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| COSI > SEC Filings for COSI > Form 10-Q on 9-Nov-2009 | All Recent SEC Filings |
9-Nov-2009
Quarterly Report
OVERVIEW
System-wide restaurants:
For the Three Months Ended
September 28, 2009 September 29, 2008
Company- Company-
Owned Franchise Total Owned Franchise Total
Restaurants at
beginning of period 98 44 142 102 43 145
New restaurants opened 1 1 2 - - -
Restaurants
permanently closed - - - 1 - 1
Restaurants at end of
period 99 45 144 101 43 144
For the Nine Months Ended
September 28, 2009 September 29, 2008
Company- Company-
Owned Franchise Total Owned Franchise Total
Restaurants at
beginning of period 101 50 151 107 (a) 34 141
New restaurants opened 2 4 6 1 10 11
Restaurants
permanently closed 4 9 13 7 1 8
Restaurants at end of
period 99 45 144 101 43 144
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(a) Includes three locations that are classified as discontinued operations.
There are currently 99 Company-owned and 46 franchised premium convenience restaurants, including one new franchised restaurant that opened subsequent to the third quarter in the Dulles International Airport in the same location as a franchised restaurant that had closed during the second quarter of fiscal 2009, operating in 18 states, the District of Columbia, and the United Arab Emirates ("UAE"). During the third quarter of fiscal 2009, we opened one new Company-owned restaurant in the Kohl Children's Museum located in Illinois and one new franchised Cosi restaurant opened in the Reagan National Airport in the same location as a franchised restaurant that had closed during the second quarter of fiscal 2009. During the first nine months of fiscal 2009, four new franchised restaurants opened which included one location in the UAE, one location in Boston, one location in the District of Columbia, and location at Reagan National Airport. During the first nine months of fiscal 2009, we also opened one new Company-owned restaurant in the Kohl Children's Museum located in Illinois and we purchased one franchised restaurant in Minnesota and are now operating it as a Company-owned location. In addition, during the first nine months of fiscal 2009, we closed four underperforming Company-owned and nine franchised restaurants, which included three locations in the Chicago area, two in Pennsylvania, two in New Jersey, two in the District of Columbia market, one in Florida, two in the UAE, and one that was purchased from a franchisee and is now operated as a Company-owned location.
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
Rustic and our Etruscan Whole Grain. Our beverage menu features a variety of
house coffees and other specialty coffee drinks, soft drinks, bottled beverages
including premium still and sparkling water and teas. We also offer beer and
wine at most of our locations and an additional limited selection of alcoholic
beverages at some of our locations. Our restaurants offer lunch and afternoon
coffee in a counter service format, with most offering breakfast and/or dinner
and dessert menus as well. We operate our Company-owned restaurants in two
formats: Cosi and Cosi Downtown. Cosi Downtown restaurants, which are located in
nonresidential central business districts, close for the day in the early
evening, while Cosi restaurants offer dinner and dessert in a fast casual dining
atmosphere. All our restaurants offer our catering services which include
breakfast baskets, lunch buffets, dessert and fruit platters, and many of our
core menu offerings.
We are currently eligible to offer franchises in 47 states and the District of
Columbia. We offer franchises to area developers and individual franchise
operators. The initial franchise fee, payable to us, for both an area developer
and an individual franchise operator, is $40,000 for the first restaurant and
$35,000 for each additional restaurant.
We expect that Company-owned restaurants (restaurants that we own as opposed to
franchised restaurants) will always be an important part of our new restaurant
growth; however, our franchising and area developer models will be key
components of our growth strategy. We believe that our concept, growth potential
and unit-level economics will enable us to attract experienced well-capitalized
area developers. By franchising, we believe we will be able to increase the
presence of our restaurants in various markets throughout the country and
generate additional revenue without the large upfront capital commitments and
risk associated with opening Company-owned restaurants.
We also continue to explore strategic opportunities with our Cosi Pronto (our
grab-and-go concept) and full-service concepts in educational establishments,
airports, train stations and other public venues that meet our operating and
financial criteria.
Recent Developments
On September 30, 2009, we filed a registration statement on Form S-3 with the
Securities and Exchange Commission for a rights offering to our existing
stockholders. We plan to make the rights offering through the distribution of
non-transferable subscription rights to purchase shares of our common stock, par
value $0.01 per share, at a subscription price to be determined and subject to
an aggregate ownership limitation equal to 19.9% of our common stock. Assuming
the rights offering is fully subscribed, we expect to receive gross proceeds of
approximately $5 million. We are planning to commence a rights offering in order
to raise equity capital in a cost-effective manner that provides all of our
stockholders the opportunity to participate.
The proposed rights offering will also include an over-subscription privilege,
which will entitle each rights holder that exercises all of its basic
subscription privilege in full the right to purchase additional shares of common
stock that remain unsubscribed at the expiration of the rights offering, subject
to the availability and pro rata allocation of shares among persons exercising
this over-subscription right.
In conjunction with the rights offering, all of our executive officers and
outside directors have agreed to purchase shares that are subject to their basic
subscription privilege, at the same subscription price offered to shareholders,
for an aggregate commitment of $141,501 (which, except for one outside director,
constitutes the full extent of the basic subscription privileges of the
executive officers and directors). In addition, all of our executive officers
and one of our outside directors have agreed to purchase, at the same
subscription price offered to shareholders, shares that would otherwise be
available for purchase by them pursuant to the exercise of their
over-subscription privileges in an aggregate amount of up to $337,211. The total
amount of commitments by the directors and executive officers is $478,712.
A registration statement relating to these securities has been filed with the
SEC but has not yet become effective. The securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. The rights will be issued to all shareholders as of a record date
which has yet to be determined. The subscription price also has yet to be
determined. We will provide notice of the record date and subscription price in
the future at such time as they are determined.
CRITICAL ACCOUNTING POLICIES
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
("GAAP") requires the appropriate application of certain accounting policies,
many of which require us to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenue and expenses during the reporting period. Actual results may differ
from those estimates.
We believe the application of our accounting policies, and the estimates
inherently required therein, are reasonable and generally accepted for companies
in the restaurant industry. We believe that the following addresses the more
critical accounting policies used in the preparation of our consolidated
financial statements and require 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: ASC 360-10-35 Property, Plant, & Equipment requires
management judgments regarding the future operating and disposition plans for
marginally-performing assets, and estimates of expected realizable values for
assets to be sold. The application of this standard has affected the amount and
timing of charges to operating results that have been significant in recent
years. We evaluate possible impairment at the individual restaurant level
periodically and record an impairment loss whenever we determine impairment
factors are present. We consider a history of poor financial operating
performance to be the primary indicator of potential impairment for individual
restaurant locations. We determine whether a restaurant location is impaired
based on expected undiscounted cash flows, generally for the remainder of the
lease term, and then determine the impairment charge based on discounted cash
flows for the same period. Restaurants are not considered for impairment during
the period before they enter the comparable restaurant base, unless specific
circumstances warrant otherwise.
Lease Termination Charges: ASC 820-30 Exit or Disposal Cost Obligations requires
companies to recognize costs associated with exit or disposal activities when
they are incurred, rather than at the end of a commitment to an exit or disposal
plan. For all exit activities, we estimate our likely liability under
contractual leases for restaurants that have been closed. Such estimates have
affected the amount and timing of charges to operating results and are impacted
by 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.
Accounting for Lease Obligations: In accordance with ASC 840-25 Leases, we
recognize rent expense on a straight-line basis over the lease term commencing
on the date we take possession. We include any rent escalations, rent abatements
during the construction period and any other rent holidays in our straight-line
rent expense calculation.
Landlord Allowances: In accordance with ASC 840-25 Leases, we record landlord
allowances as deferred rent in other long-term liabilities on the consolidated
balance sheets and amortize them on a straight-line basis over the term of the
related leases.
Income Taxes: We have recorded a full valuation allowance to reduce our deferred
tax assets related primarily to net operating loss carryforwards. Our
determination of the valuation allowance is based on an evaluation of whether it
is more likely than not that we will be able to utilize the net operating loss
carryforwards based on the 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 ASC 740-10 Income Taxes. No adjustment was
made to the beginning retained earnings balance, as the ultimate deductibility
of all tax positions is highly certain but there is uncertainty about the
timing of such deductibility. No interest or penalties have been accrued
relative to tax positions due to the Company having either a tax loss or net
operating loss carry-forwards to offset any taxable income in all subject years.
As a result, no liability for uncertain tax positions has been recorded.
REVENUE
Restaurant Net Sales. Our Company-owned and operated restaurant sales are
composed almost entirely of food and beverage sales. We record revenue at the
time of the purchase of our products by our customers.
Franchise Fees and Royalties. Franchise fees and royalties includes fees earned
from franchise agreements entered into with area developers and franchise
operators as well as royalties received based on sales generated at franchised
restaurants. We recognize the franchise fee in the period in which a franchise
location opens or when fees are forfeited as a result of a termination of an
area development agreement. We recognize franchise royalties in the period in
which sales are made by our franchise operators.
Gift Card Sales. We offer our customers the opportunity to purchase gift cards
at our restaurants and through our website. Customers can purchase these cards
at varying dollar amounts. At the time of purchase by the customer, we record a
gift card liability for the face value of the card purchased. We recognize the
revenue and reduce the gift card liability when the gift card is redeemed. We do
not reduce our recorded liability for potential non-use of purchased gift cards.
COMPARABLE RESTAURANT SALES
In calculating comparable restaurant sales, we include a restaurant in the
comparable restaurant base after it has been in operation for 15 full months. We
remove from the comparable restaurant base any restaurant that is temporarily
shut down for remodeling for a complete period in the period that it is shut
down. At September 28, 2009 and at September 29, 2008, there were 97 and 98
restaurants in our comparable restaurant base, respectively.
COSTS AND EXPENSES
Cost of Food and Beverage. Cost of food and beverage is comprised of food and
beverage costs. Food and beverage costs are variable and increase with sales
volume.
Restaurant Labor and Related Benefits. The costs of labor and related benefits
include direct hourly and management wages, bonuses, payroll taxes, health
insurance and all other fringe benefits.
Occupancy and Other Restaurant Operating Expenses. Occupancy and other operating
expenses include direct restaurant level operating expenses, including the cost
of paper and packaging, supplies, restaurant repairs and maintenance, utilities,
rents and related occupancy costs.
General and Administrative Expenses. General and administrative expenses include
all corporate and administrative functions that support our restaurants and
provide an infrastructure to operate our business. Components of these expenses
include executive management costs; supervisory and staff salaries; non-field
stock-based compensation expense; non-field bonuses and related taxes and
employee benefits; travel; information systems; training; support center rent
and related occupancy costs; and professional and consulting fees. The salaries,
bonuses and employee benefits costs included as general and administrative
expenses are generally more fixed in nature and do not vary directly with the
number of restaurants we operate. Stock-based compensation expense includes the
charges related to recognizing the fair value of stock options and restricted
stock as compensation for awards to certain key employees and non-employee
directors, except the costs related to stock-based compensation for restaurant
employees which are included in restaurant labor and related benefits.
Depreciation and Amortization. Depreciation and amortization consists
principally of depreciation and amortization of restaurant assets.
Restaurant Pre-opening Expenses. Restaurant pre-opening expenses, which are expensed as incurred, include the costs of recruiting, hiring and training the initial restaurant work force, travel, the cost of food and labor used during the period before opening, the cost of initial quantities of supplies and other direct costs related to the opening or remodeling of a restaurant. Pre-opening expenses also include rent expense recognized on a straight-line basis from the date we take possession through the period of construction, renovation and fixturing prior to opening the restaurant.
RESULTS OF OPERATIONS
Our operating results for the three and nine month periods ended September 28,
2009 and September 29, 2008, expressed as a percentage of total revenues (except
where otherwise noted), were as follows:
Three Months Ended Nine Months Ended
September 28, September 29, September 28, September 29,
2009 2008 2009 2008
Revenues:
Restaurant net sales 98.3 % 97.3 % 98.2 % 97.9 %
Franchise fees and royalties 1.7 2.7 1.8 2.1
Total revenues 100.0 100.0 100.0 100.0
Cost and expenses:
Cost of food and beverage (1) 23.2 22.4 22.6 22.8
Restaurant labor and related benefits (1) 37.5 34.0 36.8 33.7
Occupancy and other restaurant operating
expenses (1) 31.5 30.8 30.8 29.4
92.2 87.2 90.2 85.9
General and administrative expenses 11.6 15.5 12.4 15.8
Depreciation and amortization 5.7 6.2 6.0 6.0
Restaurant pre-opening expenses - - - 0.1
Provision for losses on asset impairments
and disposals - 2.3 0.3 1.0
Closed store costs - - - 0.1
Lease termination expense - 0.2 0.2 0.3
Total costs and expenses 108.1 109.0 107.4 107.3
Operating loss (8.1 ) (9.0 ) (7.4 ) (7.3 )
Interest income - 0.0 - 0.1
Interest expense - - - -
Other income 0.2 0.1 - -
Loss from continuing operations (7.9 ) (8.9 ) (7.4 ) (7.2 )
Discontinued operations:
Loss from discontinued operations - - - (0.3 )
Net loss (7.9 ) (8.9 ) (7.4 ) (7.5 )
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(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 September 28, 2009 $ 29,528 98.3 %
Quarter ended September 29, 2008 $ 33,975 97.3 %
as a % of total
(in thousands) revenues
Nine months ended September 28, 2009 $ 88,667 98.2 %
Nine months ended September 29, 2008 $ 102,641 97.9 %
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Restaurant net sales. Restaurant net sales decreased 13.1%, or approximately
$4.4 million, during the third quarter of fiscal 2009 as compared to the third
quarter of fiscal 2008. This was due primarily to the decrease of 11.9%, or
approximately $3.9 million, in net sales in our comparable restaurant base and
$0.8 million of net sales related to Company-owned restaurants closed during and
subsequent to the third quarter of fiscal 2008, partially offset by $0.3 million
of net sales at new restaurants not yet in their sixteenth month of operation as
of September 28, 2009. For comparable restaurants, during the third quarter of
fiscal 2009, our average guest check decreased 2.4% and our transaction count
decreased 9.5% compared to the third quarter of fiscal 2008.
During the first nine months of fiscal 2009, restaurant net sales decreased
13.6%, or approximately $14.0 million, as compared to the first nine months of
fiscal 2008. This was due primarily to the decrease of 12.0%, or approximately
$11.9 million, in net sales in our comparable restaurant base and $3.0 million
of net sales related to Company-owned restaurants closed during and subsequent
to the third quarter of fiscal 2008, partially offset by $0.9 million of net
sales at new restaurants not yet in their sixteenth month of operation as of
September 28, 2009. For comparable restaurants, during the first nine months of
fiscal 2009, our average guest check decreased 2.4% and our transaction count
decreased 9.6% compared to the first nine months of fiscal 2008.
Franchise Fees and Royalties
Franchise fees and royalties
as a % of total
(in thousands) revenues
Quarter ended September 28, 2009 $ 505 1.7 %
Quarter ended September 29, 2008 $ 955 2.7 %
as a % of total
(in thousands) revenues
Nine months ended September 28, 2009 $ 1,668 1.8 %
Nine months ended September 29, 2008 $ 2,203 2.1 %
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Franchise fees and royalties. Franchise fees and royalties decreased by 47.1%,
or approximately $0.5 million, to approximately $0.5 million in the third
quarter of fiscal 2009, as compared to the third quarter of fiscal 2008, due
primarily to a $0.5 million decrease in franchise fees resulting from the
termination of one area development agreement in the third quarter of fiscal
2008 partially offset by a slight increase in royalties during the third quarter
of fiscal 2009.
During the first nine months of fiscal 2009, franchise fees and royalties
decreased by 24.3%, or approximately $0.5 million, as compared to the first nine
months of fiscal 2008, due primarily to a $0.6 million decrease in franchise
fees resulting from the termination of one area development agreement in the
second quarter of fiscal 2008, fewer store openings in fiscal 2009, and a 3.8%
decrease in royalties during the first nine months of fiscal 2009.
Costs and Expenses
Cost of food and beverage
as a % of restaurant
(in thousands) net sales
Quarter ended September 28, 2009 $ 6,858 23.2 %
Quarter ended September 29, 2008 $ 7,611 22.4 %
as a % of total
(in thousands) revenues
Nine months ended September 28, 2009 $ 20,011 22.6 %
Nine months ended September 29, 2008 $ 23,408 22.8 %
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Cost of food and beverage. The increase in food and beverage costs as a
percentage of net sales during the third quarter of fiscal 2009, as compared to
the third quarter of fiscal 2008, is due primarily to the impact of higher costs
associated with our limited time lobster promotional menu offering during the
fiscal 2009 third quarter as well as the addition of a new steak product to our
menu offerings, partially offset by lower year-over-year costs for certain
commodities, primarily wheat and dairy products.
The decrease in food and beverage costs as a percentage of net sales during the
first nine months of fiscal 2009, as compared to the first nine months of fiscal
2008, is due primarily to lower year-over-year costs for certain commodities,
primarily wheat and dairy products, and the favorable impact of negotiations
. . .
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