Add
COSI to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| COSI > SEC Filings for COSI > Form 10-Q on 8-May-2009 | All Recent SEC Filings |
8-May-2009
Quarterly Report
OVERVIEW
System wide restaurants:
For the Three Months Ended
March 30, 2009 March 31, 2008
Company- Company-
Owned Franchise Total Owned Franchise Total
Restaurants at
beginning of period 101 50 151 107 (a) 34 141
New restaurants
opened - 1 1 - 8 8
Restaurants
permanently closed 4 3 7 5 - 5
Restaurants at end of
period 97 48 145 102 42 144
|
(a) Includes three locations that are classified as discontinued operations
There are currently 98 company-owned and 47 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 2009, one new
franchised Cosi restaurant opened in the District of Columbia, we purchased one
franchised restaurant in Minnesota and are now operating it as a Company-owned
location and one franchised location closed in Florida. 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, three were in the Chicago area,
two were in Pennsylvania, and two were in New Jersey. During the first three
months of fiscal 2008, eight franchised restaurants were opened, including one
in the UAE. Also during the first quarter of fiscal 2008, we closed five
Company-owned restaurants of which two were underperforming locations where the
leases expired and three were locations in the Seattle market where we exited
the market and sold the assets at those locations to a local restaurant
development company that is operating them under a different brand.
Our restaurants offer innovative, savory, made-to-order products featuring our
authentic hearth-baked crackly crust signature Cosi bread and fresh distinctive
ingredients. We maintain a pipeline of new menu offerings that are introduced
seasonally through limited time offerings to keep our products relevant to our
target customers.
Our menu features high-quality sandwiches, freshly tossed salads, Cosi bagels,
Flatbread pizzas, S'mores and other desserts. We feature our authentic
hearth-baked crackly crust signature Cosi bread in two varieties, our original
Rustica and our Etruscan Whole Grain. Our beverage menu features a variety of
house coffees and other specialty coffee drinks, soft drinks, bottled beverages
including premium still and sparkling water and teas. We also offer beer and
wine at most of our locations and an additional limited selection of alcoholic
beverages at some of our locations. Our restaurants offer lunch and afternoon
coffee in a counter service format, with most offering breakfast and/or dinner
and dessert menus as well. We operate our company-owned restaurants in two
formats: Cosi and Cosi Downtown. Cosi Downtown restaurants, which are located in
nonresidential central business districts, close for the day in the early
evening, while Cosi restaurants offer dinner and dessert in a fast casual dining
atmosphere. All our restaurants offer our catering services which include
breakfast baskets, lunch buffets, dessert and fruit platters, and many of our
core menu offerings.
We are currently eligible to offer franchises in 47 states and the District of
Columbia. We offer franchises to area developers and individual franchise
operators. The initial franchise fee, payable to us, for both an area developer
and an individual franchise operator, is $40,000 for the first restaurant and
$35,000 for each additional restaurant.
We expect that company-owned restaurants (restaurants that we own as opposed to
franchised restaurants) will always be an important part of our new restaurant
growth; however, our franchising and area developer models will be key
components of our growth strategy. We believe that our concept, growth potential
and unit-level economics will enable us to attract experienced well-capitalized
area developers. By franchising, we believe we will be able to increase the
presence of our restaurants in various markets throughout the country and
generate additional revenue without the large upfront capital commitments and
risk associated with opening company-owned restaurants.
We also continue to explore strategic opportunities with our Cosi Pronto (our
grab-and-go concept) and full-service concepts in educational establishments,
airports, train stations and other public venues that meet our operating and
financial criteria.
CRITICAL ACCOUNTING POLICIES
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
("GAAP") requires the appropriate application of certain accounting policies,
many of which require us to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenue and expenses during the reporting period. Actual results may differ
from those estimates.
We believe the application of our accounting policies, and the estimates
inherently required therein, are reasonable and generally accepted for companies
in the restaurant industry. We believe that the following addresses the more
critical accounting policies used in the preparation of our consolidated
financial statements and require management's 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: SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, 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 SFAS 144
has affected the amount and timing of charges to operating results that have
been significant in recent years. We evaluate possible impairment at the
individual restaurant level periodically and record an impairment loss whenever
we determine impairment factors are present. We consider a history of poor
financial operating performance to be the primary indicator of potential
impairment for individual restaurant locations. We determine whether a
restaurant location is impaired based on expected undiscounted cash flows,
generally for the remainder of the lease term, and then determine the impairment
charge based on discounted cash flows for the same period. Restaurants are not
considered for impairment during the period before they enter the comparable
restaurant base, unless specific circumstances warrant otherwise.
We did not record any asset impairment charges during the three-month periods
ended March 30, 2009 or March 31, 2008.
Lease Termination Charges: SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, 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 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.
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 an exit agreement with the landlord. During the
first quarter of fiscal 2008, we recorded a lease termination charge of
approximately $0.2 million related to a location
where we made a decision, subsequent to entering into a lease, not to build a
restaurant and reached an agreement with the landlord to terminate the lease.
Accounting for Lease Obligations: In accordance with FASB Technical Bulletin
No. 85-3, Accounting for Operating Leases with Scheduled Rent Increases, 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 FASB Technical Bulletin No. 88-1, Issues
Relating to Accounting for Leases, we record landlord allowances as deferred
rent in other long-term liabilities on the consolidated balance sheets and
amortize them on a straight-line basis over the term of the related leases.
Income Taxes: We have recorded a full valuation allowance to reduce our deferred
tax assets related primarily to net operating loss carryforwards. Our
determination of the valuation allowance is based on an evaluation of whether it
is more likely than not that we will be able to utilize the net operating loss
carryforwards, based on the Company's 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 FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 ("FIN
48"). 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 carry-forwards 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.
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 30, 2009 and March 31, 2008, there were 96 and 91 restaurants in
our comparable restaurant base, respectively.
COSTS AND EXPENSES
Cost of Food and Beverage. Cost of food and beverage is comprised of food and
beverage costs. Food and beverage costs are variable and increase with sales
volume.
Restaurant Labor and Related Benefits. The costs of labor and related benefits
include direct hourly and management wages, bonuses, payroll taxes, health
insurance and all other fringe benefits.
Occupancy and Other Restaurant Operating Expenses. Occupancy and other operating
expenses include direct restaurant level operating expenses, including the cost
of paper and packaging, supplies, restaurant repairs and maintenance, utilities,
rents and related occupancy costs.
General and Administrative Expenses. General and administrative expenses include
all corporate and administrative functions that support our restaurants and
provide an infrastructure to operate our business. Components of these expenses
include executive management costs; supervisory and staff salaries; non-field
stock-based compensation expense; non-field bonuses and related taxes and
employee benefits; travel; information systems; training; support center rent
and related occupancy costs; and professional and consulting fees. The salaries,
bonuses and employee benefits costs included as general and administrative
expenses are generally more fixed in nature and do not vary directly with the
number of restaurants we operate. Stock-based compensation expense includes the
charges related to recognizing the fair value of stock options and restricted
stock as compensation for awards to certain key employees and non-employee
directors, except the costs related to stock-based compensation for restaurant
employees which are included in restaurant labor and related benefits.
Depreciation and Amortization. Depreciation and amortization consists
principally of depreciation and amortization of restaurant assets.
Restaurant Pre-opening Expenses. Restaurant pre-opening expenses, which are
expensed as incurred, include
the costs of recruiting, hiring and training the initial restaurant work force,
travel, the cost of food and labor used during the period before opening, the
cost of initial quantities of supplies and other direct costs related to the
opening or remodeling of a restaurant. Pre-opening expenses also include rent
expense recognized on a straight-line basis from the date we take possession
through the period of construction, renovation and fixturing prior to opening
the restaurant.
RESULTS OF OPERATIONS
Our operating results for the three month periods ended March 30, 2009 and
March 31, 2008, expressed as a percentage of total revenues (except where
otherwise noted), were as follows:
Three Months Ended
March 30, March 31,
2009 2008
Revenues:
Restaurant net sales 98.1 % 97.8 %
Franchise fees and royalties 1.9 2.2
Total revenues 100.0 100.0
Cost and expenses:
Cost of food and beverage (1) 22.2 23.2
Restaurant labor and related benefits (1) 37.7 34.8
Occupancy and other restaurant operating expenses (1) 31.9 29.8
91.8 87.8
General and administrative expenses 13.8 15.2
Depreciation and amortization 6.9 6.4
Restaurant pre-opening expenses - 0.1
Closed store costs 0.2 0.1
Lease termination expense 0.7 0.7
Total costs and expenses 111.6 108.4
Operating loss (11.6 ) (8.4 )
Interest income - 0.1
Interest expense - -
Other income - -
Loss from continuing operations (11.6 ) (8.3 )
Discontinued operations:
Loss from discontinued operations - (0.8 )
Net loss (11.6) % (9.1) %
|
(1) These are expressed as a percentage of restaurant net sales versus all other items expressed as a percentage of total revenues.
Restaurant Net Sales
Restaurant net sales
as a % of total
(in thousands) revenues
Quarter ended March 30, 2009 $ 28,124 98.1 %
Quarter ended March 31, 2008 $ 32,459 97.8 %
|
Restaurant net sales. Restaurant net sales decreased 13.4%, or approximately
$4.3 million, during the first quarter of fiscal 2009 as compared to the first
quarter of fiscal 2008. This was due primarily to the decrease of 11.3%, or
approximately $3.5 million, in net sales in our comparable restaurant base and
$1.0 million of net sales related to Company-owned restaurants closed during and
subsequent to the first quarter of fiscal 2008, partially offset by $0.2 million
of net sales at new restaurants not yet in their sixteenth month of operation as
of March 30, 2009. For comparable restaurants, during the first quarter of
fiscal 2009, our average guest check decreased 2.0% and our transaction count
decreased 9.3% compared to the first quarter of fiscal 2008.
We believe that it is possible that the recent outbreak of the H1N1 influenza A
virus, commonly referred to as the "swine flu", could have an impact on our
sales if the number of new cases continues to increase. To the extent that our
guests have concerns regarding eating in public places due to a perceived
increased risk of exposure to the virus, our sales during the remaining portion
of the fiscal year could be negatively impacted.
Franchise Fees and Royalties
Franchise fees and royalties
as a % of total
(in thousands) revenues
Quarter ended March 30, 2009 $ 542 1.9 %
Quarter ended March 31, 2008 $ 732 2.2 %
|
Franchise fees and royalties. Franchise fees and royalties decreased by 26.0%,
or approximately $0.2 million, to approximately $0.5 million in the first
quarter of fiscal 2009, as compared to the first quarter of fiscal 2008, due
primarily to a $0.2 million decrease in franchise fees, resulting from fewer
franchise restaurant openings during the fiscal 2009 first quarter 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 30, 2009 $ 6,237 22.2 %
Quarter ended March 31, 2008 $ 7,536 23.2 %
|
Cost of food and beverage. The decrease in food and beverage costs as a percentage of net sales during the first quarter of fiscal 2009 as compared to the first quarter of fiscal 2008 is due primarily to the impact of lower year-over-year costs for certain commodities, primarily wheat and dairy products, and the favorable impact of negotiations that resulted in lower pricing for certain protein items.
Restaurant labor and related benefits
as a % of restaurant
(in thousands) net sales
Quarter ended March 30, 2009 $ 10,609 37.7 %
Quarter ended March 31, 2008 $ 11,311 34.8 %
|
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 2009, as compared to the first quarter of fiscal 2008, is due to the impact of the decrease in sales in our comparable restaurant base on our fixed manager salaries and hourly labor.
Occupancy and other restaurant
operating expenses
as a % of restaurant
(in thousands) net sales
Quarter ended March 30, 2009 $ 8,967 31.9 %
Quarter ended March 31, 2008 $ 9,680 29.8 %
|
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 2009, as compared to the first quarter of fiscal 2008, is due primarily to the deleveraging of occupancy costs against decreased sales at our comparable restaurant base and higher marketing and promotional costs partially offset by a decrease in costs for repairs and maintenance.
General and administrative expenses
as a % of total
(in thousands) revenues
Quarter ended March 30, 2009 $ 3,969 13.8 %
Quarter ended March 31, 2008 $ 5,038 15.2 %
|
General and administrative expenses. The decrease in general and administrative costs during the first quarter of fiscal 2009, as compared to the first quarter of fiscal 2008, is due to labor savings resulting from administrative workforce reductions and lower stock-based compensation costs, partially offset by board fees associated with the work of the special committee and higher legal costs associated with the process of reviewing strategic alternatives.
Depreciation and amortization
as a % of total
(in thousands) revenues
Quarter ended March 30, 2009 $ 1,964 6.9 %
Quarter ended March 31, 2008 $ 2,111 6.4 %
|
Depreciation and amortization. The lower depreciation and amortization costs during the first quarter of fiscal 2009, as compared to the first quarter of fiscal 2008 is due primarily to the impact of impairments recorded subsequent to the first quarter of fiscal 2008 as well as the continued depreciation and amortization of our comparable restaurant base, partially offset by higher depreciation and amortization costs related to one new restaurant that opened subsequent to the first quarter of fiscal 2008.
Restaurant pre-opening expenses
as a % of total
(in thousands) revenues
Quarter ended March 30, 2009 $ 4 0.0 %
Quarter ended March 31, 2008 $ 28 0.1 %
|
Restaurant pre-opening expenses. The restaurant pre-opening expenses during the first quarter of fiscal 2009 are related to a new company-owned restaurant that was purchased from a franchisee and started operating as a Company-owned store subsequent to the first quarter of fiscal 2009. Restaurant pre-opening expenses during the first quarter of fiscal 2008 were related to one new Company-owned restaurant that opened during the second quarter of fiscal 2008. During the first quarter of fiscal 2008, approximately 98.9% of restaurant pre-opening expenses were for occupancy costs incurred prior to the opening of the restaurant.
Closed store costs
as a % of total
(in thousands) revenues
Quarter ended March 30, 2009 $ 43 0.2 %
Quarter ended March 31, 2008 $ 32 0.1 %
|
Closed store costs. 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. The closed store costs for the three-month period ended March 31, 2008 are related to two underperforming locations that closed during the quarter at the expiration of their operating leases.
. . .
|
|