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EX-32.1 - EXHIBIT 32.1 - COSI INC | c00981exv32w1.htm |
EX-31.2 - EXHIBIT 31.2 - COSI INC | c00981exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - COSI INC | c00981exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 29, 2010
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 000-50052
COSÌ, INC.
(Exact name of registrant as specified in its charter)
Delaware | 06-1393745 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1751 Lake Cook Road
Deerfield, Illinois 60015
(Address of principal executive offices) (Zip Code)
Deerfield, Illinois 60015
(Address of principal executive offices) (Zip Code)
(847) 597-8800
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o | Accelerated filer o | Non-Accelerated filer o | Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Number of shares of Common Stock, $.01 par value, outstanding at May 4, 2010: 51,551,201
COSI, INC.
Index to Form 10-Q
For the three month period ended March 29, 2010
For the three month period ended March 29, 2010
Page Number | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
7-11 | ||||||||
12-26 | ||||||||
26 | ||||||||
26 | ||||||||
27 | ||||||||
27 | ||||||||
27 | ||||||||
28 | ||||||||
29 | ||||||||
CERTIFICATIONS |
30-32 | |||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 |
2
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. | Financial Statements |
Cosi, Inc.
Consolidated Balance Sheets
As of March 29, 2010 and December 28, 2009
(dollars in thousands, except share and per share data)
March 29, 2010 | December 28, 2009 | |||||||
(Unaudited) | (Note 1) | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 7,052 | $ | 4,079 | ||||
Accounts receivable, net |
669 | 560 | ||||||
Inventories |
934 | 967 | ||||||
Prepaid expenses and other current assets |
1,616 | 2,136 | ||||||
Total current assets |
10,271 | 7,742 | ||||||
Furniture and fixtures, equipment and leasehold improvements, net |
20,842 | 22,100 | ||||||
Intangibles, security deposits and other assets, net |
1,618 | 1,728 | ||||||
Total assets |
$ | 32,731 | $ | 31,570 | ||||
Liabilities and Stockholders Equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 3,219 | $ | 3,079 | ||||
Accrued expenses |
9,021 | 9,628 | ||||||
Deferred franchise revenue |
53 | 44 | ||||||
Current portion of other long-term liabilities |
506 | 588 | ||||||
Total current liabilities |
12,799 | 13,339 | ||||||
Deferred franchise revenue |
2,494 | 2,563 | ||||||
Other long-term liabilities, net of current portion |
6,035 | 6,343 | ||||||
Total liabilities |
21,328 | 22,245 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Common stock $.01 par value; 100,000,000 shares
authorized,
51,551,201 and 40,862,474 shares issued, respectively |
516 | 409 | ||||||
Additional paid-in capital |
283,019 | 277,994 | ||||||
Treasury stock, 239,543 shares at cost |
(1,198 | ) | (1,198 | ) | ||||
Accumulated deficit |
(270,934 | ) | (267,880 | ) | ||||
Total stockholders equity |
11,403 | 9,325 | ||||||
Total liabilities and stockholders equity |
$ | 32,731 | $ | 31,570 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
3
Table of Contents
Cosi, Inc.
Consolidated Statements of Operations
For the Three Month Periods Ended March 29, 2010 and March 30, 2009
(dollars in thousands, except share and per share data)
Three Months Ended | ||||||||
March 29, | March 30, | |||||||
2010 | 2009 | |||||||
(Unaudited) | (Unaudited) | |||||||
Revenues: |
||||||||
Restaurant net sales |
$ | 27,074 | $ | 28,124 | ||||
Franchise fees and royalties |
525 | 542 | ||||||
Total revenues |
27,599 | 28,666 | ||||||
Costs and expenses: |
||||||||
Cost of food and beverage |
6,329 | 6,237 | ||||||
Restaurant labor and related benefits |
10,664 | 10,744 | ||||||
Occupancy and other restaurant operating expenses |
9,044 | 8,967 | ||||||
26,037 | 25,948 | |||||||
General and administrative expenses |
3,321 | 3,834 | ||||||
Depreciation and amortization |
1,380 | 1,964 | ||||||
Restaurant pre-opening expenses |
| 4 | ||||||
Closed store costs |
| 43 | ||||||
Lease termination expense |
1 | 202 | ||||||
Gain on sale of assets |
(87 | ) | | |||||
Total costs and expenses |
30,652 | 31,995 | ||||||
Operating loss |
(3,053 | ) | (3,329 | ) | ||||
Interest income |
| 1 | ||||||
Interest expense |
(1 | ) | (1 | ) | ||||
Other income |
| 3 | ||||||
Net loss |
$ | (3,054 | ) | $ | (3,326 | ) | ||
Per Share Data: |
||||||||
Loss per share, basic and diluted |
$ | (0.06 | ) | $ | (0.08 | ) | ||
Weighted average shares outstanding: |
48,982,134 | 40,261,278 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
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Cosi, Inc.
Consolidated Statement of Stockholders Equity
For the Three Months Ended March 29, 2010
(unaudited)
(dollars in thousands, except share data)
(dollars in thousands, except share data)
Common Stock | Treasury Stock | |||||||||||||||||||||||||||
Additional | ||||||||||||||||||||||||||||
Number of | Paid In | Number of | Accumulated | |||||||||||||||||||||||||
Shares | Amount | Capital | Shares | Amount | Deficit | Total | ||||||||||||||||||||||
Balance, December 28, 2009 |
40,862,474 | $ | 409 | $ | 277,994 | 239,543 | $ | (1,198 | ) | $ | (267,880 | ) | $ | 9,325 | ||||||||||||||
Issuance of common stock
(1) |
10,451,677 | 105 | 4,790 | 4,895 | ||||||||||||||||||||||||
Net issuance of
restricted stock |
(1,200 | ) | 2 | (2 | ) | | ||||||||||||||||||||||
Stock-based compensation |
238,250 | 237 | 237 | |||||||||||||||||||||||||
Net loss |
(3,054 | ) | (3,054 | ) | ||||||||||||||||||||||||
Balance, March 29, 2010 |
51,551,201 | $ | 516 | $ | 283,019 | 239,543 | $ | (1,198 | ) | $ | (270,934 | ) | $ | 11,403 | ||||||||||||||
(1) | The additional paid-in capital represents the proceeds net of issuance costs from the
shareholder rights offering and related private placement to directors and officers of the Company |
The accompanying notes are an integral part of these consolidated financial statements.
5
Table of Contents
Cosi, Inc.
Consolidated Statements of Cash Flows
For the Three Month Periods Ended March 29, 2010 and March 30, 2009
(dollars in thousands)
March 29, | March 30, | |||||||
2010 | 2009 | |||||||
(Unaudited) | (Unaudited) | |||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (3,054 | ) | $ | (3,326 | ) | ||
Adjustments to reconcile net loss to net cash used in
operating activities |
||||||||
Depreciation and amortization |
1,380 | 1,964 | ||||||
Gain on sale of assets |
(87 | ) | | |||||
Provision for bad debts |
10 | 57 | ||||||
Stock-based compensation expense |
237 | 294 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(119 | ) | 215 | |||||
Inventories |
33 | 99 | ||||||
Prepaid expenses and other current assets |
520 | 397 | ||||||
Other assets |
26 | 41 | ||||||
Accounts payable and accrued expenses |
(467 | ) | (205 | ) | ||||
Deferred franchise revenue |
(60 | ) | (56 | ) | ||||
Lease termination reserve |
(154 | ) | | |||||
Other long-term liabilities |
(236 | ) | (378 | ) | ||||
Net cash used in operating activities |
(1,971 | ) | (898 | ) | ||||
Cash flows from investing activities: |
||||||||
Capital expenditures |
(122 | ) | (115 | ) | ||||
Proceeds from sale of assets |
171 | | ||||||
Net cash provided by (used in) investing
activities |
49 | (115 | ) | |||||
Cash flows from financing activities: |
||||||||
Proceeds from issuance of common stock |
5,226 | | ||||||
Common stock issuance costs |
(331 | ) | ||||||
Net cash provided by financing activities |
4,895 | | ||||||
Net increase (decrease) in cash and cash equivalents |
2,973 | (1,013 | ) | |||||
Cash and cash equivalents, beginning of period |
4,079 | 5,589 | ||||||
Cash and cash equivalents, end of period |
$ | 7,052 | $ | 4,576 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid for: |
||||||||
Corporate franchise and income taxes |
$ | 115 | $ | 107 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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Table of Contents
COSI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 Basis of Presentation
We have prepared the accompanying unaudited condensed consolidated financial statements in
accordance with the requirements of Form 10-Q and, therefore, they do not include all information
and footnotes necessary for a fair presentation of financial position, results of operations, and
cash flows in conformity with accounting principles generally accepted in the United States of
America (U.S. GAAP). In our opinion, the financial statements reflect all adjustments that are
necessary for a fair presentation of the results of operations for the periods shown. All such
adjustments are of a normal recurring nature. In preparing financial statements in conformity with
U.S. GAAP, we must make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, expenses, and related disclosures at the date of the financial statements
and during the reporting period. Actual results could differ from those estimates.
As used in this quarterly report on Form 10-Q, unless the context requires otherwise, the terms
we, our, Company or Cosi refer to Cosi, Inc. and its consolidated subsidiaries.
The balance sheet at December 28, 2009 has been derived from audited financial statements at that
date but does not include all of the information and footnotes required by U.S. GAAP for complete
financial statements.
The results for the three month periods ended March 29, 2010 and March 30, 2009 are not indicative
of the results for the full fiscal year.
Certain amounts in the March 31, 2009 consolidated statement of operations have been reclassified
to conform to the March 30, 2010 presentation.
This Report should be read in conjunction with our Annual Report on Form 10-K for the fiscal year
ended December 28, 2009, as filed with the Securities and Exchange Commission (SEC).
There have been no material changes to our significant accounting policies and estimates from the
information provided in Note 1 of our consolidated financial statements included in our Form 10-K
for the fiscal year ended December 28, 2009.
Note 2 Stock-Based Compensation Expense
A summary of non-cash, stock-based compensation expense is as follows:
For the Three Months Ended | ||||||||
(in thousands) | ||||||||
March 29, | March 30, | |||||||
2010 | 2009 | |||||||
Stock option compensation expense |
$ | 1 | $ | 14 | ||||
Restricted stock compensation expense, net of forfeitures |
236 | 280 | ||||||
Total non-cash, stock-based
compensation expense, net of
forfeitures |
$ | 237 | $ | 294 | ||||
As of March 29, 2010, there is no remaining unrecognized compensation expense related to stock
options granted under the Companys various incentive plans. As of March 29, 2010, there was
approximately $0.8 million of total unrecognized compensation expense related to restricted stock shares and
units granted under the Cosi, Inc. 2005 Omnibus Long-Term Incentive Plan (the 2005 Plan). The
expense related to these grants is being recognized on a straight-line basis from the date of each
grant through fiscal 2014.
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COSI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) continued
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) continued
During the first quarter of fiscal 2010, pursuant to the 2005 Plan and in accordance with the terms
and conditions prescribed by the Compensation Committee of our Board of Directors, we granted and
issued 238,250 restricted stock shares and 200,000 restricted stock units to key employees. The
vesting of these shares and stock units will occur as follows: (i) 20% of the stock shares and
stock units vested on the grant date, and (ii) an additional 20% of the stock shares and stock
units will vest on each anniversary of the grant date provided that at each such date the employee
continues to be employed by the Company. The value of the shares and the stock units for the grants
made during the first quarter of fiscal 2010, based on the closing price of our common stock on the
date of the grants, was approximately $0.4 million. There were no issuances for restricted stock
shares, restricted stock units, or stock options during the first quarter of fiscal 2009.
Stock-based compensation expense, net of forfeitures, relating to grants for restricted stock
shares and restricted stock units of approximately $0.2 million and $0.3 million is included in the
accompanying consolidated statement of operations for the quarters ended March 29, 2010 and March
30, 2009, respectively.
During the first quarter of fiscal 2010 and fiscal 2009, 1,200 and 2,000 shares, respectively, of
previously issued restricted common stock were forfeited. The value of the forfeited shares, based
on the closing price of our common stock on the date of the grants, was approximately $0.01 million
and $0.02 million, respectively. The accompanying consolidated statement of operations for the
three month periods ended March 29, 2010 reflects the reversal of approximately $0.01 million of
previously amortized costs related to these forfeited shares during the first quarter of fiscal
2010.
Note 3 Earnings Per Share
Basic and diluted loss per common share is calculated by dividing the net loss by the weighted
average common shares outstanding during the period. As of March 29, 2010, there were 247,600
unvested restricted shares of common stock outstanding and there were no stock options that were
in-the-money. As of March 30, 2009, there were 130,200 unvested restricted shares of common stock
outstanding and there were no stock options that were in-the-money. The unvested restricted shares
meet the requirements for participating securities but were not included in the computation of
basic and diluted earnings per share because we incurred a net loss in all periods presented and, hence, the
impact would be anti-dilutive. At March 29, 2010 and at March 30, 2009 there were, respectively,
270,000 and 265,000 unvested restricted stock units. The unvested stock units do not meet the
requirements for participating securities and were not included in the computation of basic and diluted
earnings per share. Out-of-the-money stock options were not included in the computation of basic and diluted
earnings per share because we incurred a net loss in all periods presented and, hence, the impact
would be anti-dilutive. Out-of-the-money stock options to purchase an aggregate of 590,521 and
700,633 shares of common stock were outstanding at March 29, 2010 and March 30, 2009, respectively.
Note 4 Asset impairments
In accordance with FASB Accounting Standards Codification Topic 360 (ASC Topic 360), (formerly SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets), we evaluate possible
impairment at the individual restaurant level periodically and record an impairment loss whenever
we determine impairment factors are present. We consider a history of poor financial operating
performance to be the primary indicator of potential impairment for individual restaurant
locations. We determine whether a restaurant location is impaired based on expected undiscounted
cash flows, generally for the remainder of the lease term, and then determine the impairment charge based on discounted cash flows for the
same period.
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COSI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) continued
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) continued
Restaurants are not considered for impairment during the period before they enter the comparable
restaurant base, unless specific circumstances warrant otherwise.
We did not record any asset impairments during the first quarter of fiscals 2010 and 2009.
Note 5 Lease Termination Costs
During the first quarter of fiscal 2010 we incurred lease termination costs of less than $0.01
million. During the first quarter of fiscal 2009, we recorded a lease termination charge of
approximately $0.2 million related to an underperforming location in the Midwest region where we
reached a lease termination agreement with the landlord. As of March 29, 2010, the remaining
balance of this lease termination commitment was approximately $0.1 million.
Future store closings, if any, may result in additional lease termination charges. The incurrence
of additional lease termination costs will be dependent on our ability to improve operations in
those restaurants. If unsuccessful, lease termination costs will be determined through negotiating
acceptable terms with our landlords to terminate the leases for those restaurants, or on our
ability to locate sub-tenants or assignees for the leases at those locations.
Note 6 Contingencies
From time to time, we are a defendant in litigation arising in the ordinary course of our business,
including but not limited to claims resulting from slip and fall accidents, claims under federal
and state laws governing access to public accommodations or other federal and state laws applicable
to our business operations, employment-related claims, property damages, claims from guests
alleging illness, injury or other food quality, health or operational concerns, and enforcement of
intellectual property rights.
Note 7 Income Taxes
We have recorded a full valuation allowance to reduce our deferred tax assets related primarily to
net operating loss carryforwards. Our determination of the valuation allowance is based on an
evaluation of whether it is more likely than not that we will be able to utilize the net operating
loss carryforwards, based on the Companys operating results. A positive adjustment to income will
be recorded in future years if we determine that we could realize these deferred tax assets.
As of December 28, 2009, we had net operating loss (NOL) carryforwards of approximately $187.5
million for U.S. federal income tax purposes. Under the Internal Revenue Code, an ownership
change with respect to a corporation can significantly limit the amount of pre-ownership change
NOLs and certain other tax assets that the corporation may utilize after the ownership change to
offset future taxable income, possibly reducing the amount of cash available to the corporation to
satisfy its obligations. An ownership change generally would occur if the aggregate stock ownership
of holders of at least 5% of our stock increases by more than 50 percentage points over the
preceding three year period. We do not believe that the recent rights offering (see Note 9) has
triggered an ownership change. In addition, a limitation would not have an impact on our
consolidated financial statements as we have recorded a valuation allowance for the entire amount
of our deferred tax assets.
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COSI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) continued
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) continued
We have adopted ASC 740-10, Income Taxes, which prescribes a comprehensive financial statement
model of how a company should recognize, measure, present and disclose uncertain tax positions that
the company has taken or expects to take in its income tax returns. The standard requires that only
income tax benefits that meet the more likely than not recognition threshold be recognized or
continue to be recognized on the effective date. Initial recognition amounts would have been
reported as a cumulative effect of a change in accounting principle.
No adjustment was made to the beginning retained earnings balance, as the ultimate deductibility of
all tax positions is highly certain but there is uncertainty about the timing of such
deductibility. No interest or penalties have been accrued relative to tax positions due to the
Company having either a tax loss or net operating loss carryforwards to offset any taxable income
in all subject years. As a result, no liability for uncertain tax positions has been recorded.
Should the Company need to accrue interest or penalties on uncertain tax positions, it would
recognize the interest as interest expense and the penalties as a general and administrative
expense.
Due to our unexpired NOLs, Cosi could be subject to IRS income tax examination for the tax year
1996 and all subsequent years. We could also be subject to state income tax examinations in certain
states where we have unexpired NOLs.
Note 8 New Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (FASB) issued Update No. 2010-06 (ASU
2010-06), which provides updated guidance on disclosure requirements under Accounting Standards
Codification (ASC) 820 Fair Value Measurements and Disclosures (formerly SFAS 157, Fair Value
Measures). We have adopted ASU 2010-06 as of January 25, 2010. The adoption did not have a
significant impact on the Companys consolidated financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting
bodies that do not require adoption until a future date are not expected to have a significant
impact on our consolidated financial statements upon adoption.
Note 9 Rights Offering and Private Placement of Common Stock
On January 6, 2010, we completed a shareholders rights offering to our shareholders of record as
of November 9, 2009. We issued a total of 10,000,000 shares of our $0.01 par value common stock at
a subscription price of $0.50 per share. In conjunction with the rights offering, our executive
officers and outside directors purchased an aggregate 451,677 shares of our $0.01 par value common
stock, at a subscription price of $0.50 per share, through a private placement. We received, in the
aggregate, net proceeds of approximately $4.9 million from the rights offering and the private
placement of common stock.
Note 10 Subsequent Events
Sale of Assets
On April 27, 2010, we completed the sale of thirteen restaurants and related assets in the
Washington, D.C. market to Capitol C Restaurants LLC (Capitol C) for $8.35 million. The sale was
made pursuant to an Asset Purchase and Sale Agreement dated April 27, 2010, by and among the
Company, Cosi Sandwich Bar, Inc., a wholly-owned subsidiary of the Company, Capitol C and Capitol C Holdings LLC (Holdings), the
parent company of Capitol C. Under the terms of the Asset Purchase and Sale Agreement, $6.4 million
of the purchase price was paid in cash at closing, $1.35 million is to be paid pursuant to a
three-year promissory note and the balance of $0.6 million is being held in escrow subject to the
satisfaction of certain conditions. The restaurants will be operated under franchise agreements
between the Company and Capitol C, and Holdings has entered into a development agreement to open
six additional Cosi restaurants in the District of Columbia area.
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COSI INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) continued
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) continued
As a result of this sale, we will dispose of approximately $3.3 million in net furniture and
fixtures, equipment and leasehold improvements, and recognize a gain on the sale of assets of
approximately $5.0 million during the second
quarter of fiscal 2010. In addition, our current accounts receivable and non-current note
receivable will increase by $0.2 million and $1.75 million, respectively, due to the $1.35 million
promissory note and the $0.6 million held in escrow.
Our 2009 net restaurant sales from the thirteen restaurants sold were approximately $18.7 million
with related restaurant level operating costs and expenses of approximately $16.0 million.
Additionally, there was $1.4 million of depreciation and amortization associated with these
restaurants and $0.9 million of general and administrative costs. Had the sale of these restaurants
occurred on the first day of our fiscal 2009, and assuming these restaurants generated the same
level of sales when operated by Capitol C, the franchise royalty income recognized from these
thirteen restaurants would have been approximately $0.9 million for fiscal 2009. This would have
resulted in a reduction in our fiscal 2009 net loss of approximately $0.6 million.
The pro forma financial statements which were previously filed by the Company with the SEC on a
Current Report on Form 8-K on April 30, 2010 are hereby incorporated by reference.
Regaining Compliance with NASDAQ Listing Standards
On April 27, 2010 we received notice from the Listing Qualifications Department of The NASDAQ
Stock Market that we have regained compliance with the NASDAQ Listing Standards by curing our bid
price and stockholders equity deficiencies. As of April 21, 2010, the bid price of our common
stock had closed above the $1.00 minimum requirement for a period of 10 consecutive trading days.
Additionally, based on total shares outstanding of 51,551,201, our common stock has exceeded
the alternative minimum $50 million market value of listed securities requirement as required by
Listing Rule 5450(b)(2)(A). We now meet all continued listing standards for the NASDAQ Global
Market. As a result, we were removed from the hearings process and the scheduled hearing before the
NASDAQ Hearings Panel was cancelled.
11
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Item 2: | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis of our financial condition and results of operations for the
fiscal quarters ended March 29, 2010 and March 30, 2009 should be read in conjunction with
Selected Consolidated Financial Data and our audited consolidated financial statements and the
notes to those statements that are in our 2009 Annual Report on Form 10-K. Our discussion contains
forward-looking statements based upon current expectations that involve risks and uncertainties,
such as our plans, objectives, expectations and intentions. Actual results and the timing of
events could differ materially from those anticipated in these forward-looking statements as a
result of a number of factors, including those set forth under Cautionary Note Regarding
Forward-Looking Statements below and elsewhere in this Quarterly Report.
OVERVIEW
System wide restaurants:
For the Three Months Ended | ||||||||||||||||||||||||
March 29, 2010 | March 30, 2009 | |||||||||||||||||||||||
Company- | Company- | |||||||||||||||||||||||
Owned | Franchise | Total | Owned | Franchise | Total | |||||||||||||||||||
Restaurants at beginning of
period |
99 | 46 | 145 | 101 | 50 | 151 | ||||||||||||||||||
New restaurants opened |
| | | | 1 | 1 | ||||||||||||||||||
Restaurants permanently closed |
| 2 | 2 | 4 | 3 | 7 | ||||||||||||||||||
Restaurants at end of period |
99 | 44 | 143 | 97 | 48 | 145 | ||||||||||||||||||
As of March 29, 2010 there were 99 Company-owned and 44 franchised premium convenience
restaurants operating in 18 states, the District of Columbia, and the United Arab Emirates (UAE).
Subsequent to the first quarter of fiscal 2010, we sold thirteen company-owned restaurants in the
District of Columbia to a franchisee (see Note 10). Subsequent to this sale, there are 86
Company-owned and 57 franchised premium convenience restaurants. During the first quarter of fiscal
2010, we closed two franchised restaurants, one in Minnesota and one in the UAE. During the first
quarter of fiscal 2009, one new franchised restaurant opened in the UAE. In addition, during the
first quarter of fiscal 2009, we closed four underperforming Company-owned and three franchised
restaurants, of which three were in the Chicago area, two were in Pennsylvania, and two were in New
Jersey.
Our restaurants offer innovative, savory, made-to-order products featuring our authentic
hearth-baked crackly crust signature Cosi bread and fresh distinctive ingredients. We maintain a
pipeline of new menu offerings that are introduced seasonally through limited time offerings to
keep our products relevant to our target customers. Our menu features high-quality sandwiches,
freshly-tossed salads, Cosi bagels, hot melts, flatbread pizzas, Smores and other desserts, and a
variety of coffees along with other soft drink beverages, bottled beverages including premium still
and sparkling water, teas, alcoholic beverages, and other specialty coffees. Our restaurants offer
lunch and afternoon coffee in a counter-service format, with most offering breakfast and/or dinner
and dessert menus as well. We operate our Company-owned restaurants in two formats: Cosi and Cosi
Downtown. Cosi Downtown restaurants, which are located in nonresidential central business
districts, close for the day in the early evening, while Cosi restaurants offer dinner and dessert
in a casual dining atmosphere.
We are currently eligible to offer franchises in 47 states and the District of Columbia. We offer
franchises to area developers and individual franchise operators. The initial franchise fee,
payable to us, for both an area developer and an individual franchise operator, is $40,000 for the
first restaurant and $35,000 for each additional restaurant.
We believe that offering Cosi® franchised restaurants to area developers and individual franchisees
offers the prospects of strong financial returns. By franchising, we believe we will be able to
increase the presence of our
restaurants in various markets throughout the country and generate additional revenue without the
large upfront capital commitments and risk associated with opening Company-owned restaurants.
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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 we expect that Company-owned restaurants (restaurants that we own as opposed
to franchised restaurants) will always be an important part of our new restaurant growth.
We also continue to explore strategic opportunities with our Cosi Pronto (our grab-and-go concept)
and full-service concepts in educational establishments, airports, train stations and other public
venues that meet our operating and financial criteria.
Recent Developments
Sale of Assets
On April 27, 2010, we completed the sale of thirteen restaurants and related assets in the
Washington, D.C. market to Capitol C Restaurants LLC (Capitol C) for $8.35 million. The sale was
made pursuant to an Asset Purchase and Sale Agreement dated April 27, 2010, by and among the
Company, Cosi Sandwich Bar, Inc., a wholly-owned subsidiary of the Company, Capitol C and Capitol C
Holdings LLC (Holdings), the parent company of Capitol C. Under the terms of the Asset Purchase
and Sale Agreement, $6.4 million of the purchase price was paid in cash at closing, $1.35 million
is to be paid pursuant to a three-year promissory note and the balance of $0.6 million is being
held in escrow subject to the satisfaction of certain conditions. The restaurants will be operated
under franchise agreements between the Company and Capitol C, and Holdings has entered into a
development agreement to open six additional Cosi restaurants in the District of Columbia area.
As a result of this sale, we will dispose of approximately $3.3 million in net furniture and
fixtures, equipment and leasehold improvements, and recognize a gain on the sale of assets of
approximately $5.0 million during the second quarter of fiscal 2010. In addition, our current
accounts receivable and non-current note receivable will increase by $0.2 million and $1.75
million, respectively, due to the $1.35 million promissory note and the $0.6 million held in
escrow.
Our 2009 net restaurant sales from the thirteen restaurants sold were approximately $18.7 million
with related restaurant level operating costs and expenses of approximately $16.0 million.
Additionally, there was $1.4 million of depreciation and amortization associated with these
restaurants and $0.9 million of general and administrative costs. Had the sale of these restaurants
occurred on the first day of our fiscal 2009, and assuming these restaurants generated the same
level of sales when operated by Capitol C, the franchise royalty income recognized from these
thirteen restaurants would have been approximately $0.9 million for fiscal 2009. This would have
resulted in a reduction in our fiscal 2009 net loss of approximately $0.6 million.
The pro forma financial statements which were previously filed by the Company with the SEC on a
Current Report on Form 8-K on April 30, 2010 are hereby incorporated by reference.
Regaining Compliance with NASDAQ Listing Standards
On April 27, 2010 we received notice from the Listing Qualifications Department of The NASDAQ
Stock Market that we have regained compliance with the NASDAQ Listing Standards by curing our bid
price and stockholders equity deficiencies. As of April 21, 2010, the bid price of our common
stock had closed above the $1.00 minimum requirement for a period of 10 consecutive trading days.
Additionally, based on total shares outstanding of 51,551,201, our common stock has exceeded
the alternative minimum $50 million market value of listed securities requirement as required by
Listing Rule 5450(b)(2)(A). We now meet all continued listing standards for the NASDAQ Global
Market. As a result, we were removed from the hearings process and the scheduled hearing before the
NASDAQ Hearings Panel was cancelled.
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CRITICAL ACCOUNTING POLICIES
The preparation of the consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America (US GAAP) requires the appropriate application
of certain accounting policies, many of which require us to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results may differ from those estimates.
We believe the application of our accounting policies, and the estimates inherently required
therein, are reasonable and generally accepted for companies in the restaurant industry. We believe
that the following addresses the more critical accounting policies used in the preparation of our
consolidated financial statements and require managements most difficult and subjective judgments,
often as a result of the need to make estimates about the effect of matters that are inherently
uncertain.
Long Lived Assets: ASC 360-10-35 Property, Plant, & Equipment requires management judgments
regarding the future operating and disposition plans for marginally-performing assets, and
estimates of expected realizable values for assets to be sold. The application of this standard has
affected the amount and timing of charges to operating results that have been significant in recent
years. We evaluate possible impairment at the individual restaurant level periodically and record
an impairment loss whenever we determine impairment factors are present. We consider a history of
poor financial operating performance to be the primary indicator of potential impairment for
individual restaurant locations. We determine whether a restaurant location is impaired based on
expected undiscounted cash flows, generally for the remainder of the lease term, and then determine
the impairment charge based on discounted cash flows for the same period. Restaurants are not
considered for impairment during the ramp-up period before they enter the comparable restaurant
base, unless specific circumstances warrant otherwise.
Lease Termination Charges: ASC 820-30 Exit or Disposal Cost Obligations requires companies to
recognize costs associated with exit or disposal activities when they are incurred, rather than at
the end of a commitment to an exit or disposal plan. For all exit activities, we estimate our
likely liability under contractual leases for restaurants that have been closed. Such estimates
have affected the amount and timing of charges to operating results and are impacted by
managements judgments about the time it may take to find a suitable subtenant or assignee, or the
terms under which a termination of the lease agreement may be negotiated with the landlord.
Accounting for Lease Obligations: In accordance with ASC 840-25 Leases, we recognize rent expense
on a straight-line basis over the lease term commencing on the date we take possession. We include
any rent escalations, rent abatements during the construction period and any other rent holidays in
our straight-line rent expense calculation.
Landlord Allowances: In accordance with ASC 840-25 Leases, we record landlord allowances as
deferred rent in other long-term liabilities on the consolidated balance sheets and amortize them
on a straight-line basis over the term of the related leases.
Stock-Based Compensation Expense: In accordance with ASC 718-10-25 Compensation Stock
Compensation, we recognize stock-based compensation expense according to the fair value recognition
provision, which generally requires, among other things, that all employee share-based compensation
be measured using a fair value method and that all the resulting compensation expense be recognized
in the financial statements.
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We measure the estimated fair value of our granted stock options using a Black-Scholes pricing
model and of our restricted stock based on the fair market value of a share of registered stock on
the date of grant. The weighted average fair values of the stock options granted through 2005, the
last time we issued stock options, were determined using the Black-Scholes option-pricing model.
We estimate stock option forfeitures in calculating the expense relating to stock-based
compensation. The expected
volatility is based on an average of the historical volatility of the Companys stock, the implied
volatility of market options, peer company volatility, and other factors. The average expected life
represents the period of time that stock option grants are expected to be outstanding and is
derived from historical terms and other factors. The risk-free interest rate is based on the rate
of U.S. Treasury zero-coupon issues with remaining term equal to the expected life of stock option
grants.
Income Taxes: We have recorded a full valuation allowance to reduce our deferred tax assets that
relate primarily to net operating loss carryforwards. Our determination of the valuation allowance
is based on an evaluation of whether it is more likely than not that we will be able to utilize the
net operating loss carryforwards based on the Companys operating results. A positive adjustment to
income will be recorded in future years if we determine that we could realize these deferred tax
assets.
We have adopted the provisions of ASC 740-10 Income Taxes beginning in fiscal 2007. No adjustment
was made to the beginning retained earnings balance, as the ultimate deductibility of all tax
positions is highly certain but there is uncertainty about the timing of such deductibility. No
interest or penalties have been accrued relative to tax positions due to the Company having either
a tax loss or net operating loss carryforwards to offset any taxable income in all subject years.
As a result, no liability for uncertain tax positions has been recorded.
REVENUE
Restaurant Net Sales. Our company-owned and operated restaurant sales are composed almost entirely
of food and beverage sales. We record revenue at the time of the purchase of our products by our
customers.
Franchise Fees and Royalties. Franchise fees and royalties includes fees earned from franchise
agreements entered into with area developers and franchise operators as well as royalties received
based on sales generated at franchised restaurants. We recognize the franchise fee in the period in
which a franchise location opens or when fees are forfeited as a result of a termination of an area
development agreement. We recognize franchise royalties in the period in which sales are made by
our franchise operators.
Gift Card Sales. We offer our customers the opportunity to purchase gift cards at our restaurants
and through our website. Customers can purchase these cards at varying dollar amounts. At the time
of purchase by the customer, we record a gift card liability for the face value of the card
purchased. We recognize the revenue and reduce the gift card liability when the gift card is
redeemed. We do not reduce our recorded liability for potential non-use of purchased gift cards.
COMPARABLE RESTAURANT SALES
In calculating comparable restaurant sales, we include a restaurant in the comparable restaurant
base after it has been in operation for 15 full months. We remove from the comparable restaurant
base any restaurant that is temporarily shut down for remodeling for a complete period in the
period that it is shut down. At March 29, 2010 and March 30, 2009, there were 97 and 96 restaurants
in our comparable restaurant base, respectively.
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COSTS AND EXPENSES
Cost of Food and Beverage. Cost of food and beverage is composed of food and beverage costs. Food
and beverage costs are variable and fluctuate with sales volume.
Restaurant Labor and Related Benefits. The costs of restaurant labor and related benefits include
direct hourly and management wages, bonuses, payroll taxes, health insurance and all other fringe
benefits.
Occupancy and Other Restaurant Operating Expenses. Occupancy and other restaurant operating
expenses include direct restaurant-level operating expenses, including the cost of paper and
packaging, supplies, repairs and maintenance, utilities, rent and related occupancy costs.
General and Administrative Expenses. General and administrative expenses include all corporate and
administrative functions that support our restaurants and provide an infrastructure to operate our
business. Components of these expenses include executive management costs; supervisory and staff
salaries; non-field stock-based compensation expense; non-field bonuses and related taxes and
employee benefits; travel; information systems; training; support center rent and related occupancy
costs; and professional and consulting fees. The salaries, bonuses and employee benefits costs
included as general and administrative expenses are generally more fixed in nature and do not vary
directly with the number of restaurants we operate. Stock-based compensation expense includes the
charges related to recognizing the fair value of stock options and restricted stock as compensation
for awards to certain key employees and non-employee directors, except the costs related to
stock-based compensation for restaurant employees which are included in restaurant labor and
related benefits.
Depreciation and Amortization. Depreciation and amortization principally relates to restaurant
assets. We use the straight-line method of depreciation.
Restaurant Pre-opening Expenses. Restaurant pre-opening expenses are expensed as incurred and
include the costs of recruiting, hiring and training the initial restaurant work force, travel, the
cost of food and labor used during the period before opening, the cost of initial quantities of
supplies and other direct costs related to the opening or remodeling of a restaurant. Pre-opening
expenses also include rent expense recognized on a straight-line basis from the date we take
possession through the period of construction, renovation and fixturing prior to opening the
restaurant.
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RESULTS OF OPERATIONS
Our operating results for the three month periods ended March 29, 2010 and March 30, 2009,
expressed as a percentage of total revenues (except where otherwise noted), were as follows:
Three Months Ended | ||||||||
March 29, | March 30, | |||||||
2010 | 2009 | |||||||
Revenues: |
||||||||
Restaurant net sales |
98.1 | % | 98.1 | % | ||||
Franchise fees and royalties |
1.9 | 1.9 | ||||||
Total revenues |
100.0 | 100.0 | ||||||
Cost and expenses: |
||||||||
Cost of food and beverage (1) |
23.4 | 22.2 | ||||||
Restaurant labor and related benefits (1) |
39.4 | 38.2 | ||||||
Occupancy and other restaurant operating expenses
(1) |
33.4 | 31.9 | ||||||
96.2 | 92.3 | |||||||
General and administrative expenses |
12.0 | 13.4 | ||||||
Depreciation and amortization |
5.0 | 6.9 | ||||||
Restaurant pre-opening expenses |
| | ||||||
Closed store costs |
| 0.2 | ||||||
Lease termination expense |
| 0.7 | ||||||
Gain on sale of asssets |
(0.3 | ) | | |||||
Total costs and expenses |
111.1 | 111.6 | ||||||
Operating loss |
(11.1 | ) | (11.6 | ) | ||||
Interest income |
| | ||||||
Interest expense |
| | ||||||
Other income |
| | ||||||
Net loss |
(11.1 | )% | (11.6 | )% | ||||
(1) | These are expressed as a percentage of restaurant net sales versus all other items
expressed as a percentage of total revenues. |
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Restaurant Net Sales
Restaurant net sales | ||||||||
as a % of total | ||||||||
(in thousands) | revenues | |||||||
Quarter ended March 29, 2010 |
$ | 27,074 | 98.1 | % | ||||
Quarter ended March 30, 2009 |
$ | 28,124 | 98.1 | % |
Restaurant net sales. Restaurant net sales decreased 3.7%, or approximately $1.1 million,
during the first quarter of fiscal 2010 as compared to the first quarter of fiscal 2009. This was
due primarily to the decrease of 4.3%, or approximately $1.2 million, in net sales in our
comparable restaurant base and $0.3 million in net sales related to Company-owned restaurants
closed during and subsequent to the first quarter of fiscal 2009, partially offset by $0.5 million
of net sales at new restaurants not yet in their sixteenth month of operation as of March 29, 2010.
Comparable net sales for the quarter were adversely impacted in the month of February by severe
winter weather across the mid-atlantic and northeast regions where we have a high concentration of
Company-owned restaurants. For comparable restaurants, during the first quarter of fiscal 2010, our
average guest check increased 1.3% and our transaction count decreased 5.6% compared to the first
quarter of fiscal 2009. The increase in average check was largely due to higher catering sales in
the quarter as compared to the prior year.
Franchise Fees and Royalties
Franchise fees and royalties | ||||||||
as a % of total | ||||||||
(in thousands) | revenues | |||||||
Quarter ended March 29, 2010 |
$ | 525 | 1.9 | % | ||||
Quarter ended March 30, 2009 |
$ | 542 | 1.9 | % |
Franchise fees and royalties. Franchise fees and royalties decreased by 3.1%, or approximately
$0.02 million, to approximately $0.5 million in the first quarter of fiscal 2010, as compared to
the first quarter of fiscal 2009, due primarily to a $0.01 million decrease in franchise fees
resulting from no franchise restaurant openings during the fiscal 2010 first quarter as compared to
one franchise restaurant opening during the prior year quarter as well as approximately $0.01
million decrease in royalties resulting from lower franchise sales due in part to fewer franchise
restaurants in operation during the first quarter of 2010 as compared to the prior year quarter.
Costs and Expenses
Cost of food and beverage | ||||||||
as a % of restaurant | ||||||||
(in thousands) | net sales | |||||||
Quarter ended March 29,
2010 |
$ | 6,329 | 23.4 | % | ||||
Quarter ended March 30,
2009 |
$ | 6,237 | 22.2 | % |
Cost of food and beverage. The increase in the cost of food and beverage as a percentage of
restaurant net sales during the first quarter of fiscal 2010 as compared to the comparable prior
year period is due primarily to the impact on menu mix of certain new products and limited time
offerings which had a higher than average cost for the product category.
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Restaurant labor and related benefits | ||||||||
as a % of restaurant | ||||||||
(in thousands) | net sales | |||||||
Quarter ended March
29, 2010 |
$ | 10,664 | 39.4 | % | ||||
Quarter ended March
30, 2009 |
$ | 10,744 | 38.2 | % |
Restaurant labor and related benefits. The increase in restaurant labor and related benefits
as a percentage of restaurant net sales during the first quarter of fiscal 2010, as compared to the
first quarter of fiscal 2009, is due primarily to the deleveraging effect on our fixed manager
salaries and hourly labor of the decrease in comparable restaurant net sales primarily related to
the severe winter weather experienced in some of our markets during February 2010 as well as the
impact of higher state unemployment taxes.
Occupancy and other restaurant | ||||||||
operating expenses | ||||||||
as a % of restaurant | ||||||||
(in thousands) | net sales | |||||||
Quarter ended March 29,
2010 |
$ | 9,044 | 33.4 | % | ||||
Quarter ended March 30,
2009 |
$ | 8,967 | 31.9 | % |
Occupancy and other restaurant operating expenses. The increase in occupancy and other
restaurant operating expenses, as a percentage of sales, during the first quarter of fiscal 2010,
as compared to the first quarter of fiscal 2009, is due primarily to the deleveraging of occupancy
costs against decreased sales at our comparable restaurant base and higher costs in the first
quarter of 2010 as compared to the first quarter of 2009 for repairs and maintenance of the
restaurants.
General and administrative expenses | ||||||||
as a % of total | ||||||||
(in thousands) | revenues | |||||||
Quarter ended March 30, 2010 |
$ | 3,321 | 12.0 | % | ||||
Quarter ended March 30, 2009 |
$ | 3,834 | 13.4 | % |
General and administrative expenses. The decrease in general and administrative costs during
the first quarter of fiscal 2010, as compared to the first quarter of fiscal 2009, is due to labor
savings resulting from administrative workforce reductions that occurred during fiscal 2009, higher
board fees during the first quarter of fiscal 2009 associated with the work of the special
committee for reviewing strategic alternatives, lower legal costs, lower costs for third-party
information technology services and lower stock-based compensation costs.
Depreciation and amortization | ||||||||
as a % of total | ||||||||
(in thousands) | revenues | |||||||
Quarter ended March 29, 2010 |
$ | 1,380 | 5.0 | % | ||||
Quarter ended March 30, 2009 |
$ | 1,964 | 6.9 | % |
Depreciation and amortization. The lower depreciation and amortization costs during the first
quarter of fiscal 2010, as compared to the first quarter of fiscal 2009 is due primarily to the
impact of impairments recorded during and
subsequent to the first quarter of fiscal 2009 as well as the continued depreciation and
amortization of our comparable restaurant base.
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Restaurant pre-opening expenses | ||||||||
as a % of total | ||||||||
(in thousands) | revenues | |||||||
Quarter ended March 29, 2010 |
$ | | 0.0 | % | ||||
Quarter ended March 30, 2009 |
$ | 4 | 0.0 | % |
Restaurant pre-opening expenses. We did not incur any restaurant pre-opening expenses during
the first quarter of fiscal 2010. The restaurant pre-opening expenses during the first quarter of
fiscal 2009 were related to the conversion of one franchise restaurant in Minnesota to a
Company-owned restaurant subsequent to the first quarter of fiscal 2009.
Closed store costs | ||||||||
as a % of total | ||||||||
(in thousands) | revenues | |||||||
Quarter ended March 29, 2010 |
$ | | 0.0 | % | ||||
Quarter ended March 30, 2009 |
$ | 43 | 0.2 | % |
Closed store costs. We did not incur any closed store costs during the first quarter of fiscal
2010. The closed store costs for the three-month period ended March 30, 2009, are related to three
underperforming locations where we negotiated early exit agreements with the landlords and closed
those locations during the first quarter of fiscal 2009 and one underperforming location that
closed at the expiration of the operating lease also during the first quarter of fiscal 2009.
Lease termination expense | ||||||||
as a % of total | ||||||||
(in thousands) | revenues | |||||||
Quarter ended March 29, 2010 |
$ | 1 | 0.0 | % | ||||
Quarter ended March 30, 2009 |
$ | 202 | 0.7 | % |
Lease termination expense. The lease termination charge during the first quarter of fiscal
2010 was not material. The lease termination charge during the first quarter of fiscal 2009 is
related to an underperforming location in the Midwest region where we reached an early exit
agreement with the landlord.
Gain on sale of assets | ||||||||
as a % of total | ||||||||
(in thousands) | revenues | |||||||
Quarter ended March 29, 2010 |
$ | 87 | 0.3 | % | ||||
Quarter ended March 30, 2009 |
$ | | 0.0 | % |
Gain on Sale of Assets. The gain recognized during the first quarter of fiscal 2010 is related
to the sale of a liquor license.
Net loss | ||||||||
as a % of total | ||||||||
(in thousands) | revenues | |||||||
Quarter ended March 29, 2010 |
$ | (3,054 | ) | (11.1 | %) | |||
Quarter ended March 30, 2009 |
$ | (3,326 | ) | (11.6 | %) |
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Net loss. The approximately $0.3 million decrease in our net loss during the first quarter of
fiscal 2010, as compared to the first quarter of fiscal 2009, is due primarily to a $0.5 million
decrease in general and administrative expenses as well as $0.6 million decrease in depreciation
expense, partially offset by lower restaurant operating margins resulting from the decrease in net
sales in our comparable restaurant base.
Subsequent event. On April 27, 2010, pursuant to an Asset Purchase and Sale Agreement, the Company
completed the sale of thirteen restaurants and related assets in the Washington, D.C. market to
Capitol C for $8.35 million. Under the terms of this agreement, $6.4 million of the purchase price
was paid in cash at closing, $1.35 million is to be paid pursuant to a three-year promissory note
and the balance of $0.6 million is being held in escrow subject to the satisfaction of certain
conditions.
As a result of this sale, we will dispose of approximately $3.3 million in net furniture and
fixtures, equipment and leasehold improvements, and recognize a gain on the sale of assets of
approximately $5.0 million during the second quarter of fiscal 2010. In addition, our current
accounts receivable and non-current note receivable will increase by $0.2 million and $1.75
million, respectively, due to the $1.35 million promissory note and the $0.6 million held in
escrow.
Our 2009 net restaurant sales from the thirteen restaurants sold were approximately $18.7 million
with related restaurant level operating costs and expenses of approximately $16.0 million.
Additionally, there was $1.4 million of depreciation and amortization associated with these
restaurants and $0.9 million of general and administrative costs. Had the sale of these restaurants
occurred on the first day of our fiscal 2009, and assuming these restaurants generated the same
level of sales when operated by Capitol C, the franchise royalty income recognized from these
thirteen restaurants would have been approximately $0.9 million for fiscal 2009. This would have
resulted in a reduction in our fiscal 2009 net loss of approximately $0.6 million.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were approximately $7.1 million on March 29, 2010, compared with $4.1
million on December 28, 2009. We had negative working capital of ($2.5) million on March 29, 2010,
compared with negative working capital of ($5.6) million as of December 28, 2009. The increase in
working capital as of the first quarter of fiscal 2010 is primarily due to the net proceeds of $4.9
million received from our rights offering (see Note 9), partially offset by the funding of the
operating loss for the period. Our principal requirements for cash in 2010 will be for working
capital needs and routine maintenance of our existing restaurants.
Net cash used in operating activities during the three-month period ended March 29, 2010, was
approximately $2.0 million compared with $0.9 million of net cash used in operating activities in
the three month period ended March 30, 2009. The increase in cash used in operating activities
during the first quarter of fiscal 2010 was the result of a higher year-over-year operating loss
net of depreciation expense and the payment of certain lease termination and legal settlement
obligations.
Total cash provided by investing activities was approximately $0.05 million compared to total cash
used in investing activities of $0.1 million during the first quarter of fiscal 2009. The
year-over-year increase in cash provided from investing activities is due to the proceeds of the
sale of a liquor license partially offset by capital expenditures primarily for maintenance of
existing Company-owned restaurants.
Cash provided by financing activities of approximately $4.9 million during the first quarter of
fiscal 2010 is from proceeds associated with the shareholder rights offering and the private
placement of shares to our executive officers
and outside directors (see Note 9).
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We do not have any current plans to open additional Company-owned restaurants during the remainder
of fiscal 2010. However, we will continue to seek out and assess opportunities to develop new
Company-owned locations in existing markets. We do expect to incur capital maintenance costs on
existing Company-owned restaurants during fiscal 2010. As we currently have no credit facility or
available line of credit, we expect to fund any required capital maintenance costs on existing
Company-owned locations or required capital for new restaurant development, if any, from cash and
cash equivalents on hand, including the cash proceeds from the sale of thirteen Company-owned
restaurants in the District of Columbia, which was successfully completed subsequent to the end of
the first quarter of fiscal 2010 (see Note 10), expected cash flows generated by existing
Company-owned restaurants, and expected franchise fees and royalties.
We believe that our current cash and cash equivalents, the proceeds from the completed rights
offering, the proceeds from the sales of the thirteen Company-owned restaurants in the District of
Columbia, and the expected cash flows from Company-owned restaurant operations and expected
franchise fees and royalties will be sufficient to fund our cash requirements for working capital
needs and maintenance of existing restaurant locations for the next twelve months and for new
Company-owned restaurant development, if any. Our conclusion is based on our expected performance
for fiscal 2010 and includes a sensitivity analysis that projects varying levels of decline in
consumer demand. The range of levels selected was based on our reasonable expectation of demand
given the seasonality of our historical performance and the potential impact the current economic
environment may have on consumer spending. In analyzing our capital cash outlays during the first
quarters of fiscal 2010 and fiscal 2009, 70.6% and 59.1%, respectively, of our capital expenditures
were spent on repair and maintenance costs associated with existing Company-owned locations. We
currently do not expect significant levels of cash outlays for capital expenditures during the
remainder of fiscal 2010.
If our Company-owned restaurants do not generate the cash flow levels that we expect, if new
franchised restaurants do not open according to our expectations, if we do not generate the
franchise fees and royalties that we currently expect, if we incur significant unanticipated cash
requirements beyond our normal liquidity needs, or if we experience other unforeseen circumstances
then, in order to fund our cash requirements, we may have to cease new Company-owned restaurant
development efforts and may have to effect further labor reductions in general and administrative
support functions, seek to sell certain Company-owned locations to franchisees and/or other third
parties, seek other sources of financing or take other actions necessitated by the impact of such
unanticipated circumstances.
There can be no assurance that we will be able to obtain such financing or sell Company-owned
locations to franchisees or other third parties or that we will be able to do so in a timely manner
and on acceptable terms to meet our requirements. Given the continued instability in the credit and
financial markets, it may be difficult for the Company to obtain additional financing and for
franchisees to obtain the financing necessary to open restaurants or to acquire Company-owned
locations. An inability to access additional sources of liquidity to fund our cash needs could
materially adversely affect our financial condition and results of operations.
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We have entered into agreements that create contractual obligations. These obligations will have
an impact on future liquidity and capital resources. The table below presents a summary of these
obligations as of March 29, 2010:
Payments Due by Period | ||||||||||||||||||||
(in thousands) | ||||||||||||||||||||
Due | Due | Due | ||||||||||||||||||
Total | Due | Fiscal 2011 | Fiscal 2013 | After | ||||||||||||||||
Description | Obligations | Fiscal 2010 | to Fiscal 2012 | to Fiscal 2014 | Fiscal 2014 | |||||||||||||||
Long-term debt (1) |
$ | 50 | $ | 25 | $ | 25 | $ | | $ | | ||||||||||
Operating leases (2) |
72,742 | 12,050 | 29,313 | 19,562 | 11,817 | |||||||||||||||
Other long-term liabilities (3) |
869 | 315 | 554 | | | |||||||||||||||
Total contractual cash
obligations |
$ | 73,661 | $ | 12,390 | $ | 29,892 | $ | 19,562 | $ | 11,817 | ||||||||||
(1) | Amounts shown include aggregate scheduled interest payments of $0.005 million. The principal
amount of the debt, net of interest obligations, is included in the other long-term liabilities, in
the attached consolidated balance sheets. This obligation is related to a trademark infringement
settlement. |
|
(2) | Amounts shown are net of an aggregate $0.1 million of sub-lease rental income due under
non-cancelable subleases and include accrued contractual lease increases of approximately an
aggregate $4.3 million, which are included in other long-term liabilities in the attached
consolidated balance sheets. |
|
(3) | These obligations are related to contractual obligations for lease termination
agreements and for two obligations related to legal settlements. These obligations are non-interest
bearing and are included in other long-term liabilities in the attached consolidated balance
sheets. |
We are obligated under non-cancelable operating leases for our restaurants and our
administrative offices. Lease terms are generally ten years with renewal options and generally
require us to pay a proportionate share of real estate taxes, insurance and common area and other
operating costs. Some restaurant leases provide for contingent rental payments which are not
included in the above table.
Certain of our lease agreements provide for scheduled rent increases during the lease term or for
rental payments to commence at a date other than the date of initial occupancy. Rent expense is
recognized on a straight-line basis over the term of the respective leases from the date we take
possession. Our 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 and
totaled $4.3 million and $4.4 million as of the end of the first quarter of fiscal 2010 and 2009,
respectively.
Certain of our leases also provide for landlord contributions to offset a portion of the cost of
our leasehold improvements. These allowances are recorded as deferred liabilities and amortized on
a straight-line basis as a reduction to rent expense over the term of the related leases. Included
in other long-term liabilities in the accompanying consolidated balance sheets for the first
quarter of fiscal 2010 and 2009 were landlord allowances of $1.2 million and $1.4 million,
respectively.
As of March 29, 2010, the Company had outstanding approximately $0.2 million in standby letters of
credit, which were provided 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 and are not available for withdrawal by the Company. These amounts are included as a
component of Intangibles, Security Deposits and Other Assets in the accompanying consolidated
balance sheets.
In fiscal 2001, we entered into a settlement agreement involving a trademark dispute. The
settlement agreement requires us to make annual payments of approximately $0.03 million through
2011. The estimated present value of those future payments is included in other liabilities in the
accompanying consolidated balance sheets.
During fiscal 2008, we entered into a settlement agreement involving a claim from a former
employee. The settlement agreement requires us to pay $0.3 million in an initial payment during the
first quarter of fiscal 2009 and another $1.0 million in the aggregate in non-interest bearing
monthly installments thereafter through 2012. The amount of this settlement is included in other
liabilities in the accompanying consolidated balance sheets.
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During fiscal 2009, we entered into a settlement agreement involving a customer claim alleging
damages under the American with Disabilities Act with regard to access at our restaurants. The
settlement requires us to pay $0.08 million in the aggregate in non-interest bearing quarterly
installments commencing in fiscal 2010 through fiscal 2012. The amount of this settlement is
included in other liabilities in the accompanying consolidated first quarter of 2010 balance
sheets.
PURCHASE COMMITMENTS
We have an agreement with Distribution Market Advantage, Inc. (Distribution Marketing Advantage)
that provides us access to a national network of independent distributors. Under this agreement the
independent distributors supply us with approximately 78% of our food and paper products, primarily
under pricing agreements that we negotiate directly with the suppliers. This agreement expires in
November 2010 and we have issued a request for proposal to Distribution Marketing Advantage and
other distribution organizations. We expect to complete the review and evaluation of proposals
during the second quarter of fiscal 2010.
We have a long-term beverage marketing agreement with the Coca-Cola Company. We received a
marketing allowance under this agreement, which is being recognized as a reduction to expense
ratably based on actual products purchased. Although we are eligible to receive additional amounts
under the agreement if certain purchase levels are achieved, no additional amounts have been
received or recorded as of March 29, 2010. During the fourth quarter of fiscal 2009 we amended the
marketing agreement with the Coca-Cola Company to include additional products and higher per unit
amounts against the marketing allowance.
We purchase all contracted coffee products through a single supplier, Coffee Bean International,
Inc. (Coffee Bean International). In the event of a business interruption, Coffee Bean
International is required to utilize the services of a third-party roaster to fulfill its
obligations. If the services of a third-party roaster are used, Coffee Bean International will
guarantee that the product fulfillment standards stated in our contract will remain in effect
throughout such business interruption period. This agreement expires in June 2010 and we have
issued a request for a proposal to Coffee Bean International and other coffee suppliers. We intend
to conclude the review and evaluation of proposals prior to the expiration of the current contract.
Self-Insurance
We have a self-insured group health insurance plan. We are responsible for all covered claims to a
maximum liability of $100,000 per participant during a plan year. Benefits paid in excess of
$100,000 are reimbursed to the plan under our stop-loss policy. In addition, we have an aggregate
stop-loss policy whereby our 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. For our 2010 plan
year, this pre-determined dollar amount is $2.5 million.
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
We caution that any forward-looking statements (as such term is defined in the Private Securities
Litigation Reform Act of 1995) contained or incorporated by reference in this Form 10-Q or made by
our management involve risks and uncertainties and are subject to change based on various important
factors, many of which may be beyond our control. Accordingly, our future performance and financial
results may differ materially from those expressed or implied in any such forward-looking
statements. For these statements, we claim the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995. Any such
forward-looking statements are subject to risks and uncertainties, including, without limitation,
those described in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December,
28, 2009. If any of these risks or uncertainties actually occurs, our business, financial condition
or operating results could be materially and adversely affected, and the trading price of our
common stock could decline. We do not undertake to publicly update or revise our forward-looking
statements even if our future changes make it clear that any projected results expressed or implied
therein will not be realized.
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Listed below are just some of the factors that would impact our forward looking statements:
| the cost of our principal food products and supply and delivery shortages or interruptions; |
|
| labor shortages or increased labor costs; |
| changes in demographic trends and consumer tastes and preferences, including changes
resulting from concerns over nutritional or safety aspects of beef, poultry, produce or other
foods or the effects of food-borne illnesses, such as E.coli, mad cow disease and avian
influenza or bird flu; |
| competition in our markets, both in our existing business and locating suitable restaurant
sites; |
| our operation and execution in new and existing markets; |
| expansion into new markets, including foreign countries; |
| our ability to attract and retain qualified franchisees and our franchisees ability to
open restaurants on a timely basis; |
| our ability to locate suitable restaurant sites in new and existing markets and negotiate
acceptable lease terms; |
| the rate of our internal growth, and our ability to generate increased revenue from our new
and existing restaurants; |
| our ability to generate positive cash flow from existing and new restaurants; |
| fluctuations in our quarterly results due to seasonality; |
| increased government regulation and our ability to secure required governmental approvals
and permits; |
| our ability to create customer awareness of our restaurants in new markets; |
| the reliability of our customer and market studies; |
| cost effective and timely planning, design and build-out of new restaurants; |
| our ability to recruit, train and retain qualified corporate and restaurant personnel and
management; |
| market saturation due to new restaurant openings; |
| inadequate protection of our intellectual property; |
| our ability to obtain additional capital and financing; |
| adverse weather conditions, which impact customer traffic at our restaurants; and |
| adverse economic conditions. |
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The words believe, may, will, should, anticipate, estimate, expect, intend,
objective, seek, plan, strive, project or similar words, or the negatives of these words,
identify forward-looking statements. We qualify any forward-looking statements entirely by these
cautionary factors.
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
Interest Rate Risk
Our market risk exposures are related to our cash and cash equivalents and interest that we may pay
on debt. We have no derivative financial commodity instruments. 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. During the first
quarter of fiscal 2010 we held no short-term investments and, as a result, a hypothetical one
percentage point interest change from those in effect during the first quarter of fiscal 2010 would
not have resulted in a fluctuation of interest income. In the first quarter of fiscals 2010 and
2009, interest income was not material.
Foreign Currency Risk
As of first quarter of fiscal 2010, all of our transactions are conducted, and our accounts
denominated, in U.S. dollars. Accordingly, we are not exposed to foreign currency risk.
Inflation
The primary inflationary factors affecting our business are food and labor costs. Some of our food
costs are subject to fluctuations in commodity prices. Volatility in the commodity markets such as
the wheat and dairy markets can have an adverse impact on our results from operations. Some of our
hourly personnel at our restaurants are paid at rates based on the applicable minimum wage, and
increases in the minimum wage will directly affect our labor costs. Many of our leases require us
to pay taxes, maintenance, repairs, insurance, and utilities, all of which are generally subject to
inflationary increases. Historically, inflation has not had a material impact on our results of
operation.
Item 4. | Controls and Procedures |
Our management, with the participation of our Chief Executive Officer and our Chief Financial
Officer, evaluated the effectiveness of our disclosure controls and procedures as such term is
defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the
Exchange Act), as of the end of the fiscal year covered by this report. Based on this evaluation,
our Chief Executive Officer and our Chief Financial Officer concluded that, as of the end of the
period covered by this report, our disclosure controls and procedures were effective (i) to ensure
that information required to be disclosed by us in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in
the SECs rules and forms and (ii) to ensure that information required to be disclosed by us in the
reports that we submit under the Exchange Act is accumulated and communicated to our management,
including our principal executive and principal financial officers, or persons performing similar
functions, as appropriate, to allow timely decisions regarding required disclosure.
There have been no changes in our internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the first fiscal quarter to
which this report relates that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
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Part II. OTHER INFORMATION
Item 1: | LEGAL PROCEEDINGS |
From time to time, we are a defendant in litigation arising in the ordinary course of our business,
including but not limited to, claims resulting from slip and fall accidents, claims under federal
and state laws governing access to public accommodations or other federal and state laws applicable
to our business operations, employment-related claims, property damages, claims from guests
alleging illness, injury or other food quality, health or operational concerns, and enforcement of
intellectual property rights.
Item 1A: | RISK FACTORS |
In addition to the other information set forth in this report, the factors discussed in Part I.
Item 1A. Risk Factors in our Annual Report on Form 10-K for our 2009 fiscal year could materially
affect the Companys business, financial condition or operating results. There have been no
material changes in our risk factors since our Annual Report on Form 10-K for the year ended
December 28, 2009.
Item 6: | EXHIBITS |
(a) Exhibits:
Exhibit Number | Description | |
Exhibit 31.1 | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
Exhibit 31.2 | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
Exhibit 32.1 | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this Report to be signed on its behalf by the undersigned thereunto duly authorized.
COSI, INC.
Date: May 13, 2010
|
By: | /s/ JAMES HYATT
|
||||
President, | ||||||
Chief Executive Officer, and Director | ||||||
Date: May 13, 2010
|
By: | /s/ WILLIAM KOZIEL
|
||||
Chief Financial Officer (chief accounting officer) | ||||||
Treasurer and Secretary |
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EXHIBIT INDEX
Exhibit 31.1 | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
Exhibit 31.2 | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
Exhibit 32.1 | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
29