of outstanding warrants.
On August 2, 2002, the Company sold 220 shares of its Common Stock to an
existing shareholder for an aggregate consideration of $3.85 pursuant to the
exercise of outstanding warrants.
On August 12, 2002, the Company issued stock purchase warrants to purchase
983,671 shares of Common Stock at $6.00 per share to 20 investors, all of which
were accredited investors and 18 of which were existing shareholders of the
Company, pursuant to a Senior Secured Note and Warrant Purchase Agreement.
During September 2002, the Company issued stock purchase warrants to purchase
210,002 shares of Common Stock at $6.00 per share to 20 investors, all of which
were accredited investors and 18 of which were existing shareholders of the
Company, pursuant to a Senior Secured Note and Warrant Purchase Agreement.
During October 2002, the Company issued stock purchase warrants to purchase
360,001 shares of Common Stock at $6.00 per share to 20 investors, all of which
were accredited investors and 18 of which were existing shareholders of the
Company, pursuant to a Senior Secured Note and Warrant Purchase Agreement.
During November 2002, the Company issued stock purchase warrants to purchase
516,330 shares of Common Stock at $6.00 per share to 9 investors, all of which
were accredited investors and all of which were existing shareholders of the
Company, pursuant to a Senior Secured Note and Warrant Purchase Agreement.
On December 19, 2002, the Company sold 4,396 shares of its Common Stock to an
existing shareholder for an aggregate consideration of $43.96 pursuant to the
exercise of outstanding warrants.
(D) ISSUANCES OF PROMISSORY NOTES.
On January 18, 2002, the Company sold a promissory note in the principal amount
of $500,000, to two investors, pursuant to a Note and Warrant Purchase
Agreement.
During September 2002, the Company sold promissory notes in the principal amount
of $3.0 million to 20 investors, all of which were accredited investors and 18
of which were existing shareholders of the Company, pursuant to a Senior Secured
Note and Warrant Purchase Agreement.
During October 2002, the Company sold promissory notes in the principal amount
of $6.5 million to 20 investors, all of which were accredited investors and 18
of which were existing shareholders of the Company, pursuant to a Senior Secured
Note and Warrant Purchase Agreement.
There were no underwriters employed in connection with any of the transactions
set forth in this Item 5.
The issuances described in this Item 5 prior to June 4, 2002 do not reflect the
1.75 to 1 reverse stock split.
13
The issuances described in (a), (c) (except for the 6th, 7th and 8th issuances)
and (d) were made in reliance upon the exemption from registration provided
pursuant to Section 4(2) of the Securities Act. The Company determined that each
of these sales qualified as private placements under Section 4(2) because (i)
neither the issuer nor any person acting on its behalf offered or sold these
securities by any form of general solicitation or general advertising, (ii) no
private placement included more than 3 non-accredited investors, (iii) in
connection with each private placement, the Company provided written disclosure
with respect to all relevant financial and other information to each investor,
and (iv) the Company provided written disclosure to each purchaser prior to sale
stating that the securities had not been registered under the Securities Act
and, therefore, could not be resold unless they were registered under the
Securities Act or unless an exemption from registration was available. The
6th, 7th and 8th issuances described in (c) were made in reliance upon the
exemption from registration provided pursuant to Rule 506 of Regulation D,
promulgated under the Securities Act.
The sales of the Company's common stock pursuant to the exercise of stock
options described in (b) we made in reliance upon the exemption from
registration provided pursuant to Rule 701 promulgated under the Securities Act
as securities sold pursuant to certain compensatory benefit plans and contracts
relating to compensation.
USE OF PROCEEDS
We registered and sold 5,555,556 shares of our common stock, par value $0.01, to
the public at an aggregate offering price of $38,888,892 or $7.00 per share
pursuant to registration statement No. 333-86390, which was declared effective
on November 21, 2002. The offering has terminated. The lead underwriter of the
offering was William Blair & Company, LLC. Through December 30, 2002, we
incurred the following expenses in connection with our initial public offering:
---------------------------------------------
In $ Millions
---------------------------------------------
Gross Proceeds $ 38.9
---------------------------------------------
Underwriter's Commissions (2.7)
---------------------------------------------
Other costs of issuance paid by
the Company (3.4)
--------
----------------------------------------------
Net Proceeds to the Company $ 32.8
========
----------------------------------------------
The net offering proceeds to us through December 30, 2002 after deducting the
total expenses above were approximately $32.8 million.
- --------------------------------------------------------------------------------
Intended Use Actual Use
Of Proceeds of Proceeds
In $ Millions as stated in through
prospectus December 30, 2002
- --------------------------------------------------------------------------------
Develop new restaurants and maintain and
remodel existing restaurants
$ 19.6 $ 8.5
- --------------------------------------------------------------------------------
Prepay outstanding 13% senior subordinated
notes due 2006 6.6 6.6
- --------------------------------------------------------------------------------
Retire all outstanding 12% senior secured
notes 7.5 7.5
- --------------------------------------------------------------------------------
14
Equity Compensation Plan Information
Number of Securities
Remaining available for
Number of Securities to be Weighted-Average Exercise Future Issuance under
Issued upon Exercise of Price of Outstanding Equity Compensation Plans
Outstanding Options, Options, Warrants and (Excluding Securities
Plan Category Warrants and Rights Rights Reflected in Column(a))
(a) (b) (c)
Equity Compensation Plans
Approved by Security
Holders 3,406,332 $10.41 2,943,794
Equity Compensation Plans Not
Approved by Security
Holders None None None
15
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction
with the consolidated financial statements and notes thereto included in Item 8
of Part II, "Financial Statements and Supplementary Data", and the information
contained herein in Item 7 of Part II, "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Historical results are not
necessarily indicative of future results.
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
FISCAL YEAR
---------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Statement of Operations
Data:
Net sales ................. $ 84,424.2 $ 70,184.1 $ 51,222.8 $ 37,262.2 $ 20,686.7
Costs and expenses:
Cost of goods sold ...... 22,697.5 18,791.7 13,844.0 10,838.5 6,332.9
Restaurant operating
expenses .............. 50,852.7 45,114.5 32,172.9 22,236.2 11,386.5
---------- ---------- ---------- ---------- ----------
Total costs of sales . 73,550.2 63,906.2 46,016.9 33,074.7 17,719.4
---------- ---------- ---------- ---------- ----------
General and
administrative expenses 17,811.7 18,361.5 14,774.2 14,024.3 7,728.7
Depreciation and
amortization .......... 5,851.2 6,690.0 6,158.1 3,155.2 1,196.6
Restaurant pre-opening
expenses .............. 1,845.1 1,438.8 1,409.5 661.4 720.9
Provision for losses on
asset impairments and
disposals ............. 1,056.5 8,486.3 5,847.5 4,208.7 --
Merger costs and related
expenses .............. -- -- -- 8,958.7 --
Lease termination
costs ................. (1,165.0) 6,410.7 477.3 3,437.1 --
Stock compensation ........ -- -- -- 4,512.6 --
---------- ---------- ---------- ---------- ----------
Operating income (loss) ... (14,525.5) (35,109.4) (23,460.7) (34,770.5) (6,678.9)
---------- ---------- ---------- ---------- ----------
Other income (expense):
Interest income .......... 98.3 340.5 441.4 478.6 406.6
Interest expense ......... (1,192.6) (527.5) (210.7) (206.1) (94.6)
Amortization of
Deferred Financing
Costs .................. (549.0) (126.9) -- -- --
Loss on Extinguishment of
Debt ................... (5,083.2) -- -- -- --
Other income (expense) .... 380.9 -- -- -- --
---------- ---------- ---------- ---------- ----------
Total other income
(expense), net ...... (6,345.6) (313.9) 230.7 272.5 312.0
---------- ---------- ---------- ---------- ----------
Net income (loss) ......... (20,871.1) (35,423.3) (23,230.0) (34,498.0) (6,366.9)
Preferred stock
dividends ............... (8,193.6) (6,678.1) (4,219.7) (2,561.3) (1,064.4)
---------- ---------- ---------- ---------- ----------
Net income (loss)
attributable to common
stockholders ............ $(29,064.7) $(42,101.4) $(27,449.7) $(37,059.3) $ (7,431.3)
========== ========== ========== ========== ==========
Net income (loss) per
common share:
Basic and diluted ....... $ (5.04) $ (9.34) $ (6.09) $ (8.79) $ (2.18)
---------- ---------- ---------- ---------- ----------
Shares used in computing
net income per common
share (in thousands)
Basic and diluted ....... 5,763 4,507 4,504 4,215 3,406
---------- ---------- ---------- ---------- ----------
16
Fiscal Year
----------------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- --------
(in thousands, except per share data)
Selected Balance Sheet
Data:
Cash and cash equivalents ............................... 13,032.3 4,469.6 5,062.9 6,985.7 6,494.6
Total assets ............................................ 66,243.1 35,388.4 32,065.8 25,856.6 24,982.8
Total debt and capital .................................. 1,648.5 11,180.0 4,435.8 1,645.6 989.4
lease obligations
Mandatorily redeemable .................................. -- 92,289.3 61,695.3 35,020.5 16,680.5
preferred stock
Total common stockholders' .............................. 39,327.0 (88,979.9) (48,275.3) (20,825.7) 3,378.7
equity (deficit)
Selected Statement of
Cash Flow Data:
Cash flow from operating ................................ (5,812.7) (12,382.2) (8,539.1) (8,539.7) (3,146.9)
activities
Cash flow from investing ................................ (27,464.2) (20,267.9) (18,347.7) (14,742.3) (11,704.6)
activities
Cash flow from financing ................................ 41,839.7 32,056.8 24,964.0 23,773.2 18,510.6
activities
Selected Operating
Data:
Restaurants open at end of .............................. 91 67 52 36 25
period
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We own and operate 94 fast casual restaurants in 11 states and the District
of Columbia. Cosi restaurants are all-day cafes that feature signature bread and
coffee products in an environment that changes throughout the day. Cosi
restaurants offer breakfast, lunch, afternoon coffee, dinner, and dessert menus
full of creative, cravable foods and beverages.
We operate our restaurants in two formats: Cosi and Cosi Downtown. All of
our restaurants offer our signature bread and coffee products for breakfast,
lunch and afternoon coffee in a counter service format. After 5 p.m., our Cosi
restaurants add table service and offer dinner and dessert in a casual dining
format. Cosi Downtown restaurants, which are located in non-residential central
business districts, close for the day in the early evening. By operating in
multiple dayparts, we believe we are able to maximize revenues and leverage both
development and operating costs.
17
We opened 17 new restaurants in fiscal 2000, 17 new restaurants in fiscal
2001, and 25 new restaurants in fiscal 2002. We closed one restaurant and our
mini-training restaurant associated with the Xando Coffee and Bar former
headquarters in fiscal 2000 and closed one restaurant in addition to our World
Trade Center restaurant, our World Trade Center kiosk and our World Financial
Center restaurant which were closed due to the events of September 11th in
fiscal 2001. We closed one restaurant in the first quarter of fiscal 2002, which
was not suited for remodeling to our current prototype. Our World Financial
Center restaurant re-opened on September 9, 2002.
- --------------------- ---------- ---- --------- ---------- ------------ ------
2000 2001 2002
- --------------------- ---------- ---- --------- ---------- ------------ ------
Restaurants open at
Beginning of year 38 (a) 53 (a) 67
- --------------------- ---------- ---- --------- ---------- ------------ ------
Restaurants Opened 17 17 25 (b)
- --------------------- ---------- ---- --------- ---------- ------------ ------
Restaurants Closed 2 3 (a) (b) 1
- --------------------- ---------- ---- --------- ---------- ------------ ------
Restaurants open at
End of Year 53 (a) 67 91
- --------------------- ---------- ---- --------- ---------- ------------ ------
(a) Includes Kiosk location formerly operated in World Trade Center Plaza.
(b) Excludes World Financial Center location which closed 9/11/01 and re-opened
9/9/02
Our financial performance in fiscal 2001 and fiscal 2002 was adversely
affected by the results of the 16 restaurants that we operated in New York
Central Business District locations. These restaurants have high, market
specific, fixed expenses and were disproportionately impacted by the economic
recession in 2001 and 2002 and the events of September 11th, 2001.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements and the notes to our consolidated
financial statements contain information that is pertinent to management's
discussion and analysis. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities. We
believe the following critical accounting policies involve additional management
judgment due to the sensitivity of the methods, assumptions, and estimates
necessary in determining the related asset and liability amounts.
Statement of Financial Accounting Standards, or SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets," supercedes SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," and APB Opinion No. 30, "Reporting Results of Operations
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions." This statement
retains the fundamental provisions of SFAS 121 for recognition and measurement
of impairment, but amends the accounting and reporting standards for segments of
a business to be disposed of. We adopted the provisions of this statement
beginning in fiscal 2002. This standard 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. Actual results
may differ from those estimates. The application of SFAS 144 and previously SFAS
121 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, and record an impairment loss whenever we determine
impairment factors are present. We consider a history of restaurant operating
losses to be the primary indicator of potential impairment for individual
restaurant locations. We have identified certain units that have been impaired,
and recorded charges of approximately $1.1 million (related to two restaurants)
, $7.2 million (related to fourteen restaurants, including one damaged in the
events of September 11, 2001), and $5.8 million (related to ten restaurants)in
the statements of operations for 2002, 2001 and 2000, respectively. We have
historically not recorded material additional impairment charges subsequent to
the initial determination of impairment.
18
We have estimated our likely liability under contractual leases for
restaurants that have been, or will be closed. Such estimates have affected the
amount and timing of charges to operating results that have been significant in
recent years, and are impacted by management's 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.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses accounting for
restructuring, discontinued operation, plant closing, or other exit or disposal
activity. SFAS 146 requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. SFAS 146 is to be applied prospectively
to exit or disposal activities initiated after December 31, 2002. The adoption
of SFAS 146 is not expected to have a significant impact on the Company's
financial position and results of operations.
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." SFAS 148 amends SFAS 123
"Accounting for Stock-Based Compensation" to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123 to require more prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The additional disclosure requirements of SFAS 148 are effective for
fiscal years ending after December 15, 2002 and have been incorporated into the
accompanying financial statements and footnotes. The Company has elected to
continue to follow the intrinsic value method of accounting as prescribed by APB
25 to account for employee stock options.
We have recorded a full valuation allowance to reduce our deferred tax
assets related to net operating loss carry forwards. A positive adjustment to
income will be required in future years if we determine that we could realize
these deferred tax assets.
NET SALES
Our sales are composed almost entirely of food and beverage sales.
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. At
fiscal year end 2000, there were 34 restaurants in the comparable restaurant
base. At fiscal year end 2001, there were 40 restaurants in the comparable
restaurant base. At fiscal year end 2002, there were 57 restaurants in our
comparable restaurant base.
COSTS AND EXPENSES
Cost of goods sold. Cost of goods sold is composed of food and beverage
costs. Food and beverage costs are variable, and increase with sales volume.
Restaurant operating expenses. Restaurant operating expenses include direct
hourly and management wages, bonuses, taxes and benefits for restaurant
employees, and other direct restaurant level operating expenses including the
cost of 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 facilitate our future growth. Components of
these expenses include executive management; supervisory and staff salaries,
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, bonus 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.
Depreciation and amortization. Depreciation and amortization principally
includes depreciation on restaurant assets.
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 of or remodeling of a restaurant.
19
Our fiscal year ends on the Monday falling nearest to December 31st. Fiscal
years 2000, 2001 and 2002 each included 52 weeks.
20
RESULTS OF OPERATIONS
Our operating results for fiscal years 2000, 2001 and 2002 expressed as a
percentage of sales were as follows:
FISCAL YEAR
-----------
2002 2001 2000
------ ------ ------
Net sales ........................................ 100.0% 100.0% 100.0%
Costs and Expenses:
Cost of goods sold ............................. 26.9% 26.8% 27.0%
Restaurant operating expenses .................. 60.2% 64.3% 62.8%
Total costs of sales ........................... 87.1% 91.1% 89.8%
General and administrative ..................... 21.1% 26.2% 28.8%
expenses
Depreciation and amortization .................. 6.9% 9.5% 12.0%
Restaurant pre-opening expenses ................ 2.2% 2.1% 2.8%
Provision for losses on asset
impairments and disposals ................... 1.3% 12.1% 11.4%
Lease termination costs ........................ (1.4)% 9.1% 0.9%
Operating income (loss) .......................... (17.2)% (50.0)% (45.8)%
Other income (expense):
Interest income ................................ 0.1% 0.5% 0.9%
Interest expense ............................... (1.4)% (0.9)% (0.4)%
Amortization of Deferred
Financing Costs .............................. (0.7)% (0.1)% --
Loss on Early Extinguishment of ................. (6.0)% -- --
Debt
Other income (expense) ......................... 0.5% -- --
Total other income (expense), net .............. (7.5)% (0.4)% 0.5%
Net income (loss) ................................ (24.7)% (50.5)% (45.4)%
FISCAL YEAR 2002 VS. FISCAL YEAR 2001
NET SALES
Sales increased $14.2 million, or 20.3%, to $84.4 million in 2002, from
$70.2 million in fiscal 2001. This increase was primarily due to the full period
contribution of sales from restaurants opened in fiscal 2001, from sales of
restaurants opened in 2002 and from an increase in comparable restaurant sales
of 4%. This was partially offset by the loss of our World Trade Center
restaurant and the closure of our World Financial Center restaurant due to the
events of September 11, 2001. Our World Financial Center restaurant reopened in
September 2002. Additionally, one restaurant was not suited for remodeling to
our current prototype and was closed during the period. Comparable restaurant
sales were adversely affected by the effect of the economic downturn on our New
York City Central Business District restaurants, the effect of September 11 on
all of our restaurants and the reduction of our menu pricing during the first
quarter of fiscal 2002. Excluding the New York City Central Business District
restaurants, comparable restaurant sales increased 9% for the year. This
increase was driven by the sales performance of the six remodeled restaurants
that were open for the full period and the eight restaurants that were remodeled
during the period, all of which were remodeled to incorporate our full product
line.
COSTS AND EXPENSES
Cost of goods sold. Cost of goods sold increased $3.9 million or 20.8% to
$22.7 million in fiscal 2002, from $18.8 million in fiscal 2001. As a percentage
of sales, cost of goods sold increased to 26.9% of sales in fiscal 2002, from
26.8% in fiscal 2001. The increase in cost of goods sold as a percentage of
sales was primarily due to the reduction in our menu pricing during the first
quarter of fiscal 2002, and to a shift in our sales mix due to the expansion of
our food offering in 2002. During the year, food sales increased to 70.7% of
total sales, from 66.2% last year, with an offsetting reduction in our beverage
sales, which were 29.3% of total sales, compared to 33.8% last year. Our food
sales have a higher cost of sales when compared to our beverage sales. These
increases were partially offset by improvements in our food costs, as a
percentage of food sales, as we were able to reduce our ingredient costs through
better purchasing and through menu changes.
Restaurant operating expenses. Restaurant operating expenses increased by
$5.7 million, or 12.7%, to $50.8 million in fiscal 2002, from $45.1 million in
fiscal 2001. This increase is primarily due to the increase in the number of
restaurants in operation this year. As a percentage of sales, restaurant
operating expenses decreased to 60.2% of sales in fiscal 2002, from 64.3% in
fiscal 2001. This reduction was primarily due to reductions in our labor costs.
21
General and administrative costs. General and administrative costs
decreased by $0.6 million, or 3.0%, to $17.8 million in fiscal 2002, from $18.4
million in fiscal 2001. As a percentage of sales, general and administrative
costs decreased to 21.1% of sales in fiscal 2002, from 26.2% of sales in fiscal
2001. The decrease as a percentage of sales was primarily due to sales leverage
against these costs. General and administrative costs in 2001 included
approximately $0.8 million of one-time expenses including severance payments
related to the continued enhancement of our management team. Excluding these
one-time costs from 2001, our general and administrative costs were essentially
held flat in 2002.
Depreciation and amortization. Depreciation and amortization decreased $0.8
million, or 12.5%, to $5.9 million in fiscal 2002, from $6.7 million in fiscal
2001. This decrease was primarily due to additional depreciation expense in the
first half of fiscal 2001 on assets to be disposed of in connection with
restaurant remodels, as well as reduced depreciation in fiscal 2002 on assets
for which impairment write-downs were taken in fiscal 2001. As a percentage of
restaurant sales, depreciation and amortization decreased to 6.9% of sales in
fiscal 2002, compared to 9.5% of sales in fiscal 2001. During 2002, our store
opening program was weighted toward the latter part of the year, with 12 of the
25 new restaurants opening in the last quarter. Therefore, only a limited amount
of depreciation expense was recorded for these new restaurants in 2002.
Restaurant pre-opening expenses. Restaurant pre-opening expenses increased
to $1.8 million in fiscal 2002, from $1.4 million in fiscal 2001. As a
percentage of restaurant sales, restaurant pre-opening expenses increased to
2.2% of sales in fiscal 2002, from 2.1% of sales in fiscal 2001. This increase
as a percentage of sales is due to the limited amount of sales recorded by our
restaurants opened in 2002. As noted above, 12 of the 25 new restaurants were
opened in the last quarter. Including restaurants which were remodeled in each
year, restaurant pre-opening costs were reduced from approximately $63,000 per
restaurant in 2001 to $54,000 in 2002.
Loss on impairment of property and equipment and restaurant closures.
During fiscal 2002, we recognized $1.1 million of asset impairment costs
(related to two under performing restaurants) compared to $7.2 million (related
to 14 restaurants) in 2001. In 2001 we also recorded restaurant closure costs of
$1.3 million related to the loss of our World Trade Center restaurant.
Lease termination costs. During 2002, we recorded a credit of $1.2 million,
as we revised our estimates of the expected cost to terminate leases on
locations that are closed, or are expected to close. Of this amount, $0.4
million was related to a reserve we had established last year for our restaurant
in the World Financial Center, which had been closed due to the terrorist
attacks on September 11, 2001. That restaurant was reopened in September of
2002, and has been performing satisfactorily since then. The remaining $0.8
million of adjustments to our lease termination reserves represent revisions to
our estimated liabilities related to ten other locations that are closed, or are
expected to close. During fiscal 2001, we recorded $6.4 million of these costs.
Interest income and expense. During fiscal 2002 interest income was $0.1
million, down from $0.3 million from the same period a year ago. This was due to
a decrease in the average investable cash balance during the period, and lower
interest rates available on short-term investments. Interest expense increased
$0.6 million to $1.2 million from $0.6 million in fiscal 2001. The increase in
interest expense is due to borrowings under our 12% senior secured notes due
2004 and our 13% senior subordinated notes due 2006, neither of which were
outstanding during the first nine months of fiscal 2001. Those notes were repaid
in December 2002 with proceeds from our initial public offering.
Amortization of deferred financing costs and debt discount. During fiscal
2002, we recorded $0.5 million in amortization of deferred financing costs, and
accretion of debt discount on our Senior Secured Credit Facility, our Senior
Subordinated Credit Facility and on our Equipment Loan Credit Facility. This
compares to $0.1 million recorded in 2001, primarily related to our Equipment
Loan Credit Facility. The increase is due to amortization of debt discount
related to our Senior Subordinated Credit Facility, which was in place for
eleven months of the year and due to amortization of deferred financing costs
and debt discount related to our Senior Secured Credit Facility, which was in
place for a portion of the third and fourth quarters in fiscal 2002.
Loss on early extinguishment of debt. In the fourth quarter of fiscal 2002
we repaid our Senior Subordinated and Senior Secured Credit Facilities. At the
time of repayment we wrote off $5.1 million in unamortized deferred financing
costs and debt discount related to these Credit Facilities.
Other income. During fiscal 2002 we recorded $0.4 million of other income,
principally the receipt of business interruption insurance proceeds related to
our World Financial Center restaurant, which was closed from September 11, 2001
until early September 2002.
22
FISCAL YEAR 2001 VS. FISCAL YEAR 2000
NET SALES
Sales increased $19.0 million, or 37.1%, to $70.2 million in fiscal 2001,
from $51.2 million in fiscal 2000. This increase was primarily due to sales from
the 17 new restaurants opened in fiscal 2001, and the full year contribution of
sales from restaurants opened in fiscal 2000. This increase was partially offset
by a 2% decrease in sales of the restaurants in our comparable restaurant base
at the end of the period, the closure of our World Financial Center restaurant
due to the events of September 11th, the closure of the mini-training restaurant
associated with the Xando Coffee and Bar former headquarters and one additional
restaurant closure. The decrease in comparable restaurant sales was primarily
due to the especially acute effect of the economic downturn on our New York
Central Business District restaurants as well as the significant impact of the
events of September 11th. Excluding the New York Central Business District
restaurants, comparable restaurant sales increased 7% in fiscal 2001, including
an 11% increase in the fourth quarter of fiscal 2001. This increase was
partially due to comparable restaurant sales in six restaurants that were
remodeled during the year to incorporate our full product line.
COSTS AND EXPENSES
Cost of goods sold. Cost of goods sold increased $5.0 million, or 35.7%, to
$18.8 million in fiscal 2001, from $13.8 million in fiscal 2000. As a percentage
of sales, cost of goods sold decreased to 26.8% of sales in fiscal 2001, from
27.0% in fiscal 2000. The decrease in cost of goods sold was primarily due to
the full year benefit of the elimination of our commissary during fiscal 2000.
Restaurant operating expenses. Restaurant operating expenses increased
$12.9 million, or 40.2%, to $45.1 million in fiscal 2001, from $32.2 million in
fiscal 2000. As a percentage of sales, restaurant operating expenses increased
to 64.3% of sales in fiscal 2001, from 62.8% in fiscal 2000. This increase,
which was primarily labor costs, was due to the development of the Cosi and Cosi
Downtown prototypes, and the related restaurant operating systems. These
prototypes are expected to be the basis for the future expansion of both the
Cosi and Cosi Downtown concepts. Additionally, sales were adversely affected by
the events of September 11th, which resulted in the fixed components of
restaurant operating expenses increasing as a percentage of sales.
General and administrative expenses. General and administrative expenses
increased $3.6 million, or 24.3%, from $14.8 million in fiscal 2000 to $18.4
million in fiscal 2001. The increase was primarily due to the development of the
support systems associated with our growth strategy and $0.8 million of one-time
expenses, including severance payments related to the continued enhancement of
our management team. As a percentage of sales, general and administrative
expenses decreased to 26.2% of sales in fiscal 2001, from 28.8% of sales in
fiscal 2000, due to leveraging of our existing infrastructure.
Depreciation and amortization. Depreciation and amortization increased $0.5
million, or 8.6%, to $6.7 million in fiscal 2001, from $6.2 million in fiscal
2000. This increase was due to depreciation on restaurants opened in 2001 and a
full year's depreciation on restaurants opened in 2000 of $1.4 million. These
increases were offset by a $0.9 million reduction from asset impairment
write-downs in connection with continued refinement of our restaurant prototype.
Restaurant pre-opening expenses. Restaurant pre-opening expenses remained
constant at $1.4 million in fiscal 2001, despite an increase in the number of
restaurants opened or remodeled. We opened or remodeled 23 restaurants in 2001
versus 18 in 2000. Both labor and travel costs were reduced in our average
pre-opening expenses per restaurant as we continued the refinement of our
training programs and penetrated existing markets.
Loss on impairment of property and equipment and restaurant closures. Loss
on impairment of property and equipment and restaurant closures increased $2.6
million to $8.5 million in fiscal 2001, from $5.8 million in fiscal 2000. These
costs were due to asset impairment write-downs, the loss of our World Trade
Center restaurant, World Trade Center kiosk and World Financial Center
restaurant and the closure of a restaurant.
Lease termination costs. Lease termination costs increased $5.9 million to
$6.4 million in fiscal 2001, compared to $0.5 million in fiscal 2000. These
costs were primarily due to lease terminations in connection with restaurants
closed or planned to close in connection with the continued refinement of our
restaurant prototype in fiscal 2001.
Interest income and expense. Interest income decreased $0.1 million to $0.3
million in fiscal 2001, from $0.4 million in fiscal 2000. Interest expense
increased $0.4 million to $0.6 million in fiscal 2001, from $0.2 million in
fiscal 2000. The increase is due to interest on our term loans drawn down in
late fiscal 2000, which were outstanding for all of fiscal 2001, and interest on
our senior subordinated debt, which was issued in November 2001.
23
Amortization of Deferred Financing Costs and Debt Discount. During 2001 we
recorded $0.1 million in amortization of deferred financing costs and debt
discount primarily related to our Equipment Loan Credit Facility.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS AND SEASONALITY
Our quarterly operating results may fluctuate significantly as a result of
a variety of factors, including the timing of new restaurant openings and
related expenses, profitability of new restaurants, increases or decreases in
comparable restaurant sales, general economic conditions, consumer confidence in
the economy, consumer preferences, competitive factors, unanticipated increases
in food, labor, commodity, energy, insurance and other operating costs, weather
conditions and seasonal fluctuations.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $13.0 million on December 30, 2002 compared
with $4.5 million at December 31, 2001 and $5.1 million at January 1, 2001. Our
working capital was $0.7 million as of December 30, 2002, compared with a
deficit of $5.3 million at December 31, 2001 and a deficit of $2.8 million at
January 1, 2001. Our principal requirements for cash are capital expenditures
for the development of new restaurants, and for maintaining or remodeling
existing restaurants and funding operations. To date we have financed our
requirements for capital with private equity and debt financings, and with the
proceeds of the initial public offering of our common stock.
In August 2002, we entered into a Senior Secured Note and Warrant Purchase
Agreement with certain of our existing shareholders and members of our board of
directors. This agreement provided us with a $16.4 million credit facility
available for general corporate purposes. This credit facility was increased to
$25.0 million in November 2002. The facility allowed us to draw down funds from
time to time until August 12, 2003. Each borrowing was evidenced by a senior
note, bearing interest at 12% per annum. Interest on the notes accrued and was
payable, together with principal, in August 2004. This credit facility
terminated upon the consummation of our initial public offering of our common
stock and all amounts then outstanding were repaid. Prior to the initial public
offering of our common stock in November 2002 and during the year ended December
31, 2001, we met our requirements for capital with proceeds from the sale of
Series C preferred stock and the issuance of Senior Subordinated and Senior
Secured Notes.
Net cash used in operating activities for the fifty-two weeks ended
December 30, 2002 was $5.8 million, compared to $12.4 million for the fifty-two
weeks ended December 31, 2001 and $8.5 million for the fifty-two weeks ended
January 1, 2001. Funds used in operating activities in 2002 decreased primarily
as a result of a reduction in our net loss compared to 2001, and an increase in
our accounts payable at year-end. Accounts payable were unusually high at
year-end due to the high level of purchases associated with our new restaurants
opened in the fourth quarter of 2002, and to be opened in the first quarter of
2003.
Total capital expenditures for the fifty-two weeks ended December 30, 2002
were $27.2 million, compared to expenditures of $20.4 million for the fifty-two
weeks ended December 31, 2001. These expenditures were primarily related to the
opening of 25 new restaurants, and remodeling nine restaurants, including the
reopening of our World Financial Center restaurant, during the fifty-two weeks
ended December 30, 2002, and opening 17 new restaurants, and remodeling six
existing restaurants in 2001. Total capital expenditures were $18.2 million for
fiscal 2000, and were primarily related to the opening of 17 new restaurants,
and for remodeling one existing restaurant.
Net cash provided by financing activities was $41.8 million for the
fifty-two weeks ended December 30, 2002, $32.1 million for the fifty-two weeks
ended December 31, 2001 and $25.0 million for the fifty-two weeks ended January
1, 2001. During fiscal 2002 we issued approximately 1.1 million shares of Series
C preferred stock, and received approximately $19.3 million, net of offering
costs. Of this, approximately $3.6 million represented the exchange of
approximately $3.5 million face amount of our 13% Senior Subordinated Notes and
accrued interest. We also issued approximately 5.6 million shares of our common
stock in our initial public offering, and received approximately $32.8 million,
net of offering costs. Prior to our initial public offering, we issued
approximately $0.5 million of additional Senior Subordinated Notes and accrued
$0.8 million of interest on these notes, and issued approximately $9.5 million
face amount of our 12% Senior Secured notes and accrued $0.2 million of interest
on these notes. During the period, we made scheduled repayments of $1.2 and $0.5
million related to our other outstanding long-term debt and capital lease
obligations, respectively. Approximately $6.6 million of the proceeds from our
initial public offering were used to repay our outstanding 13% Senior
Subordinated notes, including accrued interest and pre-payment premium, and
approximately $7.5 million of proceeds and approximately $2.1 million of
available cash were used to repay our outstanding 12% Senior Secured notes,
including accrued interest. In fiscal 2001, we sold approximately 1.4 million
shares of Series C Preferred Stock and received approximately $24.1 million, net
of offering costs. In November 2001, we entered into Senior Subordinated Note
and Warrant purchase agreements with a group of investors, pursuant to which we
received approximately $9.3 million in proceeds. During 2001, we entered into
other financing agreements totaling approximately $0.4 million and repaid
approximately $1.4 million on existing loans and capital leases. There are two
notes payable outstanding under our equipment loan credit facility: a note
payable due September 1, 2003 at an interest rate of 9.1%, and a note payable
due December 1, 2003 at an interest rate of 8.5%.
24
During the first quarter of fiscal 2003, we have experienced lower sales and
operating profits than we had projected, mostly related to underperformance at
new restaurants opened in the second half of 2002 and in the first quarter of
2003, and severe winter weather in the Northeast. In addition, our cash position
has been adversely impacted by the payment of costs associated with restaurants
in our development pipeline that we have determined not to open. Principally
because of these developments, the Company determined that it was prudent to
seek additional financing. Consequently, we have obtained a $3 million line of
credit (the "Loan") from a bank to be used for general corporate purposes. The
Loan bears interest at 75 basis points over the bank's prime lending rate and is
secured by all of our tangible and intangible property, other than equipment
pledged to secure our equipment loan credit facility (see page F-12). The Loan
matures in May 2004. We have agreed to pay the bank fees and expenses of
approximately $22,000 upon funding of the Loan. The Loan is guaranteed, jointly
and severally, by Eric J. Gleacher, one of our Directors; Charles G. Phillips,
one of our shareholders, and an entity related to ZAM Holdings, LP, our largest
shareholder (together, "the Guarantors"). At any time during the term of the
Loan, the Guarantors have the right to require the bank to assign the Loan to
the Guarantors. If the Loan has not been assigned by the bank to the Guarantors,
and has not been paid in full by August 15, 2003, then the bank is required to
assign the Loan to the Guarantors. If approved by our Shareholders, upon
assignment of the Loan to the Guarantors, the Loan will be convertible into
shares of our common stock, under certain circumstances, at the option of the
Guarantors, at a conversion price equal to the lesser of $1.50 or 85% of the
weighted average price per share of our common stock for the fifteen trading day
period ending three trading days before the conversion date.
We currently anticipate making a rights offering (the "Offering") to our
existing shareholders to raise approximately $12 million. We currently
anticipate that the Offering will give our existing shareholders the right to
purchase shares of our common stock at a purchase price per share equal to the
lesser of $1.50 or 85% of the weighted average price per share of our common
stock for the fifteen trading day period ending three trading days before the
expiration date of the Offering. A group of our shareholders, including the
Guarantors or related entities, have indicated that they will commit to purchase
shares in the offering, or provide other funding support, in the amount of $8.5
million of the $12 million offering. This shareholder group's commitment to
purchase shares in the offering will be subject to shareholder approval of the
equity conversion feature of the Loan.
The terms of the Loan and the Offering were reviewed and approved by a
committee of our board comprised of disinterested directors.
We intend to file a registration statement with the Securities and Exchange
Commission relating to the Offering. The timing and completion of the Offering
is subject to market conditions and other contingencies. There can be no
assurance that we will be able to complete the Offering on terms acceptable to
the company or at all. The Offering will only be made pursuant to a prospectus
filed with the Securities and Exchange Commission. This does not constitute an
offer to sell, or the solicitation of an offer to buy, any securities nor shall
there be any sale of securities in any state or jurisdiction in which such
offer, solicitation or sale would be unlawful prior to registration or
qualification under the securities law of any such state or jurisdiction.
We currently estimate that our capital expenditures during 2003 will be
approximately $3.8 million, principally for the opening of six new restaurants,
and for maintaining and remodeling existing restaurants. Most of these
expenditures have been paid and the remaining will be funded through existing
cash balances and from the proceeds from the Loan. We anticipate that our
capital expenditures for the remainder of the year will be minimal.
Our future capital requirements and the adequacy of available funds will
depend on many factors, including our ability to generate cash from operations,
the pace of our expansion, real estate markets, the availability of suitable
site locations and the nature of the arrangements negotiated with landlords. We
presently anticipate that our current cash balances, proceeds from the Loan, and
internally generated cash flows will be sufficient to fund our cash requirements
for the next twelve months.
Our cash resources going forward will be highly dependant upon the level of
internally generated cash from operations and upon any potential future
financing transactions, including the Offering.
25
CONTRACTUAL OBLIGATIONS
As of December 30, 2002
DUE IN FROM
TOTAL DUE WITHIN DUE IN FROM 3 TO 5 DUE AFTER
CONTRACTUAL OBLIGATIONS (IN THOUSANDS) 1 YEAR 1 TO 3 YEARS YEARS 5 YEARS
----------------------- ------------ ---------- ---------- ---------- ----------
Notes Payable ................................................ $ 1,529.1 $ 1,280.4 $ 86.9 $ 79.0 $ 82.8
Employment Agreements ........................................ 3,421.9 1,482.0 1,939.9
Capital Lease Obligations .................................... 119.4 116.9 2.5
Operating Lease Obligations (a) (b) .......................... 105,775.3 12,082.9 24,872.1 24,665.8 44,154.5
(a) Amounts shown are net of $2.5 million of sublease rental income due under
non-cancelable subleases.
(b) Includes approximately $12.6 million of obligations on leases for
restaurants that have either been closed or are planned to be closed.
We are obligated under non-cancelable operating leases for our restaurants
and our administrative offices. Lease terms are generally for ten years with
renewal options and generally require us to pay a proportionate share of real
estate taxes, insurance, common area and other operating costs. Some restaurant
leases provide for contingent rental payments.
Except for the foregoing, we have no off-balance sheet contractual
arrangements. We have no unconditional purchase arrangements except that as of
December 30, 2002 we were party to contracts with respect to the construction of
restaurants for which approximately $2.6 million remained to be invoiced to us,
we are obligated to purchase approximately $1.1 million of roasted coffee
between now and fiscal year end 2003, and we are obligated to purchase
approximately 2.0 million gallons of fountain syrups at the then-current
annually published national chain account prices under a beverage marketing
agreement with the Coca-Cola company. Historically we have not purchased nor
entered into interest rate swaps or future, forward option or other instruments
designed to hedge against changes in interest rates or the price of commodities
we purchase, except as described above.
RECENT DEVELOPMENTS
During the first quarter of Fiscal 2003, we announced our intention to
create a franchising and area development program. While we expect that Company
owned stores will always be an important part of our new store growth, we
believe that incorporating a franchising and area developer model into our
strategy will position us to maximize the market potential for the Cosi brand
and concept consistent with our available capital and thus maximize shareholder
value. We also announced that our Chairman and CEO had resigned, and that we are
slowing the growth of our company owned stores. We announced that as a result,
we have reduced our general and administrative staff by approximately 30% (24
positions were eliminated), and announced that we expected to record a one-time
charge of approximately $1.7 million in the first quarter of 2003 to provide for
severance costs related to the executive and general and administrative staff
reductions.
Subsequent to making that announcement on February 3, 2003, we have
determined that additional changes to our executive management are appropriate,
and now expect that the charge in the first quarter of 2003 to provide for
severance costs related to the executive and general and administrative staff
reductions will be approximately $3.7 million.
In addition, during the first quarter of 2003, we expect to record
additional charges of $2.1 million to write down assets at three restaurant
locations that were closed during the first quarter of 2003, and on 25 locations
which were in our development pipeline, but which have been cancelled.
During the first quarter of fiscal 2003, we have experienced lower sales
and operating profits than we had projected, mostly related to new restaurants
opened in the second half of 2002 and in the first quarter of 2003, and severe
winter weather in the Northeast. Three under performing restaurants have been
closed during the first quarter of 2003, and we may close up to ten additional
under performing restaurants. We have obtained a $3 million line of credit (the
"Loan") from a bank to be used for general corporate purposes. The Loan bears
interest at 75 basis points over the bank's prime lending rate and is secured by
all of our tangible and intangible property, other than equipment pledged to
secure our equipment loan credit facility (see page F-12). The Loan matures in
May 2004. We have agreed to pay the bank fees and expenses of approximately
$22,000 upon funding of the Loan. The Loan is guaranteed, jointly and severally,
by Eric J. Gleacher, one of our Directors;
26
Charles G. Phillips, one of our shareholders and an entity related to ZAM
Holdings, LP, our largest shareholder, (together, "the Guarantors"). At any time
during the term of the Loan the Guarantors have the right to require the bank to
assign the Loan to the Guarantors. If the Loan has not been assigned by the bank
to the Guarantors, and has not been paid in full by August 15, 2003, then the
bank is required to assign the Loan to the Guarantors. If approved by our
shareholders, upon assignment of the loan to the Guarantors, the Loan will be
convertible into shares of our common stock, under certain circumstances, at the
option of the Guarantors, at a conversion price equal to the lesser of $1.50 or
85% of the weighted average price per share of our common stock for the fifteen
trading day period ending three trading days before the conversion date.
We currently anticipate making a rights offering (the "Offering") to our
existing shareholders to raise approximately $12 million. We currently
anticipate that the Offering will give each of our existing shareholders the
right to purchase shares of our common stock at a purchase price per share equal
to the lesser of $1.50 or 85% of the weighted average price per share of our
common stock for the fifteen trading day period ending three trading days before
the expiration date of the Offering. A group of our shareholders, including the
Guarantors or related entities, have indicated that they will commit to purchase
shares in the offering, or provide other funding support, in the amount of $8.5
million of the $12 million offering. This shareholder group's commitment to
purchase shares in the offering will be subject to shareholder approval of the
equity conversion feature of the loan.
The terms of the Loan and the Offering were reviewed and approved by a
committee of our board comprised of disinterested directors.
We intend to file a registration statement with the Securities and Exchange
Commission relating to the Offering. The timing and completion of the Offering
is subject to market conditions and other contingencies. There can be no
assurance that we will be able to complete the Offering on terms acceptable to
the company or at all. The Offering will only be made pursuant to a prospectus
filed with the Securities and Exchange Commission. This does not constitute an
offer to sell, or the solicitation of an offer to buy, any securities nor shall
there be any sale of securities in any state or jurisdiction in which such
offer, solicitation or sale would be unlawful prior to registration or
qualification under the securities law of any such state or jurisdiction.
On March 31, 2003 Mr. William D. Forrest joined our Board of Directors, and
was elected Chairman of the Board. Mr. Forrest is a Managing Director at
Gleacher Partners, L.L.C. Eric Gleacher, who was previously Chairman of the
Board, will remain a Director. Jay Wainwright will serve as interim Chief
Executive Officer until a successor is hired, and Nick Marsh will be stepping
down as our Chief Operating Officer, and will be leaving the company.
Management's near term focus will be to improve profitability and cash flow
from existing units, with reduced general and administrative costs, under the
leadership of our new Chairman, William D. Forrest. Assuming completion of the
Offering, management believes that it will be able to address problem units,
open new restaurants as appropriate, and incorporate a franchise and area
development program into our strategy.
On February 5, 2003, a purported shareholder class action complaint was
filed in the United States District Court for the Southern District of New York
(the "Court"), alleging that the Company and various of its officers and
directors and the Underwriter violated Sections 11, 12(a)(2) and 15 of the
Securities Act of 1933 by misstating, and by failing to disclose, certain
financial and other business information (Sheel Mohnot v. Cosi, Inc., et al.,
No. 03 CV 812). At least six additional class action complaints with similar
allegations were later filed (collectively, the "Securities Act Litigation").
The Securities Act Litigation is brought on behalf of a purported class of
purchasers of the Company's stock allegedly traceable to its November 22, 2002
initial public offering ("IPO"). The complaints in the Securities Act Litigation
generally claim that at the time of the IPO, the Company's offering materials
failed to disclose that the funds raised through the IPO would be insufficient
to implement the Company's expansion plan; that it was improbable that the
Company would be able to open 53 to 59 new stores in 2003; that at the time of
the IPO, Cosi had negative working capital and therefore did not have available
working capital to repay certain debts; and that the principal purpose for going
forward with the IPO was to repay certain existing shareholders and members of
the Board of Directors for certain debts and to operate the Company's existing
restaurants.
On February 21, 2003, a purported shareholder class action complaint was
filed in the Court alleging that the Company and certain of its officers and
directors violated Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, and Rule 10-b promulgated thereunder, by issuing a series of material
misrepresentations to the market between November 22, 2002 and February 4, 2003
(the "Class Period") (Georgette Pacia v. Cosi, Inc. et al., No. 03-CV-1156) (the
"Securities Exchange Act Litigation"). The emphasis of the allegations in the
complaint in the Securities Exchange Act Litigation is that the defendants
knowingly or recklessly caused misrepresentations and omissions to be made
regarding the Company's operating condition and future business prospects. Among
other things, plaintiffs in the Securities Exchange Act Litigation allege that
defendants failed to disclose that the funds raised by the IPO would be
insufficient to implement the Company's expansion plan; that at the time of the
IPO, defendants should have known that the costs of expansion would be greater
than the cash available to the Company, making it improbable that the Company
would be able to successfully continue to open new stores at the pace announced
by the Company; and that defendants failed to disclose that a reduction in the
offering price of the IPO would result in the Company being forced to abandon
its growth strategy.
The plaintiffs in the Securities Act Litigation and the Securities Exchange
Act Litigation (the "Litigations") generally seek to recover compensatory
damages, expert fees, attorneys' fees, costs of Court and pre- and post-judgment
interest. The Underwriter is seeking indemnification from the Company for any
damages assessed against it in the Securities Act Litigation. The Litigations
are at a preliminary stage, and the Company expects that these related lawsuits
will be consolidated into a single action. The Company believes that it has
meritorious defenses to these claims, and intends to vigorously defend against
them.
27
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB approved SFAS 145, "Rescission of FASB Statements
No. 4, 44 and 54, Amendment of SFAS 13, and Technical Corrections." SFAS 145
rescinds previous accounting guidance, which required all gains and losses from
extinguishment of debt be classified as an extraordinary item. Under SFAS 145
classification of debt extinguishment depends on the facts and circumstances of
the transaction. SFAS 145 is effective for fiscal years beginning after May 15,
2002. The Company does not expect SFAS 145 to have a material impact on the
Company's financial position or results of its operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses accounting for
restructuring, discontinued operation, plant closing, or other exit or disposal
activity. SFAS 146 requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. SFAS 146 is to be applied prospectively
to exit or disposal activities initiated after December 31, 2002. The adoption
of SFAS 146 is not expected to have a significant impact on the Company's
financial position or results of its operations.
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." SFAS 148 amends SFAS 123
"Accounting for Stock-Based Compensation" to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123 to require more prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The additional disclosure requirements of SFAS 148 are effective for
fiscal years ending after December 15, 2002 and have been incorporated into the
accompanying financial statements and footnotes. The Company has elected to
continue to follow the intrinsic value method of accounting as prescribed by APB
25 to account for employee stock options.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our market risk exposures are related to our cash, cash equivalents,
investments and interest that we pay on our debt. We have no derivative
financial instruments or derivative commodity instruments in our cash, cash
equivalents and investments. We invest our excess cash in investment grade
highly liquid short-term investments. These investments are not held for trading
or other speculative purposes. Changes in interest rates affect the investment
income we earn on our investments and, therefore, impact our cash flows and
results of operations.
All of our transactions are conducted, and our accounts are denominated, in
United States dollars. Accordingly, we are not exposed to foreign currency risk.
INFLATION
The primary inflationary factors affecting our business are food and labor
costs. A large number of our restaurant personnel 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. We believe that inflation has not had a material impact
on our results of operations in recent years.
28
FORWARD-LOOKING STATEMENTS
Matters discussed in this report which relate to events or developments
which are expected to occur in the future, including any discussion, expressed
or implied, of anticipated growth, operating results or earnings constitute
forward-looking statements. Forward-looking statements are based on management's
beliefs, assumptions and expectations of our future economic performance, taking
into account the information currently available to management. These statements
are not statements of historical fact. Forward-looking statements involve risks
and uncertainties that may cause our actual results, performance or financial
condition to differ materially from the expectations of future results,
performance or financial condition we express or imply in any forward-looking
statements. Factors that could contribute to these differences include, but are
not limited to:
o the cost of our principal food products;
o labor shortages or increased labor costs;
o changes in consumer preferences and demographic trends;
o increasing competition in the fast casual dining segment of the
restaurant industry;
o expansion into new markets;
o our ability to effectively manage our business with a reduced general
and adminsistrative staff;
o our ability to incorporate a franchising and area development model in
to our strategy;
o the availablity and cost of additional financing;
o fluctuations in our quarterly results;
o increased government regulation;
o supply and delivery shortages or interruptions;
o market saturation due to new restaurant openings;
o inadequate protection of our intellectual property;
o adverse weather conditions which impact customer traffic at our
restaurants; and
o adverse economic conditions.
The words "believe," "may," "will," "should," "anticipate," "estimate,"
"expect," "intend," "objective," "seek," "plan," "strive" 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is listed in Item 16 (a) of Part IV of
this Form 10-K.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required to be furnished pursuant to this item with respect
to Directors of the Company will be set forth under the caption "Election of
Directors" in the registrant's proxy statement (the "Proxy Statement") to be
furnished to stockholders in connection with the solicitation of proxies by the
Company's Board of Directors for use at the 2003 Annual Meeting of Stockholders
to be held on May 22, 2003, and is incorporated herein by reference, and the
information with respect to Executive Officers is set forth, pursuant to General
Instruction G of Form 10-K, under Part I of this Report.
The information required to be furnished pursuant to this item with respect
to compliance with Section 16(a) of the Exchange Act will be set forth under the
caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy
Statement, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required to be furnished pursuant to this item will be set
forth under the caption "Executive Compensation" in the Proxy Statement, and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The information required to be furnished pursuant to this item will be set
forth under the captions "Voting Securities," "Security Ownership of Management"
and "Equity Compensation Plan Information" in the Proxy Statement, and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required to be furnished pursuant to this item will be set
forth under the caption "Certain Relationships and Related Party Transactions"
in the Proxy Statement, and is incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES.
Under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, the Company has evaluated the effectiveness of the design and operation
of its disclosure controls and procedures within 90 days of the filing date of
this annual report, and, based on their evaluation, the Chief Executive Officer
and Chief Financial Officer have concluded that these disclosure controls and
procedures are effective. There were no significant changes in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation.
ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information required to be furnished pursuant to this item will be set
forth under the caption "Principal Accountant Fees and Services" in the Proxy
Statement, and is incorporated herein by reference.
30
PART IV
ITEM 16. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) LIST OF FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS:
FINANCIAL STATEMENTS:
The financial statements required to be filed hereunder are listed on page
F-1 hereof.
FINANCIAL STATEMENT SCHEDULES:
The financial statement schedules required to be filed hereunder are listed
on page S-1 hereof.
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
31
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
--------- -------------------------------------------------------
2.1# -- Merger Agreement by and among Xando, Incorporated,
Xando Merger Corp. and Cosi Sandwich Bar, Inc., dated as of
October 4, 1999. (Filed as exhibit 2.1 to the
Company's Registration Statement on Form S-1, file
#333-86390)
3.1 -- Amended and Restated Certificate of Incorporation of
Cosi, Inc.
3.2 -- Amended and Restated By-Laws of Cosi, Inc.
4.1# -- Form of Certificate of Common Stock. (Filed as
exhibit 4.1 to the Company's Registration Statement
on Form S-1, file #333-86390)
4.2 -- Rights Agreement between Cosi, Inc. and American
Stock Transfer and Trust Company as Rights Agent.
4.3# -- Amended and Restated Registration Agreement, dated as
of March 30, 1999. (Filed as exhibit 4.3 to the
Company's Registration Statement on Form S-1, file
#333-86390)
10.1# -- Amended and Restated Cosi Stock Incentive Plan.(Filed as
exhibit 10.1 to the Company's Registration Statement
on Form S-1, file #333-86390)
10.2# -- Cosi Employee Stock Purchase Plan.(Filed as
exhibit 10.2 to the Company's Registration Statement
on Form S-1, file #333-86390)
10.3# -- Cosi Non-Employee Director Stock Incentive Plan.(Filed as
exhibit 10.3 to the Company's Registration Statement
on Form S-1, file #333-86390)
10.4# -- Cosi Sandwich Bar, Inc. Incentive Stock Option Plan(Filed as
exhibit 10.4 to the Company's Registration Statement
on Form S-1, file #333-86390)
10.5.1# -- Employment Agreement between Cosi and Jay Wainwright,
effective as of January 1, 2002. (Filed as exhibit 10.5.2
to the Company's Registration Statement on Form S-1,
file #333-86390)
10.5.2# -- Employment Agreement between
Cosi and Nick Marsh, effective as
of January 1, 2002. . (Filed as
exhibit 10.5.3 to the Company's
Registration Statement on Form
S-1, file #333-86390)
10.5.3# -- Employment Agreement between
Cosi and David Orwasher,
effective as of January 1, 2002.
(Filed as exhibit 10.5.4 to the
Company's Registration Statement
on Form S-1, file #333-86390)
10.6# -- Amended and Restated Distributor Service Agreement
between
Cosi and Maines Paper & Food Service, Inc., dated as
of
June 18, 2002.(1). (Filed as exhibit 10.6 to the
Company's Registration Statement on Form S-1, file
#333-86390)
10.7# -- Form of Senior Secured Note and Warrant Purchase
Statement Agreement (Filed as exhibit 4.1 to the Company's
Registration on Form S-1, file #333-86390)
21.1# -- Subsidiaries of Cosi, Inc. . (Filed as exhibit 21.1
to the Company's Registration Statement on Form S-1,
file #333-86390)
99.1 -- Certification of the Chief
Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley
Act of 2002.
99.2 -- Certification of the Chief
Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley
Act of 2002.
# - Previously filed
(1) Portions of Exhibit 10.6 have been omitted and filed separately with
the Securities and Exchange Commission pursuant to a request for
confidential treatment.
(b) REPORTS ON FORM 8-K.
The Company filed a Current Report on Form 8-K on February 4, 2003, which
attached and incorporated by reference the Company's press release dated
February 3, 2003, announcing the resignation of Chairman and CEO Andrew
Stenzler, the appointment of Jay Wainwright as CEO and the election of Eric
Gleacher as Chairman of the Board of Directors.
The Company filed a Current Report on Form 8-K on February 26, 2003, which
attached and incorporated by reference the Company's press release dated
February 25, 2003 reporting the Company's financial results for the fourth
fiscal quarter and fiscal year ended December 30, 2002.
32
S-3
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Jay Wainwright
Chief Executive Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has been signed by the following persons in
the capacities and on the date indicated:
- ---------------------------- --------------------------- ----------------------
SIGNATURE TITLE DATE
- ---------------------------- --------------------------- ----------------------
/s/ Jay Wainwright Chief Executive Officer
- ---------------------------- --------------------------- ----------------------
Jay Wainwright
- ---------------------------- --------------------------- ----------------------
- ---------------------------- --------------------------- ----------------------
/s/ William D. Forrest Chairman March 31, 2003
- ---------------------------- --------------------------- ----------------------
William D. Forrest
- ---------------------------- --------------------------- ----------------------
- ---------------------------- --------------------------- ----------------------
/s/ Terry Diamond Director March 31, 2003
- ---------------------------- --------------------------- ----------------------
Terry Diamond
- ---------------------------- --------------------------- ----------------------
- ---------------------------- --------------------------- ----------------------
/s/ Creed L. Ford III Director March 31, 2003
- ---------------------------- --------------------------- ----------------------
/ Creed L. Ford III
- ---------------------------- --------------------------- ----------------------
- ---------------------------- --------------------------- ----------------------
/s/ Eric Gleacher Director March 31, 2003
- ---------------------------- --------------------------- ----------------------
Eric Gleacher
- ---------------------------- --------------------------- ----------------------
- ---------------------------- --------------------------- ----------------------
Chief Operating
/s/ Nick Marsh Officer and Director March 31, 2003
- ---------------------------- --------------------------- ----------------------
Nick Marsh
- ---------------------------- --------------------------- ----------------------
/s/ D. Ian McKinnon Director March 31, 2003
- ---------------------------- --------------------------- ----------------------
D. Ian McKinnon
- ---------------------------- --------------------------- ----------------------
- ---------------------------- --------------------------- ----------------------
/s/ Jeffrey M. Stork Director March 31, 2003
- ---------------------------- --------------------------- ----------------------
Jeffrey M. Stork
- ---------------------------- --------------------------- ----------------------
- ---------------------------- --------------------------- ----------------------
/s/ Greg Wooley Director March 31, 2003
- ---------------------------- --------------------------- ----------------------
Greg Wooley
- ---------------------------- --------------------------- ----------------------
- ---------------------------- --------------------------- ----------------------
/s/ Kenneth S. Betuker Chief Financial Officer
(Chief Accounting Officer)
Treasurer and Secretary March 31, 2003
- ---------------------------- --------------------------- ----------------------
Kenneth S. Betuker
- ---------------------------- --------------------------- ----------------------
CERTIFICATIONS
I, Jay Wainwright, Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Cosi, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003
By: /s/ Jay Wanwright
------------------------
Jay Wainwright
Chief Executive Officer
S-4
CERTIFICATIONS
I, Kenneth S. Betuker, Chief Financial Officer Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Cosi, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003
By: /s/ Kenneth S. Betuker
------------------------
Kenneth S. Betuker
Chief Financial Officer
S-5
COSI, INC.
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
PAGE
_____
Report of Independent Auditors ............................................ F-2
Consolidated Financial Statements:
Consolidated Balance Sheets at December 30, 2002
and December 31, 2001 ............................................. F-3
Consolidated Statements of Operations for the years
ended December 30, 2002, December 31, 2001
and January1, 2001 ................................................ F-4
Consolidated Statements of Redeemable Securities
and Stockholders' Equity for the years ended
December 30, 2002, December 31, 2001 and
January 1, 2001 ................................................... F-5
Consolidated Statements of Cash Flows for the years
ended December 30, 2002, December 31, 2001
and January 1, 2001 ............................................... F-6
Notes to Consolidated Financial Statements ................................ F-7
F-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Cosi, Inc.
We have audited the accompanying consolidated balance sheets of Cosi, Inc.
as of December 30, 2002 and December 31, 2001 and the related consolidated
statements of operations, redeemable securities and stockholders' equity and
cash flows for each of the three years in the period ended December 30, 2002.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Cosi, Inc. at
December 30, 2002 and December 31, 2001, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 30, 2002, in conformity with accounting principles generally accepted
in the United States.
As discussed in Note 2, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets" effective January 1, 2002.
/s/ ERNST & YOUNG LLP
New York, New York
February 19, 2003 except for Note 17,
as to which the date is March 31, 2003
F-2
COSI, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 30, DECEMBER 31,
2002 2001
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .......................................................... $ 13,032,307 $ 4,469,571
Accounts receivable, net of allowances of
$232,129 and $219,845 ............................................................ 1,511,526 1,198,786
Inventory .......................................................................... 1,465,730 1,403,806
Prepaid expenses and other current assets .......................................... 1,676,279 568,353
------------- -------------
Total current assets ........................................................ 17,685,842 7,640,516
PROPERTY, EQUIPMENT AND LEASEHOLD
IMPROVEMENTS, net .................................................................. 45,755,319 25,507,195
INTANGIBLES, SECURITY DEPOSITS AND OTHER ASSETS, net ................................. 2,801,919 2,240,733
------------- -------------
Total assets ................................................................ $ 66,243,080 $ 35,388,444
============= =============
LIABILITIES, REDEEMABLE SECURITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................................................... $ 8,925,245 $ 4,737,121
Accrued liabilities ................................................................ 5,922,408 4,951,809
Current portion of other liabilities ............................................... 671,601 1,678,880
Current portion of capital lease obligations ....................................... 116,940 441,862
Current portion of long-term debt .................................................. 1,280,432 1,136,835
------------- -------------
Total current liabilities ................................................... 16,916,626 12,946,507
OTHER LIABILITIES, net of current portion ............................................ 9,748,334 9,531,364
CAPITAL LEASE OBLIGATIONS, net of current portion .................................... 2,485 135,236
LONG-TERM DEBT, net of current portion ............................................... 248,650 9,466,022
------------- -------------
Total liabilities ........................................................... 26,916,095 32,079,129
------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 13)
REDEEMABLE SECURITIES:
Series A Convertible Preferred stock -- $0.01 par value; 2,005,862
authorized, 1,146,206 issued and outstanding;
aggregate liquidation preference $18,768,150, including
accrued dividends of $4,727,116 in 2001 ......................................... -- 18,318,205
Series C Convertible Preferred stock-- $0.01 par value;
10,510,191 authorized 4,161,589 issued and outstanding,
aggregate liquidation preference of $74,524,713 including
accrued dividends of $8,807,592 in 2001 ............................................. -- 73,971,056
------------- -------------
Total redeemable securities ................................................. -- 92,289,261
------------- -------------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock-- $.01 par value: 100,000,000 shares
authorized, 16,573,514 and 4,511,494 shares
issued and outstanding, respectively ............................................. 165,735 45,115
Additional paid-in capital ......................................................... 189,255,034 32,004,032
Notes receivable from stockholders ................................................. (2,974,804) (2,974,804)
Accumulated deficit ................................................................ (147,118,980) (118,054,289)
------------- -------------
Total stockholders' equity (deficit) ........................................ 39,326,985 (88,979,946)
------------- -------------
Total liabilities, redeemable securities and
stockholders' equity (deficit) ............................................ $ 66,243,080 $ 35,388,444
============= =============
The accompanying notes are an integral part of these
consolidated statements.
F-3
COSI, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
-------------------
DECEMBER 30, DECEMBER 31, JANUARY 1,
2002 2001 2001
------------ ------------ ------------
NET SALES .................................................... $ 84,424,247 $ 70,184,136 $ 51,222,818
COST OF SALES:
Cost of goods sold ......................................... 22,697,549 18,791,711 13,843,992
Restaurant operating expenses .............................. 50,852,670 45,114,495 32,172,860
------------ ------------ ------------
TOTAL COST OF SALES .................................. 73,550,219 63,906,206 46,016,852
GENERAL AND ADMINISTRATIVE EXPENSES .......................... 17,811,712 18,361,511 14,774,234
DEPRECIATION AND AMORTIZATION ................................ 5,851,207 6,689,985 6,158,146
RESTAURANT PRE-OPENING EXPENSES .............................. 1,845,120 1,438,783 1,409,497
PROVISION FOR LOSSES ON ASSET IMPAIRMENTS AND
DISPOSALS .................................................. 1,056,471 8,486,309 5,847,545
LEASE TERMINATION COSTS ...................................... (1,164,984) 6,410,759 477,266
------------ ------------ ------------
Operating loss ....................................... (14,525,498) (35,109,417) (23,460,722)
INTEREST INCOME .............................................. 98,334 340,453 441,350
INTEREST EXPENSE ............................................. (1,192,598) (527,511) (210,655)
AMORTIZATION OF DEFERRED FINANCING COSTS ..................... (548,972) (126,868)
LOSS ON EARLY EXTINGUISHMENT OF DEBT ......................... (5,083,188)
OTHER INCOME (EXPENSE) ....................................... 380,871 -- --
------------ ------------ ------------
Net loss ............................................. (20,871,051) (35,423,343) (23,230,027)
PREFERRED STOCK DIVIDENDS .................................... (8,193,640) (6,678,085) (4,219,684)
------------ ------------ ------------
NET LOSS ATTRIBUTABLE TO COMMON STOCK ........................ (29,064,691) $(42,101,428) $(27,449,711)
------------ ============ ============
PER SHARE DATA:
Net Loss Per Share:
Basic and diluted ........................................ $ (5.04) $ (9.34) $ (6.09)
============ ============ ============
Weighted Average Common Shares Outstanding:
Actual ................................................. 5,762,818 4,507,237 4,503,862
============ ============ ============
The accompanying notes are an integral part of these consolidated statements.
F-4
COSI, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE SECURITIES AND STOCKHOLDERS' EQUITY
For the Years Ended JANUARY 1, 2001, DECEMBER 31, 2001
and December 30, 2002
REDEEMABLE SECURITIES
-------------------------------------------------------------------------------------
SERIES A CONVERTIBLE SERIES C CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK
--------------------------- ---------------------------
TOTAL
NUMBER OF NUMBER OF REDEEMABLE
SHARES AMOUNT SHARES AMOUNT SECURITIES
---------- ----------- ---------- ----------- ------------
BALANCE, January 3, 2000 ............ 1,146,206 15,118,619 1,268,981 19,901,891 35,020,510
Issuance of Series C convertible
preferred stock, net of issuance
costs ............................ -- -- 1,426,936 22,455,104 22,455,104
Accrued preferred stock dividend ... -- 1,320,434 -- 2,649,775 3,970,209
Accretion of preferred stock to
liquidation value ................ -- 224,936 -- 24,539 249,475
Issuance of common stock ........... -- -- -- -- --
Net loss ........................... -- -- -- -- --
---------- ----------- ---------- ----------- ------------
BALANCE, January 1, 2001 ............ 1,146,206 16,663,989 2,695,917 45,031,309 61,695,298
Issuance of Series C convertible
preferred stock, net of issuance
costs ............................ -- -- 1,465,672 23,915,878 23,915,878
Issuance of warrants ............... -- -- -- -- --
Issuance of warrants in connection
with preferred stock financing ... -- -- -- -- --
Accrued preferred stock dividend ... -- 1,429,280 -- 4,980,812 6,410,092
Accretion of preferred stock to
liquidation value ................ -- 224,936 -- 43,057 267,993
Issuance of common stock ........... -- -- -- -- --
Net loss ........................... -- -- -- -- --
---------- ----------- ---------- ----------- ------------
BALANCE, December 31, 2001 .......... 1,146,206 18,318,205 4,161,589 73,971,056 92,289,261
Issuance of Series C convertible
preferred stock, net of issuance
costs ............................ -- -- 942,629 15,626,611 15,626,611
Issuance of warrants ............... -- -- -- -- --
Issuance of warrants in connection
with preferred stock financing ...
Accrued preferred stock dividend ... -- 1,376,383 -- 6,473,731 7,850,114
Accretion of preferred stock to
liquidation value ................ -- 200,836 -- 142,690 343,526
Exchange of senior subordinated debt
and warrants for Series C
Convertible Preferred Stock (Note
16) .............................. -- -- 217,327 3,613,075 3,613,075
Issuance of common stock ........... -- -- -- -- --
Conversion to common stock .......... (1,146,206) (19,895,424) (5,321,545) (99,827,163) (119,722,587)
Net loss ........................... -- -- -- -- --
---------- ----------- ---------- ----------- ------------
BALANCE, December 30, 2002
.. ................................... -- $-- -- $-- $--
========== =========== ========== =========== ============
[TABLE CONTINUED]
--------------------------
COMMON STOCK
--------------------------
NOTES
ADDITIONAL RECEIVABLE
NUMBER OF PAID-IN FROM ACCUMULATED
SHARES AMOUNT CAPITAL STOCKHOLDERS DEFICIT TOTAL
---------- --------- ------------- ------------- -------------- -------------
BALANCE, January 3, 2000 ............ 4,503,815 45,038 30,606,697 (2,974,804) (48,503,150) (20,826,219)
Issuance of Series C convertible
preferred stock, net of issuance
costs ............................ -- -- -- -- -- --
Accrued preferred stock dividend ... -- -- -- -- (3,970,209) (3,970,209)
Accretion of preferred stock to
liquidation value ................ -- -- -- -- (249,475) (249,475)
Issuance of common stock ........... 54 1 634 -- -- 635
Net loss ........................... -- -- -- -- (23,230,027) (23,230,027)
---------- --------- ------------- ------------- -------------- -------------
BALANCE, January 1, 2001 ............ 4,503,869 45,039 30,607,331 (2,974,804) (75,952,861) (48,275,295)
Issuance of Series C convertible
preferred stock, net of issuance
costs ............................ -- -- -- -- -- --
Issuance of warrants ............... -- -- 1,098,469 -- -- 1,098,469
Issuance of warrants in connection
with preferred stock financing ... -- -- 231,631 -- -- 231,631
Accrued preferred stock dividend ... -- -- -- -- (6,410,092) (6,410,092)
Accretion of preferred stock to
liquidation value ................ -- -- -- -- (267,993) (267,993)
Issuance of common stock ........... 7,625 76 66,601 -- -- 66,677
Net loss ........................... -- -- -- -- (35,423,343) (35,423,343)
---------- --------- ------------- ------------- -------------- -------------
BALANCE, December 31, 2001 .......... 4,511,494 45,115 32,004,032 (2,974,804) (118,054,289) (88,979,946)
Issuance of Series C convertible
preferred stock, net of issuance
costs ............................ -- -- -- -- -- --
Issuance of warrants ............... -- -- 4,901,874 4,901,874
Issuance of warrants in connection
with preferred stock financing ... 43,900 43,900
Accrued preferred stock dividend ... -- -- -- -- (7,850,114) (7,850,114)
Accretion of preferred stock to
liquidation value ................ -- -- -- -- (343,526) (343,526)
Exchange of senior subordinated debt
and warrants for Series C
Convertible Preferred Stock (Note
16) .............................. -- -- (429,865) -- -- (429,865)
Issuance of common stock ........... 5,594,409 55,944 33,077,182 -- 33,133,126
Conversion to common stock .......... 6,467,611 64,676 119,657,911 119,722,587
Net loss ........................... -- -- -- -- (20,871,051) (20,871,051)
---------- --------- ------------- ------------- -------------- -------------
BALANCE, December 30, 2002
.. ................................... 16,573,514 $ 165,735 $ 189,255,034 $ (2,974,804) $(147,118,980) $ 39,326,985
========== ========= ============= ============= ============== =============
The accompanying notes are an integral part of these consolidated statements.
F-5
COSI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 30, DECEMBER 31, JANUARY 1,
2002 2001 2001
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ....................................................... $(20,871,051) $(35,423,343) $(23,230,027)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ................................ 5,851,207 6,689,985 6,158,146
Amortization of deferred financing costs ..................... 548,972 126,868 --
Loss on early extinguishment of debt ......................... 5,083,188 -- --
Asset impairments and disposals .............................. 1,056,471 9,933,142 5,847,545
Provision for bad debts ...................................... 27,000 3,600 73,330
Changes in operating assets and liabilities:
Accounts receivable ........................................ (339,740) 762,161 (1,653,944)
Inventory .................................................. (61,924) (492,934) (397,048)
Other assets ............................................... (367,352) (619,006) 667,935
Accounts payable ........................................... 4,188,124 918,150 2,282,931
Accrued liabilities ........................................ 970,599 (255,229) 2,358,273
Accrued merger and integration ............................. -- -- (639,300)
Accrued contractual lease increases ........................ 785,794 825,772 628,401
Prepaid expenses and other current assets .................. (1,107,926) (53,084) (198,203)
Lease termination accrual .................................. (1,576,103) 5,201,674 (437,146)
------------ ------------ ------------
Net cash used in operating activities .................... (5,812,741) (12,382,244) (8,539,107)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, equipment and leasehold
improvements ................................................. (27,155,800) (20,350,590) (18,161,055)
Payments made for security deposits ............................ (308,404) 82,725 (186,693)
------------ ------------ ------------
Net cash used in investing activities .................... (27464,204) (20,267,865) (18,347,748)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ......................... 33,133,126 66,677 635
Net proceeds from issuance of preferred stock .................. 15,670,511 24,147,509 22,455,104
Retirement of Sr. Subordinated & Sr. Secured Notes ............. (16,320,692) -- --
Principal payments on capital lease
obligations .................................................. (457,673) (572,060) (303,783)
Proceeds from long-term debt plus related
Warrants and accrued interest ................................ 10,980,647 9,269,198 2,998,977
Principal payments on long-term debt ........................... (1,166,238) (854,516) (186,947)
------------ ------------ ------------
Net cash provided by financing
activities ............................................. 41,839681 32,056,808 24,963,986
------------ ------------ ------------
Net increase (decrease) in cash .................................. 8,562,736 (593,301) (1,922,869)
CASH AND CASH EQUIVALENTS, beginning of year ..................... 4,469,571 5,062,872 6,985,741
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year ........................... $ 13,032,307 $ 4,469,571 $ 5,062,872
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest ..................................................... $ 1,323,459 $ 466,764 $ 220,492
============ ============ ============
Corporate franchise and income taxes ......................... $ 118,690 $ 277,198 $ 7,931
============ ============ ============
Non-cash financing transactions:
Assets acquired under capital leases ......................... $-- $-- $ 134,678
============ ============ ============
Conversion of Senior Subordinated Debt to
Series C Preferred ......................................... $ 3,183,210 $-- $--
============ ============ ============
Conversion of Warrants to Series C Preferred ................. $ 429,865 $-- $--
============ ============ ============
The accompanying notes are an integral part of these consolidated statements.
F-6
COSI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 1, 2001, DECEMBER 31, 2001 AND DECEMBER 30, 2002
1. DESCRIPTION AND ORGANIZATION OF BUSINESS
Cosi, Inc. and subsidiaries (the "Company" or "Cosi") engages in the
business of operating restaurants, which sell high-quality coffees and
sandwiches along with a variety of coffee beverages, teas, baked goods and
alcoholic beverages. As of December 30, 2002, the Company had 91 restaurants in
operation in Connecticut, New York, the District of Columbia, Pennsylvania,
Maryland, Massachusetts, Virginia, Illinois, New Jersey, Michigan, Ohio and
Wisconsin.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR END
The Company's fiscal year ends on the Monday closest to December 31. Fiscal
years 2002, 2001 and 2000 ended on December 30, 2002, December 31, 2001 and
January 1, 2001, respectively. Fiscal 2002, 2001 and 2000 each contained 52
weeks.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All intercompany accounts and transactions
have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers all short-term liquid investments with a maturity of
three months or less when purchased to be cash equivalents. At December 30, 2002
and December 31, 2001, $9.4 million and $1.4 million, respectively, was invested
primarily in commercial paper and money market accounts and is classified as
cash and cash equivalents in the accompanying consolidated balance sheets.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash deposits and accounts
receivable. The Company places its cash deposits in FDIC insured financial
institutions, commercial paper and money market funds. Cash deposits may exceed
FDIC insured levels from time to time.
The Company's accounts receivable consist principally of receivables from
trade or "house" accounts representing corporate customers, as well as amounts
due from certain landlords for tenant improvement reimbursements. The Company
has established credit procedures, whereby analyses are performed to control the
granting of credit to customers.
INVENTORY
Inventory is stated at the lower of cost (first in, first out method) or
market, and consists principally of whole bean coffee, liquor, sandwich
ingredients and packaging and related food supplies.
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements are stated at cost and
include improvements and costs incurred in the development and construction of
new restaurants and remodels, equipment and leasehold improvements. Depreciation
is computed using the straight-line method over estimated useful lives, which
range from two to fifteen years. Leasehold improvements are amortized using the
straight-line method over the shorter of their estimated useful lives or the
term of the related leases.
F-7
RESTAURANT IMPAIRMENT CHARGES
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be disposed of", and APB Opinion No. 30, "Reporting Results of Operations
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions." SFAS 144 retains
the fundamental provisions of SFAS 121 for recognition and measurement of
impairment, but amends the accounting and reporting standards for segments of a
business to be disposed of. The Company adopted the provisions of this statement
beginning in fiscal 2002. The adoption of SFAS 144 did not have a material
impact on the Company's financial position or results of operations. In
accordance with SFAS. 144 and previously under SFAS 121, impairment losses are
recorded on long-lived assets on a restaurant by restaurant basis whenever
impairment factors are determined to be present. The Company considers a history
of restaurant operating losses to be the primary indicator of potential
impairment for individual restaurant locations. The Company has identified
certain units that have been impaired, and recorded charges of approximately
$5.8 million (related to ten restaurants), $7.2 million (related to fourteen
restaurants, including $0.3 million for one restaurant damaged in the events of
September 11, 2001 -- See Note 15) and $1.1 million (related to two restaurants)
in the statements of operations for fiscal years 2000, 2001 and 2002,
respectively. The Company determines whether a restaurant location is impaired
based on expected undiscounted cash flows, generally for the remainder of the
lease term, and then determines the impairment charge based on discounted cash
flows for the same period.
INTANGIBLES, SECURITY DEPOSITS AND OTHER ASSETS
Intangibles and other assets consist of expenditures associated with
obtaining liquor licenses, trademarks and logos. Liquor licenses are stated at
cost which, in the aggregate, is not in excess of market. Security deposits
primarily consist of deposits placed on leased locations. Amortization expense
related to intangibles and other assets amounted to approximately $8,400 and
$9,400 for fiscal years 2000 and 2001, respectively. Due to the adoption of SFAS
No. 142, "Goodwill and Other Intangible Assets" (see note 5) no amortization
expense was recorded in fiscal 2002.
The Company reviews intangible assets for impairment whenever events or
changes in circumstances indicate that the carrying amounts of those assets may
not be recoverable in accordance with SFAS 142. Management believes that there
is no impairment with respect to such intangible assets at December 30, 2002 or
December 31, 2001.
OTHER LIABILITIES
Other liabilities consist of deferred rent and accrued lease termination
costs (see Note 14).
INCOME TAXES
The Company accounts for income taxes in accordance with the provisions of
SFAS No. 109, "Accounting for Income Taxes". Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit
carry-forwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the year in which those
temporary differences are expected to be recovered or settled.
REVENUE RECOGNITION
The Company records revenue at the time of the purchase of its products by
its customers.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company accounts for financial instruments in accordance with SFAS No.
107, "Disclosures about Fair Value of Financial Instruments". The carrying value
of all financial instruments reflected in the accompanying balance sheet
approximates fair value at December 30, 2002 and December 31, 2001.
STOCK-BASED COMPENSATION
The Company complies with the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". This statement establishes financial
accounting and reporting standards for stock-based employee compensation plans.
The provisions of SFAS 123 encourage entities to adopt a fair value based method
of accounting for stock compensation plans; however, these provisions also
permit the Company to continue to measure compensation costs under pre-existing
accounting pronouncements. Pursuant to SFAS 123, the Company has elected to
continue the accounting set forth in Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees" and to provide the necessary
pro forma disclosures (Note 12).
F-8
The following table illustrates the effect on net loss attributable to
common stock and net loss per common share as if the Company had applied the
fair value recognition provisions of SFAS 123 to stock-based employee
compensation.
2002 2001 2000
------------ --------------- ------------
Net loss attributable to common
stock - as reported ............... $(29,064,691) $ (42,101,428) $(27,449,711)
Stock based compensation determined
under SFAS 123 ................... (1,952,266) (1,377.415) (570,972)
Net loss attributable to common
stock - Pro forma ................ (31,016,957) (43,478,843) (28,020,683)
Net loss per common share --
Basic and Diluted:
As reported ......................... $ (5.04) $ (9.34) $ (6.09)
============ =============== ============
Pro forma ........................... $ (5.38) $ (9.64) $ (6.23)
============ =============== ============
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
FISCAL YEAR ENDED 2002 2001 2000
- ------------------------------------ ------- ----------- --------
Expected volatility................. 40% (a) -- --
Average expected option life........ 5 years 5 years 5 years
Average risk-free interest rate..... 4.11% 4.57% 6.37%
Dividend yield...................... 0% 0% 0%
(a) For options issued subsequent to the Company's initial public offering.
NET LOSS PER SHARE
The Company follows the provisions of SFAS No. 128, "Earnings Per Share". In
accordance with this statement, basic net loss per share is computed by dividing
the net loss attributable to common shareholders (after deducting preferred
stock dividends) by the weighted-average number of common shares outstanding.
Diluted net loss per share is computed by dividing the net loss attributable to
common shareholders by the weighted-average number of common shares and dilutive
common share equivalents, if any, outstanding. For all periods presented, the
impact of all common share equivalents has not been included, as their inclusion
would be anti-dilutive.
SEGMENT DISCLOSURES
The Company has adopted the provisions of SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information". Pursuant to this
pronouncement, operating segments are defined as components of an enterprise
about which separate financial information is available and is evaluated
regularly by the chief operating decision maker in deciding how to allocate
resources in assessing performance. Management of the Company considers its
operations to be in the food service industry and, as a result, the Company has
one single reporting operating unit with all sales historically generated in the
United States.
PRE-OPENING COSTS
All costs incurred prior to the opening of a location, which consist
primarily of salaries and other direct expenses incurred with the initial setup
of restaurants and certain costs related to remodels, employee training and
general restaurant management, are expensed as incurred.
ADVERTISING COSTS
Advertising costs are expensed as incurred and approximated $110,000 ,
$141,000 and $177,000 for fiscal years 2002, 2001 and 2000, respectively.
COMPREHENSIVE INCOME
The Company's operations did not give rise to items includable in
comprehensive income that were not already in its net loss for fiscal years
2002, 2001 and 2000. Accordingly, the Company's comprehensive loss is the same
as its net loss for all periods presented.
F-9
RECLASSIFICATIONS
Certain items in the financial statements presented have been reclassified
to conform to the fiscal 2002 presentation.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB approved SFAS 145, "Rescission of FASB Statements
No. 4, 44 and 54, Amendment of SFAS 13, and Technical Corrections." SFAS 145
rescinds previous accounting guidance, which required all gains and losses from
extinguishment of debt be classified as an extraordinary item. Under SFAS 145
classification of debt extinguishment depends on the facts and circumstances of
the transaction. SFAS 145 is effective for fiscal years beginning after May 15,
2002. The Company does not expect SFAS 145 to have a material impact on our
financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses accounting for restructuring,
discontinued operation, plant closing, or other exit or disposal activity. SFAS
146 requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. SFAS 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. The adoption of SFAS 146
is not expected to have a significant impact on the Company's financial position
and results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS 148 amends SFAS 123 "Accounting
for Stock-Based Compensation" to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS 148 amends the disclosure requirements
of SFAS 123 to require more prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
additional disclosure requirements of SFAS 148 have been incorporated into the
accompanying financial statements and footnotes. The Company has elected to
continue to follow the intrinsic value method of accounting as prescribed by APB
25 to account for employee stock options.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results may differ from those
estimates.
3. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, consists of the following:
DECEMBER 30, DECEMBER 31,
2002 2001
----------- -----------
Accounts receivable, trade .......... $ 616,411 $ 657,102
Reimbursements due from landlords ... 823,100 482,548
Other ............................... 304,144 278,981
----------- -----------
1,743,655 1,418,631
Less: allowance for doubtful accounts (232,129) (219,845)
----------- -----------
Accounts receivable ................. $ 1,511,526 $ 1,198,786
=========== ===========
At December 30, 2002 one landlord reimbursement represented 27% of total
reimbursements due from landlords.
F-10
4. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consist of the following:
DECEMBER 30, DECEMBER 31,
2002 2001
------------ ------------
Leasehold improvements ........... $ 36,297,351 $ 23,216,827
Furniture and fixtures ........... 9,499,929 6,279,777
Restaurant equipment ............. 13,000,904 6,455,154
Computer and telephone equipment . 7,962,204 5,600,702
Construction in progress ......... 1,063,823 181,252
------------ ------------
67,824,211 41,733,712
Less: accumulated depreciation and
amortization ................... (22,068,892) (16,226,517)
------------ ------------
$ 45,755,319 $ 25,507,195
============ ============
Depreciation and amortization expense for fiscal years 2002, 2001 and 2000
was $5,851,207, $6,680,585 and $6,131,888, respectively.
5. INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted SFAS No. 141, "Business
Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". These
statements established financial accounting and reporting standards for acquired
goodwill and other intangible assets. Specifically, the standards address how
intangible assets should be accounted for both at the time of acquisition and
after they have been recognized in the financial statements. The provisions of
SFAS 141 apply to all business combinations initiated after June 30, 2001. In
accordance with SFAS 142, intangible assets, included purchased goodwill, must
be evaluated for impairment. Those intangible assets that will continue to be
classified as goodwill or as other intangibles with indefinite lives are no
longer amortized. Finite lived intangibles will continue to be amortized over
their estimated useful lives. The adoption of these standards did not have a
material impact on the Company's financial statements, principally because the
Company's significant business combination, which took place in fiscal 1999, was
accounted for under the pooling-of-interests method of accounting in which no
goodwill was recorded. The Company's intangibles consist of expenditures
associated with obtaining liquor licenses, trademarks and logos. These
identifiable intangibles have indefinite lives and, accordingly, are no longer
being amortized effective January 1, 2002 upon adoption of this Statement.
In accordance with SFAS 142, the effect of this change is reflected
prospectively. The following table reflects consolidated results of operations
adjusted as though the adoption of SFAS 141 and 142 occurred as of January 2,
2001:
YEAR ENDED
------------ ------------ ------------
DECEMBER 30, DECEMBER 31, JANUARY 1,
2002 2001 2001
------------ ------------ ------------
Net loss:
As reported .................. $(20,871,051) $(35,423,343) $(23,230,027)
Indefinite-lived
intangibles amortization .... -- 9,400 8,400
------------ ------------ ------------
As adjusted .................. $(20,871,051) $(35,413,943) $(23,238,427)
============ ============ ============
Intangible assets consist of the following:
DECEMBER 30, DECEMBER 31,
2002 2001
---------- ----------
Liquor Licenses $ 903,806 $ 527,679
Trademarks .... 459,339 443,941
---------- ----------
$1,363,145 $ 971,620
========== ==========
F-11
6. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
DECEMBER 30, DECEMBER 31,
2002 2001
---------- ----------
Payroll and related benefits and taxes $1,521,208 $2,043,941
Professional and legal costs ......... 436,993 188,581
Taxes payable ........................ 825,331 473,022
Other ................................ 3,138,876 2,246,265
---------- ----------
$5,922,408 $4,951,809
========== ==========
7. LONG-TERM DEBT
NOTES PAYABLE
The Company maintains a credit facility in the original amount of $3
million under a Master Loan and Security Agreement dated October 28, 1999 (the
"Equipment Loan Credit Facility"). The proceeds are required to be used for the
purchases of equipment. Borrowings are secured by the equipment purchased. Each
borrowing under the Equipment Loan Credit Facility is payable over 36 months and
the interest rate is determined at the time of the borrowing. Warrants to
purchase shares of common stock were issued in connection with the Credit
Facility. The warrants entitle the holder to acquire 8,068 shares of the
Company's common stock for $14.875 per share. As of December 30, 2002, there
were two notes payable outstanding under the Equipment Loan Credit Facility. The
note payable due September 1, 2003 requires monthly payments of $35,949, which
commenced in October 2000, and accrues interest at a rate of 9.10% per annum.
The note payable due December 1, 2003 requires monthly payments of $58,361,
which commenced in December 2001, and accrues interest at a rate of 8.50% per
annum.
In addition to the monthly payments, the Company is required to pay loan
fees of $113,738 and $186,158, respectively, which are due September 1, 2003 and
December 1, 2003, respectively. The Company is amortizing these loan fees as
additional interest expense over the term of the notes.
In addition to the credit facility, the Company has an outstanding note
payable of approximately $130,000. The note is due March 2007 and requires
monthly payments of $3,097, which commenced in May 1998, and accrues interest at
a rate of 10% per year.
In 2001 the Company entered into a settlement agreement involving a
trademark dispute. Under that agreement, the Company is obligated to make annual
payments of $25,000 per year through 2011. The present value of those future
payments is included in Notes Payable on the accompanying balance sheets.
SENIOR SUBORDINATED DEBT
In November 2001, the Company issued approximately $9 million of senior
subordinated notes along with detachable warrants. The notes bore interest at
13% per annum, compounded quarterly and payable in arrears, and were subject to
a mandatory prepayment at the election of the Company or the holders at any time
after the earliest of (i) a material change in ownership, as defined, (ii) a
merger or sale of substantially all of the Company's assets, (iii) a substantial
change in corporate structure, as defined, or (iv) a default by the Company, as
defined. The notes were repaid in December 2002 in connection with the Company's
initial public offering of its common stock. (see note 11) The warrants are
exercisable at $.01 per common share and are exercisable for a period of 5 years
from the date of issuance. The fair value ascribed to the warrants was
$1,079,808. The value assigned to the warrants was being recognized as interest
expense over the term of the notes. Upon the repayment of the notes in December
2002 the Company recorded a charge of approximately $0.5 million to write off
the unamortized portion of the fair value ascribed to the warrants. This amount
is classified as loss on early extinguishment of debt in the accompanying
Consolidated Statement of Operations.
SENIOR SECURED DEBT
In August and November 2002, the Company entered into Senior Secured Note
and Warrant Purchase Agreements with certain of our existing shareholders and
members of our board of directors. These agreements provided the Company with a
credit facility of up to $25.0 million available for general corporate purposes.
The facility allowed the Company to draw down funds from time to time until
August 12, 2003. Each draw down was evidenced by a senior secured note bearing
interest at 12% per annum. During 2002 the Company issued $9.5 million of 12%
senior secured notes pursuant to this credit facility. These notes ranked senior
to all of the Company's other funded indebtedness and were secured by all of the
Company's tangible and intangible property, other than equipment pledged to
secure the Company's equipment loan credit facility and its capitalized lease
obligations. (see Note 8). Interest on the notes accrues and was payable
together with principal upon maturity. All notes issued pursuant to these
agreements matured, and the credit facility terminated, upon the consummation of
the Company's Initial Public Offering. (see Note 11).
F-12
In connection with the Senior Secured Note and Warrant Purchase Agreements,
the Company issued warrants to purchase an aggregate of 2,070,004 shares of its
common stock, at an exercise price of $6.00 per share, pro rata to the parties
to the agreement. Each warrant issued pursuant to the Senior Secured Note and
Warrant Purchase Agreements has a five year term and may not be exercised until
after one year from the date of issuance. The fair value ascribed to the
warrants was $4,840,465. The value assigned to the warrants was being recognized
as interest expense over the term of the notes. Upon the repayment of the notes
in December 2002 the Company recorded a charge of approximately $4.5 million to
write off the unamortized portion of the fair value ascribed to the warrants.
This amount is classified as loss on early extinguishments of debt in the
accompanying Consolidated Statement of Operations.
Maturities of long-term debt during the next five fiscal years and
thereafter are as follows (As of December 30, 2002)
2003 ................... $ 1,280,432
2004 ................... 41,434
2005 ................... 45,438
2006 ................... 49,836
2007 ................... 29,139
Thereafter ............. 82,803
-----------
$ 1,529,082
Less: Current maturities (1,280,432)
-----------
Long-term debt, net .... $ 248,650
8. CAPITAL LEASE OBLIGATIONS
At December 30, 2002, the Company is obligated under capital leases for
certain restaurant equipment with an original cost of $2,019,144. The leases
expire at various dates through 2004. The following is a schedule of future
minimum lease payments for capital leases as of December 30, 2002:
2003 ...................................... 122,563
2004 ...................................... 2,917
Total lease payments ...................... 125,480
Less: amount representing interest ........ (6,055)
--------
Present value of net capital lease payments 119,425
Less: current portion ..................... (116,940)
--------
Long-term portion ......................... 2,485
9. INCOME TAXES
Significant components of the Company's deferred tax assets are as follows:
DECEMBER 30, DECEMBER 31,
2002 2001
------------ ------------
Deferred tax assets:
Net operating loss carryforward ............ $ 30,851,620 $ 21,239,769
Deferred compensation ...................... 1,669,651 1,669,651
Depreciation expense and Impairment
of Long-Lived Assets .................... 8,837,192 10,139,945
Lease termination accrual .................. 2,451,461 3,034,619
Allowance for doubtful accounts ............ 85,888 81,343
Contractual lease increases ................ 1,403,914 1,113,171
Accrued expenses ........................... 492,299 238,190
Other assets ............................... 6,973 6,973
------------ ------------
Total deferred tax assets .......... 45,798,998 37,523,661
Valuation allowance .......................... (45,798,998) (37,523,661)
------------ ------------
Net deferred taxes ................. $ -- $ --
============ ============
As of December 30, 2002, the Company has Federal net operating tax loss
carryforwards of approximately $83.4 million, which if not used, will expire
through 2022. Utilization of the net operating losses may be subject to an
annual limitation due to the change in ownership provisions of the Internal
Revenue Code and similar state provisions. These annual limitations may result
in the expiration of these net operating losses before their utilization. The
Company has recorded a valuation allowance to offset the benefit associated with
the deferred tax assets noted above due to the uncertainty of realizing the
related benefits.
F-13
10. CAPITALIZATION
CHANGE IN AUTHORIZED NUMBER OF SHARES
On November 22, 2002, the Company amended its Certificate of Incorporation
to increase its authorized capital stock from 45,673,947 shares to 140,000,000,
of which 100,000,000 shares will be Common Stock and 40,000,000 shares will be
Preferred Stock.
REDEEMABLE SECURITIES
Series A Convertible Preferred Stock
In connection with the Series A Convertible Preferred Stock Purchase
Agreement (the "Series A Purchase Agreement") dated April 28, 1998, the Company
issued 1,142,124 shares of Series A Convertible Preferred Stock (the "Series A")
for approximately $14 million. The proceeds were reduced by $351,800 for closing
costs. The Series A Purchase Agreement provides for the issuance of one warrant
to purchase one share of the Company's Common Stock at an exercise price of $.01
(the "Warrants") for each 13 shares of Series A issued. The Warrants are
exercisable for a period of ten years from the date of issuance and will expire
on the earlier of (i) if required by the Company, the completion of a qualified
public offering, as defined or (ii) the redemption of all of the Series A. The
Company allocated $997,818 of the proceeds to the warrants to recognize their
fair value. In November 1999, the Company issued an additional 4,082 shares of
Series A for $50,000, based on the same terms and conditions. No additional
warrants were issued.
Series B Convertible Preferred Stock
Contemporaneously with the Series A Purchase Agreement, the Company issued
261,521 shares of Series B Convertible Preferred Stock (the "Series B Executive
Stock") to certain officers of the Company in exchange for promissory notes
aggregating $2,974,804 pursuant to the terms of an Executive Stock Agreement the
"Executive Agreement". The promissory notes accrue interest at an annual rate of
5.75% and mature in April 2003. These notes are included in stockholders' equity
as notes receivable from stockholders. The Executive Agreement provided that
shares of Series B vest at the rate of 25% per year or immediately upon a
qualified public offering. During 1999, the officers converted the Series B
Executive Stock into an equal number of shares of common stock subject to the
same vesting provisions. In the event that the Company no longer employs the
stockholders, the Executive Agreement provides for certain Company stock
repurchases and/or stockholder put options.
Series C Convertible Preferred Stock
On March 1, 1999, the Company entered into a bridge financing arrangement
(the "Agreement") pursuant to which it issued Subordinated Promissory Notes (the
"Promissory Notes") aggregating $1.5 million maturing on July 28, 1999. The
Promissory Notes bear interest at an escalating rate (ranging from 12% to 18%)
based on the number of days from the issuance of the Promissory Notes. Warrants
(the "Bridge Warrants") to purchase shares of Series A Convertible Preferred
Stock were issued in connection with the Promissory Notes. The Bridge Warrants
entitle the holder to acquire a certain amount of the Company's Series A
Convertible Preferred Stock for a price to be determined at the time of the
Company's next financing. The amount of preferred stock to be issued would be
based upon a price per share based on certain provisions in the Agreement. At
the time of the Company's March 30, 1999 financing, the terms of the Bridge
Warrants were specified to be for the purchase of 25,208 shares of Series A
Convertible Preferred Stock at $14.875 per share. The fair value of the Bridge
Warrants was determined using the Black-Scholes option-pricing model and totaled
$88,230. On March 30, 1999, the Promissory Notes were exchanged for 100,840
shares of Series C Convertible Preferred Stock. The value assigned to the Bridge
Warrants was recognized as interest expense and the carrying amount of the
Promissory Notes were converted to Series C Convertible Preferred Stock upon
conversion of the Promissory Notes.
On March 30, 1999, in connection with the 1999 Series C Preferred Stock
Purchase Agreement (the "1999 Series C Purchase Agreement"), the Company issued
1,343,668 shares of Series C convertible preferred stock ("1999 Series C"), par
value $0.01 per share and received proceeds of approximately $20 million
(including the exchange for the Company's Promissory Notes aggregating $1.5
million; described above). The proceeds were reduced by $128,411 for closing
costs. During 1999, 74,687 shares of Series C were converted to an equal number
of shares of Common Stock.
During fiscal 2000, the Company issued an aggregate of 1,426,936 shares of
Series C, par value $.01 at $15.75 per share, ("2000 Series C"). The Company
received aggregate proceeds of approximately $22.4 million in April 2000, June
2000, and September 2000. The terms of the issuance of 2000 Series C are the
same as the March 1999 issuance of 1999 Series C, with the exception that the
liquidation preference of the 2000 Series C is $15.75 per share.
F-14
During fiscal 2001, the Company issued 1,465,672 shares of Series C
convertible preferred stock, par value $.01. ("2001 Series C"). The Company
received proceeds of approximately $23.9 million, net of issuance costs. The
terms of the issuance of 2001 Series C are the same as the previous issuances of
Series C convertible preferred stock, with the exception that the liquidation
preference is $16.625 per share.
During fiscal 2002, the Company issued 1,159,956 shares of Series C
convertible preferred stock, par value $.01. ("2002 Series C"). The Company
received proceeds of approximately $19.2 million, net of issuance costs. The
terms of the issuance of 2002 Series C are the same as the previous issuances of
Series C convertible preferred stock, with the exception that the liquidation
preference is $16.625 per share.
In connection with the Company's initial public offering of its common
stock in November 2002, (see note 11) all outstanding shares of Series A and
Series C Convertible Preferred Stock were converted to common stock, on a one
for one basis. Upon the conversion any unamortized issuance costs were charged
to Additional Paid in Capital.
COMMON STOCK PURCHASE RIGHTS
On November 18, 2002, the Board of Directors resolved to adopt a
Shareholders' Rights Plan "Rights Plan". At that time the Board declared a
dividend distribution of one right ("Right") for each share of common stock,
$.01 par value per share of the Corporation on November 25, 2002, to
shareholders of record on November 25, 2002. Each Right entitles the registered
holder to purchase from the Company one one-hundredth of a share of preferred
stock of the Company designated as Series D Preferred Stock at a price of $100
per one one-hundredth of a share. The Board of Directors also resolved to amend
its certificate of incorporation, to designate 1,000,000 shares of Series D
Preferred Stock for such issuance.
Each holder of a share of the Company's common stock has the right to
purchase from the Company one one-hundredth (1/100) of a share of the Company's
Series D preferred stock, $.01 par value per share, at a price of $100 per one
one-hundredth of a Series D preferred share. The exercise price and the number
of Series D preferred shares issuable upon exercise are subject to adjustments
from time to time to prevent dilution. The share purchase rights are not
exercisable until the earlier to occur of (1) 10 days following a public
announcement that a person or group of affiliated or associated persons,
referred to as an acquiring person, have acquired beneficial ownership of 15% or
more of the Company's outstanding voting common stock or (2) 10 business days
following the commencement of, or announcement of an intention to make, a tender
offer or exchange offer which would result in an acquiring person beneficially
owning 15% or more of the Company's outstanding voting shares of common stock.
If the Company is acquired in a merger or other business combination, or if
more than 50% of the Company's consolidated assets or earning power is sold
after a person or group has become an acquiring person, proper provision will be
made so that each holder of a share purchase right -- other than share purchase
rights beneficially owned by the acquiring person, which will thereafter be void
- -- will have the right to receive, upon exercise of the share purchase right at
the then current exercise price, the number of shares of common stock of the
acquiring company which at the time of the transaction have a market value of
two times the exercise price. If any person or group becomes an acquiring
person, proper provision shall be made so that each holder of a share purchase
right -- other than share purchase rights beneficially owned by the acquiring
person, which will thereafter be void -- will have the right to receive upon
exercise of the share purchase right at the then current exercise price, the
number of shares of Series D preferred stock with a market value at the time of
the transaction equal to two times the exercise price.
Series D preferred shares issuable upon exercise of the share purchase
rights will not be redeemable. Each Series D preferred share will be entitled to
a minimum preferential dividend payment of $.10 per share and will be entitled
to an aggregate dividend of 100 times the cash dividend declared per share of
common stock. In the event the Company is liquidated, the holders of the Series
D preferred shares will be entitled to receive a payment in an amount equal to
the greater of $100 per one one-hundredth share or 100 times the payment made
per share of common stock. Each Series D preferred share will have 100 votes,
voting together with the shares of common stock. Finally, in the event of any
merger, consolidation or other transaction in which shares of common stock are
exchanged, each Series D preferred share will be entitled to receive 100 times
the amount received per share of common stock. These rights are protected by
customary antidilution provisions.
Before the date the share purchase rights are exercisable, the share
purchase Rights may not be detached or transferred separately from the common
stock. The share purchase Rights will expire in 2012, or, if the share purchase
Rights become exercisable before 2012, at the close of business on the 90th day
following such date the share purchase Right become exercisable, provided that
the Company's board of directors does not extend or otherwise modify the Right.
At any time on or prior to 10 business days following the time an acquiring
person acquires beneficial ownership of 15% or more of the Company's outstanding
voting common stock, the Company's board of directors may redeem the share
purchase Rights in whole, but not in part, at a price of $.01 per share purchase
Right. Immediately upon any share purchase Rights redemption, the exercise
Rights terminate, and the holders will only be entitled to receive the
redemption price.
F-16
STOCK PURCHASE WARRANTS
Warrants to purchase 2,212,636 shares of the Company's common stock were
outstanding as of December 30, 2002; 106,827 of which have an exercise price of
$.01 per share and expire from November 2006 to April 2008; 2,070,004 of which
have an exercise price of $6.00 per share, become exercisable after August 16,
2003 and expire from August 2007 to November 2007; 33,279 of which have an
exercise price of $14.88 per share and expire in November 2007; and 2,526 of
which have an exercise price of $16.63 per share and expire in December 2006 All
of these warrants provide for anti-dilution adjustments in the event of stock
splits, stock dividends, sales by the Company of its stock at, or issuance of
options or warrants containing an exercise price of, less than fair market value
or merger, consolidation, recapitalization or similar transactions. All of the
holders of these warrants are entitled to participate in any dividends declared
upon shares of the Company's common stock (other than dividends payable solely
in shares of common stock) as if these holders had fully exercised such
warrants.
11. INITIAL PUBLIC OFFERING
On November 22, 2002, the Company completed an initial public offering of
its common stock, issuing 5,555,556 shares at $7.00 per share. Concurrently, all
outstanding shares of Series A and Series C preferred stock were converted to
common stock, and all of the Company's outstanding obligations under its Senior
Subordinated and Senior Secured Debt agreements were repaid, and the Company's
Senior Secured Credit Facility was terminated (See Note 7). In connection with
the repayment of the Senior Subordinated and Senior Secured debt, and the
termination of the Senior Secured credit facility, all unaccreted debt discount,
and unamortized deferred financing charges were written off, and a loss on early
extinguishment of debt of approximately $4.9 million was recorded. The total net
proceeds of the offering, net of offering expenses of approximately $6.1 million
including underwriter's discount were approximately $32.8 million.
12. STOCK OPTION PLANS
The Company has several stock option plans that provide for the granting of
incentive and nonqualified stock options to participants, employees and
non-employee directors, to acquire Common Stock.
There are 6,350,126 shares of Common Stock reserved for issuance under the
Plans. Grants have been made at fair market value (as determined by the Board of
Directors prior to the Company's initial public offering) and generally vest
over a period of five years and expire ten years from the date of the grant. The
Board of Directors approves vesting terms on an individual basis. The Company
accounts for stock option grants in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees."
Activity with respect to the Company's stock option plans for the years
ended January 1, 2001, December 31, 2001 and December 30, 2002 was as follows:
NUMBER RANGE OF WEIGHTED AVERAGE
OF OPTIONS EXERCISE PRICE EXERCISE PRICE
---------- -------------- ----------------
Balance as of January 3, 2000 . 1,428,609 $1.56 - 18.81 $ 8.18
Granted ..................... 818,803 $ 12.25 $ 12.25
Exercised ................... (55) $ 10.94 $ 10.94
Canceled/Expired ............ (143,192) $8.93 - 12.25 $ 11.00
---------
Balance as of January 1, 2001 . 2,104,165 $1.56 - 18.81 $ 9.62
Granted ..................... 1,377,234 $ 12.25 $ 12.25
Exercised ................... (5,349) $5.30 - $ 12.25 $ 7.31
Canceled/Expired ............ (210,445) $8.93 - $ 12.25 $ 11.93
---------
Balance as of December 31, 2001 3,265,605 $1.56 - $ 18.81 $ 10.59
Granted ..................... 501,518 $6.00 - $ 12.25 $ 10.40
Exercised ................... (32,142) $ 10.94 $ 10.94
Canceled/Expired ............ (328,649) $6.11 - $ 12.25 $ 12.09
---------
Balance as of December 30, 2002 3,406,332 $1.56 - $ 18.81 $ 10.41
=========
There were approximately 1.8 million, 1.5 million and 1.1 million options
exercisable under the Plans as of December 30, 2002, December 31, 2001 and
January 1, 2001, respectively.
F-16
Summarized information about the Company's stock options outstanding and
exercisable at December 30, 2002 is as follows:
OUTSTANDING EXERCISABLE
----------------------------------------------- -----------------------------
REMAINING
AVERAGE AVERAGE AVERAGE
EXERCISE PRICE RANGE OPTIONS LIFE PRICE OPTIONS PRICE
-------------------- ------------ ----------------- ------------ ------------ ---------
$1.56 ................................ 171,234 3.6 years $ 1.56 171,234 $ 1.56
$5.30 - $6.11 ........................ 475,518 5.8 years $ 5.55 336,409 $ 5.33
$8.93 - $12.25 ....................... 2,702,436 7.4 years $ 11.71 1,251,116 $ 11.10
$14.88 - $18.81 ...................... 57,144 0.1 years $ 15.86 57,144 $ 15.86
13. DEFINED CONTRIBUTION PLAN
The Company has a 401(k) Plan (the "Plan") for all qualified employees. The
Plan provides for a matching employer contribution of twenty-five percent of up
to four percent of the employees' deferred savings. The employer contributions
vest over five years. The deferred amount cannot exceed fifteen percent of an
individual participant's compensation in any calendar year. The Company's
contribution to the Plan was $35,380, $26,115 and $21,635 for fiscal years 2002,
2001 and 2000, respectively.
14. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
As of December 30, 2002 the Company is committed under lease agreements
expiring through 2014 for occupancy of its retail restaurants (excluding leases
for retail restaurants not yet opened as of December 30, 2002, which are
disclosed separately below) and for office space at the following minimum annual
rentals:
2003 ..... $12,082,924
2004 ..... 12,352,035
2005 ..... 12,520,043
2006 ..... 12,404,946
2007 ..... 12,260,853
Thereafter 44,154,542
Amounts shown are net of approximately $2.5 million of sublease rental
income under non-cancellable subleases. Rental expense for the fiscal years
ended 2002, 2001 and 2000 totaled $10,434,766, $9,096,207 and $6,184,680 ,
respectively. Certain lease agreements have renewal options ranging from 3 years
to 15 years. In addition, certain leases obligate the Company to pay additional
rent if restaurant sales reach certain minimum levels (percentage rent). Amounts
incurred under these additional rent provisions were $217,075, $168,451 and
$174,402 for fiscal years 2002, 2001 and 2000, respectively.
As of December 30, 2002, future minimum rental payments required under
non-cancelable operating leases for retail restaurants, which were not yet
opened as of December 30, 2002, are as follows:
2003 ..... $ 1,660,839
2004 ..... 2,209,670
2005 ..... 2,322,144
2006 ..... 2,350,189
2007 ..... 2,405,282
Thereafter 13,521,350
Certain of the Company's lease agreements provide for scheduled rent
increases during the lease term, or for rental payments commencing at a date
other than the date of initial occupancy. In accordance with SFAS No. 13,
"Accounting for Leases," rent expense is recognized on a straight-line basis
over the term of the respective leases. The Company's obligation with respect to
these scheduled rent increases has been presented as a long-term liability in
other liabilities in the accompanying consolidated balance sheets.
As of December 30, 2002, the Company had outstanding approximately $368,000
in standby letters of credit, which were given as security deposits for certain
of the lease obligations. The letters of credit are fully secured by cash
deposits or marketable securities held in accounts at the issuing banks. Such
deposits are not available for withdrawal, amounted to approximately $368,000 at
December 30, 2002 and are included as a component of Intangible, Security
Deposits and Other Assets in the accompanying consolidated balance sheet.
In fiscal 2000 and 2001, the Company recorded a provision of approximately
$477,000 and $6,411,000 respectively, and in 2002 the Company recorded a credit
of approximately $1,165,000, relating to lease commitments for restaurants the
Company has closed or is committed to close. During fiscal 2002, the Company
made cash payments totaling approximately $411,000 for those restaurants'
leases.
F-17
As of December 30, 2002, future minimum lease payments related to
restaurants that have been closed or are committed to be closed is approximately
$12.6 million, with remaining lease terms ranging from 6 to 12 years.
Other liabilities in the accompanying consolidated balance sheet as of
December 30, 2002 include $6,625,570 in accrued lease termination costs
(including a current portion of $671,601) and $3,794,354 in accrued contractual
lease increases. Other liabilities as of December 31, 2001 include $8,201,674 in
accrued lease termination costs (including a current portion of $1,678,880) and
$3,008,570 in accrued contractual lease increases.
PURCHASE COMMITMENT
During fiscal year 1999, the Company entered into an exclusive coffee
supply agreement with an unrelated third party ("Supplier"). The agreement calls
for minimum purchases, in terms of both quantity and price, to be made by the
Company of coffee beans and related products. The agreement is in effect through
December 2003 but may be terminated by the Company or the Supplier provided 180
days notice is given in advance of such termination. The Company is obligated to
purchase approximately $1.1 million of roasted coffee between now and fiscal
year end 2003 under the terms of that agreement.
During fiscal year 2002, the Company entered into a beverage marketing
agreement with the Coca-Cola Company. Under the agreement, the Company is
obligated to purchase approximately 2.0 million gallons of fountain syrups at
the then-current annually published national chain account prices.
During 2002, the Company received $600,000 in allowances from food and
beverage suppliers, which is being recognized ratably based on actual product
purchased. The Company may receive additional amounts if certain purchase levels
are achieved.
SELF-INSURANCE
The Company has a self-insured group health insurance plan. The Company is
responsible for all covered claims to a maximum liability of $50,000 per
participant during a plan year. Benefits paid in excess of $50,000 are
reimbursed to the plan under the Company's stop loss policy. In addition, the
Company also has an aggregate stop loss policy whereby the Company's liability
for total claims submitted cannot exceed a pre-determined dollar factor based
upon, among other things, past years' claims experience, actual claims paid, the
number of plan participants and monthly accumulated aggregate deductibles. Group
health insurance expense for the fiscal years 2002, 2001 and 2000 was
approximately $1,108,000, $968,000 and $800,000, respectively.
LITIGATION
From time to time, the Company is a party to litigation arising in the
normal course of its business operations. In the opinion of management and
counsel, it is not anticipated that the settlement or resolution of any such
matters will have a material adverse impact on the Company's financial
condition, liquidity or results of operations.
The Company has been named as a defendant in several purported class action
complaints (see Note 17).
EMPLOYMENT AGREEMENTS
During fiscal 2002, the Company entered into employment agreements with
certain officers and employees. The term of each agreement is for three years
with each agreement expiring in 2005. The Company's aggregate remaining
obligations under these employment agreements was approximately $3.4 million as
of December 30, 2002.
15. RELATED PARTY TRANSACTIONS
The Company incurs fees with a legal firm, a partner of which is an owner
of less than 0.5% of the Company's equity securities, and is also the father of
the Company's Chief Executive Officer. This firm provides legal services on
behalf of the Company, which amounted to approximately $575,000, $71,000 and
$41,000 for the fiscal years 2002, 2001 and 2000. Furthermore, the Company
engages a public relations firm that is partially owned by a family member of a
founding shareholder of the Company. This firm provides public relations
services to the Company, which amounted to approximately $235,000, $146,000 and
$67,000 for fiscal years 2002, 2001 and 2000, respectively. Management of the
Company believes that these related party transactions were effected on a basis
that approximates fair market value. Subsequent to December 30, 2002 the
relationship with the public relations firm has been terminated.
F-18
16. EFFECT OF THE EVENTS OF SEPTEMBER 11, 2001
As a result of the events of September 11, 2001, a Company owned restaurant
location and a kiosk that had operated in the World Trade Center in New York
City were destroyed. Additionally, due to its proximity to the World Trade
Center, another restaurant in the World Financial Center was closed after the
attacks and was reopened in September 2002. The Company and its insurer, and its
insurance broker are in disagreement over the amount of insurance coverage for
these locations. Consequently, approximately $1.3 million has been included in
the 2001 provisions for asset impairments and disposals. The loss is net of
approximately $1.0 million received or recoverable by the Company from property
and casualty insurance. .During fiscal 2002 the Company received $320,000 for
business interruption insurance claims which has been recorded as other income
in the accompanying statement of operations. Any future amounts received will be
recognized in income when received, or earlier, if the Company is notified of
the amount of claims approved by its insurers.
17. SUBSEQUENT EVENTS
During the first quarter of Fiscal 2003, The Company announced its
intention to create a franchising and area development program. While management
expects that Company owned stores will always be an important part of our new
store growth, it believes that incorporating a franchising and area developer
model into the Company's strategy will position the Company to maximize the
market potential for the Cosi brand and concept consistent with our available
capital and thus maximize shareholder value. The Company also announced that its
Chairman and CEO had resigned, and that it was slowing the growth of its company
owned stores, and that it expected to record a one-time charge of approximately
$1.7 million in the first quarter of 2003 to provide for severance costs related
to the executive and general and administrative staff reductions.
Subsequent to making that announcement on February 3, 2003, the board
determined that additional changes to executive management are appropriate, and
now expect that the charge in the first quarter of 2003 to provide for severance
costs related to the executive and general and administrative staff reductions
will be approximately $3.7 million.
In addition, during the first quarter of 2003, the Company expects to
record additional charges of $2.1 million to write down assets at three
restaurant locations that were closed during the first quarter of 2003, and on
25 locations which were in our development pipeline, but which have been
cancelled.
During the first quarter of 2003, the Company obtained a $3 million line of
credit (the "Loan") from a bank to be used for general corporate purposes. The
Loan bears interest at 75 basis points over the bank's prime lending rate and is
secured by all of our tangible and intangible property, other than equipment
pledged to secure our equipment loan credit facility (see page F-12). The Loan
matures in May 2004. We have agreed to pay the bank fees and expenses of
approximately $22,000 upon funding of the Loan. The Loan is guaranteed, jointly
and severally, by Eric J. Gleacher, one of our Directors; Charles G. Phillips,
one of our shareholders an entity related to ZAM Holdings, LP, our largest
shareholder (together, "the Guarantors"). At any time during the term of the
Loan, the Guarantors have the right to require the bank to assign the Loan to
the Guarantors. If the Loan has not been assigned by the bank to the Guarantors,
and has not been paid in full by August 15, 2003, then the bank is required to
assign the Loan to the Guarantors. If approved by our shareholders, upon
assignment of the loan to the Guarantors, the loan will be convertible into
shares of our common stock, under certain circumstances, at the option of the
Guarantors, at a conversion price equal to the lesser of $1.50 or 85% of the
weighted average price per share of our common stock for the fifteen trading day
period ending three trading days before the conversion date.
The Company currently anticipate making a rights offering (the "Offering")
to existing shareholders to raise approximately $12 million. The Company
currently anticipates that the Offering will give existing shareholders the
right to purchase shares of common stock at a purchase price per share equal to
the lesser of $1.50 or 85% of the weighted average price per share of common
stock for the fifteen trading day period ending three trading days before the
expiration date of the Offering. A group of shareholders, including the
Guarantors, have indicated that they will commit to purchase shares in the
offering, or provide other funding support, in the amount of $8.5 million of the
$12 million offering. This shareholder group's commitment to purchase shares in
the Offering will be subject to shareholder approval of the equity conversion
feature of the Loan.
The terms of the Loan and the Offering were reviewed and approved by a
committee of our board comprised of disinterested directors.
The Company intends to file a registration statement with the Securities
and Exchange Commission relating to the Offering. The timing and completion of
the Offering is subject to market conditions and other contingencies. There can
be no assurance that the Company will be able to complete the Offering on terms
acceptable to the Company or at all. The Offering will only be made pursuant to
a prospectus filed with the Securities and Exchange Commission.
On March 31, 2003 Mr. William D. Forrest joined our Board of Directors, and
was elected Chairman of the Board. Mr. Forrest is a Managing Director at
Gleacher Partners, L.L.C. Eric Gleacher, who was previously Chairman of the
Board, will remain a Director. The Company also announced that Jay Wainwright
will as interim Chief Executive Officer until a successor is hired, and Nick
Marsh will be stepping down as Chief Operating Officer, and will be leaving the
Company.
On February 5, 2003, a purported shareholder class action complaint was
filed in the United States District Court for the Southern District of New York
(the "Court"), alleging that the Company and various of its officers and
directors and the Underwriter violated Sections 11, 12(a)(2) and 15 of the
Securities Act of 1933 by misstating, and by failing to disclose, certain
financial and other business information (Sheel Mohnot v. Cosi, Inc., et al.,
No. 03 CV 812). At least six additional class action complaints with similar
allegations were later filed (collectively, the "Securities Act Litigation").
The Securities Act Litigation is brought on behalf of a purported class of
purchasers of the Company's stock allegedly traceable to its November 22, 2002
initial public offering ("IPO"). The complaints in the Securities Act Litigation
generally claim that at the time of the IPO, the Company's offering materials
failed to disclose that the funds raised through the IPO would be insufficient
to implement the Company's expansion plan; that it was improbable that the
Company would be able to open 53 to 59 new stores in 2003; that at the time of
the IPO, Cosi had negative working capital and therefore did not have available
working capital to repay certain debts; and that the principal purpose for going
forward with the IPO was to repay certain existing shareholders and members of
the Board of Directors for certain debts and to operate the Company's existing
restaurants.
On February 21, 2003, a purported shareholder class action complaint was
filed in the Court alleging that the Company and certain of its officers and
directors violated Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, and Rule 10-b promulgated thereunder, by issuing a series of material
misrepresentations to the market between November 22, 2002 and February 4, 2003
(the "Class Period") (Georgette Pacia v. Cosi, Inc. et al., No. 03-CV-1156) (the
"Securities Exchange Act Litigation"). The emphasis of the allegations in the
complaint in the Securities Exchange Act Litigation is that the defendants
knowingly or recklessly caused misrepresentations and omissions to be made
regarding the Company's operating condition and future business prospects. Among
other things, plaintiffs in the Securities Exchange Act Litigation allege that
defendants failed to disclose that the funds raised by the IPO would be
insufficient to implement the Company's expansion plan; that at the time of the
IPO, defendants should have known that the costs of expansion would be greater
than the cash available to the Company, making it improbable that the Company
would be able to successfully continue to open new stores at the pace announced
by the Company; and that defendants failed to disclose that a reduction in the
offering price of the IPO would result in the Company being forced to abandon
its growth strategy.
The plaintiffs in the Securities Act Litigation and the Securities
Exchange Act Litigation (the "Litigations") generally seek to recover
compensatory damages, expert fees, attorneys' fees, costs of Court and pre- and
post-judgment interest. The Underwriter is seeking indemnification from the
Company for any damages assessed against it in the Securities Act Litigation.
The Litigations are at a preliminary stage, and the Company expects that these
related lawsuits will be consolidated into a single action. The Company believes
that it has meritorious defenses to these claims, and intends to vigorously
defend against them.
F-19
F-20
18. SELECTED QUARTERLY OPERATING DATA (UNAUDITED)
The following table contains selected unaudited statement of operations
information for each quarter of fiscal 2002 and 2001. The Company believes that
the following information reflects all normal recurring adjustments necessary
for a fair presentation of the information for the periods presented. The
operating results for any quarter are not necessarily indicative of results for
any future period. Unaudited quarterly results were as follows:
2001 2002
------------------------------------------------- ---------------------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
----------- ----------- ----------- ------------ ------------ ----------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales ....................$ 15,855.9 $ 18,463.8 $ 18,217.0 $ 17,647.4 $ 18,052.1 $ 20,919.9 $ 22,085.5 $ 23,366.7
Cost of goods sold ........... 4,205.6 4,871.7 4,817.3 4,897.1 4,853.4 5,645.6 5,861.5 6,337.0
Restaurant operating
expenses .................... 9,976.1 11,586.2 11,984.7 11,567.5 11,127.0 12,366.5 13,160.6 14,198.6
Total costs of
sales ....................... 14,181.7 16,457.9 16,802.0 16,464.6 15,980.4 18,012.1 19,022.1 20,535.6
General and
administrative
expenses .................... 3,735.2 4,534.5 4,528.4 5,563.4 4,620.3 4,227.6 4,051.7 4,912.1
Depreciation and
amortization ................ 2,021.9 2,126.9 1,243.0 1,298.2 1,210.3 1,335.5 1,602.2 1,703.2
Restaurant
pre-opening
expenses .................... 253.6 320.0 407.9 457.3 111.4 286.1 542.3 905.3
Provision for losses
on asset impairments
and disposals ............... 90.4 -- 1,561.9 6,834.0 -- 7.3 -- 1,049.2
Lease termination
costs ....................... 578.3 -- 1,647.1 4,185.3 -- -- -- (1,165.0)
Operating income
(loss) ...................... (5,005.2) (4,975.5) (7,973.3) (17,155.4) (3,870.3) (2,948.7) (3,132.8) (4,573.7)
Interest income .............. 60.8 105.9 146.9 26.9 29.9 32.4 20.0 16.0
Interest expense ............. (75.5) (92.1) (84.0) (276.0) (301.4) (245.6) (232.5) (413.1)
Amortization of deferred
financing cost & debt discount (22.9) (22.9) (22.9) (58.1) (86.4) (62.4) (230.5) (169.7)
Loss on Early Extinguishment
of Debt ...................... -- -- -- -- -- -- -- (5,083.2)
Other income
(expense) ................... -- -- -- -- -- -- 380.4 .5
Net income (loss) ............ (5,042.8) (4,984.6) (7,933.3) (17,462.6) (4,228.2) (3,224.3) (3,195.4) (10,223.2)
Preferred stock
dividends ................... (1,312.7) (1,639.4) (1,836.0) (1,890.0) (1,960.5) (2,383.4) (2,432.8) (1,416.9)
Net income (loss)
attributable to
common
stockholders ................ (6,355.5) (6,624.0) (9,769.3) (19,352.6) (6,188.7) (5,607.7) (5,628.2) (11,640.1)
Net income (loss) per
common share ................ (1.41) (1.47) (2.17) (4.29) (1.37) (1.23) (1.24) (1.23)
Shares used in
computing net loss
per common share (in
thousands) .................. 4,504 4,505 4,508 4,511 4,527 4,544 4,545 9,434
F-21
REPORT OF INDEPENDENT AUDITORS ON SCHEDULE
To the Board of Directors
Cosi, Inc.
We have audited the consolidated financial statements of Cosi, Inc. as of
December 30, 2002 and December 31, 2001, and for each of the three years in the
period ended December 30, 2002, and have issued our report thereon dated
February 19, 2003, except for Note 17 as to which the date is March 31, 2003.
(included elsewhere in this Annual Report on Form 10K) Our audits also included
the financial statement Schedule II -- Valuation and Qualifying Accounts
included in this Annual Report on Form 10K. This schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
New York, New York
February 19, 2003
S-1
SCHEDULE II
COSI, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDING DECEMBER 30, 2002
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER ACCOUNTS DEDUCTIONS BALANCE AT
DESCRIPTION OF PERIOD EXPENSES (DESCRIBE) (DESCRIBE) END OF PERIOD
----------- --------- -------- ---------- ---------- -------------
(IN $000S)
JANUARY 1, 2001
Allowance for doubtful accounts
receivable .............................................. 306.9 88.1 -- (28.0)(a) 367.0
Lease termination reserve .................................. 3,437.1 477.3 -- (914.4)(b) 3,000.0
Accrued merger and integration
costs ................................................... 639.3 55.7 -- (695.0)(c) --
DECEMBER 31, 2001
Allowance for doubtful accounts
receivable .............................................. 367.0 3.6 -- (150.8)(a) 219.8
Lease termination reserve .................................. 3,000.0 6,410.8 -- (1,209.1)(b) 8,201.7
DECEMBER 30, 2002
Allowance for doubtful accounts
receivable .............................................. 219.8 27.0 -- (14.7)(a) 232.1
Lease termination reserve .................................. 8,201.7 (1,165.0) -- (411.1)(b) 6,625.6
NOTES:
(a) Write-off of uncollectable accounts.
(b) Payments to landlords and others for leases on closed stores.
(c) Payments of merger and integration costs.
S-2
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
a. Exhibits
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- ----------------------------------------------------------------
2.1# -- Merger Agreement by and among Xando, Incorporated, Xando
Merger Corp. and Cosi Sandwich Bar, Inc., dated as of
October 4, 1999. (Filed as exhibit 2.1 to the Company's
Registration Statement on Form S-1, file #333-86390)
3.1 -- Amended and Restated Certificate of Incorporation of Cosi, Inc.
3.2 -- Amended and Restated By-Laws of Cosi, Inc.
4.1# -- Form of Certificate of Common Stock. (Filed as exhibit 4.1 to
the Company's Registration Statement on Form S-1,
file #333-86390)
4.2 -- Rights Agreement between Cosi, Inc. and American
Stock Transfer and Trust Company as Rights Agent.
4.3# -- Amended and Restated Registration Agreement, dated as of
March 30, 1999. (Filed as exhibit 4.3 to the Company's
Registration Statement on Form S-1, file #333-86390)
10.1# -- Amended and Restated Cosi Stock Incentive Plan.
(Filed as exhibit 10.1 to
the Company's Registration Statement on Form S-1,
file #333-86390)
10.2# -- Cosi Employee Stock Purchase Plan. (Filed as exhibit 10.2 to
the Company's Registration Statement on Form S-1,
file #333-86390)
10.3# -- Cosi Non-Employee Director Stock Incentive Plan.
(Filed as exhibit 10.3 to
the Company's Registration Statement on Form S-1,
file #333-86390)
10.4# -- Cosi Sandwich Bar, Inc. Incentive Stock Option Plan
(Filed as exhibit 10.4 to
the Company's Registration Statement on Form S-1,
file #333-86390)
10.5.1# -- Employment Agreement between Cosi and Jay Wainwright,
effective as of January 1, 2002.. (Filed as exhibit 10.5.2 to
the Company's Registration Statement on Form S-1,
file #333-86390)
10.5.2# -- Employment Agreement between Cosi and Nick Marsh, effective
as of January 1, 2002..(Filed as exhibit 10.5.3 to the Company's
Registration Statement on Form S-1, file #333-86390)
10.5.3# -- Employment Agreement between Cosi and David Orwasher,
effective as of January 1, 2002.. (Filed as exhibit 10.5.4 to
the Company's Registration Statement on Form S-1,
file #333-86390)
10.6# -- Amended and Restated Distributor Service Agreement between
Cosi and Maines Paper & Food Service, Inc., dated as of
June 18, 2002.(1) . (Filed as exhibit 10.6 to the Company's
Registration Statement on Form S-1, file #333-86390)
10.7# -- Form of Senior Secured Note and Warrant Purchase Agreement
(Filed as exhibit 10.7 to
the Company's Registration Statement on Form S-1,
file #333-86390)
21.1# -- Subsidiaries of Cosi, Inc.. (Filed as exhibit 21.1 to the
Company's Registration Statement on Form S-1, file #333-86390)
99.1 --- Certification of the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 --- Certification of the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
# previously filed
(1) Portions of Exhibit 10.6 have been omitted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.