UNITED STATES
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 June 30, 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 Street
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 August 12, 2003, 17,710,103 shares of the registrant's Common Stock, $.01
par value, were outstanding.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (unaudited)
Consolidated Balance Sheets as of June 30, 2003 and
December 30, 2002 (unaudited)
Consolidated Statements of Operations for the three months and
six months ended June 30, 2003 and July 1, 2002 (unaudited)
Consolidated Statement of Stockholders' Equity for the six
months ended June 30, 2003 (unaudited)
Consolidated Statements of Cash Flows for the six months ended
June 30, 2003 and July 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. CONTROLS & PROCEDURES
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. CHANGES IN SECURITIES AND 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
Page 2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
COSI, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share information)
June 30, December 30,
2003 2002
-------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........................ $ 3,743.1 $ 13,032.3
Accounts receivable, net of allowances of
$231.3 and $232.1, respectively ................ 1,096.0 1,511.5
Inventory ........................................ 1,276.5 1,465.8
Prepaid expenses and other current assets ........ 1,177.3 1,676.3
---------- ----------
Total current assets ...................... 7,292.9 17,685.9
PROPERTY, EQUIPMENT AND LEASEHOLD
IMPROVEMENTS, net ................................ 40,258.2 45,755.3
INTANGIBLES, SECURITY DEPOSITS AND OTHER
ASSETS, net ..................................... 2,826.0 2,801.9
---------- ----------
Total assets .............................. $ 50,377.1 $ 66,243.1
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................. $ 4,590.8 $ 8,925.2
Accrued liabilities .............................. 7,582.5 5,922.4
Current portion of other liabilities ............. 612.5 671.6
Current portion of capital lease obligations ..... 18.4 117.0
Current portion of long-term debt ................ 811.0 1,280.4
---------- ----------
Total current liabilities ................. 13,615.2 16,916.6
OTHER LIABILITIES, net of current portion .......... 11,664.1 9,748.3
CAPITAL LEASE OBLIGATIONS, net of current portion .. -- 2.5
LONG-TERM DEBT, net of current portion.............. 3,254.4 248.7
---------- ----------
Total liabilities ......................... 28,533.7 26,916.1
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock -- $.01 par value: 100,000,000 shares
authorized, 17,732,081 and 16,573,514 shares
issued and outstanding, respectively ........... 177.3 165.7
Additional paid-in capital ....................... 190,836.2 189,255.0
Deferred stock compensation ...................... (1,162.2)
Treasury stock, at cost 21,978 shares in 2003 .... (250.0)
Notes receivable from stockholders ............... (2,724.8) (2,974.8)
Accumulated deficit .............................. (165,032.9) (147,118.9)
---------- ----------
Total stockholders' equity ................ 21,843.4 39,327.0
---------- ----------
Total liabilities and
stockholders' equity .................... $ 50,377.1 $ 66,243.1
========== ==========
The accompanying notes are an integral part of these consolidated statements.
Page 3
COSI, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
Three Months Ended Six Months Ended
------------------------------ -----------------------------
June 30, 2003 July 1, 2002 June 30, 2003 July 1, 2002
------------- ------------ ------------- ------------
NET SALES ............................................. $ 28,936.4 $ 20,919.9 $ 54,590.9 $ 38,972.0
COST OF SALES:
Cost of goods sold .................................. 8,172.5 5,645.6 15,489.0 10,499.0
Restaurant operating expenses ....................... 17,818.9 12,366.5 34,620.1 23,493.5
---------- ---------- ---------- ----------
TOTAL COST OF SALES ........................... 25,991.4 18,012.1 50,109.1 33,992.5
GENERAL AND ADMINISTRATIVE
EXPENSES............................................... 4,435.4 4,227.6 12,360.6 8,847.9
DEPRECIATION AND AMORTIZATION ......................... 1,994.4 1,335.5 3,953.0 2,545.8
RESTAURANT PRE-OPENING EXPENSES
-- 286.1 349.1 397.5
PROVISION FOR LOSSES ON ASSET IMPAIRMENTS AND DISPOSALS
2,790.8 7.3 5,358.8 7.3
LEASE TERMINATION COSTS ............................... -- -- 257.1 --
---------- ---------- ---------- ----------
Operating loss ................................ (6,275.6) (2,948.7) (17,796.8) (6,819.0)
INTEREST INCOME ....................................... 10.4 32.4 35.5 62.3
INTEREST EXPENSE ...................................... (50.9) (245.6) (97.9) (547.0)
AMORTIZATION OF DEFERRED FINANCING COSTS .............. (29.8) (62.4) (54.8) (148.8)
---------- ---------- ---------- ----------
Net loss ...................................... (6,345.9). (3,224.3) (17,914.0) (7,452.5)
PREFERRED STOCK DIVIDENDS ............................. -- (2,383.4) -- (4,343.9)
NET LOSS ATTRIBUTABLE TO COMMON STOCK ................. $ (6,345.9) $ (5,607.7) $(17,914.0) $(11,796.4)
========== ========== ========== ==========
PER SHARE DATA:
Net Loss Per Share: ................................. $ (0.38) $ (1.23) $ (1.07) $ (2.60)
========== ========== ========== ==========
Basic and diluted
Weighted Average Common Shares
Outstanding ......................................... 16,824 4,544 16,699 4,533
========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated statements.
Page 4
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Six Months Ended June 30, 2003
(unaudited)
(In thousands, except share information)
Common Stock Treasury Stock
----------------------------------------- ----------------------
Additional
Number of Paid-In Deferred Number of
Shares Amount Capital Compensation Shares
------ ------ ------- ------------ ------
BALANCE, December 30, 2002 ............ 16,573,514 $165.7 $189,255.0
Stock compensation .................... -- -- 43.1 -- --
Exercise of warrants ................. 1,274 -- -- -- --
Issuance of restricted stock ......... 1,157,293 11.6 1,538.1 $(1,549,7)
Amortization of deferred compensation
Return of shares for note ............. -- -- -- 387.5 21,978
Net loss ............................. -- -- -- -- --
BALANCE, June 30, 2003 ................ 17,732,081 $177.3 $190,836.2 $ (1,162.2) $ 21,978
Treasury Stock
------------------------------
Note
Receivable
from Accumulated
Amount Stockholders Deficit Total
------ ------------ ------- -----
BALANCE, December 30, 2002 ...... -- $(2,974.8) $ (147,118.9) $ 39,327.0
Stock compensation .............. -- -- -- 43.1
Issuance of restricted stock ... -- -- -- --
Amortization of deferred compens 387.5
Return of shares for note ....... $(250.0) 250.0 -- --
Net loss ....................... -- -- (17,914.0) (17,914.0)
BALANCE, June 30, 2003 .......... $(250.0) $(2,724.8) $ (165,032.9) $ 21,843.4
Page 5
COSI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
For the Six Months Ended
June 30, 2003 July 1,2002
------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................ $(17,914.0) $ (7,452.5)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ..................... 3,953.0 2,545.7
Amortization of deferred financing
costs & debt discount ........................... 54.8 148.8
Non-cash portion of asset impairments
and disposals ................................... 4,923.3 --
Provision for bad debts ........................... 18.0 4.9
Stock compensation expense ........................ 387.4 --
Non-cash employee severance cost .................. 43.1 --
Changes in operating assets and liabilities:
Accounts receivable ............................. 397.5 163.8
Inventory ....................................... 189.2 (98.8)
Other assets .................................... (266.5) (828.0)
Accounts payable ................................ (4,334.6) (1,208.7)
Accrued liabilities ............................. 3,229.6 (346.6)
Accrued contractual lease increases ............. 287.6 364.7
Prepaid expenses and other current
assets .......................................... 499.0 (382.7)
Lease termination accrual ....................... (43.4) (222.7)
--------- ---------
Net cash used in operating
activities .................................... (8,576.2) (7,312.1)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, equipment and
leasehold improvements ............................. (3,379.1) (6,721.8)
Return of (payments made for) security
deposits ............................................ 187.6 (23.8)
--------- ---------
Net cash used in investing
activities ................................... (3,191.5) (6,745.6)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock .............. 43.1 351.6
Net proceeds from issuance of preferred ............. -- 15,670.5
stock
Principal payments on capital lease
obligations ....................................... (101.1) (249.1)
Proceeds from long-term debt plus related
warrants and accrued interest ..................... 3,000.0 904.0
Principal payments on long-term debt ................ (463.6) (561.8)
--------- ---------
Net cash provided by financing
activities .................................. 2,478.5 16,115.2
--------- ---------
Net increase (decrease) in cash ....................... (9,289.2) 2,057.5
CASH AND CASH EQUIVALENTS, beginning of year .......... 13,032.3 4,469.6
--------- ---------
CASH AND CASH EQUIVALENTS, end of period .............. $ 3,743.1 $ 6,527.1
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest .......................................... $ 97.9 $ 547.0
========= =========
Corporate franchise and income taxes .............. $ 80.3 $ 159.2
========= =========
Non-cash financing transactions:
Conversion of Senior Subordinated
Debt to ......................................... $ -- $ 3,183.2
Series C Preferred Stock
Conversion of Warrants to Series C
Preferred Stock .................................. $ -- $ 429.9
========= =========
The accompanying notes are an integral part of these consolidated statements.
Page 6
Notes to Consolidated Financial Statements (unaudited)
June 30, 2003
Note A -- Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Cosi, Inc. and its subsidiaries (collectively, "Cosi," the "Company," "we" or
"us") have been prepared in accordance with generally accepted accounting
principles for interim financial information and 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 accounting principles generally accepted
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
26 week period ended June 30, 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. 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.
Certain reclassifications have been made to conform previously reported
data to the current presentation.
Note B -- Stock-Based Compensation
The Company complies with the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). 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"). 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.
Page 7
The following table illustrates the effect on net loss attributable to
common stock and net loss per share of common stock as if the Company had
applied the fair value recognition provisions of SFAS 123 to stock-based
employee compensation:
For the Six Months
Ended
(In 000's)
June 30, 2003 July 1, 2002
------------- -------------
Net loss attributable ................
to common stock - as reported ...... $(17,914.0)) $ (11,796.4)
============ ============
Stock based
compensation included in the
determination of net loss, as
reported ............................ 43.1 --
------------ ------------
Stock based compensation
determined under SFAS 123 ............ (801.3) (962.7)
------------ ------------
Net loss attributable to common stock
- Pro forma ......................... (18,672.2) (12,759.1)
Net loss per common share
-- Basic and Diluted:
As reported .......................... $ (1.07) $ (2.60)
============ ============
Pro forma ............................ $ (1.12) $ (2.81)
============ ============
Note C -- Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements consist of the following:
June 30, December 30,
(In 000's) 2003 2002
--------- ------------
Leasehold improvements .................... $ 34,816.6 $ 36,297.4
Furniture and fixtures .................... 9,500.2 9,499.9
Restaurant equipment ...................... 13,586.3 13,000.9
Computer and
telephone equipment ...................... 8,153.0 7,962.2
Construction in
progress .................................. 204.2 1,063.8
--------- ---------
66,260.3 67,824.2
Less: accumulated
depreciation and .......................... (26,002.1) (22,068.9)
--------- ---------
amortization ............................ $ 40,258.2 $ 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 No. 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 $3.5 million (related to eight restaurants)
in the first half of fiscal 2003. No impairment charges were recorded in the
first half 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 half 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 Company's 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.
Page 8
Note D -- Accrued Liabilities
Accrued liabilities consist of the following:
June 30, December 30,
(In 000's) 2003 2002
--------- ------------
Payroll and related
benefits and taxes ................ $1,771.6 $1,521.2
Professional and legal
costs ............................. 313.6 437.0
Taxes payable ..................... 816.2 825.3
Severance payable - current
portion .......................... 1,239.4 --
Unearned vendor allowances ........ 581.0 595.5
Other ............................. 2,860.7 2,543.4
-------- --------
$7,582.5 $5,922.4
======== ========
Note E - Long-Term Debt
Notes Payable
The Company maintains a credit facility in the original amount of $3
million under a Master Loan and Security Agreement dated October 28, 1999 (the
"Equipment Loan Credit Facility"). The proceeds are required to be used for the
purchases of equipment. Borrowings are secured by the equipment purchased. Each
borrowing under the Equipment Loan Credit Facility is payable over 36 months and
the interest rate is determined at the time of the borrowing. Warrants to
purchase shares of common stock were issued in connection with the Credit
Facility. The warrants entitle the holder to acquire 8,068 shares of the
Company's common stock for $14.875 per share. As of December 30, 2002, there
were two notes payable outstanding under the Equipment Loan Credit Facility. The
note payable due September 1, 2003 requires monthly payments of $35,949, which
commenced in October 2000, and accrues interest at a rate of 9.10% per annum.
The note payable due December 1, 2003 requires monthly payments of $58,361,
which commenced in December 2001, and accrues interest at a rate of 8.50% per
annum.
In addition to the monthly payments, the Company is required to pay loan
fees of $113,738 and $186,158, respectively, which are due September 1, 2003 and
December 1, 2003, respectively. The Company is amortizing these loan fees as
additional interest expense over the term of the notes.
The Company has an outstanding note payable of approximately $120,000. The
note is due March 2007 and requires monthly payments of $3,097, which commenced
in May 1998, and accrues interest at a rate of 10% per year.
In 2001 the Company entered into a settlement agreement involving a
trademark dispute. Under that agreement, the Company is obligated to make annual
payments of $25,000 per year through 2011. The present value of those future
payments is included in Notes Payable on the accompanying balance sheets.
In April 2003 the Company borrowed the full amount of a $3 million line of
credit (the "$3 Million Note") from a bank to be used for general corporate
purposes. The $3 Million Note bears interest at 75 basis points over Bank of
America'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 $3 Million Note 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 $3 Million Note is guaranteed, jointly and severally, by Eric J.
Gleacher, one of the Company's stockholders and formerly a director; Charles G.
Phillips, one of its shareholders and an entity related to ZAM Holdings, the
Company's largest shareholder (together, "the Guarantors"). At any time during
the term of the $3 Million Note, the Guarantors have the right to require the
bank to assign the $3 Million Note to the Guarantors. If the $3 Million Note 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 $3 Million Note to
the Guarantors. On August 5, 2003, the Guarantors agreed, upon assignment of the
$3 Million Note, to extend the maturity of the note to December 31, 2004. If
approved by the Company's shareholders, upon assignment of the $3 Million Note
to the Guarantors, the $3 Million Note 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.
Page 9
Note F -- 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 For the Six Months
Ended Ended
June 30, 2003 July 1, 2002 June 30, 2003 July 1, 2002
------------- ------------ ------------- ------------
Basic and Diluted:
Net loss .......................... $ (6,345.9 $ (3,224.3 $(17,914.0) $ (7,452.5)
Preferred stock
dividends ......................... -- (2,383.4) -- (4,343.9)
Net loss attributable
to common stock .................. (6,345.9) (5,607.7) (17,914.0) (11,796.4)
---------- ---------- ---------- ----------
Weighted average common shares
outstanding ...................... 16,823.7 4,544.4 16,698.6 4,533.3
Net loss per share ................ $ (0.38) $ (1.23) $ (1.07) $ (2.60)
========== ========== ========== ==========
Note G - 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 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, including severance payments, expected to
be incurred in connection with this personnel reduction. This charge is included
in general and administrative expenses in the accompanying consolidated
statements of operations. Of these costs, $0.8 million were paid during the
first half of fiscal 2003, leaving a remaining accrued liability of $2.9 million
as of June 30, 2003. Of this amount, $1.6 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 804.9
--------
Balance June 30, 2003 $2,852.0
Note H - Restricted Stock
On June 26, 2003, the Company entered into an employment agreement with
William D. Forrest. Pursuant to the agreement, Mr. Forrest will serve as
Executive Chairman for three years ending on March 31, 2006. In consideration
for Mr. Forrest's service as the Company's Executive Chairman, on June 26, 2003,
the Company issued to Mr. Forrest 1,156,407 shares of its authorized but
unissued common stock, representing 5% of its outstanding common stock on a
fully diluted basis (assuming all outstanding options and warrants are
exercised). Upon completion of the Company's pending rights offering, the
Company will issue a number of additional shares to Mr. Forrest such that his
percentage ownership of Cosi on a fully diluted basis remains 5%; provided,
however, that if the subscription price in the rights offering is less than
$1.25 per share, the Company will issue Mr. Forrest a number of shares equal to
the number of shares that Mr. Forrest would have received in the offering based
upon a subscription price of $1.25 per share. Mr. Forrest's rights in the shares
vest as follows: (i) 25% of the shares vested upon issuance; (ii) 25% of the
shares will vest on April 1, 2004, provided the agreement is still in effect;
and (iii) on the last day of each month, commencing with April 2004, and ending
on March 2006, 2.08% of the shares will vest, and an additional .08% of the
shares will vest on March 31, 2006, provided that at the end of each month the
agreement is still in
Page 10
effect. All shares not vested will fully vest upon the termination of this
agreement by Cosi without cause (as defined in the agreement), or upon a change
of control (as defined in the agreement). If Mr. Forrest is terminated by the
Company for cause (as defined in the agreement), all unvested shares will be
forfeited. Mr. Forrest agreed that, during the term of the agreement and for a
period of 12 months thereafter, he will not compete with the Company or solicit
its employees. The value of Mr. Forrest's shares, based on the closing price of
the Company's common stock on the date of the grant, of $1.34 per share, was
$1,549,585, which was recorded as deferred stock compensation within
stockholder's equity. The amortization of deferred stock compensation expense,
representing the value of the shares that vested upon issuance, of $387,396 is
included in general and administrative expenses in the accompanying consolidated
statements of operations. The remaining balance will be amortized as stock
compensation expense evenly over the remaining life of Mr. Forrest's employment
agreement.
Note I - 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 of the Company's IPO violated Sections 11,
12(a)(2) and 15 of the Securities Act of 1933, as amended, 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 eight additional class
action complaints with substantially similar allegations were later filed. These
actions have been consolidated in In re Cosi, Inc. Securities Litigation
(collectively, the "Securities Act Litigation"). On July 7, 2003, lead
plaintiffs filed a Consolidated Amended Complaint, alleging on behalf of a
purported class of purchasers of the Company's stock allegedly traceable to its
November 22, 2002 IPO, 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 restaurants in 2003; that at
the time of the IPO, the Company 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.
The plaintiffs in the Securities Act Litigation generally seek to recover
recessionary 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 Securities Act Litigation is at a preliminary stage, and the Company
believes that it has meritorious defenses to these claims, and intends to
vigorously defend against them.
Note J - Subsequent Events
On July 7, 2003 Mr. Kevin Armstrong joined Cosi as its Chief Executive
Officer, and was appointed to the Company's Board of Directors. In connection
with his employment Mr. Armstrong was granted options to purchase 900,000 shares
of the Company's common stock at a price of $1.77 per share, the closing market
price on the date of the grant. Twenty-five percent of Mr. Armstrong's options
vested immediately, with 1/3 of the balance vesting on each of the first three
anniversaries of the grant date.
On August 5 and 6, 2003, the Company issued senior secured promissory
notes with an aggregate principal amount of $1.5 million to Eric J. Gleacher,
Charles G. Phillips and ZAM Holdings, L.P. (collectively the "$1.5 Million
Note") Subject to stockholder approval, each of these persons will have the
right to convert, in whole or in part, their pro-rata share of the outstanding
principal amount of the $1.5 Million Note plus accrued and unpaid interest into
shares of common stock at a conversion price equal to the lesser of (i) $1.50
per share and (ii) 85% of the weighted average price per share of the Company's
common stock as reported on the Nasdaq National Market for the 15-trading-day
period ending three trading days before the conversion date.
On August 5, 2003, the Company entered into an Investment Agreement with
Mr. Gleacher, Mr. Phillips, LJCB Nominees Pty Ltd, and ZAM Holdings, L.P.,
(together the "Funding Parties"). Pursuant to the Investment Agreement, subject
to certain conditions, the Funding Parties have agreed to provide funding to the
Company in an aggregate amount up to $8.5 million reduced by the amount
outstanding under the $3 Million Note and the $1.5 Million Note. At the option
of the Funding Parties, the Funding Parties may fund such greater amount
permitted by the Investment
Page 11
Agreement to allow the Funding Parties to maintain certain relative ownership
levels. If stockholders (other than the Funding Parties) subscribe for at least
$2.0 million worth of shares in the Company's pending rights offering, the
Funding Parties would, subject to certain conditions, provide this funding in
the form of an investment in common stock at the subscription price. If
stockholders (other than the Funding Parties) do not subscribe for at least $2.0
million worth of shares in the Company's pending rights offering, the Company
will not consummate the pending rights offering, and the Funding Parties will,
subject to certain conditions, provide this funding in the form of, at their
option, a purchase of shares of common stock at the subscription price or the
purchase of a senior secured note which is convertible into shares of common
stock. The Funding Parties agreed not to exercise their basic subscription
privilege or over-subscription privilege in the Company's pending rights
offering.
On August 5, 2003, the Company and Mr. Gleacher, Mr. Phillips and ZAM
Holdings, L.P. entered into an agreement pursuant to which Messrs. Gleacher and
Phillips and ZAM Holdings, L.P. agreed to provide funding to the Company by
purchasing senior secured promissory notes in the aggregate principal amount of
$3 million if (i) the Company's proposed rights offering is abandoned by
December 1, 2003, (ii) stockholders do not approve (a) the conversion feature of
the $3 Million Note and the $1.5 Million Note, and (b) the Investment Agreement,
(iii) as a result, the Funding Parties do not provide the funding contemplated
by the Investment Agreement and (iv) the Company's "Cumulative Modified EBITDA",
for the months of July through October, 2003 is no less than a loss of
$1,185,000. "Cumulative Modified EBITDA" is defined in the agreement as (A) the
Company's earnings before interest, taxes, depreciation, asset impairment
charges, restaurant closing costs and other items customarily and properly
classified by the Company as one-time, extraordinary expenses for internal
reporting purposes) less (B) capital expenditures. The $3 million in additional
funding would be provided in the form of a non-convertible secured promissory
note. The note will mature on January 15, 2005. Messrs. Gleacher and Phillips
and ZAM Holdings, L.P. will only provide this funding if stockholders do not
approve the conversion feature of the $3 Million Note and the $1.5 Million Note
and the Investment Agreement, and the Company does not consummate the rights
offering.
Page 12
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Our objective is to build a nationwide system of distinctive restaurants
that generate attractive unit economics by appealing to a broad range of
customers. In 2003, we announced our intention to incorporate a franchising and
area developer model into our business strategy.
As of June 30, 2003, we owned and operated 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.
Subsequent to June 30, 2003 we closed one underperforming restaurant.
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 first quarter of fiscal 2003. No new
restaurants were opened in the second quarter of fiscal 2003. Five new
restaurants were opened in the first half of fiscal 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.
-----------------------------------------------------------
Six Months Ended June 30, July 1,
2003 2002
-----------------------------------------------------------
Restaurants open at beginning of
period 91 67
-----------------------------------------------------------
Restaurants opened 6 5
-----------------------------------------------------------
Restaurants closed 3 1
-----------------------------------------------------------
Restaurants open at end of period 94 71
-----------------------------------------------------------
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 of financial condition and results of operation. 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
Page 13
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 ("SFAS") No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets," ("SFAS 144") supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of," ("SFAS 121") 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." SFAS 144 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. SFAS 144 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 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," ("SFAS 146") 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, and was adopted by the Company in January 2003.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." ("SFAS 148"). SFAS 148
amends SFAS No. 123 "Accounting for Stock-Based Compensation" ("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 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 Opinion No. 25, "Accounting for Stock Issued to
Employees" 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
June 30, 2003 and July 1, 2002 there were 64 and 50 restaurants in our
comparable restaurant base, respectively.
Costs and Expenses
Page 14
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 cost of food and labor used
during the period before opening, the cost of initial quantities of supplies,
and other direct costs related to the opening or remodeling of a restaurant.
Our fiscal year ends on the Monday falling nearest to December 31st.
Fiscal years 2000, 2001 and 2002 each included 52 weeks. The six-month periods
ended June 30, 2003 and July 1, 2002 each contained 26 weeks.
Results of Operations
Our operating results for the three and six months ended June 30th 2003
and July 1st 2002, expressed as a percentage of sales, were as follows:
Three Months Ended Six Months Ended
June 30, July 1, June 30, July 1,
2003 2002 2003 2002
---- ---- ---- ----
Net sales ................. 100.0% 100.0% 100.0% 100.0%
Costs and Expenses:
Cost of goods sold ...... 28.2% 27.0% 28.4% 26.9%
Restaurant operating
expenses .............. 61.6% 59.1% 63.4% 60.3%
----- ----- ----- -----
Total costs of sales .... 89.8% 86.1% 91.8% 87.2%
General and
administrative expenses 15.3% 20.2% 22.6% 22.7%
Depreciation and
amortization .......... 6.9% 6.4% 7.2% 6.5%
Restaurant pre-opening
expenses .............. -- 1.4% 0.6% 1.0%
Provision for losses on
asset impairments and
disposals ............. 9.6% -- 9.8% --
Lease termination costs . -- -- 0.5% --
Operating income (loss) ... (21.7)% (14.1)% (32.6)% (17.5)%
----- ----- ----- -----
Other income (expense):
Interest income ......... 0.1% 0.2% 0.1% 0.2%
Interest expense ........ (0.2)% (1.2)% (0.2)% (1.4)%
Amortization of deferred
financing costs ....... (0.1)% (0.3)% (0.1)% (0.4)%
----- ----- ----- -----
Total other income
(expense), net ........ (0.2)% (1.3)% (0.2)% (1.6)%
----- ----- ----- -----
Net income (loss) ......... (21.9)% (15.4)% (32.8)% (19.1)%
Page 15
Three and six months ended June 30, 2003 vs. three and six months ended July 1,
2002
Net Sales
Sales increased $8.0 million, or 38.3%, to $28.9 million in the second
quarter of fiscal 2003, from $20.9 million in the second quarter of fiscal 2002.
This increase was primarily due to the full period contribution of sales from
the 20 restaurants opened during fiscal 2002, subsequent to the second 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. Three
restaurants were closed at the end of the first quarter, having minimal impact
on sales comparisons to last year. Year-to-date sales increased $15.6 million,
or 40.1%, to $54.6 million in the first half of fiscal 2003, from $39.0 million
in the first half of fiscal 2002. This increase was primarily due to the full
period contribution of sales from the 20 restaurants opened during fiscal 2002,
subsequent to the second 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.
In the second quarter of fiscal 2003 comparable restaurant sales increased
5.4%. In comparable restaurants, our transaction count was up 3.8% compared to
the same period last year, and our average check increased 1.6%. For the first
half of fiscal 2003 comparable restaurant sales increased 5.2%. In comparable
restaurants, our transaction count was up 1.4% and our average check increased
3.8% compared to the same period last year.
Subsequent to the end of the second quarter, we identified 22 restaurants
that had low sales during the breakfast daypart and we determined that the
profit contribution from that daypart in those restaurants was not sufficient.
Subsequently, we closed those particular restaurants during the breakfast
daypart. This will have a negative effect on our sales growth going forward, but
we believe that our profitability will be improved by this action. However,
there can be no assurances that this action will improve our profitability.
Costs and Expenses
Cost of goods sold. In the second quarter of fiscal 2003, cost of goods
sold increased $2.5 million or 44.8%, to $8.2 million, from $5.6 million in the
second quarter of fiscal 2002. As a percentage of sales, cost of goods sold
increased to 28.2% of sales in the second quarter of fiscal 2003, from 27.0% in
the second quarter of fiscal 2002. The increase in cost of goods sold as a
percentage of sales was primarily due to a shift in our sales mix in 2003 when
compared to 2002. During the second quarter of fiscal 2003, food sales increased
to 75.9% of total sales, from 69.7% in last year's quarter, with an offsetting
reduction in our beverage sales, which were 24.1% of total sales in this year's
quarter, compared to 30.3% 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. Produce costs were higher in the second quarter this year when compared to
last year due to the adverse weather conditions this spring, and added demand.
These higher produce costs, combined with the disproportional increase in our
salad sales also contributed to the increase in cost of goods sold. Late in this
year's quarter we adjusted our menu prices for salads upward in order to more
appropriately price our salad products versus our competitors' prices. We expect
that this price adjustment will have a positive impact on our cost of goods
sold, as a percentage of our sales. Year-to-date, cost of goods sold increased
$5.0 million or 47.5% to $15.5 million, from $10.5 million in the first half of
fiscal 2002. As a percentage of sales, cost of goods sold increased to 28.4% of
sales in the first half of fiscal 2003, from 26.9% in the first half of fiscal
2002. The increase in cost of goods sold as a percentage of sales this year was
primarily due to a shift in our sales mix in 2003 when compared to 2002, as
discussed above. Additionally, for most of the first quarter of fiscal 2002 our
menu prices were higher than they were in 2003, contributing to lower cost of
goods sold, as a percentage of sales in 2002, when compared to 2003.
Restaurant operating expenses. Restaurant operating expenses increased by
$5.5 million, or 44.1%, to $17.8 million in the second quarter of fiscal 2003,
from $12.4 million in the second 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 61.6%
of sales in the second quarter of fiscal 2003, from 59.1% in the second quarter
of fiscal 2002. This increase, as a percentage of sales, was primarily due to
increases in our labor costs. Year-to-date, restaurant operating expenses
increased by $11.1 million, or 47.4%, to $34.6 million in the first half of
fiscal
Page 16
2003, from $23.5 million in the first half 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 63.4%
of sales in the first half of fiscal 2003, from 60.3% in the first half of
fiscal 2002. This increase, as a percentage of sales, was primarily due to
increases in our labor costs.
General and administrative costs. General and administrative costs
increased by $0.2 million, or 4.9%, to $4.4 million in the second quarter of
fiscal 2003, from $4.2 million in the second quarter of fiscal 2002. This
increase is primarily due to a $0.4 million employee stock compensation charge
in this year's quarter related to the grant of shares of restricted common stock
to William D. Forrest. Additionally, during this year's quarter $0.4 million of
costs associated with our store development department were incurred. That
department has been significantly reduced subsequent to the end of the second
quarter. These increases were partially offset by $0.6 million in cost
reductions associated with reductions in our executive, general and
administrative staff since the beginning of the year. As a percentage of sales,
general and administrative costs decreased to 15.3% of sales in the second
quarter of fiscal 2003, from 20.2% of sales in the second quarter of fiscal 2002
primarily due to sales leverage against these costs. Year-to-date general and
administrative costs increased by $3.6 million, or 39.7%, to $12.4 million in
the first half of fiscal 2003, from $8.8 million in the first half of fiscal
2002. This increase is primarily due to a $3.7 million employee severance charge
in this year's first quarter, the $0.4 million employee stock compensation
charge and $0.4 million in store development department costs in this year's
second quarter. These increases were partially offset by $0.9 million in cost
reductions associated with reductions in our executive, general and
administrative staff since the beginning of the year. As a percentage of sales,
general and administrative costs decreased to 22.6% of sales in the first half
of fiscal 2003, from 22.7% of sales in the first half of fiscal 2002. The
decrease as a percentage of sales was entirely due to sales leverage against
these costs. Excluding the employee severance charge, the employee stock
compensation charge and the store development costs discussed above, general and
administrative costs decreased to 14.5% of sales in this year's first half.
Depreciation and amortization. Depreciation and amortization increased
$0.7 million, or 49.3%, to $2.0 million in the second quarter of fiscal 2003,
from $1.3 million in the second quarter of fiscal 2002. This increase was
primarily due to additional depreciation expense for restaurants opened
subsequent to the second quarter of fiscal 2002. As a percentage of restaurant
sales, depreciation and amortization increased to 6.9% of sales in the second
quarter of fiscal 2003, compared to 6.4% of sales in the second 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. Year-to-date, depreciation and amortization increased $1.5
million, or 55.3%, to $4.0 million in the first half of fiscal 2003, from $2.5
million in the first half of fiscal 2002. This increase was primarily due to
additional depreciation expense for restaurants opened subsequent to the second
quarter of fiscal 2002. As a percentage of restaurant sales, depreciation and
amortization increased to 7.2% of sales in the first half of fiscal 2003,
compared to 6.5% of sales in the first half 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 second quarter of fiscal 2002.
Restaurant pre-opening expenses. There were no restaurant pre-opening
expenses recorded in the second quarter of fiscal 2003 as no new restaurants
were opened. In the second quarter of fiscal 2002, $0.3 million in restaurant
pre-opening expenses were recorded. Year-to-date, restaurant pre-opening
expenses decreased $0.1 million to $0.3 million in the first half of fiscal
2003, from $0.4 million in the first half of fiscal 2002. As a percentage of
restaurant sales, restaurant pre-opening expenses decreased to 0.6% of sales in
the first half of fiscal 2003, from 1.0% of sales in the first half of fiscal
2002. This decrease is primarily due to the decrease in the number of new
restaurants opened or remodeled in the first half of fiscal 2003. Six new
restaurants were opened in the first half of fiscal 2003 compared to five new
restaurants and five remodeled restaurants opened in the first half of fiscal
2002.
Loss on impairment of property and equipment and restaurant disposals.
During the second quarter of fiscal 2003, we recognized $2.8 million of asset
impairment and store disposal costs. This entire charge represents impairment
charges taken on six underperforming restaurants. Of these six restaurants,
three were opened in the second half of fiscal 2002 and one was opened in the
first quarter of fiscal 2003. An immaterial amount of losses on asset disposals
was recognized during the second
Page 17
quarter of fiscal 2002. Year-to-date, we have recognized $5.4 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 first quarter, approximately $1.3 million were charges taken on
twenty-five locations which were in our development pipeline but have been
cancelled, and approximately $3.5 million represents impairment charges taken on
eight underperforming restaurants, three of which have been identified for
closure in the future. We have identified thirteen additional units, eight of
which were opened in late 2002 and early 2003, in which we believe that
performance improvements can be achieved. However, if such improvements are not
realized additional impairment charges will be necessary.
Lease termination costs. No lease termination costs were recorded in the
second quarter of either fiscal 2003 or 2002. Year-to-date in fiscal 2003, we
have recognized $0.3 million of lease 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 first quarter. No
such charges were recognized during the first half of fiscal 2002.
We announced previously that our Board of Directors had concluded that the
Company's financial performance would be strengthened by closing in an orderly
fashion as many as 13 of the Company's restaurants, three of which were closed
in the first quarter of fiscal 2003. Future closings are dependent on our
ability to negotiate acceptable terms with our landlords to terminate the leases
for those units, or on our ability to locate acceptable sub-tenants or assignees
for the leases at those locations. Future closings may result in additional
lease termination costs. Subsequent to the end of the second quarter we closed
one additional location, and have entered into a sublease for that location. We
remain liable under our prime lease. There can be no assurances that we will be
successful in negotiating terms that will enable us to close additional
underperforming units.
Interest income and expense. During the second quarter and first half of
fiscal 2003 and the second quarter and first half of fiscal 2002 interest income
was less than $0.1 million. Interest expense decreased $0.2 million to less than
$0.1 million in the second quarter of fiscal 2003 from $0.3 million in the
second quarter of fiscal 2002. Year-to-date interest expense has decreased $0.4
million to $0.1 million in the first half of fiscal 2003 from $0.5 million in
the first half 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 half 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
second 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 second quarter of fiscal
2002. Year-to-date we recorded less than $0.1 million in amortization of
deferred financing costs related to our equipment loan credit facility in the
first half of fiscal 2003. This compares to $0.1 million recorded in the first
half 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 $3.7 million on June 30, 2003, compared
with $13.0 million on December 30, 2002. Our working capital was a deficit of
$6.3 million on June 30, 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 half 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, and from the proceeds of the $3 Million Note, described below.
Net cash used in operating activities for the six months ended June 30,
2003 was $8.6 million, compared to $7.3 million for the six months ended July 1,
2002. Funds used in operating activities in the first half of 2003 increased
primarily as a result of an increase in our net loss compared to the first half
of 2002. Total capital expenditures for the six months ended June 30, 2003 were
$3.4 million, compared to expenditures of $6.7 million for the six months ended
July 1, 2002. These expenditures were primarily related to the opening of six
new restaurants during the first
Page 18
half of fiscal 2003, and remodeling five existing restaurants and constructing
five new restaurants during the first half of fiscal 2002. Net cash provided by
financing activities was $2.5 million for the six months ended June 30, 2003.
During the period, we borrowed $3 million under the $3 Million Note, and made
scheduled repayments of $0.4 million and $0.1 million related to our outstanding
long-term debt and capital lease obligations, respectively.
During fiscal 2002, we issued approximately 1.1 million shares of Series C
preferred stock 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. We also issued approximately 5.6 million shares of our common stock in
our initial public offering and received approximately $32.8 million, net of
offering costs. Prior to our initial public offering, we issued approximately
$0.5 million of additional Senior Subordinated Notes and accrued $0.8 million of
interest on these notes, and issued approximately $9.5 million face amount of
our 12% Senior Secured notes and accrued $0.2 million of interest on these
notes. During the period, we made scheduled repayments of $1.2 and $0.5 million
related to our other outstanding long-term debt and capital lease obligations,
respectively. Approximately $6.6 million of the proceeds from our initial public
offering were used to repay our outstanding 13% Senior Subordinated notes,
including accrued interest and pre-payment premium, and approximately $7.5
million of proceeds and approximately $2.1 million of available cash were used
to repay our outstanding 12% Senior Secured notes, including accrued interest.
There are two notes payable outstanding under our equipment loan credit
facility: a note payable due September 1, 2003, at an interest rate of 9.1%, and
a note payable due December 1, 2003 at an interest rate of 8.5%.
During the first half of fiscal 2003, we 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 determined not to open. Principally because
of these developments, we determined that it was prudent to seek additional
financing. Consequently, we obtained a $3 million line of credit from a bank to
be used for general corporate purposes and borrowed the full amount on April 1,
2003 (the "$3 Million Note"). In addition, we announced our intention to pursue
a rights offering (the "Offering") to raise approximately $14 million. In
connection therewith, we announced that a group of our shareholders, including
the Guarantors (defined below), indicated that they will commit to provide
funding in the amount of up to $8.5 million. This commitment is subject to,
among other things, our shareholders approving the conversion feature of the $3
Million Note and the $1.5 Million Note (described below). The $3 Million Note
bears interest at 75 basis points over Bank of America's prime lending rate and
the $3 Million Note is secured by all of our tangible and intangible property,
other than equipment pledged to secure our equipment loan credit facility. The
$3 Million Note matures in May, 2004. We paid the bank fees and expenses of
approximately $22,000 upon funding of the $3 Million Note. The $3 Million Note
is guaranteed, jointly and severally, by Eric J. Gleacher, one of our
stockholders, and one of our former directors; Charles G. Phillips, one of our
stockholders and Ziff Investors Partnership, L.P. II, an entity related to ZAM
Holdings, L.P., our largest stockholder (together, "the Guarantors"). At any
time during the term of the $3 Million Note, the Guarantors have the right to
require the bank to assign the $3 Million Note to the Guarantors or their
designees that are reasonably acceptable to us. If the $3 Million Note has not
been assigned by the bank to the Guarantors or their designees, and has not been
paid in full by August 15, 2003, then the bank is required to assign the $3
Million Note to the Guarantors or their designees. On August 5, 2003, the
Guarantors agreed, upon assignment of the $3 Million Note, to extend the
maturity of the note to December 31, 2004. If our stockholders approve the
conversion feature of the senior secured notes, upon assignment of the $3
Million Note to the Guarantors or their designees, the $3 Million Note will be
convertible into shares of our common stock, 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
Page 19
trading days before the conversion date. If our stockholders approve the
conversion feature of the senior secured notes and if we consummate the rights
offering the $3 Million Note will be converted by the holders.
On August 5, 2003, we entered into an Investment Agreement (the
"Investment Agreement") with Eric J. Gleacher, Charles G. Phillips, LJCB
Nominees Pty Ltd, and ZAM Holdings, L.P., (together the "Funding Parties").
Pursuant to the Investment Agreement, subject to certain conditions, the Funding
Parties have agreed to provide funding to us in an aggregate amount up to $8.5
million reduced by the amount outstanding under the $3 Million Note and the $1.5
Million Note. At the option of the Funding Parties, the Funding Parties may fund
such greater amount permitted by the Investment Agreement to allow the Funding
Parties to maintain certain relative ownership levels. If our stockholders
(other than the Funding Parties) subscribe for at least $2.0 million worth of
shares in the Offering, the Funding Parties would, subject to certain
conditions, provide this funding in the form of an investment in our common
stock at the subscription price. If our stockholders (other than the Funding
Parties) do not subscribe for at least $2.0 million worth of shares in the
Offering, we will not consummate the Offering and the Funding Parties will,
subject to certain conditions, provide this funding in the form of, at their
option, a purchase of shares of our common stock at the subscription price or
the purchase of a senior secured note which is convertible into shares of our
common stock. The Funding Parties agreed not to exercise their basic
subscription privilege or over-subscription privilege in the Offering. The $8.5
million in funding described above is allocated as follows: (a) Mr. Gleacher,
$2,000,000; (b) Mr. Phillips, $750,000; (c) LJCB, $750,000 and (d) ZAM Holdings,
L.P. $5,000,000.
In order to ensure that we would have sufficient cash resources pending
consummation of the Offering, on August 5 and 6, 2003, Messrs. Gleacher,
Phillips and ZAM Holdings provided $1.5 million of the Funding Parties' $8.5
Million commitment in the form of three senior secured promissory notes. All
three notes equal an aggregate of $1.5 million (the "$1.5 Million Note"). The
terms of the $1.5 Million Note are substantially similar to the terms of the $3
Million Note and the $1.5 Million Note matures on December 31, 2004. If approved
by our shareholders, the $1.5 Million Note will be convertible into shares of
our common stock, at the option of the holders thereof, 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. If our stockholders approve the conversion feature
of the senior secured notes and if we consummate the Offering, the $1.5 Million
Note will be converted by the holders.
The Funding Parties funding commitment pursuant to the Investment
Agreement is subject to certain conditions, including our stockholders approving
the conversion feature of the $3 Million Note and the $1.5 Million Note and the
Investment Agreement and the transactions contemplated thereby, including the
Offering. In order to provide the Company with sufficient liquidity and cash
resources in the event that the conditions to the Investment Agreement are not
satisfied, and consequently the Funding Parties are not obligated to provide
funding under the Investment Agreement, on August 5, 2003, the Company and Mr.
Gleacher, Mr. Phillips and ZAM Holdings, L.P. entered into an agreement pursuant
to which Messrs. Gleacher and Phillips and ZAM Holdings, L.P. agreed to provide
funding to the Company by purchasing senior secured promissory notes from the
Company in the aggregate principal amount of $3 million if (i) the Offering is
abandoned by December 1, 2003, (ii) the Company's stockholders do not approve
(a) the conversion feature of the $3 Million Note and the $1.5 Million Note, and
(b) the Investment Agreement, (iii) as a result, the Funding Parties do not
provide the funding contemplated by the Investment Agreement and (iv) the
Company's "Cumulative Modified EBITDA" for the months of July through October,
2003 is no less than a loss of $1,185,000. "Cumulative Modified EBITDA" is
defined in the agreement as (A) the Company's earnings before interest, taxes,
depreciation, amortization, asset impairment charges, restaurant closing costs
and other items customarily and properly classified by the Company as one-time,
extraordinary expenses for internal reporting purposes less (B) capital
expenditures.
The $3 million in additional funding would be provided in the form of a
non-convertible secured promissory note with terms which may be substantially
less favorable to the Company than the $3 Million Note and the $1.5 Million
Note. The note will mature on January 15, 2005. Messrs. Gleacher and Phillips
and ZAM Holdings will only provide this funding if our stockholders do not
approve the conversion feature of the $3 Million Note and the $1.5 Million Note
and the Investment Agreement, and the Company does not consummate the rights
offering. In this event, the Funding Parties are only committed to provide an
aggregate of $7.5 million (the $3 Million Note, the $1.5 Million Note and the $3
million non-convertible note described above) as opposed to up to $8.5
Page 20
million pursuant to the Investment Agreement (the $3 Million Note, the $1.5
Million Note and up to $4 million pursuant to the Investment Agreement).
We currently estimate that our current cash resources will be sufficient
until the completion of the Offering, or until the abandonment of the Offering
and funding of the remaining commitment by the Funding Parties.
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, the remainder
will be funded through existing cash balances and from the proceeds from the
$1.5 Million Note. We anticipate that our capital expenditures for the remainder
of the year will be minimal.
We plan to fund the operations, maintenance and growth of our restaurants
primarily through the Offering (including the senior secured notes) and
internally generated cash flow produced by our existing restaurants. Our cash
resources going forward will be highly dependent upon the level of internally
generated cash from operations and upon any potential future financing
transactions, including the Offering. If cash flows from our existing
restaurants or cash flow 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 alternative financing from external sources
to continue funding our operations and growth, close underperforming restaurants
or alter 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.
In the event that our stockholders approve the conversion feature of the
notes and the Investment Agreement and our stockholders, other than the Funding
Parties, subscribe for at least $2 million in the Offering, we will, subject to
certain conditions, secure a minimum of $10.5 million of funding in the form of
purchases of our common stock, including the conversion of the $3 Million Note
and the $1.5 Million Note. We anticipate that this funding, our current cash
balances and internally generated cash flows will be sufficient to fund our cash
requirements for the next twelve months.
In the event that our stockholders approve the conversion feature of the
notes and the Investment Agreement, but our stockholders, other than the Funding
Parties, do not subscribe for a minimum of $2 million in the Offering, we will
not consummate the Offering and we will, subject to certain conditions, obtain a
maximum of $8.5 million in funding (including the $3 Million Note and the $1.5
Million Note) in the form of, at the option of the Funding Parties, a purchase
of shares of our common stock at the subscription price or the purchase of a
senior secured note which is convertible into shares of our common stock. In
addition, the $3 Million Note and the $1.5 Million Note may remain outstanding
and payable at maturity in December 2004, which could have an adverse effect on
our near term working capital. In this event, we anticipate that this funding,
our current cash balances and internally generated cash flows will be sufficient
to fund our cash requirements for the next twelve months. However, we may need
to secure additional financing upon the maturity of the $3 Million Note and the
$1.5 Million Note. There can be no assurance that such financing will be
available on terms acceptable to us, or at all.
In the event that our stockholders do not approve the conversion feature
of the notes and the Investment Agreement, and the Company satisfies the EBITDA
condition described above, we will not consummate the Offering and we will
secure a maximum of $7.5 million in financing (including the $3 Million Note and
the $1.5 Million Note). The $3 million in additional funding would be in the
form of senior secured non-convertible notes due January 15, 2005. In addition,
the $3 Million Note and the $1.5 Million Note will remain outstanding and
payable at maturity in December 2004, which could have an adverse effect on our
near term working capital. In this event, we anticipate that this funding, our
current cash balances and internally generated cash flows will be sufficient to
fund our cash requirements for the next twelve months. However, we may need to
secure additional financing upon the maturity of the $3 Million Note and the
$1.5 Million Note and the $3 million non-convertible note. There can be no
assurance that such financing will be available on terms acceptable to us, or at
all.
In the event that our stockholders do not approve the conversion feature
of the notes and the Investment Agreement, and the Company does not satisfy the
EBITDA condition described above, the Funding Parties will not be obligated to
provide any additional funding and we will need to secure
Page 21
additional financing to execute our business plan in the near future. There can
be no assurance that we will be able to secure such financing on terms favorable
to the Company or at all. The failure to obtain such financing would likely have
a material adverse effect on the Company, our operations and growth plans,
including our plans to open or franchise new restaurants.
Contractual Obligations
The following table sets forth the Company's future contractual payment
obligations as of June 30, 2003:
Due July - Due in Due in
Total December 2004 and 2006 and Due after
Contractual Obligations (in thousands) 2003 2005 2007 2007
----------------------- -------------- ---- ---- ---- ----
Notes payable ............................... $ 4,065.4 $ 816.7 $ 3,086.9 $ 79.0 $ 82.8
Employee severance obligations .............. 2,852.0 837.7 2,014.3
Employment agreement ........................ 511.9 162.0 349.9
Capital lease obligations ................... 18.4 18.4
Operating lease obligations (a) (b) ........ 110,936.3 6,580.4 26,759.8 26,689.2 50,906.9
(a) Amounts shown are net of $2.5 million of sublease rental income due under
non-cancelable subleases.
(b) Includes approximately $11.4 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 (the "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 $0.6 million of roasted coffee beans 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.
Page 22
FORWARD-LOOKING STATEMENTS
Matters discussed in this report which relate to events or developments
that 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 fluctuations in our quarterly results;
o labor shortages or increased labor costs;
o the rate of our internal growth and our ability to generate
increased revenue from existing restaurants;
o changes in consumer preferences and demographic trends;
o increased government regulation;
o increasing competition in the fast casual dining segment of the
restaurant industry;
o supply and delivery shortages or interruptions;
o expansion into new markets;
o market saturation due to new restaurant openings;
o our ability to effectively manage our business with a reduced
general and administrative staff;
o our ability to incorporate a franchising and area developer model
into our strategy;
o inadequate protection of our intellectual property;
o adverse weather conditions, which impact customer traffic at our
restaurants;
o the availability and cost of additional financing, both to fund our
existing operations and to grow and open new restaurants;
o adverse economic conditions; and
o our ability to generate positive cash flow from operations.
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. We
undertake no obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
Page 23
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
holds 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 the
interest expense the Company pays on its floating rate debt, and therefore,
impacts the Company's 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. Controls & Procedures
Based on an evaluation carried out, as of the end of the period covered by
this report, under the supervision and with the participation of the Company's
management, including its Chief Executive Officer and Chief Financial Officer,
the Chief Executive Officer and Chief Financial Officer have concluded that the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended) are effective
to ensure that information required to be disclosed by the Company in reports
that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the rules and forms
of the Securities and Exchange Commission. As of the end of the period covered
by this report, there have been no significant changes in the Company's internal
control over financial reporting that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
Page 24
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,
alleging that the Company and various of its officers and directors and the
underwriter of the Company's IPO violated Sections 11, 12(a)(2) and 15 of the
Securities Act of 1933, as amended, 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 eight additional class action complaints with
substantially similar allegations were later filed. These actions have been
consolidated in In re Cosi, Inc. Securities Litigation (collectively, the
"Securities Act Litigation"). On July 7, 2003, lead plaintiffs filed a
Consolidated Amended Complaint, alleging on behalf of a purported class of
purchasers of the Company's stock, allegedly traceable to its November 22, 2002
IPO, 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 restaurants in 2003; that at the time of the
IPO, the Company 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.
The plaintiffs in the Securities Act Litigation generally seek to recover
recessionary 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 Securities Act Litigation is at a preliminary stage, and the Company
believes that it has meritorious defenses to these claims, and intends to
vigorously defend against them.
ITEM 2. CHANGES IN SECURITIES AND USEOF 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 June 30,
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
=====
Page 25
The net offering proceeds to us through June 30, 2003 after deducting the
total expenses above were approximately $32.8 million.
Intended use of Actual use of
In $ millions proceeds as proceeds
stated in through June
prospectus 30, 2003
Develop new restaurants and
maintain and remodel $19.6 $12.6
existing restaurants
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 -- 6.1
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
Page 26
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit
Number Description of Exhibit
------ ----------------------
4.1 -- Investment Agreement, dated as of August 5, 2003,
among the Company,
Eric J. Gleacher, Charles G. Phillips,
LJCB Nominees Pty Ltd, and ZAM Holdings, L.P.
(Filed as Exhibit 4.9 to the Company's Registration
Statement on Form S-1, filed on August 6, 2003).
4.2 -- Letter Agreement, dated as of August 5, 2003, among
the Company, Eric J. Gleacher, Charles G.
Phillips, and ZAM Holdings, L.P.
(Filed as Exhibit 4.10 to the Company's Registration
Statement on Form S-1, filed on August 6, 2003).
4.3 -- Promissory Note, dated as of August 5, 2003,
between the Company and ZAM Holdings, L.P.
(Filed as Exhibit 4.8.1 to the Company's Registration
Statement on Form S-1, filed on August 6, 2003).
4.4 -- Promissory Note, dated as of August 5, 2003,
between the Company and Eric J. Gleacher (Filed as
Exhibit 4.8.2 to the Company's Registration Statement
on Form S-1, filed on August 6, 2003).
4.5 -- Promissory Note, dated as of August 6, 2003,
between the Company and Charles G. Phillips.
10.1 -- Second Amendment to Distributor Service
Agreement between Cosi and Maines Paper & Food
Service, Inc.
31.1 -- Certification of the Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 -- Certification of the Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 -- Certification of the Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 -- 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 May 13, 2003, which
attached and incorporated by reference the Company's press release dated May 8,
2003 reporting the Company's financial results for the first fiscal quarter
ended March 31, 2003.
Page 27
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Cosi, Inc.
Dated: August 14, 2003 By: /s/ Kevin Armstrong
---------------------------------
Kevin Armstrong
Chief Executive Officer
Dated: August 14, 2003 By: /s/ Kenneth S. Betuker
---------------------------------
Kenneth S. Betuker
Chief Financial Officer
(Chief Accounting Officer)
Treasurer and Secretary
Page 28