SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF1934 For the quarterly period ended March 31, 2003
Or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ________ to ________
Commission file number 000-50052
Cosi, Inc.
(Exact name of registrant as specified in its charter)
Delaware 06-1393745
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
242 West 36th St,
New York, NY 10018
(Address of principal (Zip code)
executive offices)
(212) 653-1600
(Registrant's 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 [X] No [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Exchange Act) Yes [_] No [X]
As of May 5, 2003, 16,580,031 shares of the registrant's Common Stock, $.01 par
value, were outstanding.
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COSI, INC.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (unaudited)
Consolidated Balance Sheets as of March 31, 2003 and
December 30, 2002 (unaudited)
Consolidated Statements of Operations for the three months
ended March 31, 2003 and April 1, 2002 (unaudited)
Consolidated Statements of Cash Flows for the three months
ended March 31, 2003 and April 1, 2002 (unaudited)
Notes to Consolidated Financial Statements (unaudited)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4. DISCLOSURE CONTROLS & PROCEDURES
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. USE OF PROCEEDS
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
COSI, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share information)
MARCH 31, DECEMBER 30,
2003 2002
----------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ..................... $ 3,610.9 $ 13,032.3
Accounts receivable, net of allowances of
$219.4 and $232.1, respectively ............. 1,481.5 1,511.5
Inventory ..................................... 1,438.9 1,465.8
Prepaid expenses and other current assets ..... 1,396.6 1,676.3
----------- ------------
Total current assets ................... 7,927.9 17,685.9
PROPERTY, EQUIPMENT AND LEASEHOLD
IMPROVEMENTS, net ............................. 44,917.2 45,755.3
INTANGIBLES, SECURITY DEPOSITS AND OTHER
ASSETS, net .................................. 2,913.6 2,801.9
----------- ------------
Total assets ........................... $ 55,758.7 $ 66,243.1
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .............................. $ 6,389.9 $ 8,925.2
Accrued liabilities ........................... 7,927.7 5,922.4
Current portion of other liabilities .......... 671.6 671.6
Current portion of capital lease obligations .. 62.6 117.0
Current portion of long-term debt ............. 1,105.4 1,280.4
----------- ------------
Total current liabilities .............. 16,157.2 16,916.6
OTHER LIABILITIES, net of current portion ....... 11,558.7 9,748.3
CAPITAL LEASE OBLIGATIONS, net of current portion 1.5 2.5
LONG-TERM DEBT, net of current portion .......... 239.3 248.7
----------- ------------
Total liabilities ...................... 27,956.7 26,916.1
----------- ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock-- $.01 par value: 100,000,000
shares
authorized, 16,580,031 and 16,573,514 shares
issued and outstanding, respectively ........ 165.7 165.7
Additional paid-in capital .................... 189,298.2 189,255.0
Notes receivable from stockholders ............ (2,974.8) (2,974.8)
Accumulated deficit ........................... (158,687.1) (147,118.9)
----------- ------------
Total stockholders' equity ............. 27,802.0 39,327.0
----------- ------------
Total liabilities, and
stockholders' equity ................. $ 55,758.7 $ 66,243.1
=========== ============
The accompanying notes are an integral part of these consolidated statements.
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COSI, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
FOR THE THREE MONTHS ENDED
---------- ----------
MARCH 31, APRIL 1,
2003 2002
---------- ----------
NET SALES ........................................ $ 25,654.4 $ 18,052.1
COST OF SALES:
Cost of goods sold ............................. 7,316.5 4,853.4
Restaurant operating expenses .................. 16,801.2 11,127.0
---------- ----------
TOTAL COST OF SALES ...................... 24,117.7 15,980.4
GENERAL AND ADMINISTRATIVE EXPENSES .............. 7,925.2 4,620.3
DEPRECIATION AND AMORTIZATION .................... 1,958.6 1,210.3
RESTAURANT PRE-OPENING EXPENSES .................. 349.1 111.4
PROVISION FOR LOSSES ON ASSET IMPAIRMENTS AND
DISPOSALS ..................................... 2,568.0 --
LEASE TERMINATION COSTS .......................... 257.1 --
---------- ----------
Operating loss ........................... (11,521.3) (3,870.3)
INTEREST INCOME ................................. 25.2 29.9
INTEREST EXPENSE ................................. (47.0) (301.4)
AMORTIZATION OF DEFERRED FINANCING COSTS ......... (25.0) (86.4)
---------- ----------
Net loss ................................. (11,568.1) (4,228.2)
PREFERRED STOCK DIVIDENDS ........................ -- (1,960.5)
---------- ----------
NET LOSS ATTRIBUTABLE TO COMMON STOCK ............ $(11,568.1) $ (6,188.7)
========== ==========
PER SHARE DATA:
Net Loss Per Share:
Basic and diluted ............................ $ (0.70) $ (1.37)
========== ==========
Weighted Average Common Shares Outstanding:
Actual ..................................... 16,573.8 4,527.6
========== ==========
The accompanying notes are an integral part of these consolidated statements.
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COSI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
FOR THE THREE MONTHS ENDED
--------------------------------
MARCH 31, 2003 APRIL 1, 2002
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................ $ (11,568.1) $ (4,228.2)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ..................... 1,958.6 1,210.3
Amortization of deferred financing costs .......... 25.0 86.4
Non-cash portion of asset impairments and disposals 2,051.9 --
Provision for bad debts ........................... 9.0 --
Non-cash employee severance cost .................. 43.1 --
Changes in operating assets and liabilities:
Accounts receivable ............................. 21.0 382.9
Inventory ....................................... 26.8 (49.0)
Other assets .................................... (245.8) (64.5)
Accounts payable ................................ (2,535.3) (2,362.6)
Accrued liabilities ............................. 3,692.1 (46.8)
Accrued contractual lease increases ............. 123.4 190.6
Prepaid expenses and other current assets ....... 279.7 (277.3)
Lease termination accrual ....................... 0.2 (127.3)
-------------- --------------
Net cash used in operating activities ......... (6,118.4) (5,285.5)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, equipment and leasehold
improvements ...................................... (3,172.4) (2,725.5)
Return of (payments made for) security deposits ...... 109.2 (18.7)
-------------- --------------
Net cash used in investing activities ......... (3,063.2) (2,744.2)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock .............. -- 351.6
Net proceeds from issuance of preferred stock ....... -- 15,669.9
Principal payments on capital lease
obligations ....................................... (55.4) (154.1)
Proceeds from long-term debt plus related
Warrants and accrued interest ..................... -- 727.3
Principal payments on long-term debt ................ (184.4) (466.6)
-------------- --------------
Net cash provided by (used in) financing
activities .................................. (239.8) 16,128.1
-------------- --------------
Net increase (decrease) in cash ....................... (9,421.4) 8,098.4
CASH AND CASH EQUIVALENTS, beginning of year .......... 13,032.3 4,469.6
-------------- --------------
CASH AND CASH EQUIVALENTS, end of period .............. $ 3,610.9 $ 12,568.0
-------------- ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest .......................................... $ 47.0 $ 301.4
============== ==============
Corporate franchise and income taxes .............. $ 40.8 $ 14.6
============== ==============
Non-cash financing transactions:
Conversion of Senior Subordinated Debt to
Series C Preferred .............................. $ -- $ 3,183.2
============== ==============
Conversion of Warrants to Series C Preferred ...... $ -- $ 429.9
============== ==============
The accompanying notes are an integral part of these consolidated statements.
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Notes to Consolidated Financial Statements (unaudited)
March 31, 2003
NOTE A --BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Cosi, Inc. and its subsidiaries (the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial information,
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly they do not include all of the information and footnotes required by
generally accepted accounting principles in the United States for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the thirteen-week period ended March 31,
2003 are not necessarily indicative of the results that may be expected for the
fiscal year ending December 29, 2003.
The balance sheet at December 30, 2002 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles in the United
States for complete financial statements.
Certain reclassifications have been made to conform previously reported
data to the current presentation.
For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's annual report on Form 10-K for
the year ended December 30, 2002.
NOTE B -- STOCK-BASED COMPENSATION
The Company complies with the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". This statement establishes financial
accounting and reporting standards for stock-based employee compensation plans.
The provisions of SFAS 123 encourage entities to adopt a fair value based method
of accounting for stock compensation plans; however, these provisions also
permit the Company to continue to measure compensation costs under pre-existing
accounting pronouncements. In December 2002, the FASB issued SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS 148
amends SFAS 123 to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS
123 to require more prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The additional disclosure
requirements of SFAS 148 have been incorporated herein. Pursuant to SFAS 123,
the Company has elected to continue the accounting set forth in Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" and to provide the necessary pro forma disclosures.
The following table illustrates the effect on net loss attributable to
common stock and net loss per common share as if the Company had applied the
fair value recognition provisions of SFAS 123 to stock-based employee
compensation.
FOR THE THREE MONTHS ENDED
--------------------------------
(IN 000'S) MARCH 31, 2003 APRIL 1, 2002
-------------- --------------
Net loss attributable to common
stock - as reported .................... $ (11,568.1) $ (6,188.7)
============== ==============
Stock based compensation included
in the determination of net loss,
as reported ............................ 43.1 --
-------------- --------------
Stock based compensation
determined under SFAS 123 .............. (450.7) (312.4)
-------------- --------------
Net loss attributable to common
stock - Pro forma ...................... (11,975.7) (6,501.1)
Net loss per common share -- Basic and
Diluted:
As reported .............................. $ (0.70) $ (1.37)
============== ==============
Pro forma ................................ $ (0.72) $ (1.44)
============== ==============
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NOTE C -- PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consist of the following:
MARCH 31, DECEMBER 30,
(IN 000'S) 2003 2002
------------ ------------
Leasehold improvements ......................... $ 36,540.0 $ 36,297.4
Furniture and fixtures ......................... 9,883.8 9,499.9
Restaurant equipment ........................... 14,168.8 13,000.9
Computer and telephone equipment ............... 8,282.3 7,962.2
Construction in progress ....................... 50.0 1,063.8
------------ ------------
68,924.9 67,824.2
Less: accumulated depreciation
and amortization ............................... (24,007.7) (22,068.9)
------------ ------------
$ 44,917.2 $ 45,755.3
============ ============
RESTAURANT IMPAIRMENT CHARGES
In accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" and previously under SFAS 121, impairment losses
are recorded on long-lived assets on a restaurant by restaurant basis whenever
impairment factors are determined to be present. The Company considers a history
of restaurant operating losses to be the primary indicator of potential
impairment for individual restaurant locations. The Company has identified
certain units that have been impaired, and recorded an asset impairment charge
of approximately $0.7 million (related to two restaurants) in the first quarter
of fiscal 2003. No impairment charges were recorded in the first quarter of
fiscal 2002. The Company determines whether a restaurant location is impaired
based on expected undiscounted cash flows, generally for the remainder of the
lease term, and then determines the impairment charge based on discounted cash
flows for the same period.
In addition, during the first quarter of fiscal 2003 the Company recorded
a charge of $0.6 million to reflect the writedown of fixed assets associated
with the closure of three underperforming restaurants, and also recorded a
writedown of approximately $1.3 million to reflect the writeoff of construction
in progress on 25 restaurants which were in the development pipeline, but have
been cancelled. These charges have been recorded in provision for losses on
asset impairments and disposals in the accompanying Consolidated Statements of
Operations.
NOTE D -- ACCRUED LIABILITIES
Accrued liabilities consist of the following:
MARCH 31, DECEMBER 30,
(IN 000'S) 2003 2002
------------ ------------
Payroll and related benefits and taxes ........... $ 1,389.8 $ 1,521.2
Professional and legal costs ..................... 331.2 437.0
Taxes payable .................................... 617.3 825.3
Severance payable - current portion .............. 1,616.1 --
Unearned vendor allowances ....................... 590.4 595.5
Other ............................................ 3,382.9 2,543.4
------------ ------------
$ 7,927.7 $ 5,922.4
============ ============
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NOTE E --EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share for the periods indicated (in thousands, except for per share
data):
FOR THE THREE MONTHS ENDED
--------------------------------
MARCH 31, 2003 APRIL 1, 2002
-------------- --------------
Basic and Diluted:
Net loss ................................... $ (11,568.1) $ (4,228.2)
Preferred stock dividends .................. -- (1,960.5)
Net loss attributable to common stock ...... (11,568.1) (6,188.7)
-------------- --------------
Weighted average common shares outstanding . 16,573.8 4,527.6
Net loss per share ......................... $ (0.70) $ (1.37)
============== ==============
NOTE F -- EMPLOYEE SEVERANCE CHARGE
During the first quarter of fiscal 2003 the Company reduced its Executive,
General and Administrative staffing by 26 persons. These reductions were made
primarily due to a reduction in the Company's growth plans, and due to a change
in the Company's executive management. At that time the Company recorded a
charge of $3.7 million to provide for the costs expected to be incurred in
connection with this reduction. This charge is included in general and
administrative expenses in the accompanying consolidated statements of
operations. $0.4 million of these costs were paid during the first quarter of
fiscal 2003, leaving a remaining accrued liability of $3.3 million as of March
31, 2003. Of this amount, $1.7 million is due after one year and is included in
other liabilities, net of current portion in the accompanying financial
statements.
(In $000's) Termination
Benefits
-----------
Balance December 30, 2002 --
Charges during the period 3,700.0
Non-cash portion of charges 43.1
Cash Payments 354.1
-----------
Balance March 31, 2003 3,302.8
NOTE G -- CONTINGENCIES
On February 5, 2003, a purported shareholder class action complaint was
filed in the United States District Court for the Southern District of New York
(the "Court"), alleging that the Company and various of its officers and
directors and the Underwriter violated Sections 11, 12(a)(2) and 15 of the
Securities Act of 1933 by misstating, and by failing to disclose, certain
financial and other business information (Sheel Mohnot v. Cosi, Inc., et al.,
No. 03 CV 812). At least seven additional class action complaints with similar
allegations were later filed (collectively, the "Securities Act Litigation").
The Securities Act Litigation is brought on behalf of a purported class of
purchasers of the Company's stock allegedly traceable to its November 22, 2002
initial public offering ("IPO"). The complaints in the Securities Act Litigation
generally claim that at the time of the IPO, the Company's offering materials
failed to disclose that the funds raised through the IPO would be insufficient
to implement the Company's expansion plan; that it was improbable that the
Company would be able to open 53 to 59 new stores in 2003; that at the time of
the IPO, Cosi had negative working capital and therefore did not have available
working capital to repay certain debts; and that the principal purpose for going
forward with the IPO was to repay certain existing shareholders and members of
the Board of Directors for certain debts and to operate the Company's existing
restaurants.
On February 21, 2003, a purported shareholder class action complaint was
filed in the Court alleging that the Company and certain of its officers and
directors violated Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, and Rule 10-b promulgated thereunder, by issuing a series of material
misrepresentations to the market between November 22, 2002 and February 4, 2003
(the
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"Class Period") (Georgette Pacia v. Cosi, Inc. et al., No. 03-CV-1156). One
additional class action complaint with similar allegations was later filed
(collectively, the "Securities Exchange Act Litigation"). The emphasis of the
allegations in the complaint in the Securities Exchange Act Litigation is that
the defendants knowingly or recklessly caused misrepresentations and omissions
to be made regarding the Company's operating condition and future business
prospects. Among other things, plaintiffs in the Securities Exchange Act
Litigation allege that defendants failed to disclose that the funds raised by
the IPO would be insufficient to implement the Company's expansion plan; that at
the time of the IPO, defendants should have known that the costs of expansion
would be greater than the cash available to the Company, making it improbable
that the Company would be able to successfully continue to open new stores at
the pace announced by the Company; and that defendants failed to disclose that a
reduction in the offering price of the IPO would result in the Company being
forced to abandon its growth strategy.
The plaintiffs in the Securities Act Litigation and the Securities
Exchange Act Litigation (the "Litigations") generally seek to recover
compensatory damages, expert fees, attorneys' fees, costs of Court and pre- and
post-judgment interest. The Underwriter is seeking indemnification from the
Company for any damages assessed against it in the Securities Act Litigation.
The Litigations are at a preliminary stage, and the Company expects that these
related lawsuits will be consolidated into a single action. The Company believes
that it has meritorious defenses against these claims, and intends to vigorously
defend against them.
NOTE H -- SUBSEQUENT EVENTS
The Company has obtained a $3 million line of credit (the "Loan") from a
bank to be used for general corporate purposes. The Loan bears interest at 75
basis points over the bank's prime lending rate and is secured by all of the
Company's tangible and intangible property, other than equipment pledged to
secure its equipment loan credit facility. The Loan matures in May 2004. The
Company paid the bank fees and expenses of approximately $22,000 upon funding of
the Loan in April 2003. The Loan is guaranteed, jointly and severally, by Eric
J. Gleacher, one of the Company's directors; Charles G. Phillips, one of its
shareholders and an entity related to ZAM Holdings, L.P., the Company's largest
shareholder (together, "the Guarantors"). At any time during the term of the
Loan, the Guarantors have the right to require the bank to assign the Loan to
the Guarantors. If the Loan has not been assigned by the bank to the Guarantors,
and has not been paid in full by August 15, 2003, then the bank is required to
assign the Loan to the Guarantors. If approved by the Company's shareholders,
upon assignment of the loan to the Guarantors, the Loan will be convertible into
shares of common stock, under certain circumstances, at the option of the
Guarantors, at a conversion price equal to the lesser of $1.50 or 85% of the
weighted average price per share of the Company's common stock for the fifteen
trading day period ending three trading days before the conversion date.
The Company currently anticipates making a rights offering (the
"Offering") to existing shareholders to raise approximately $12 million. The
Company currently anticipates that the Offering will give existing shareholders
the right to purchase shares of common stock at a purchase price per share equal
to the lesser of $1.50 or 85% of the weighted average price per share of common
stock for the fifteen trading day period ending three trading days before the
expiration date of the Offering. A group of shareholders, including the
Guarantors or related entities, have indicated that they will commit to purchase
shares in the offering, or provide other funding support in the amount of $8.5
million of the $12 million offering. This shareholder group's commitment to
purchase shares in the Offering is subject to shareholder approval of the equity
conversion feature of the Loan.
The terms of the Loan and the Offering were reviewed and approved by a
committee of the board of directors comprised of disinterested directors.
The Company intends to file a registration statement with the Securities
and Exchange Commission relating to the Offering. The timing and completion of
the Offering is subject to market conditions and other contingencies. There can
be no assurance that the Company will be able to complete the Offering on terms
acceptable to the Company or at all. The Offering will only be made pursuant to
a prospectus filed with the Securities and Exchange Commission.
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
We own and operate 94 fast casual restaurants in 11 states and the
District of Columbia. Cosi restaurants are all-day cafes that feature signature
bread and coffee products in an environment that changes throughout the day.
Cosi restaurants offer breakfast, lunch, afternoon coffee, dinner, and dessert
menus full of creative, cravable foods and beverages.
We operate our restaurants in two formats: Cosi and Cosi Downtown. The
majority of our restaurants offer our signature bread and coffee products for
breakfast, lunch and afternoon coffee in a counter service format. After 5 p.m.,
our Cosi restaurants add table service and offer dinner and dessert in a casual
dining format. Cosi Downtown restaurants, which are located in non-residential
central business districts, close for the day in the early evening. By operating
in multiple dayparts, we believe we are able to maximize revenues and leverage
both development and operating costs.
We opened six new restaurants in the three months ended March 31, 2003. No
new restaurants were opened in the three months ended April 1, 2002. We closed
three underperforming restaurants in the first quarter of fiscal 2003, and
closed one restaurant, which was not suited for remodeling to our current
prototype, in the first quarter of fiscal 2002.
THREE MONTHS ENDED MARCH 31, 2003 APRIL 1, 2002
-------------- --------------
Restaurants open at beginning of period 91 67
Restaurants opened 6 --
Restaurants closed 3 1
Restaurants open at end of period 94 66
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements and the notes to our consolidated
financial statements contain information that is pertinent to management's
discussion and analysis. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities. We
believe the following critical accounting policies involve additional management
judgment due to the sensitivity of the methods, assumptions, and estimates
necessary in determining the related asset and liability amounts.
Statement of Financial Accounting Standards, or SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets," supercedes SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," and APB Opinion No. 30, "Reporting Results of Operations
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions." This statement
retains the fundamental provisions of SFAS 121 for recognition and measurement
of impairment, but amends the accounting and reporting standards for segments of
a business to be disposed of. We adopted the provisions of this statement
beginning in fiscal 2002. This standard requires management judgments regarding
the future operating and disposition plans for marginally performing assets, and
estimates of expected realizable values for assets to be sold. Actual results
may differ from those estimates. The application of SFAS 144 and previously SFAS
121 has affected the amount and timing of charges to operating results that have
been significant in recent years. We evaluate possible impairment at the
individual restaurant level, and record an impairment loss whenever we determine
impairment factors are present. We consider a history of restaurant operating
losses to be the primary indicator of potential impairment for individual
restaurant locations.
We have estimated our likely liability under contractual leases for
restaurants that have been, or
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Page 10
will be closed. Such estimates have affected the amount and timing of charges to
operating results that have been significant in recent years, and are impacted
by management's judgments about the time it may take to find a suitable
subtenant or assignee, or the terms under which a termination of the lease
agreement may be negotiated with the landlord.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses accounting for
restructuring, discontinued operation, plant closing, or other exit or disposal
activity. SFAS 146 requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. SFAS 146 is to be applied prospectively
to exit or disposal activities initiated after December 31, 2002.
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." SFAS 148 amends SFAS 123
"Accounting for Stock-Based Compensation" to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123 to require more prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The additional disclosure requirements of SFAS 148 are effective for
fiscal years ending after December 15, 2002 and have been incorporated into the
accompanying financial statements and footnotes. The Company has elected to
continue to follow the intrinsic value method of accounting as prescribed by APB
25 to account for employee stock options.
We have recorded a full valuation allowance to reduce our deferred tax
assets related to net operating loss carry forwards. A positive adjustment to
income will be required in future years if we determine that we could realize
these deferred tax assets.
NET SALES
Our sales are composed almost entirely of food and beverage sales.
COMPARABLE RESTAURANT SALES
In calculating comparable restaurant sales, we include a restaurant in the
comparable restaurant base after it has been in operation for 15 full months. At
March 31, 2003 and April 1, 2002 there were 61 and 47 restaurants in our
comparable restaurant base, respectively.
COSTS AND EXPENSES
Cost of goods sold. Cost of goods sold is composed of food and beverage
costs. Food and beverage costs are variable, and increase with sales volume.
Restaurant operating expenses. Restaurant operating expenses include
direct hourly and management wages, bonuses, taxes and benefits for restaurant
employees, and other direct restaurant level operating expenses including the
cost of supplies, restaurant repairs and maintenance, utilities, rents and
related occupancy costs.
General and administrative expenses. General and administrative expenses
include all corporate and administrative functions that support our restaurants
and provide an infrastructure to operate our business. Components of these
expenses include executive management; supervisory and staff salaries, bonuses
and related taxes and employee benefits; travel; information systems; training;
support center rent and related occupancy costs and professional and consulting
fees. The salaries, bonus and employee benefits costs included as general and
administrative expenses are generally more fixed in nature and do not vary
directly with the number of restaurants we operate.
Depreciation and amortization. Depreciation and amortization principally
includes depreciation on restaurant assets.
Restaurant pre-opening expenses. Restaurant pre-opening expenses, which
are expensed as incurred, include the costs of recruiting, hiring and training
the initial restaurant work force, travel, the
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Page 11
cost of food and labor used during the period before opening, the cost of
initial quantities of supplies, and other direct costs related to the opening of
or remodeling of a restaurant.
Our fiscal year ends on the Monday falling nearest to December 31st.
Fiscal years 2000, 2001 and 2002 each included 52 weeks. The three-month periods
ended March 31st 2003 and April 1st 2002 each contained 13 weeks.
RESULTS OF OPERATIONS
Our operating results for the three months ended March 31, 2003 and April
1, 2002, expressed as a percentage of sales, were as follows:
THREE MONTHS ENDED
---------------------------------
MARCH 31, 2003 APRIL 1, 2002
-------------- -------------
Net sales ................................ 100.0% 100.0%
Costs and Expenses:
Cost of goods sold ..................... 28.5% 26.9%
Restaurant operating expenses .......... 65.5% 61.6%
-------------- -------------
Total costs of sales ................... 94.0% 88.5%
General and administrative
expenses ................................. 30.9% 25.6%
Depreciation and amortization .......... 7.6% 6.7%
Restaurant pre-opening expenses ........ 1.4% 0.6%
Provision for losses on asset
impairments and disposals ........... 10.0% --
Lease termination costs ................ 1.0% --
Operating income (loss) .................. (44.9)% (21.4)%
-------------- -------------
Other income (expense):
Interest income ........................ 0.1% 0.2%
Interest expense ....................... (0.2)% (1.7)%
Amortization of Deferred
Financing Costs ...................... (0.1)% (0.5)%
-------------- -------------
Total other income (expense), net ...... (0.2)% (2.0)%
-------------- -------------
Net income (loss) ........................ (45.1)% (23.4)%
THREE MONTHS ENDED MARCH 31, 2003 VS. THREE MONTHS ENDED APRIL 1, 2002
NET SALES
Sales increased $7.6 million, or 42.1%, to $25.7 million in the first
quarter of fiscal 2003, from $18.1 million in the first quarter of fiscal 2002.
This increase was primarily due to the full period contribution of sales from
the 25 restaurants opened during fiscal 2002, subsequent to the first quarter of
fiscal 2002, from sales of six restaurants opened during the first quarter of
fiscal 2003 and from an increase in comparable restaurant sales of 5%. In
comparable restaurants, our transaction count was up 2.2% compared to last year,
and our average check increased 2.8%. This increase in comparable restaurant
sales was achieved despite the extreme winter weather conditions that impacted
most of our trade areas during the quarter. Furthermore, we reduced selling
prices by approximately 4% late in last year's quarter. Our comparable
restaurant sales performance continues to be favorably impacted by the results
of the six restaurants that were remodeled in 2002, and the seven restaurants
that were remodeled in 2001. Three restaurants were closed late in the current
quarter, having minimal impact on sales comparisons to last year.
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Page 12
COSTS AND EXPENSES
Cost of goods sold. Cost of goods sold increased $2.5 million or 50.8% to
$7.3 million in the first quarter of fiscal 2003, from $4.9 million in the first
quarter of fiscal 2002. As a percentage of sales, cost of goods sold increased
to 28.5% of sales in the first quarter of fiscal 2003, from 26.9% in the first
quarter of fiscal 2002. The increase in cost of goods sold as a percentage of
sales was primarily due to the reduction in our menu pricing which took place
late in the first quarter of fiscal 2002, and to a shift in our sales mix due to
the expansion of our food offering in 2002. During the first quarter of fiscal
2003, food sales increased to 75.4% of total sales, from 68.8% in last year's
quarter, with an offsetting reduction in our beverage sales, which were 24.6% of
total sales in this year's quarter, compared to 31.2% in last year's quarter.
Our food sales have a higher cost of sales when compared to our beverage sales.
Also, within the food category, we have seen an increase in the percentage of
sales of salads this year. These items have a seasonally higher cost in the
winter months due to seasonally higher produce costs.
Restaurant operating expenses. Restaurant operating expenses increased by
$5.7 million, or 51.0%, to $16.8 million in the first quarter of fiscal 2003,
from $11.1 million in the first quarter of fiscal 2002. This increase is
primarily due to the increase in the number of restaurants in operation this
year. As a percentage of sales, restaurant operating expenses increased to 65.5%
of sales in the first quarter of fiscal 2003, from 61.6% in the first quarter of
fiscal 2002. This increase was primarily due to increases in our labor costs.
General and administrative costs. General and administrative costs
increased by $3.3 million, or 71.5%, to $7.9 million in the first quarter of
fiscal 2003, from $4.6 million in the first quarter of fiscal 2002. This
increase is primarily due to a $3.7 million employee severance charge in this
year's quarter. The increase due to this charge was partially offset by $0.4
million in cost reductions associated with reductions in our executive, general
and administrative staff during this year's quarter. As a percentage of sales,
general and administrative costs increased to 30.9% of sales in the first
quarter of fiscal 2003, from 25.6% of sales in the first quarter of fiscal 2002.
The increase as a percentage of sales was entirely due to the employee severance
cost in this year's quarter. Excluding the employee severance charge, general
and administrative costs decreased to 16.5% of sales in this year's quarter,
primarily due to sales leverage against these costs.
Depreciation and amortization. Depreciation and amortization increased
$0.8 million, or 61.8%, to $2.0 million in the first quarter of fiscal 2003,
from $1.2 million in the first quarter of fiscal 2002. This increase was
primarily due to additional depreciation expense for restaurants opened
subsequent to the first quarter of fiscal 2002. As a percentage of restaurant
sales, depreciation and amortization increased to 7.6% of sales in the first
quarter of fiscal 2003, compared to 6.7% of sales in the first quarter of fiscal
2002. This increase, as a percentage of sales, is primarily due to the lower per
unit sales performance in restaurants opened since the first quarter of fiscal
2002. See Liquidity and Capital Resources below.
Restaurant pre-opening expenses. Restaurant pre-opening expenses increased
to $0.3 million in the first quarter of fiscal 2003, from $0.1 million in the
first quarter of fiscal 2002. As a percentage of restaurant sales, restaurant
pre-opening expenses increased to 1.4% of sales in the first quarter of fiscal
2003, from 0.6% of sales in the first quarter of fiscal 2002. This increase is
primarily due to the increase in the number of new restaurants opened in the
first quarter of 2003. Six new restaurants were opened in the first quarter of
fiscal 2003 compared to no new restaurants opened in the first quarter of fiscal
2002. Pre-opening expenses were recorded related to three restaurants that were
remodeled in the first quarter of fiscal 2002.
Loss on impairment of property and equipment and restaurant disposals.
During the first quarter of fiscal 2003, we recognized $2.6 million of asset
impairment and store disposal costs. Of this, approximately $0.6 million
represents charges related to the closure of three under performing restaurants
during the quarter, approximately $1.3 million were charges taken on twenty-five
locations which were in our development pipeline but have been cancelled, and
approximately $0.7 million represents impairment charges taken on two
underperforming restaurants which have been identified for closure in the
future. No such charges were recognized during the first quarter of fiscal 2002.
Lease termination costs. During the first quarter of fiscal 2003, we
recognized $0.3 million of lease
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Page 13
termination costs, related to the termination of several leases on restaurants
which were in the development pipeline, but for which our plans were cancelled
during the quarter. No such charges were recognized during the first quarter of
fiscal 2002.
Interest income and expense. During the first quarter of fiscal 2003 and
the first quarter of fiscal 2002 interest income was less than $0.1 million.
Interest expense decreased $0.3 million to less than $0.1 million in the first
quarter of fiscal 2003 from $0.3 million in the first quarter of fiscal 2002.
The decrease in interest expense is primarily due to the repayment of borrowings
under our 13% senior subordinated notes due 2006, which were outstanding during
the first quarter of fiscal 2002. Those notes were repaid in December 2002 with
proceeds from our initial public offering.
Amortization of deferred financing costs and debt discount During the
first quarter of fiscal 2003, we recorded less than $0.1 million in amortization
of deferred financing costs related to our Equipment Loan Credit Facility. This
compares to $0.1 million recorded in the first quarter of fiscal 2002. The
reduction in 2003 is primarily related to the repayment of our senior
subordinated notes and elimination of the associated amortization of debt
discount related to those notes.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $3.6 million on March 31, 2003, compared
with $13.0 million on December 30, 2002. Our working capital was a deficit of
$8.3 million on March 31, 2003, compared with working capital of $0.7 million as
of December 30, 2002. Our principal requirements for cash are funding
operations, capital expenditures for the development of new restaurants, and for
maintaining or remodeling existing restaurants. During the first quarter of
fiscal 2003 we financed our requirements for capital with the proceeds from the
initial public offering of our common stock that was completed in November of
2002.
Net cash used in operating activities for the three months ended March 31,
2003 was $6.1 million, compared to $5.3 million for the three months ended April
1, 2002. Funds used in operating activities in the first quarter of 2003
increased primarily as a result of an increase in our net loss compared to the
first quarter of 2002.
Total capital expenditures for the three months ended March 31, 2003 were
$3.2 million, compared to expenditures of $2.7 million for the three months
ended April 1, 2002. These expenditures were primarily related to the opening of
six new restaurants during the three months ended March 31, 2003, and remodeling
three existing restaurants and constructing four new restaurants during the
first quarter of fiscal 2002.
Net cash used in financing activities was $0.2 million for the three
months ended March 31, 2003. During the period we made scheduled repayments of
$0.2 million and less than $0.1 million related to our outstanding long-term
debt and capital lease obligations, respectively. Net cash provided by financing
activities was $16.1 million for the three months ended April 1, 2002. During
the first quarter of fiscal 2002 we issued approximately 1.1 million shares of
Series C preferred stock (all of which was subsequently converted into common
stock in connection with our IPO), and received approximately $19.3 million, net
of offering costs. Of this, approximately $3.6 million represented the exchange
of approximately $3.5 million face amount of our 13% Senior Subordinated Notes
and accrued interest.
During the first quarter of fiscal 2003, we have experienced lower sales
and operating profits than we had projected, mostly related to underperformance
at new restaurants opened in the second half of 2002 and in the first quarter of
2003 and severe winter weather in the Northeast. In addition, our cash position
has been adversely impacted by the payment of costs associated with restaurants
in our development pipeline that we have determined not to open. Principally
because of these developments, the Company determined that it was prudent to
seek additional financing. Consequently, we have obtained a $3 million line of
credit (the "Loan") from a bank to be used for general corporate purposes. The
Loan bears interest at 75 basis points over the bank's prime lending rate and is
secured by all of our tangible and intangible property, other than equipment
pledged to secure our equipment loan credit facility. The Loan matures in May
2004. We have paid the bank fees and expenses of approximately $22,000 upon
funding of the Loan. The Loan is guaranteed, jointly and severally, by Eric J.
Gleacher, one of our directors; Charles G. Phillips, one of our shareholders
- --------------------------------------------------------------------------------
Page 14
and an entity related to ZAM Holdings, L.P., our largest shareholder (together,
"the Guarantors"). At any time during the term of the Loan, the Guarantors have
the right to require the bank to assign the Loan to the Guarantors. If the Loan
has not been assigned by the bank to the Guarantors, and has not been paid in
full by August 15, 2003, then the bank is required to assign the Loan to the
Guarantors. If approved by our shareholders, upon assignment of the loan to the
Guarantors, the Loan will be convertible into shares of our common stock, under
certain circumstances, at the option of the Guarantors, at a conversion price
equal to the lesser of $1.50 or 85% of the weighted average price per share of
our common stock for the fifteen trading day period ending three trading days
before the conversion date.
We currently anticipate making a rights offering (the "Offering") to our
existing shareholders to raise approximately $12 million. We currently
anticipate that the Offering will give our existing shareholders the right to
purchase shares of our common stock at a purchase price per share equal to the
lesser of $1.50 or 85% of the weighted average price per share of our common
stock for the fifteen trading day period ending three trading days before the
expiration date of the Offering. A group of our shareholders, including the
Guarantors, or related entities have indicated that they will commit to purchase
shares in the offering, or provide other funding support, in the amount of $8.5
million of the $12 million offering. This shareholder group's commitment to
purchase shares in the Offering will be subject to shareholder approval of the
equity conversion feature of the Loan.
The terms of the Loan and the Offering were reviewed and approved by a
committee of our board comprised of disinterested directors.
We intend to file a registration statement with the Securities and
Exchange Commission relating to the Offering. The timing and completion of the
Offering is subject to market conditions and other contingencies. There can be
no assurance that we will be able to complete the Offering on terms acceptable
to the company or at all. The Offering will only be made pursuant to a
prospectus filed with the Securities and Exchange Commission. This does not
constitute an offer to sell, or the solicitation of an offer to buy, any
securities nor shall there be any sale of securities in any state or
jurisdiction in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities law of any such state or
jurisdiction.
We currently estimate that our capital expenditures during 2003 will be
approximately $3.8 million, principally for the opening of the six new
restaurants that have already been opened, and for maintaining and remodeling
existing restaurants. Most of these expenditures have been paid and the
remainder will be funded through existing cash balances and from the proceeds
from the Loan. We anticipate that our capital expenditures for the remainder of
the year will be minimal.
Our future capital requirements and the adequacy of available funds will
depend on many factors, including our ability to generate cash from operations,
the pace of our expansion, real estate markets, the availability of suitable
site locations and the nature of the arrangements negotiated with landlords. We
presently anticipate that our current cash balances, proceeds from the Loan, and
internally generated cash flows will be sufficient to fund our cash requirements
for the next twelve months.
Our cash resources going forward will be highly dependant upon the level
of internally generated cash from operations and upon any potential future
financing transactions, including the Offering.
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Page 15
CONTRACTUAL OBLIGATIONS
AS OF MARCH 31, 2003
TOTAL DUE APRIL - DUE IN 2004 DUE IN 2006 DUE AFTER
CONTRACTUAL OBLIGATIONS (IN THOUSANDS) DECEMBER 2003 AND 2005 AND 2007 2007
- ---------------------------------- -------------- ------------- ----------- ----------- ---------
Notes payable .................... $ 1,344.7 $ 1,096.0 $ 86.9 $ 79.0 $ 82.8
Employee severance obligations ... 3,302.8 1,288.5 2,014.3
Employment agreement ............. 606.4 256.5 349.9
Capital lease obligations ........ 64.1 62.0 2.1
Operating lease obligations (a)(b) 115,820.9 9,725.8 27,067.8 27,025.1 52,002.2
(a) Amounts shown are net of $2.5 million of sublease rental income due under
non-cancelable subleases.
(b) Includes approximately $11.6 million of obligations on leases for
restaurants that have either been closed or are planned to be closed.
We are obligated under non-cancelable operating leases for our restaurants
and our administrative offices. Lease terms are generally for ten years with
renewal options and generally require us to pay a proportionate share of real
estate taxes, insurance, common area and other operating costs. Some restaurant
leases provide for contingent rental payments.
PURCHASE COMMITMENT
During fiscal year 1999, we entered into an exclusive coffee supply
agreement with an unrelated third party ("Supplier"). The agreement calls for
minimum purchases, in terms of both quantity and price, to be made by the
Company of coffee beans and related products. The agreement is in effect through
December 2003 but may be terminated by the Company or the Supplier provided 180
days notice is given in advance of such termination. The Company is obligated to
purchase approximately $0.7 million of roasted coffee between now and fiscal
year end 2003 under the terms of that agreement.
During fiscal year 2002, we entered into a beverage marketing agreement
with the Coca-Cola Company. Under the agreement, the Company is obligated to
purchase approximately 2.0 million gallons of fountain syrups at the
then-current annually published national chain account prices.
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FORWARD-LOOKING STATEMENTS
Matters discussed in this report which relate to events or developments
which are expected to occur in the future, including any discussion, expressed
or implied, of anticipated growth, operating results or earnings constitute
forward-looking statements. Forward-looking statements are based on management's
beliefs, assumptions and expectations of our future economic performance, taking
into account the information currently available to management. These statements
are not statements of historical fact. Forward-looking statements involve risks
and uncertainties that may cause our actual results, performance or financial
condition to differ materially from the expectations of future results,
performance or financial condition we express or imply in any forward-looking
statements. Factors that could contribute to these differences include, but are
not limited to:
o the cost of our principal food products;
o labor shortages or increased labor costs;
o changes in consumer preferences and demographic trends;
o increasing competition in the fast casual dining segment of the
restaurant industry;
o expansion into new markets;
o our ability to effectively manage our business with a reduced
general and administrative staff;
o our ability to incorporate a franchising and area development model
into our strategy;
o the availability and cost of additional financing, both to fund our
existing operations and to grow and open new restaurants;
o the rate of our internal growth, and our ability to generate
increased revenue from our existing restaurants;
o fluctuations in our quarterly results;
o increased government regulation;
o supply and delivery shortages or interruptions;
o market saturation due to new restaurant openings;
o inadequate protection of our intellectual property;
o adverse weather conditions which impact customer traffic at our
restaurants; and
o adverse economic conditions.
The words "believe," "may," "will," "should," "anticipate," "estimate,"
"expect," "intend," "objective," "seek," "plan," "strive" or similar words, or
the negatives of these words, identify forward-looking statements. We qualify
any forward-looking statements entirely by these cautionary factors.
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Page 17
ITEM 3. Quantitative And Qualitative Disclosures About Market Risk
The Company's market risk exposures are related to its cash, cash
equivalents, investments and interest that it pays on its debt. The Company has
no derivative financial instruments or derivative commodity instruments in its
cash, cash equivalents and investments. The Company invests its 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 the Company earns on its investments and, therefore,
impacts it cash flows and results of operations.
All of the Company's transactions are conducted, and its accounts are
denominated, in United States dollars. Accordingly, the Company is not exposed
to foreign currency risk.
ITEM 4. Disclosure Controls & Procedures
Under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, the Company has evaluated the effectiveness of the design and operation
of its disclosure controls and procedures within 90 days of the filing date of
this quarterly report, and, based on their evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that these disclosure
controls and procedures are effective. There were no significant changes in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
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Page 18
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
On February 5, 2003, a purported shareholder class action complaint was
filed in the United States District Court for the Southern District of New York
(the "Court"), alleging that the Company and various of its officers and
directors and the Underwriter violated Sections 11, 12(a)(2) and 15 of the
Securities Act of 1933 by misstating, and by failing to disclose, certain
financial and other business information (Sheel Mohnot v. Cosi, Inc., et al.,
No. 03 CV 812). At least seven additional class action complaints with similar
allegations were later filed (collectively, the "Securities Act Litigation").
The Securities Act Litigation is brought on behalf of a purported class of
purchasers of the Company's stock allegedly traceable to its November 22, 2002
initial public offering ("IPO"). The complaints in the Securities Act Litigation
generally claim that at the time of the IPO, the Company's offering materials
failed to disclose that the funds raised through the IPO would be insufficient
to implement the Company's expansion plan; that it was improbable that the
Company would be able to open 53 to 59 new stores in 2003; that at the time of
the IPO, Cosi had negative working capital and therefore did not have available
working capital to repay certain debts; and that the principal purpose for going
forward with the IPO was to repay certain existing shareholders and members of
the Board of Directors for certain debts and to operate the Company's existing
restaurants.
On February 21, 2003, a purported shareholder class action complaint was
filed in the Court alleging that the Company and certain of its officers and
directors violated Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, and Rule 10-b promulgated thereunder, by issuing a series of material
misrepresentations to the market between November 22, 2002 and February 4, 2003
(the "Class Period") (Georgette Pacia v. Cosi, Inc. et al., No. 03-CV-1156). One
additional class action complaint with similar allegations was later filed
(collectively, the "Securities Exchange Act Litigation"). The emphasis of the
allegations in the complaint in the Securities Exchange Act Litigation is that
the defendants knowingly or recklessly caused misrepresentations and omissions
to be made regarding the Company's operating condition and future business
prospects. Among other things, plaintiffs in the Securities Exchange Act
Litigation allege that defendants failed to disclose that the funds raised by
the IPO would be insufficient to implement the Company's expansion plan; that at
the time of the IPO, defendants should have known that the costs of expansion
would be greater than the cash available to the Company, making it improbable
that the Company would be able to successfully continue to open new stores at
the pace announced by the Company; and that defendants failed to disclose that a
reduction in the offering price of the IPO would result in the Company being
forced to abandon its growth strategy.
The plaintiffs in the Securities Act Litigation and the Securities
Exchange Act Litigation (the "Litigations") generally seek to recover
compensatory damages, expert fees, attorneys' fees, costs of Court and pre- and
post-judgment interest. The Underwriter is seeking indemnification from the
Company for any damages assessed against it in the Securities Act Litigation.
The Litigations are at a preliminary stage, and the Company expects that these
related lawsuits will be consolidated into a single action. The Company believes
that it has meritorious defenses against these claims, and intends to vigorously
defend against them.
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Page 19
ITEM 2. Use of Proceeds
USE OF PROCEEDS
We registered and sold 5,555,556 shares of our common stock, par value $0.01, to
the public at an aggregate offering price of $38,888,892 or $7.00 per share
pursuant to registration statement No. 333-86390, which was declared effective
on November 21, 2002. The offering has terminated. The lead underwriter of the
offering was William Blair & Company, LLC. Through March 31, 2003, we incurred
the following expenses in connection with our initial public offering:
In $ Millions
Gross Proceeds $38.9
Underwriter's Commissions (2.7)
Other costs of issuance paid by the Company (3.4)
-----
Net Proceeds to the Company $32.8
=====
The net offering proceeds to us through March 31, 2003 after deducting the total
expenses above were approximately $32.8 million.
Intended Use Of Actual Use of
Proceeds as stated in Proceeds through
In $ Millions prospectus March 31, 2003
Develop new restaurants and maintain
and remodel existing restaurants $19.6 $12.4
Prepay outstanding 13% senior
subordinated notes due 2006 6.6 6.6
Retire all outstanding 12% senior
secured notes 7.5 7.5
Fund operating losses 4.1
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
ITEM 5. OTHER INFORMATION
As of April 1, 2003, in connection with the Loan and the related right,
subject to shareholder approval, of the Guarantors to convert the Loan into
shares of the Company's common stock, as described under "Liquidity and Capital
Resources," the Company amended its Rights Agreement with American Stock
Transfer And Trust Company, as rights agent, relating to the Company's preferred
stock purchase rights (the "Rights Agreement"), to include Ziff Investors
Partnership, L.P. II as an Exempt Person, as defined in Section 1(a) of the
Rights Agreement. Ziff Investors Partnership, L.P. II is one of the guarantors
of the Loan and, subject to stockholder approval, will have the right, under
certain circumstances, to convert its pro rata share of the Loan into shares of
our common stock. Ziff Investors Partnership, L.P. II is an entity related to
ZAM Holdings, L.P., which is an Exempt Person under the Rights Agreement. A copy
of the Amendment is attached hereto as Exhibit 4.3 and is incorporated herein by
reference.
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Page 20
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
4.1 -- Loan Agreement dated March 31, 2003 between Cosi, Inc. and First
Republic Bank.
4.2 -- Promissory Note dated March 31, 2003 between Cosi, Inc. and First
Republic Bank.
4.3 -- Amendment No. 1 to Rights Agreement dated as of November 21, 2002,
between Cosi, Inc. and American Stock Transfer and Trust Company, as
rights agent.
10.1 -- Separation Agreement between Cosi and Andy Stenzler, effective
January 31, 2003.
99.1 -- Certification of the Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
99.2 -- Certification of the Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K on February 4, 2003, which
attached and incorporated by reference the Company's press release dated
February 3, 2003, announcing the resignation of Chairman and CEO Andrew
Stenzler, the appointment of Jay Wainwright as CEO and the election of Eric
Gleacher as Chairman of the Board of Directors.
The Company filed a Current Report on Form 8-K on February 26, 2003, which
attached and incorporated by reference the Company's press release dated
February 25, 2003 reporting the Company's financial results for the fourth
fiscal quarter and fiscal year ended December 30, 2002.
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Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Cosi, Inc.
Dated: May 8, 2003 By: /s/ Jay Wainwright
----------------------------------------
Jay Wainwright
Chief Executive Officer
Dated: May 8, 2003 By: /s/ William D. Forrest
----------------------------------------
William D. Forrest
Chairman
Dated: May 8, 2003 By: /s/ Kenneth S. Betuker
----------------------------------------
Kenneth S. Betuker
Chief Financial Officer
(Chief Accounting Officer)
Treasurer and Secretary
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CERTIFICATIONS
I, Jay Wainwright, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cosi, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 8, 2003
By /s/ Jay Wainwright
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Jay Wainwright
Chief Executive Officer
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CERTIFICATIONS
I, Kenneth S. Betuker, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cosi, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 8, 2003
By: /s/ Kenneth S. Betuker
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Kenneth S. Betuker
Chief Financial Officer
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