| If we are unable to successfully open new restaurants, our revenue growth rate and profits may be reduced |
| To successfully expand our business, we must open new restaurants on schedule and in a profitable manner |
| In the past, we have experienced delays in restaurant openings and we and our franchisees may experience similar delays in the future |
| Delays or failures in opening new restaurants could hurt our ability to meet our growth objectives, which may affect the expectations of securities analysts and others and thus our stock price |
| We cannot guarantee that we or our franchisees will be able to achieve our expansion goals or that new restaurants will be operated profitably |
| Further, any restaurants that we or our franchisees open may not obtain operating results similar to those of our existing restaurants |
| Our ability to expand successfully will depend on a number of factors, many of which are beyond our control |
| These factors include, but are not limited to: • locating suitable restaurant sites in new and existing markets; • negotiating acceptable lease terms; • generating positive cash flow from existing and new restaurants; • successful operation and execution in new and existing markets; • recruiting, training and retaining qualified corporate and restaurant personnel and management; • attracting and retaining qualified franchisees; • cost effective and timely planning, design and build-out of restaurants; • the reliability of our customer and market studies; • consumer trends; • obtaining and maintaining required local, state and federal governmental approvals and permits related to the construction of the sites and the sale of food and alcoholic beverages; • creating customer awareness of our restaurants in new markets; • competition in our markets, both in our business and in locating suitable restaurant sites; • the cost of our principal food products and supply and delivery shortages or interruptions; • weather conditions; and • general economic conditions |
| 6 _________________________________________________________________ [57]Table of Contents We must identify and obtain a sufficient number of suitable new restaurant sites for us to sustain our revenue growth rate |
| We and our franchisees may not be able to find sufficient new restaurant sites to support our planned expansion in future periods |
| We face significant competition from other restaurant companies and retailers for sites that meet our criteria and the supply of sites may be limited in some markets |
| Our inability to obtain suitable restaurant sites at reasonable costs may reduce our growth rate, which may affect the expectations of securities analysts and others and thus our stock price |
| Our expansion in existing markets can cause sales in some of our existing restaurants to decline, which could result in restaurant closures |
| As part of our expansion strategy, we and our franchisees intend to open new restaurants in our existing markets |
| Since we typically draw customers from a relatively small radius around each of our restaurants, the sales performance and customer counts for restaurants near the area in which a new restaurant opens may decline due to cannibalization, which could result in restaurant closures |
| In addition, new restaurants added in existing markets may not achieve the same operating performance as our existing restaurants |
| Our expansion into new markets may present increased risks due to our unfamiliarity with the area |
| The restaurants we open in new geographic regions may not achieve market acceptance |
| Some of our future franchised restaurants and company-owned restaurants will be located in areas where we have little or no meaningful experience |
| Those markets may have different demographic characteristics, competitive conditions, consumer tastes and discretionary spending patterns than our existing markets that may cause our new restaurants to be less successful than restaurants in our existing markets |
| An additional risk in expansion into new markets is the lack of market awareness of the Cosi brand |
| Restaurants opened in new markets may open at lower average weekly sales volumes than restaurants opened in existing markets and may have higher restaurant-level operating expense ratios than in existing markets |
| Sales at restaurants opened in new markets may take longer to reach average annual company-owned restaurant sales, if at all, thereby affecting the profitability of these restaurants |
| We may not be able to successfully incorporate a franchising and area developer model into our strategy |
| We are incorporating a franchising and area developer model into our business strategy in certain selected markets |
| We have not used a franchising or area developer model prior to fiscal 2004 and may not be as successful as predicted in attracting franchisees and developers to the Cosi concept or identifying franchisees and developers that have the business abilities or access to financial resources necessary to open our restaurants or to successfully develop or operate our restaurants in a manner consistent with our standards |
| Incorporating a franchising and area developer model into our strategy also requires us to devote significant management and financial resources to support the franchise of our restaurants |
| Our future performance will depend on our franchisees’ ability to execute our concept and capitalize upon our brand recognition and marketing |
| We may not be able to recruit franchisees who have the business abilities or financial resources necessary to open restaurants on schedule, or who will conduct operations in a manner consistent with our concept and standards |
| Our franchisees may not be able to operate restaurants in a profitable manner |
| If we are not successful in incorporating a franchising or area developer model into our strategy, we may experience delays in our growth or may not be able to expand and grow our business |
| If our franchisees cannot develop or finance new restaurants, build them on suitable sites or open them on schedule, our growth and success may be impeded |
| Our growth depends in part upon our ability to establish a successful and effective franchise program and to attract qualified franchisees |
| If our franchisees are unable to locate suitable sites for new restaurants, negotiate acceptable lease or purchase terms, obtain the necessary financial or management resources, meet construction 7 _________________________________________________________________ [58]Table of Contents schedules or obtain the necessary permits and government approvals, our growth plans may be negatively affected |
| We cannot assure you that any of the restaurants our franchisees open will be profitable |
| Additional foodservice strategic alliances may not be successful and may materially adversely affect our business and results of operations |
| We may decide to enter into additional alliances with third parties to develop foodservice strategic alliances in select markets or through select channels |
| Identifying strategic partners, negotiating agreements and building such alliances may divert management’s attention away from our existing businesses and growth plans |
| If we are not successful in forming additional foodservice strategic alliances, we may experience delays in our growth and may not be able to expand and grow our business |
| If we do form additional strategic alliances, we cannot assure you that the restaurants opened pursuant to these strategic alliances will be profitable |
| Any inability to manage our growth effectively could materially adversely affect our operating results |
| Failure to manage our growth effectively could harm our business |
| We have grown significantly since our inception and intend to grow substantially in the future both through a franchising strategy and opening new company-owned restaurants |
| Our existing restaurant management systems, financial and management controls and information systems may not be adequate to support our planned expansion |
| Our ability to manage our growth effectively will require us to continue to enhance these systems, procedures and controls |
| We must attract and retain talented operating personnel to maintain the quality and service levels at our existing and future restaurants |
| We may not be able to effectively manage these or other aspects of our expansion |
| We cannot assure you that we will be able to respond on a timely basis to all of the changing demands that our planned expansion will impose on management and on our existing infrastructure |
| If we are unable to manage our growth effectively, our business, results of operations and financial condition could be materially adversely impacted |
| If we are unable to successfully integrate future acquisitions, our business could be negatively impacted |
| Any acquisitions may also be costly |
| We may consider future strategic acquisitions |
| Acquisitions involve numerous risks, including difficulties assimilating new operations and products |
| In addition, acquisitions may require significant management time and capital resources |
| We cannot assure you that we will have access to the capital required to finance potential acquisitions on satisfactory terms, that any acquisition would result in long-term benefits to us, or that management would be able to manage effectively the resulting business |
| Future acquisitions are likely to result in the incurrence of additional indebtedness, which could contain restrictive covenants, or the issuance of additional equity securities, which could dilute our existing stockholders |
| We may also pay too much for a concept that we acquire relative to the actual economic return obtained |
| If our integration efforts are unsuccessful, our business and results of operations could suffer |
| Risks Related to Our Business If we are unable to execute our business strategy, we could be materially adversely affected |
| Our ability to successfully execute our business strategy will depend on a number of factors, some of which are beyond our control, including, but not limited to: • our ability to generate positive cash flow from operations; • identification and availability of suitable restaurant sites; • competition for restaurant sites and customers; • negotiation of favorable leases; • management of construction and development costs of new and renovated restaurants; • securing required governmental approvals and permits; • recruitment and retention of qualified operating personnel; 8 _________________________________________________________________ [59]Table of Contents • successful operation and execution in new and existing markets; • recruiting, training and retaining qualified corporate and restaurant personnel and management; • identification of under-performing restaurants and our ability to improve or efficiently close under-performing restaurants, including securing favorable lease termination terms; • the rate of our internal growth, and our ability to generate increased revenue from existing restaurants; • our ability to incorporate a franchising and area developer model into our strategy; • competition in new and existing markets; • the reliability of our customer and market studies; • consumer trends; • the cost of our principal food products and supply and delivery shortages or interruptions; • weather conditions; and • general regional and national economic conditions |
| Each of these factors could delay or prevent us from successfully executing our business strategy, which could adversely affect our growth, revenues and our results of operations |
| We have a limited operating history and we may be unable to achieve profitability |
| There are currently 94 company-owned restaurants, five of which were opened during the last quarter of fiscal 2004, one of which opened in each of the second and third quarters of 2005, six of which opened in the fourth quarter of 2005 and two of which opened in the first quarter of 2006 |
| Accordingly, limited historical information is available with which to evaluate our business and prospects |
| As a result, forecasts of our future revenues, expenses and operating results may not be as accurate as they would be if we had a longer history of operations and of combined operations |
| In fiscal 2005, we incurred net losses of dlra13dtta1 million, and, since we were formed, we have incurred net losses of approximately dlra207dtta4 million through the end of fiscal 2005 primarily due to funding operating losses, impairment charges, the cost of our merger in 1999, new restaurant opening expenses and lease termination costs |
| We intend to continue to expend significant financial and management resources on the development of additional restaurants, both company-owned and franchised |
| We cannot predict whether we will be able to achieve or sustain revenue growth, profitability or positive cash flow in the future |
| See “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” and the financial statements included in this Annual Report on Form 10-K for information on the history of our losses |
| If internally generated cash flow from our restaurants does not meet our expectations, our business, results of operations and financial condition could be materially adversely affected |
| Our cash resources, and therefore our liquidity, are highly dependent upon the level of internally generated cash from operations and upon future financing transactions |
| Although we believe that we have sufficient liquidity to fund our working capital requirements for the next twelve months, if cash flows from our existing restaurants or cash flows from new restaurants that we open do not meet our expectations or are otherwise insufficient to satisfy our cash needs or expansion plans, we may have to seek additional financing from external sources to continue funding our operations or reduce or cease our plans to open or franchise new restaurants |
| We cannot predict whether such financing will be available on terms acceptable to us, or at all |
| We may need additional capital in the future and it may not be available on acceptable terms |
| Our business may require significant additional capital in the future to, among other things, fund our operations, increase the number of company-owned or franchised restaurants, expand the range of services we offer and finance future acquisitions and investments |
| There is no assurance that financing will be available on terms acceptable to us, or at all |
| Our ability to obtain additional financing will be subject to a number of factors, including market conditions, our operating performance and investor sentiment |
| These factors may make the timing, amount, 9 _________________________________________________________________ [60]Table of Contents terms and conditions of additional financings unattractive to us |
| If we are unable to raise additional capital, our business, results of operations and financial condition could be materially adversely affected |
| Our franchisees could take actions that could harm our business |
| Franchisees are independent contractors and are not our employees |
| Although we have developed criteria to evaluate and screen prospective franchisees, we are limited in the amount of control we can exercise over our licensed franchisees, and the quality of franchised restaurant operations may be diminished by any number of factors beyond our control |
| Franchisees may not have the business acumen or financial resources necessary to successfully operate restaurants in a manner consistent with our standards and requirements and may not hire and train qualified managers and other restaurant personnel |
| Poor restaurant operations may affect each restaurant’s sales |
| Our image and reputation, and the image and reputation of other franchisees, may suffer materially and system-wide sales could significantly decline if our franchisees do not operate successfully |
| We could face liability from our franchisees |
| Various state and federal laws govern our relationship with our franchisees and potential sales of our franchised restaurants |
| If we fail to comply with these laws, we could be liable for damages to franchisees and fines or other penalties |
| Expensive litigation with our franchisees or government agencies may adversely affect both our profits and our important relations with our franchisees |
| Our financial results are affected by the financial results of our franchisees |
| We receive royalties from our franchisees |
| Our financial results are therefore somewhat contingent upon the operational and financial success of our franchisees, including implementation of our strategic plans, as well as their ability to secure adequate financing |
| If sales trends or economic conditions worsen for our franchisees, their financial health may worsen and our collection rates may decline |
| Additionally, refusal on the part of franchisees to renew their franchise agreements may result in decreased royalties |
| Entering into restructured franchise agreements may result in reduced franchise royalty rates in the future |
| Our restaurants are currently concentrated in the Northeastern and Mid-Atlantic regions of the United States, particularly in the New York City area |
| Accordingly, we are highly vulnerable to negative occurrences in these regions |
| We currently operate 59 company-owned restaurants in Northeastern and Mid-Atlantic states, of which 16 are located in the New York City area, the majority of which are located in New York central business districts |
| As a result, we are particularly susceptible to adverse trends and economic conditions in these areas |
| In addition, given our geographic concentration, negative publicity regarding any of our restaurants could have a material adverse effect on our business and operations, as could other regional occurrences impacting the local economies in these markets |
| You should not rely on past increases in our average unit volumes as an indication of our future results of operations because they may fluctuate significantly |
| A number of factors have historically affected, and will continue to affect, our average unit sales, including, among other factors: • our ability to execute our business and growth strategy effectively; • introduction of new menu items; • sales performance by our new and existing restaurants; • competition; • general regional and national economic conditions; 10 _________________________________________________________________ [61]Table of Contents • weather conditions; and • consumer trends |
| It is not reasonable to expect our average unit volumes to increase at rates achieved over the past several years |
| Changes in our average unit volumes could cause the price of our common stock to fluctuate substantially |
| Seasonality, inclement weather and other variable factors may adversely affect our sales and results of operations and could cause our quarterly results to fluctuate and fall below expectations of securities analysts and investors, resulting in a decline in our stock price |
| Our business is subject to significant seasonal fluctuations and weather influences on consumer spending and dining out patterns |
| Inclement weather may result in reduced frequency of dining at our restaurants |
| Customer counts (and consequently revenues) are generally highest in spring and summer months and lowest during the winter months because of the high proportion of our restaurants located in the Northeast where inclement weather affects customer visits |
| Other factors such as unanticipated increases in labor, commodity, energy, insurance or other operating costs may also cause our quarterly results to fluctuate |
| For this reason, you should not rely upon our quarterly operating results as indications of future performance |
| Our operations depend on governmental licenses and we may face liability under “dram shop” statutes |
| We are subject to extensive federal, state and local government regulations, including regulations relating to alcoholic beverage control, the preparation and sale of food, public health and safety, sanitation, building, zoning and fire codes |
| Our business depends on obtaining and maintaining required food service and/or liquor licenses for each of our restaurants |
| If we fail to obtain or maintain all necessary licenses, we may be forced to delay or cancel new restaurant openings and close or reduce operations at existing locations |
| In addition, our sale of alcoholic beverages subjects us to “dram shop” statutes in some states |
| These statutes allow an injured person to recover damages from an establishment that served alcoholic beverages to an intoxicated person |
| Although we take significant precautions to ensure that all employees are trained in the responsible service of alcohol and maintain insurance policies in accordance with all state regulations regarding the sale of alcoholic beverages, the misuse of alcoholic beverages by customers may create considerable risks for us |
| If we are the subject of a judgment substantially in excess of our insurance coverage, or if we fail to maintain our insurance coverage, our business, financial condition, operating results or cash flows could be materially and adversely affected |
| See “Business — Government Regulation” in this Annual Report on Form 10-K for a discussion of the regulations with which we must comply |
| Our failure or inability to enforce our trademarks or other proprietary rights could adversely affect our competitive position or the value of our brand |
| We own certain common law trademark rights and a number of federal and international trademark and service mark registrations, and proprietary rights to certain of our core menu offerings |
| We believe that our trademarks and other proprietary rights are important to our success and our competitive position |
| We, therefore, devote appropriate resources to the protection of our trademarks and proprietary rights |
| The protective actions that we take, however, may not be enough to prevent unauthorized usage or imitation by others, which might cause us to incur significant litigation costs and could harm our image or our brand or competitive position |
| We also cannot assure you that third parties will not claim that our trademarks or offerings infringe the proprietary rights of third parties |
| Any such claim, whether or not it has merit, could be time-consuming, result in costly litigation, cause product delays or require us to enter into royalty or licensing agreements |
| As a result, any such claim could have a material adverse effect on our business, results of operations and financial condition |
| 11 _________________________________________________________________ [62]Table of Contents We hold significant amounts of illiquid assets and may have to dispose of them on unfavorable terms |
| A certain portion of our assets, such as leasehold improvements and equipment, are illiquid |
| These assets cannot be converted into cash quickly and easily |
| We may be compelled to dispose of these illiquid assets on unfavorable terms, which could have an adverse effect on our business |
| We may face litigation that could have a material adverse effect on our business, financial condition and results of operations |
| From time to time, we are a defendant in litigation arising in the ordinary course of our business |
| Our customers may file complaints or lawsuits against us alleging that we are responsible for an illness or injury they suffered at or after a visit to a Cosi restaurant, or alleging that there was a problem with food quality or operations at a Cosi restaurant |
| We may also be subject to a variety of other claims arising in the ordinary course of our business, including personal injury claims, contract claims, claims from franchisees and claims alleging violations of federal and state law regarding workplace and employment matters, discrimination and similar matters |
| We could also become subject to class action lawsuits related to these matters in the future |
| To date, none of such litigation, some of which is covered by insurance, has had a material adverse effect on our consolidated financial position, results of operations or cash flows |
| Regardless of whether any future claims against us are valid or whether we are found to be liable, claims may be expensive to defend and may divert our management’s attention away from our operations and hurt our performance |
| The outcome of litigation, particularly class action lawsuits and regulatory actions, is difficult to assess or quantify |
| Plaintiffs in these types of lawsuits may seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss relating to such lawsuits may remain unknown for substantial periods of time |
| A judgment significantly in excess of our insurance coverage for any claims could materially adversely affect our financial condition or results of operations |
| There may also be adverse publicity associated with litigation that could decrease customer acceptance of our services or those of our franchisees, regardless of whether the allegations are valid or whether we are ultimately found liable |
| As a result, litigation may adversely affect our business, financial condition and results of operations |
| Moreover, complaints, litigation or adverse publicity experienced by one or more of our franchisees could also hurt our business as a whole |
| We have a new management team that does not have proven success with the Company |
| Some members of our management team have been in place for only a relatively short period of time |
| They do not have previous experience with us, and we cannot assure you that they will fully integrate themselves into our business or that they will effectively manage our business affairs |
| Our failure to assimilate the new members of management, the failure of the new members of management to perform effectively, or the loss of any of the new members of management could have a material adverse effect on our business, financial condition and results of operations |
| If we are unable to protect our customers’ credit card data, we could be exposed to data loss, litigation and liability, and our reputation could be significantly harmed |
| In connection with credit card sales, we transmit confidential credit card information securely over public networks and store it in our data warehouse |
| Third parties may have the technology or know-how to breach the security of this customer information, and our security measures may not effectively prohibit others from obtaining improper access to this information |
| If a person is able to circumvent our security measures, he or she could destroy or steal valuable information or disrupt our operations |
| Any security breach could expose us to risks of data loss, litigation and liability and could seriously disrupt our operations and any resulting negative publicity could significantly harm our reputation |
| 12 _________________________________________________________________ [63]Table of Contents Risks Relating to the Food Service Industry Our business is affected by changes in consumer preferences |
| Our success depends, in part, upon the popularity of our food products, our ability to develop new menu items that appeal to consumers and what we believe is an emerging trend in consumer preferences toward premium convenience restaurants |
| We depend on consumers who prefer made-to-order food in a sophisticated environment and are willing to pay a premium price for our products |
| Shifts in consumer preferences away from our restaurants or cuisine, our inability to develop new menu items that appeal to consumers or changes in our menu that eliminate items popular with some consumers could harm our business and future profitability |
| General economic conditions and the effects of the war on terrorism may cause a decline in discretionary consumer spending, which would negatively affect our business |
| Our success depends to a significant extent on discretionary consumer spending, which is influenced by general economic and political conditions and the availability of discretionary income |
| Accordingly, we may experience declines in sales during economic downturns or during periods of uncertainty like that which followed the September 11, 2001 terrorist attacks on the United States |
| In addition, economic uncertainty due to military action overseas, such as in Iraq and post-war military, diplomatic or financial responses, may lead to further declines in sales |
| Any decline in consumer spending or economic conditions could reduce customer traffic or impose practical limits on pricing, either of which could have a material adverse effect on our sales, results of operations, business and financial condition |
| Our success depends on our ability to compete with many food service businesses |
| The restaurant industry is intensely competitive and we compete with many well-established food service companies on the basis of taste, quality and price of product offered, customer service, atmosphere, location and overall guest experience |
| We compete with other sandwich retailers, specialty coffee retailers, bagel shops, fast-food restaurants, delicatessens, cafes, bars, take-out food service companies, supermarkets and convenience stores |
| Our competitors change with each daypart (breakfast, lunch and dinner), ranging from coffee bars and bakery cafes to casual dining chains |
| Aggressive pricing by our competitors or the entrance of new competitors into our markets could reduce our sales and profit margins |
| Many of our competitors or potential competitors have substantially greater financial and other resources than we do, which may allow them to react to changes in pricing, marketing and the quick service restaurant industry better than we can |
| As competitors expand their operations, we expect competition to intensify |
| We also compete with other employers in our markets for hourly workers and may be subject to higher labor costs |
| Fluctuations in coffee prices could adversely affect our operating results |
| The price of coffee, one of our main products, can be highly volatile |
| Although most coffee trades on the commodity markets, coffee of the quality we seek tends to trade on a negotiated basis at a substantial premium above commodity coffee pricing, depending on supply and demand at the time of the purchase |
| An increase in pricing of specialty coffees could have a significant adverse effect on our profitability |
| To mitigate the risks of increasing coffee prices and to allow greater predictability in coffee pricing, we typically enter into short-term purchasing arrangements for a portion of our green coffee requirements |
| We cannot assure you that these activities will be successful or that they will not result in our paying substantially more for our coffee supply than we would have been required to pay absent such activities |
| We purchase coffee through a single supplier under an agreement that expires in June 2010 |
| Changes in food and supply costs could adversely affect our results of operations |
| Our profitability depends in part on our ability to anticipate and react to changes in food and supply costs |
| We rely on a single primary distributor of our food and paper goods |
| Although we believe that alternative distribution 13 _________________________________________________________________ [64]Table of Contents sources are available, any increase in distribution prices or failure by our distributor to perform could adversely affect our operating results |
| In addition, we are susceptible to increases in food costs as a result of factors beyond our control, such as weather conditions and government regulations |
| Failure to anticipate and adjust our purchasing practices to these changes could negatively impact our business |
| The food service industry is affected by litigation and publicity concerning food quality, health and other issues, which can cause customers to avoid our products and result in liabilities |
| Food service businesses can be adversely affected by litigation and complaints from customers or government authorities resulting from food quality, illness, injury or other health concerns or operating issues stemming from one restaurant or a limited number of restaurants |
| Adverse publicity about these allegations may negatively affect us, regardless of whether the allegations are true, by discouraging customers from buying our products |
| We could also incur significant liabilities if a lawsuit or claim results in a decision against us or if we incur litigation costs, regardless of the result |
| Our business could be adversely affected by increased labor costs or labor shortages |
| We devote significant resources to recruiting and training our managers and employees |
| Increased labor costs, due to competition, increased minimum wage or employee benefits costs or otherwise, would adversely impact our operating expenses |
| In addition, our success depends on our ability to attract, motivate and retain qualified employees, including restaurant managers and staff, to keep pace with our needs |
| If we are unable to do so, our results of operations may be adversely affected |