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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 OF 1934
For the quarterly period ended September 29, 2003
[ ] 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 October 15, 2003, 17,710,103 shares of the registrant's Common Stock, $.01
par value, were outstanding.
1
COSI, INC.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (unaudited)
Consolidated Balance Sheets as of September 29, 2003 and
December 30, 2002 (unaudited)
Consolidated Statements of Operations for the three and nine months ended
September 29, 2003 and September 30, 2002 (unaudited)
Consolidated Statement of Stockholders' Equity for the nine months ended
September 29, 2003 (unaudited)
Consolidated Statements of Cash Flows for the nine months
ended September 29, 2003 and September 30, 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
2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
COSI, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share information)
SEPTEMBER 29, DECEMBER 30,
2003 2002
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ......................... $ 3,239.0 $ 13,032.3
Accounts receivable, net of allowances of
$246.3 and $232.1, respectively ................. 1,214.8 1,511.5
Inventory ......................................... 1,149.4 1,465.8
Prepaid expenses and other current assets ......... 955.0 1,676.3
---------- ----------
Total current assets ....................... 6,558.2 17,685.9
PROPERTY, EQUIPMENT AND LEASEHOLD
IMPROVEMENTS, net ................................. 38,217.2 45,755.3
INTANGIBLES, SECURITY DEPOSITS AND OTHER ASSETS, net 3,200.8 2,801.9
---------- ----------
Total assets ............................... 47,976.2 66,243.1
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .................................. $ 4,197.1 $ 8,925.2
Accrued liabilities ............................... 8,872.4 5,922.4
Current portion of other liabilities .............. 664.6 671.6
Current portion of capital lease obligations ...... 1.5 117.0
Current portion of long-term debt ................. 429.4 1,280.4
---------- ----------
Total current liabilities .................. 14,165.0 16,916.6
OTHER LIABILITIES, net of current portion ........... 9,661.6 9,748.3
CAPITAL LEASE OBLIGATIONS, net of current portion ... -- 2.5
LONG-TERM DEBT, net of current portion .............. 4,737.0 248.7
---------- ----------
Total liabilities .......................... 28,563.6 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 ....................... (1,056.6) --
Treasury Stock, at cost 21,978 shares in 2003 ...... (250.0) --
Notes receivable from stockholders ................ (2,724.8) (2,974.8)
Accumulated deficit ............................... (167,569.5) (147,118.9)
---------- ----------
Total stockholders' equity ................. 19,412.6 39,327.0
---------- ----------
Total liabilities, and
stockholders' equity ..................... $ 47,976.2 $ 66,243.1
========== ==========
The accompanying notes are an integral part of these consolidated statements.
3
COSI, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
SEPTEMBER 29, SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 30,
2003 2002 2003 2002
---------- ---------- ---------- ----------
NET SALES ............................................. $ 27,539.3 $ 22,085.5 $ 82,130.2 $ 61,057.4
COST OF SALES:
Cost of goods sold .................................. 7,515.4 5,861.5 23,004.5 16,360.5
Restaurant operating expenses ....................... 17,442.3 13,160.6 52,062.3 36,654.1
---------- ---------- ---------- ----------
TOTAL COST OF SALES ........................... 24,957.7 19,022.1 75,066.8 53,014.6
GENERAL AND ADMINISTRATIVE EXPENSES ................... 3,502.1 4,051.7 15,862.7 12,899.6
DEPRECIATION AND AMORTIZATION ......................... 1,862.8 1,602.2 5,815.8 4,147.9
RESTAURANT PRE-OPENING EXPENSES ....................... 32.2 542.3 381.4 939.8
PROVISION FOR LOSSES ON ASSET IMPAIRMENTS AND DISPOSALS 339.9 -- 5,698.6 7.3
LEASE TERMINATION COSTS ............................... (602.8) -- (345.7) --
---------- ---------- ---------- ----------
Operating loss ................................ (2,552.6) (3,132.8) (20,349.4) (9,951.8)
INTEREST INCOME ....................................... 4.2 20.0 39.7 82.3
INTEREST EXPENSE ...................................... (87.1) (463.0) (239.8) (1,158.8)
OTHER INCOME .......................................... 99.0 380.4 99.0 380.4
---------- ---------- ---------- ----------
Net loss ...................................... (2,536.5) (3,195.4) (20,450.5) (10,647.9)
PREFERRED STOCK DIVIDENDS ............................. -- (2,432.8) -- (6,776.8)
---------- ---------- ---------- ----------
NET LOSS ATTRIBUTABLE TO COMMON STOCK ................. $ (2,536.5) $ (5,628.2) $(20,450.5) $(17,424.7)
========== ========== ========== ==========
PER SHARE DATA:
Net Loss Per Share:
Basic and diluted ................................. $ (0.14) $ (1.24) $ (1.20) $ (3.84)
Weighted Average Common Shares Outstanding: (in
thousands) ........................................ 17,710 4,545 17,036 4,536
The accompanying notes are an integral part of these consolidated statements.
4
COSI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
NINE MONTHS ENDED
------------------------
SEPTEMBER 29, SEPTEMBER 30,
2003 2002
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................. $(20,450.5) $(10,647.9)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ........................... 5,815.8 4,148.0
Amortization of deferred financing costs ................ 62.1 167.5
Non-cash portion of asset impairments and disposals ..... 5,293.9 4.5
Provision for bad debts ................................. 27.0 18.0
Amortization of deferred compensation ................... 493.1 --
Non-cash employee severance cost ........................ 43.1 --
Changes in operating assets and liabilities:
Accounts receivable ................................... 269.7 419.5
Inventory ............................................. 316.3 1.5
Other assets .......................................... (751.5) (2,121.1)
Accounts payable ...................................... (4,728.2) 164.8
Accrued liabilities ................................... 3,445.5 80.3
Accrued contractual lease increases ................... 436.7 520.2
Prepaid expenses and other current assets ............. 721.3 (236.2)
Lease termination accrual ............................. (1,025.8) (318.8)
--------- ---------
Net cash used in operating activities ............... (10,031.5) (7,799.7)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, equipment and leasehold improvements (3,571.6) (12,248.4)
Return of security deposits ............................... 290.5 --
--------- ---------
Net cash used in investing activities ............... (3,281.1) (12,248.4)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock .................... -- 351.6
Net proceeds from issuance of preferred stock ............. -- 15,670.5
Principal payments on capital lease obligations ........... (118.0) (379.9)
Proceeds from long-term debt plus related ................. 4,500.0 4,203.0
Warrants and accrued interest ...........................
Principal payments on long-term debt ...................... (862.7) (872.7)
--------- ---------
Net cash provided by (used in) financing
activities ........................................ 3,519.3 18,972.5
--------- ---------
Net increase (decrease) in cash ............................. (9,793.3) (1,075.6)
CASH AND CASH EQUIVALENTS, beginning of year ................ 13,032.3 4,469.6
--------- ---------
CASH AND CASH EQUIVALENTS, end of period .................... $ 3,239.0 $ 3,393.9
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ................................................ $ 229.2 $ 241.0
Corporate franchise and income taxes .................... 134.6 165.4
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.
5
COSI, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For Nine Months Ended September 29, 2003
(unaudited)
(in thousands, except share information)
Common Stock
----------------------------------------
Additional
Number of Paid In Deferred
Shares Amount Capital Compensation
---------- ---------- ---------- ----------
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 -- -- -- 493.1
Return of shares for note ........... -- -- -- --
Net Loss ............................ -- -- -- --
---------- ---------- ---------- ----------
BALANCE, September 29, 2003 ......... 17,732,081 $ 177.3 $190,836.2 $ (1,056.6)
========== ========== ========== ==========
Treasury Stock
--------------------------------------------
Number of Note Receivable Accumulated
Shares Amount from Stockholders Deficit Total
---------- ---------- ----------------- ---------- ----------
BALANCE, December 30, 2002 .......... -- $ -- $ (2,974.8) $ (147,119.0) $ 39,326.9
Stock Compensation .................. -- -- -- -- 43.1
Exercise of Warrants ................ -- -- -- -- --
Issuance of Restricted Stock ........ -- -- -- -- --
Amortization of deferred compensation -- -- -- -- 493.1
Return of shares for note ........... 21,978 (250.0) 250.0
Net Loss ............................ (20,450.5) (20,450.5)
---------- ---------- ---------- ---------- ----------
BALANCE, September 29, 2003 ......... $ 21,978 $ (250.0) $ (2,724.8) $(167,569.5) $ 19,412.6
========== ========== ========== ========== ==========
6
Notes to Consolidated Financial Statements (unaudited)
September 29, 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 and thirty-nine week periods
ended September 29, 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.
During the first nine months 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 decided not to open. As a result, the
Company incurred a loss of $20.4 million and used cash in operating activities
of $10.0 million for the nine months ended September 30, 2003. Cash and cash
equivalents were $3.2 million and working capital was a deficit of $7.6
million. Liquidity and Capital Resources of Management's Discussion and
Analysis describes management's plans to address these issues.
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.
NINE MONTHS ENDED THREE MONTHS ENDED
-------------------------- --------------------------
(IN 000'S, EXCEPT PER SHARE DATA)
SEPTEMBER 29, SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 30,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net loss attributable to common stock - as
reported ................................. $(20,450.5)$ (17,424.7) $ (2,536.5) (5,628.2)
Stock based compensation included in the
determination of net loss, as reported ... 43.1 -- -- --
Stock based compensation determined under
SFAS 123 ................................. (844.5) (1,444.2) (43.2) (481.5)
---------- ---------- ---------- ----------
Net loss attributable to common stock -
Pro forma ................................ (21,251.9) (18,868.9) (2,579.7) (6,109.7)
Net loss per common share -- Basic and Diluted:
As reported ................................. $ (1.20) $ (3.84) $ (0.14) $ (1.24)
========== ========== ========== ==========
Pro forma ................................... $ (1.25) $ (4.16) $ (0.15) $ (1.34)
========== ========== ========== ==========
7
NOTE C -- PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consist of the following:
SEPTEMBER 29, DECEMBER 30,
(IN 000'S) 2003 2002
--------- ---------
Leasehold improvements ........... $34,583.3 $36,297.4
Furniture and fixtures ........... 9,495.9 9,499.9
Restaurant equipment ............. 13,848.7 13,000.9
Computer and telephone equipment . 8,154.2 7,962.2
Construction in progress ......... -- 1,063.8
--------- ---------
66,082.1 67,824.2
Less: accumulated depreciation and
amortization ................... (27,864.9) (22,068.9)
--------- ---------
$38,217.2 $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 $3.8 million (related to nine restaurants) through the third
quarter of fiscal 2003. The Company recorded a nominal impairment charge in the
first three quarters 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 three quarters of fiscal 2003 the Company recorded
a charge of $.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 write-off 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:
SEPTEMBER 29, DECEMBER 30,
(IN 000'S) 2003 2002
-------- --------
Payroll and related benefits and taxes $1,592.2 $1,521.2
Professional and legal costs ......... 167.6 437.0
Taxes payable ........................ 1,415.7 825.3
Severance payable - current portion .. 1,357.0 --
Unearned vendor allowances ........... 575.7 595.5
Other ................................ 3,764.2 2,543.4
-------- --------
$8,872.4 $5,922.4
======== ========
8
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. A
note payable in the remaining principal amount of $113,738 was satisfied in full
on September 1, 2003 according to the terms of the note. A note payable due
December 1, 2003 in the amount of $186,158 requires monthly payments of $58,361,
which commenced in December 2001, and accrues interest at a rate of 8.50% per
annum. The Company is amortizing loan fees as additional interest expense over
the term of the notes.
The Company has an outstanding note payable of approximately $110,000. 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 Company paid the bank fees and expenses of approximately
$22,000 upon funding of the loan in April 2003. The $3 Million Note was
guaranteed, jointly and severally, by Eric J. Gleacher, one of the Company's
stockholders and formerly a director; Charles G. Phillips, one of its
stockholders, and an entity related to ZAM Holdings L.P., the Company's largest
stockholder (together, "the Guarantors"). On October 30, 2003, the bank assigned
the note to the Guarantors or their designees and the maturity date was extended
to December 31, 2004. If approved by the Company's stockholders, the $3 Million
Note will be convertible into shares of common stock, under certain
circumstances, at the option of the holders, 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.
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 the Guarantors 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.
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):
9
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
(IN 000'S, EXCEPT PER SHARE DATA) SEPTEMBER 29, SEPTEMBER 30, SEPTEMBER SEPTEMBER 30,
2003 2002 29, 2003 2002
---------- ---------- ---------- ----------
Basic and Diluted:
Net loss ............................ $ (2,536.5) $ (3,195.4) $(20,450.5) $(10,647.9)
Preferred stock dividends ........... -- (2,432.8) -- (6,776.8)
---------- ---------- ---------- ----------
Net loss attributable to common stock $ (2,536.5) $ (5,628.2) $(20,450.5) $(17,424.7)
========== ========== ========== ==========
Weighted average common shares
outstanding ......................... 17,710 4,545 17,036 4,536
Net loss per share .................. $ (0.14) $ (1.24) $ (1.20) $ (3.84)
========== ========== ========== ==========
For all periods presented, the impact of all common share equivalents has not
been included, as their inclusion would be anti-dilutive.
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
primarily due to a change in the Company's growth plans and 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.
During the third quarter of 2003, the Company recorded a reversal of the
severance charge of $0.9 million for an executive that was originally slated for
termination but has been reinstated in a different capacity. This reversal was
offset by a charge of $0.2 million for severance for another officer resulting
in a net reversal of $0.7 million for the third quarter of 2003 included in
general and administrative expense in the accompanying statement of operations.
Therefore, the net charge for severance included in general and administrative
expenses in the accompanying consolidated statements of operations for the nine
months ended September 29, 2003 is $3.0 million. Of this amount, $1.1 million
was paid during the first nine months of fiscal 2003, leaving a remaining
accrued liability as of September 29, 2003 in the amount of $1.9 million. Of
this amount, $0.6 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 3,037.1
Non-cash portion of charges 43.1
Cash Payments 1,135.4
--------
Balance September 29, 2003 $1,858.6
========
Note H-LEASE TERMINATION CHARGES
During the nine months ended September 29, 2003, the Company recorded a net
reversal of lease termination charges of approximately $0.3 million. This net
amount is comprised of a charge of $0.5 million for stores that the Company has
closed or 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 of fiscal 2003 offset by a reversal of $0.8 million for leases
that the Company was able to exit on a more favorable basis than previously
anticipated.
Note I-OTHER INCOME
During the third quarter of 2003, the Company received approximately $0.1
million for business interruption insurance claims related to the events of
September 11, 2001, which has been recorded in other income in the accompanying
statement of operations.
10
NOTE J - 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 Cosi and various of our officers and directors and the
underwriter of our 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 our stock allegedly traceable to our November 22, 2002 IPO, that
at the time of the IPO, our offering materials failed to disclose that the funds
raised through the IPO would be insufficient to implement our expansion plan;
that it was improbable that we would be able to open 53 to 59 new restaurants in
2003; that at the time of the IPO, we 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 our 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 us for
any damages assessed against it in the Securities Act Litigation. The Securities
Act Litigation is at a preliminary stage, and we believe that we have
meritorious defenses to these claims, and intend to vigorously defend against
them.
On September 22, 2003, defendants filed motions to dismiss the Second
Consolidated Amended Complaint in the Securities Act Litigation. Plaintiffs
filed their opposition to defendants' motion to dismiss on October 23, 2003.
Defendants' reply briefs are due November 12, 2003.
NOTE K - 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
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 $493,100 for
the nine months ended September 29, 2003 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.
Page 11
NOTE L - INVESTMENT AGREEMENT
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 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.
NOTE M - MANAGEMENT
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 18, 2003, Mr. Mark Stickney joined Cosi as its Chief Financial
Officer. In connection with his employment Mr. Stickney was granted options to
purchase 400,000 shares of the Company's common stock at a price of $2.37, the
closing market price on August 18, 2003. Mr. Stickney's options vest at a rate
of 11,111 per month upon completion of each month of employment through April
30, 2004. 111,111 options will vest on August 31, 2004, 100,000 will vest in
August 2005 and 100,000 will vest in August 2006.
Page 12
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
We own and operate 89 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 nine months ended September 29, 2003.
13 new restaurants were opened in the nine months ended September 30, 2002. We
closed six underperforming restaurants in the first nine months of fiscal 2003,
three in the first quarter of fiscal 2003 and three in the third quarter of
2003. Subsequent to September 29, 2003, we closed two additional underperforming
restaurants and as of October 30, 2003 we operate 89 restaurants.
NINE MONTHS ENDED SEPTEMBER 29, SEPTEMBER 30,
2003 2002
---- ----
Restaurants open at beginning of period 91 66
Restaurants opened 6 13
Restaurants closed 6 0
Restaurants open at end of period 91 79
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
Page 13
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 has been applied 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
September 29, 2003 and September 30, 2002 there were 66 and 55 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
Page 14
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 31. Fiscal
years 2000, 2001 and 2002 each included 52 weeks. The three-month periods ended
September 29, 2003 and September 30, 2002 each contained 13 weeks.
RESULTS OF OPERATIONS
Our operating results for the three and nine months ended September 29,
2003 and September 30, 2002, expressed as a percentage of sales, were as
follows:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER
--------- --------- --------- ---------
29, 2003 30, 2002 29, 2003 30, 2002
-------- -------- -------- --------
Net sales ................................... 100.0% 100.0% 100.0% 100.0%
Costs and Expenses:
Cost of goods sold ........................ 27.3% 26.5% 28.0% 26.8%
Restaurant operating expenses ............. 63.3% 59.6% 63.4% 60.0%
----- ----- ----- -----
Total costs of sales ...................... 90.6% 86.1% 91.4% 86.8%
General and administrative expenses ....... 12.8% 18.3% 19.3% 21.1%
Depreciation and amortization ............. 6.8% 7.3% 7.1% 6.9%
Restaurant pre-opening expenses ........... 0.1% 2.5% 0.5% 1.5%
Provision for losses on asset impairments
and disposals ........................... 1.2% 0.0% 6.9% 0.0%
Lease termination costs ................... (2.2)% 0.0% (0.4)% 0.0%
----- ----- ----- -----
Operating loss .............................. (9.3)% (14.2)% (24.8)% (16.3)%
Other income (expense):
Interest income ........................... 0.0% 0.1% 0.1% 0.1%
Interest expense .......................... (0.3)% (2.1)% (0.3)% (1.9)%
Other Income .............................. 0.4% 1.7% 0.1% 0.7%
----- ----- ----- -----
Net income (loss) ........................... (9.2)% (14.5)% (24.9)% (17.4)%
THREE AND NINE MONTHS ENDED SEPTEMBER 29, 2003 VS. THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2002
NET SALES
Sales increased $5.4 million, or 24.7%, to $27.5 million in the third
quarter of fiscal 2003, from $22.1 million in the third 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 during the third quarter, having minimal impact on sales
compared to the same period last year. Sales increased $21.0 million, or 34.5%,
to $82.1 million in the first nine months of fiscal 2003, from $61.1 million in
the first nine months of fiscal 2002. This increase was primarily due to the
full period contribution of sales from the 20 restaurants opened during fiscal
2002, from sales of six restaurants opened during the first quarter of fiscal
2003 and from an increase in comparable restaurant sales. Management estimates
that in the current quarter, the combination of our closing of 22 restaurants
for the breakfast daypart, a blackout in the northeast, and a hurricane in the
Mid Atlantic region resulted in a sales decrease of $0.5 million.
In the third quarter of fiscal 2003, comparable restaurant sales increased
4.4%. In comparable restaurants, for the third quarter of fiscal 2003, our
transaction count increased 3.6% and our average check increased 1.0% compared
to the same period last year. For the first nine months of fiscal 2003,
comparable restaurant sales increased 5.0%. In our comparable restaurants, in
the first 9 months of fiscal 2003, our transaction count was up 3.7% and our
average check increased 1.2%
Page 15
compared to the first nine months of last year.
During the third quarter of 2003, we identified 22 restaurants that had
insufficient profit contribution from the breakfast daypart. As a result, we
closed those restaurants during the breakfast daypart. While these breakfast
closures will have a negative impact on our sales growth going forward, we
believe that the closures will improve our future profitability. However, there
can be no assurances that this action will have a positive impact on our
profitability.
COSTS AND EXPENSES
Cost of goods sold. In the third quarter of fiscal 2003, cost of goods
sold increased $1.6 million or 28.2%, to $7.5 million, from $5.9 million in the
third quarter of fiscal 2002. As a percentage of sales, cost of goods sold
increased to 27.3% of sales in the third quarter of fiscal 2003, from 26.5% in
the third 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 third quarter of fiscal 2003, food sales increased to 75.3% of
total sales, from 70.0% in last year's quarter, with an offsetting reduction in
our beverage sales, which were 24.7% of total sales in this year's quarter,
compared to 30.0% 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 increased demand for produce. These higher produce costs, combined
with the disproportionate increase in our salad sales also contributed to the
increase in cost of goods sold. Late in the second quarter of the current year,
we adjusted our menu prices for salads upward in order to more appropriately
price our salad products versus our competitors' prices.
Year-to-date, cost of goods sold increased $6.6 million, or 40.6% to $23.0
million, from $16.4 million in the first nine months of fiscal 2002. As a
percentage of sales, cost of goods sold increased to 28.0% of sales in the first
nine months of fiscal 2003, from 26.8% in the first nine months 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 a
percentage of sales, 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
$4.2 million, or 32.5%, to $17.4 million in the third quarter of fiscal 2003,
from $13.2 million in the third quarter of fiscal 2002. This increase is
primarily due to the increase in the number of restaurants in operation this
year compared to last year. As a percentage of sales, restaurant operating
expenses increased to 63.3% of sales in the third quarter of fiscal 2003, from
59.6% in the third quarter of fiscal 2002. This increase, as a percentage of
sales was primarily due to increases in our labor costs as a percentage of sales
due to sales performance of new stores opened subsequent to the second quarter
of 2002 that was less than management anticipated.
Year-to-date, restaurant operating expenses increased by $15.4 million, or
42.0%, to $52.1 million in the first nine months of fiscal 2003, from $36.7
million in the first nine months of fiscal 2002. This increase is primarily due
to the increase in the number of restaurants in operation this year vs. last
year. As a percentage of sales, restaurant operating expenses increased to 63.4%
of sales in the first nine months of fiscal 2003, from 60.0% in the first nine
months of fiscal 2002. This increase, as a percentage of sales, was primarily
due to increases in labor costs as described above.
General and administrative costs. General and administrative costs
decreased by $0.6 million, or 13.6%, to $3.5 million in the third quarter of
fiscal 2003, from $4.1 million in the third quarter of fiscal 2002. This
decrease is primarily due to the reversal of a severance charge for an executive
that was originally slated for termination but has been reinstated in a
different capacity and cost reductions associated with reductions in our
executive, general and administrative staff since the beginning of the year.
Such amounts were partially offset by an additional severance charge of $0.2
million for another executive. As a percentage of sales, general and
administrative costs decreased to 12.7%
Page 16
of sales in the third quarter of fiscal 2003, from 18.3% of sales in the third
quarter of fiscal 2002 primarily due to sales leverage against these costs and
reductions in our staff.
Year-to-date, general and administrative costs increased by $3.0 million,
or 23.0%, to $15.9 million in the first nine months of fiscal 2003, from $12.9
million in the first nine months of fiscal 2002. This increase is primarily due
to a $3.0 million employee severance charge recorded in the current year. As a
percentage of sales, general and administrative costs decreased to 19.3% of
sales in the first half of fiscal 2003, from 21.1% of sales in the first nine
months of fiscal 2002. The decrease as a percentage of sales was entirely due to
sales leverage against these costs. Excluding the employee severance charge
general and administrative costs decreased to 15.7% of sales in this year's nine
months, compared with 21.1% for the same period last year.
Depreciation and amortization. Depreciation and amortization increased
$0.3 million, or 16.3%, to $1.9 million in the third quarter of fiscal 2003,
from $1.6 million in the third quarter of fiscal 2002. This increase was
primarily due to additional depreciation expense for restaurants opened
subsequent to the third quarter of fiscal 2002. As a percentage of restaurant
sales, depreciation and amortization decreased to 6.8% of sales in the third
quarter of fiscal 2003, compared to 7.3% of sales in the third quarter of fiscal
2002. This decrease, as a percentage of sales, is primarily due to the increased
sales resulting from stores opened in 2002.
Year-to-date, depreciation and amortization increased $1.7 million, or
40.2%, to $5.8 million in the first nine months of fiscal 2003, from $4.1
million in the first nine months of fiscal 2002. This increase was primarily due
to additional depreciation expense for restaurants opened subsequent to the
third quarter of fiscal 2002. As a percentage of restaurant sales, depreciation
and amortization increased to 7.1% of sales in the first nine months of fiscal
2003, compared to 6.8% of sales in the first nine months 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. Restaurant pre-opening expenses were less
than $0.03 million in the third quarter of fiscal 2003, down 94.0% from $0.5
million recorded in the third quarter of fiscal 2002. This decrease resulted
from the fact that the company has not opened or remodeled any new restaurants
in the third quarter of fiscal 2003.
Year-to-date, restaurant pre-opening expenses decreased $0.5 million to
$0.4 million in the first nine months of fiscal 2003, from $0.9 million in the
first nine months of fiscal 2002. As a percentage of restaurant sales,
restaurant pre-opening expenses decreased to 0.5% of sales in the first nine
months of fiscal 2003, from 1.5% of sales in the first nine months of fiscal
2002. This decrease is due to the decrease in the number of new restaurants
opened or remodeled in the first nine months of fiscal 2003. Six new restaurants
were opened in the first nine months of fiscal 2003 compared to five new
restaurants and five remodeled restaurants opened in the first nine months of
fiscal 2002.
Loss on impairment of property and equipment and restaurant disposals.
During the third quarter of fiscal 2003, we recognized $0.3 million of asset
impairment and store disposal costs. Year-to-date, we have recognized $5.7
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 $3.8 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. In the third quarter of 2003, we have recognized
$0.6 million of income related to the reversal of some lease termination
accruals where we were able to exit the lease on a more favorable basis than
previously anticipated. No lease termination costs were recorded in the third
quarter of 2002. Year-to-date in fiscal 2003, we have recognized $0.3 million of
lease termination income related to the reversal of some lease termination
accruals where we were able to exit the lease on a more favorable basis than
previously anticipated offset by costs incurred to exit five leases. No such
charges or income were
Page 17
recognized during the first nine months 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 with another three closed in the third
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. Moreover, future closings may result in additional
lease termination costs. Subsequent to the end of the third quarter, we closed
two additional locations, and have assigned the leases to those locations to the
new tenants. However, 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 third quarter and first nine
months of fiscal 2003 and the third quarter and first nine months of fiscal
2002, interest income was less than $0.01 million. Interest expense decreased
$0.4 million to $0.1 million in the third quarter of fiscal 2003 from $0.5
million in the third quarter of fiscal 2002. Year-to-date interest expense has
decreased $1.0 million to $0.2 million in the first nine months of fiscal 2003
from $1.2 million in the first nine months 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 nine
months of fiscal 2002. Those notes were repaid in December 2002 with proceeds
from our initial public offering.
Other income. During the third quarter of fiscal 2003, we recorded $0.1
million in other income, primarily the insurance proceeds from an insurance
claim related to our World Financial Center restaurant. In the first nine months
of fiscal 2002 we recorded $0.4 million of other income, principally the receipt
of business interruption insurance proceeds related to our World Financial
Center restaurant, which was closed from September 11, 2001 until early
September 2002
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $3.2 million on September 29, 2003,
compared with $13.0 million on December 30, 2002. Our working capital was a
deficit of $7.6 million on September 29, 2003, compared with working capital of
$0.8 million as of December 30, 2002. Our principal requirements for cash are
funding operations, maintaining or remodeling existing restaurants and funding
the incorporation of a franchising and area developer model into our business
strategy. During the first nine months of fiscal 2003, we financed our
requirements for capital with the proceeds from the initial public offering of
our common stock, which was completed in November of 2002 and from the proceeds
of the $3 Million Note and the $1.5 Million Note described below and in Note E
to the financial statements.
Net cash used in operating activities for the nine months ended September
29, 2003 was $10.0 million, compared to $7.8 million for the nine months ended
September 30, 2002. Funds used in operating activities in the first nine months
of 2003 increased primarily as a result of an increase in our net loss compared
to the first nine months of 2002, and from our payment of accounts payable that
were outstanding at the end of the year.
Total capital expenditures for the nine months ended September 29, 2003
were $3.6 million, compared to expenditures of $12.2 million for the nine months
ended September 30, 2002. These expenditures were primarily related to the
opening of six new restaurants during the first 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 $3.5 million for the nine
months ended September 29, 2003. During the period, we borrowed approximately
$4.5 million under the $3 Million Note and the $1.5 Million Note (see Note E to
the financial statements) and made scheduled repayments of $0.9 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
Page 18
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 fiscal 2002 period,
we made scheduled repayments of $0.9 and $0.4 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. In fiscal 2001, we sold
approximately 1.4 million shares of Series C Preferred Stock and received
approximately $24.1 million, net of offering costs. In November 2001, we entered
into Senior Subordinated Note and Warrant purchase agreements with a group of
investors, pursuant to which we received approximately $9.3 million in proceeds.
During 2001, we entered into other financing agreements totaling approximately
$0.4 million and repaid approximately $1.4 million on existing loans and capital
leases. There is one note payable outstanding under our equipment loan credit
facility that is due December 1, 2003 at an interest rate of 8.5%.
During the first nine months 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. Primarily 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. In addition, we announced our intention to pursue a rights 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 of
the rights offering. 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 and the $1.5 Million
Note bear interest at 75 basis points over Bank of America's prime lending rate
and are each secured by all of our tangible and intangible property, other than
equipment pledged to secure our equipment loan credit facility. We paid the bank
fees and expenses of approximately $22,000 upon funding of the $3 Million Note.
The $3 Million Note was 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"). On October 30, 2003, the bank assigned the $3 Million Note to the
Guarantors or their designees, and the maturity date was extended to December
31, 2004. Upon assignment of the note, we issued amended and restated promissory
notes in the amount of $1,943,068.74, $759,397.00 and $304,634.26 (collectively,
the "$3 Million Note"). Subject to the receipt of shareholder approval of the
conversion feature of the senior secured notes, each holder will have the right
to convert, in whole or in part, their pro rata share of the outstanding
principal amount of the note plus accrued and unpaid interest into shares of our
common stock 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 rights offering, the $3 Million Note and the $1.5 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 rights 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
rights
Page 19
offering, we will not consummate the 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 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 rights 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 rights offering, on August 5, 2003, Mr. Gleacher and ZAM
Holdings provided $1,348,042.50 of the Funding Parties' $8.5 Million commitment
in the form of two senior secured promissory notes, and on August 6, 2003, Mr.
Phillips provided $157,951.50 of the Funding Parties' commitment in the form of
a senior secured promissory note. 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 stockholders, 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 rights offering, the $3 Million Note and 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
rights offering. In order to provide us 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, we entered into an
agreement with Mr. Gleacher, Mr. Phillips and ZAM Holdings, L.P. pursuant to
which Messrs. Gleacher and Phillips and ZAM Holdings, L.P. agreed to provide
funding to us by purchasing senior secured promissory notes from us in the
aggregate principal amount of $3 million if (i) the Rights Offering is abandoned
by December 1, 2003; (ii) our 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) our "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) our
earnings before interest, taxes, depreciation, amortization, asset impairment
charges, restaurant closing costs and other items customarily and properly
classified by us as one-time, extraordinary expenses for internal reporting
purposes less (B) capital expenditures. Our Cumulative Modified EBITDA for this
period satisfied condition (iv) above.
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 us 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 L.P. 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 we do 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 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 rights offering, or until the abandonment of the
rights offering and funding of the remaining commitment by the Funding Parties.
We currently estimate that our capital expenditures during 2003 will be
approximately $3.7 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.
Page 20
We plan to fund the operations, maintenance and growth of our restaurants
primarily through the rights offering (including the senior secured notes) and
internally generated cash flows produced by our existing restaurants. Our cash
resources, and therefore our liquidity, are highly dependent upon the level of
internally generated cash from operations and upon future financing
transactions, including the transactions we have negotiated with the Funding
Parties and the rights 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 additional financing from external sources to continue funding our
operations, close underperforming restaurants or reduce or cease our plans to
open or franchise new restaurants. We cannot predict whether such financing will
be available on terms acceptable to us, or at all.
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 rights 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 expected 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 rights offering, we
will not consummate the rights 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 expected near term working capital. In this event,
we anticipate that this funding, our current cash balances and expected
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, we will not consummate the rights
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 expected near term working capital. In this event, we
anticipate that this funding, our current cash balances and expected internally
generated cash flows will be sufficient to fund our cash requirements for the
next twelve months; however, we expect that we would need to reduce or cease our
plans to open or franchise new restaurants. We also 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.
Page 21
Contractual Obligations
AS OF SEPTEMBER 29, 2003
TOTAL DUE OCTOBER - DUE IN 2004 DUE IN 2006 DUE AFTER
CONTRACTUAL OBLIGATIONS (IN THOUSANDS) DECEMBER 2003 AND 2005 AND 2007 2007
----------------------- -------------- ------------- -------- -------- ----
Notes payable $ 5,166.3 $ 394.9 $ 4,639.4 $ 100.8 $ 31.2
Employee severance obligations 1,858.6 356.0 1,502.6
Capital lease obligations 1.5 1.5
Operating lease obligations (a) (b) 103,020.6 3,153.0 26,158.7 25,859.8 47,849.0
(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.
Page 22
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;
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.
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 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
For the purposes of Rules 13a-14 and 15d-14 of the Exchange Act of 1934
("Exchange Act"), the term "disclosure controls and procedures" refers to the
controls and other procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports that it files
under the Exchange Act is recorded, processed, summarized and reported within
required time periods. As of the end of the period covered by this Report (the
"Evaluation Date"), the Company carried out an evaluation, under the supervision
and with the participation of the Company's Chief Executive Officer and Chief
Financial Officer of the effectiveness of the design and operation of its
disclosure controls and procedures. Based on their evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that, as of the
Evaluation Date, such disclosure controls and procedures were effective at
ensuring that required information will be disclosed on a timely basis in the
Company's reports filed under the Exchange Act. There were no significant
changes to our internal controls or in other factors that could significantly
affect these controls subsequent to the Evaluation Date.
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 Cosi and various of our officers and directors and
the underwriter of our 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 our stock allegedly traceable to our November 22, 2002 IPO, that
at the time of the IPO, our offering materials failed to disclose that the funds
raised through the IPO would be insufficient to implement our expansion plan;
that it was improbable that we would be able to open 53 to 59 new restaurants in
2003; that at the time of the IPO, we 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 our 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 us for
any damages assessed against it in the Securities Act Litigation. The Securities
Act Litigation is at a preliminary stage, and we believe that we have
meritorious defenses to these claims, and intend to vigorously defend against
them.
Page 24
On September 22, 2003, defendants filed motions to dismiss the Second
Consolidated Amended Complaint in the Securities Act Litigation. Plaintiffs
filed their opposition to defendants' motion to dismiss on October 23, 2003.
Defendants' reply briefs are due November 12, 2003.
Page 25
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 September 29, 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 September 29, 2003 after deducting the
total expenses above were approximately $32.8 million.
Intended Use Of Actual Use of
In $ Millions Proceeds as stated Proceeds through
in prospectus September 29, 2003
------------- ------------------
Develop new restaurants and maintain and
remodel existing restaurants $19.6 $12.6
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 -- Promissory note, dated as of October 30, 2003,
between the Company and ZAM Holdings, L.P.
4.2 -- Promissory note, dated as of October 30, 2003,
between the Company and Eric J. Gleacher.
4.3 -- Promissory note, dated as of October 30, 2003,
between the Company and Charles G. Phillips.
10.1 -- Employment Agreement between the Company and Kevin
Armstrong, dated as of July 3, 2003.
10.2 -- Employment Agreement between the Company and Mark
Stickney, dated as of August 18, 2003.
10.3 -- Employment Agreement between the Company and Jonathan
M. Wainwright, dated as of August 20, 2003.
10.4 -- Separation Agreement between Cosi and
Nicholas Marsh III, dated as of July 9, 2003.
10.5 -- Separation Agreement between Cosi and Kenneth S.
Betuker, dated as of September 17, 2003.
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 August 14, 2003, which
attached and incorporated by reference the Company's press release dated August
14, 2003, reporting the Company's financial results for the quarter ended June
30, 2003.
The Company filed a Current Report on Form 8-K on August 18, 2003, which
attached and incorporated by reference (i) a transcript of a conference call
held on August 18, 2003 reporting the Company's financial results for the
quarter ended June 30, 2003, and (ii) a press release announcing management
changes.
Page 27
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: November 6, 2003 By: /s/ Kevin Armstrong
------------------------------------
Kevin Armstrong
Chief Executive Officer
Dated: November 6, 2003 By: /s/ Mark Stickney
------------------------------------
Mark Stickney
Chief Financial Officer
(Chief Accounting Officer)
Treasurer and Secretary
Page 28