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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended April 4, 2005 OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from  to Commission File No. 000-50052 COSI, INC.  Delaware
    
    06-1393745(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 1751 Lake Cook Road
Deerfield, Illinois 60015
(Address of principal executive offices) (Zip Code) (847) 597-8800
(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 þ No o Indicate by check mark whether the registrant is an accelerated filer as defined in Exchange Act
Rule 12b-2. Yes þ No o Number of shares of Common Stock, $.01 par value, outstanding at April 28, 2005: 31,493,196   1




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COSI, INC. Index to Form 10-Q
For the three month period ended April 4, 2005 Page NumberPART I. FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheets  as of April 4, 2005 and January 3, 2005
    
    
    3Consolidated Statements of Operations  Three month period ended April 4,
2005 and March 29, 2004
    
    
    4Consolidated Statement of Stockholders Equity  Three month period ended
April 4, 2005
    
    
    5Consolidated Statements of Cash Flows  Three month period ended April 4,
2005 and March 29, 2004
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7-12Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    13-19Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    21Item 4. Controls and Procedures
    
    
    21PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    21-22Item 5. Other Information
    
    
    22-23Item 6. Exhibits and Reports on Form 8-K
    
    
    23SIGNATURES
    
    
    24CERTIFICATIONS
    
    
    25-27EXHIBIT
    
    
    28-34Employment Agreement - Kevin ArmstrongCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification Pursuant to Section 906
  2




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PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements Cosi, Inc. 
 Consolidated Balance Sheets
 As of April 4, 2005 and January 3, 2005
 (dollars in thousands, except share data)
 April 4, 2005
    
    
    January 3, 2005(Note 1)AssetsCurrent assets:Cash and cash equivalents
    
    $
    5,117.0
    
    
    $
    1,089.7Investments
    
    
    1,988.4
    
    
    
    9,961.6Accounts receivable, net of allowances of $174.2 and $152.4, respectively
    
    
    612.0
    
    
    
    613.2Inventories
    
    
    855.8
    
    
    
    890.5Prepaid expenses and other current assets
    
    
    3,334.0
    
    
    
    2,315.1Total current assets
    
    
    11,907.2
    
    
    
    14,870.1Property, equipment and leasehold improvements, net
    
    
    32,629.2
    
    
    
    34,074.5Intangibles, security deposits and other assets, net
    
    
    2,332.0
    
    
    
    2,193.7Total assets
    
    $
    46,868.4
    
    
    $
    51,138.3Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    2,965.5
    
    
    $
    3,973.0Accrued expenses
    
    
    7,173.5
    
    
    
    9,677.5Current portion of other liabilities
    
    
    507.8
    
    
    
    363.0Current portion of long-term debt
    
    
    72.2
    
    
    
    74.9Total current liabilities
    
    
    10,719.0
    
    
    
    14,088.4Other long-term liabilities, net of current portion
    
    
    7,405.3
    
    
    
    7,614.2Long-term debt, net of current portion
    
    
    270.0
    
    
    
    283.4Total liabilities
    
    
    18,394.3
    
    
    
    21,986.0Commitments and contingenciesStockholders equity:Common stock  $.01 par value; 100,000,000 shares authorized,
31,466,689 and 30,819,716 shares issued and outstanding, respectively
    
    
    314.7
    
    
    
    308.2Additional paid-in capital
    
    
    227,467.4
    
    
    
    225,519.7Deferred stock compensation
    
    
    (720.0
    )
    
    
    (900.0
    )Notes receivable from stockholders
    
    
    (1,475.6
    )
    
    
    (1,458.8
    )Accumulated deficit
    
    
    (197,112.4
    )
    
    
    (194,316.8
    )Total stockholders equity
    
    
    28,474.1
    
    
    
    29,152.3Total liabilities and stockholders equity
    
    $
    46,868.4
    
    
    $
    51,138.3
 The accompanying notes are an integral part of these consolidated financial statements 3




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Cosi, Inc. 
 Consolidated Statements of Operations
 For the Three Month Periods Ended April 4, 2005 and March 29, 2004
 (dollars in thousands, except share data)
 Three Months EndedApril 4, 2005
    
    
    March 29, 2004Net sales
    
    $
    27,205.1
    
    
    $
    24,917.2Cost of sales:Cost of goods sold
    
    
    6,673.8
    
    
    
    6,495.6Restaurant operating expenses
    
    
    16,190.5
    
    
    
    16,326.3Total cost of sales
    
    
    22,864.3
    
    
    
    22,821.9General and administrative expenses
    
    
    5,180.7
    
    
    
    4,263.5Stock compensation expense
    
    
    231.2
    
    
    
    2,647.0Depreciation and amortization
    
    
    1,765.1
    
    
    
    1,746.6Restaurant pre-opening expenses
    
    
    21.9
    
    
    
    59.4Provision for losses on asset impairments
and disposals
    
    
    
    
    
    
    474.4Lease termination benefit
    
    
    
    
    
    
    (702.3
    )Operating loss
    
    
    (2,858.1
    )
    
    
    (6,393.3
    )Interest income
    
    
    30.8
    
    
    
    14.7Interest expense
    
    
    (6.3
    )
    
    
    (3.1
    )Reserve for notes receivable from
stockholders
    
    
    16.8
    
    
    
    Other income
    
    
    21.2
    
    
    
    3.6Net loss
    
    $
    (2,795.6
    )
    
    $
    (6,378.1
    )Per Share Data:Net loss per share, basic and diluted
    
    $
    (0.09
    )
    
    $
    (0.24
    )Weighted average shares outstanding:
    
    
    31,200,458
    
    
    
    26,949,230
 The accompanying notes are an integral part of these consolidated financial statements 4




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Cosi, Inc. 
 Consolidated Statement of Stockholders Equity
 For the Three Months Ended April 4, 2005
 (unaudited)
 (dollars in thousands, except share data)
 Common Stock
    
    
    
    
    
    
    NotesAdditional
    
    
    
    
    
    
    ReceivableNumber of
    
    
    
    
    
    
    Paid In
    
    
    Deferred
    
    
    from
    
    
    AccumulatedShares
    
    
    Amount
    
    
    Capital
    
    
    Compensation
    
    
    Stockholders
    
    
    Deficit
    
    
    TotalBalance, January 3, 2005
    
    
    30,819,716
    
    
    $
    308.2
    
    
    $
    225,519.7
    
    
    $
    (900.0
    )
    
    $
    (1,458.8
    )
    
    $
    (194,316.8
    )
    
    $
    29,152.3Stock compensation
    
    
    
    
    
    
    
    
    
    
    71.7
    
    
    
    180.0
    
    
    
    
    
    
    
    
    
    
    
    251.7Exercise of options
    
    
    646,973
    
    
    
    6.5
    
    
    
    1,876.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,882.5Reserve for notes
receivable from
stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16.8
    )
    
    
    
    
    
    
    (16.8
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,795.6
    )
    
    
    (2,795.6
    )Balance, April 4, 2005
    
    
    31,466,689
    
    
    $
    314.7
    
    
    $
    227,467.4
    
    
    $
    (720.0
    )
    
    $
    (1,475.6
    )
    
    $
    (197,112.4
    )
    
    $
    28,474.1
 The accompanying notes are an integral part of these consolidated financial statements. 5




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Cosi, Inc. 
 Consolidated Statements of Cash Flows
 For the Three Month Periods Ended April 4, 2005 and March 29, 2004
 (dollars in thousands)
 April 4, 2005
    
    
    March 29, 2004Cash flows from operating activities:Net loss
    
    $
    (2,795.6
    )
    
    $
    (6,378.1
    )Adjustments to reconcile net loss to net cash used in operating activitiesDepreciation and amortization
    
    
    1,765.1
    
    
    
    1,746.6Non-cash portion of asset impairments and disposals
    
    
    3.4
    
    
    
    360.5Provision for bad debts
    
    
    21.0
    
    
    
    66.8Stock compensation expense
    
    
    251.7
    
    
    
    2,981.1Reserve on notes receivable from stockholders
    
    
    (16.8
    )
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (19.8
    )
    
    
    35.4Inventories
    
    
    34.7
    
    
    
    49.6Other assets
    
    
    (115.6
    )
    
    
    29.4Prepaid expenses and other current assets
    
    
    (1,018.9
    )
    
    
    (2,257.9
    )Accounts payable
    
    
    (1,007.4
    )
    
    
    (911.5
    )Accrued expenses
    
    
    (2,504.0
    )
    
    
    (7.1
    )Other liabilities
    
    
    29.0
    
    
    
    (71.3
    )Lease termination accrual
    
    
    (93.2
    )
    
    
    (895.0
    )Net cash used in operating activities
    
    
    (5,466.4
    )
    
    
    (5,251.5
    )Cash flows used in investing activities:Capital expenditures
    
    
    (323.2
    )
    
    
    (507.3
    )Redemption of investments
    
    
    7,973.3
    
    
    
    Payment of security deposits
    
    
    (22.8
    )
    
    
    Net cash provided (used) in investing activities
    
    
    7,627.3
    
    
    
    (507.3
    )Cash flows provided by financing activities:Proceeds from issuance of common stock
    
    
    1,882.5
    
    
    
    963.7Principal payments on long-term debt and capital lease obligations
    
    
    (16.1
    )
    
    
    (10.2
    )Net cash provided by financing activities
    
    
    1,866.4
    
    
    
    953.5Net increase (decrease) in cash and cash equivalents
    
    
    4,027.3
    
    
    
    (4,805.3
    )Cash and cash equivalents, beginning of period
    
    
    1,089.7
    
    
    
    7,957.0Cash and cash equivalents, end of period
    
    $
    5,117.0
    
    
    $
    3,151.7Supplemental disclosures of cash flow information:Cash paid for:Interest
    
    $
    4.5
    
    
    $
    14.5Corporate franchise and income taxes
    
    $
    84.3
    
    
    $
    128.1
 The accompanying notes are an integral part of the consolidated financial statements. 6




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COSI, INC. 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Note 1 -  Basis of Presentation We have prepared the accompanying unaudited condensed consolidated financial
statements in accordance with the requirements of Form 10-Q and, therefore, they do
not include all information and footnotes necessary for a fair presentation of
financial position, results of operations, and cash flows in conformity with
accounting principles generally accepted in the United States of America. In our
opinion, the financial statements reflect all adjustments that are necessary for a
fair presentation of the results of operations for the periods shown. All such
adjustments are of a normal recurring nature. In preparing financial statements in
conformity with accounting principles generally accepted in the United States of
America, we must make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues, expenses, and related disclosures at the date of the
financial statements and during the reporting period. Actual results could differ from
those estimates. The balance sheet at January 3, 2005 has been derived from audited financial
statements at that date but does not include all of the information and footnotes
required by accounting principles generally accepted in the United States of America
for complete financial statements. The results for the three month period ended April 4, 2005 may not be indicative of
the results for the fiscal year. Certain amounts in the fiscal 2004 consolidated financial statements have been
reclassified to conform to the fiscal 2005 presentation. This Report should be read in conjunction with our Annual Report on Form 10-K for the
year ended January 3, 2005, as filed with the Securities and Exchange Commission
(SEC). Note 2  Financial Statement Restatement On March 16, 2005, we filed our Annual Report on Form 10-K. In that report, we
restated our financial statements for fiscal 2003 and 2002 as well as the first three
quarters of fiscal 2004. Accordingly, the prior year financial results for the
thirteen weeks ended March 29, 2004 reflect the impact of that restatement. The issue requiring restatement related to our historical accounting practice of
recognizing rent expense on a straight line basis from the commencement of business
operations rather than from the date of possession under a lease which includes the
pre-opening period of construction, renovation and fixturing. In addition, we had
historically recorded landlord allowances as a reduction of leasehold improvements
rather than as deferred rent in other longterm liabilities to be amortized over the
life of the lease. 7




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COSI, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) continued The following is a summary of the impact of the restatement on our unaudited
consolidated statement of operations for the thirteen weeks ended March 29, 2004. As PreviouslyReported (1)
    
    
    Adjustments
    
    
    As RestatedRestaurant expenses
    
    $
    16,446.9
    
    
    $
    (120.6
    )
    
    $
    16,326.3Depreciation and amortization
    
    
    1,701.3
    
    
    
    45.3
    
    
    
    1,746.6Operating loss
    
    
    (6,468.6
    )
    
    
    75.3
    
    
    
    (6,393.3
    )Net loss
    
    
    (6,453.4
    )
    
    
    75.3
    
    
    
    (6,378.1
    )Net loss per share, basic and diluted
    
    $
    (0.24
    )
    
    $
    
    
    
    $
    (0.24
    )
 (1) as previously reported after certain reclassifications made to conform to current year presentation Note 3  Investments As of April 4, 2005, we had outstanding a certain debt security as an investment. The
investment consists of a United States government agency note with an original
maturity of greater than 30 days at the date of purchase. In accordance with Statement of Financial Accounting Standards (SFAS) No. 115
Accounting for Certain Investments in Debt and Equity Securities,and based on our
intentions regarding these instruments, we classify all marketable debt securities as
held-to-maturity and account for these investments at amortized cost. The amortized
principal amount of the investment at April 4, 2005 was $2.0 million and the weighted
average interest rate was 2.09%. The amortized principal amount approximates fair
value at April 4, 2005. We determine the fair value of our investment in debt
securities based upon public market rates. The investment matures within one year. Note 4  Stock-Based Compensation The following illustrates the pro forma effect on net loss and net loss per common
share as if we had applied the fair value recognition provisions of SFAS No. 123
Accounting for Stock-Based Compensationto stock-based compensation: Three Month Periods EndedApril 4,
    
    
    March 29,2005
    
    
    2004Net loss as reported
    
    $
    (2,795.6
    )
    
    $
    (6,378.1
    )Add: stock-based compensation expense included in
reported net loss
    
    
    71.7
    
    
    
    2,581.8Deduct: Total stock-based employee compensation
expense determined under the fair value based
method for all awards
    
    
    (601.6
    )
    
    
    (527.3
    )Pro forma net loss
    
    $
    (3,325.5
    )
    
    $
    (4,323.6
    )Net loss per common share: basic and dilutedAs reported
    
    $
    (0.09
    )
    
    $
    (0.24
    )Pro forma
    
    $
    (0.11
    )
    
    $
    (0.16
    )
 8




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COSI, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  continued The pro forma amounts are not representative of the effects on reported earnings for
future periods. Pursuant to a stock option repricing previously approved by shareholders, on December
29, 2003, 1,246,164 options with exercise prices ranging from $2.37 to $12.25 were
repriced at $2.26 per common share. In accordance with APB 25, Accounting for Stock
Issued to Employees, we have recorded a charge for the three months ended April 4,
2005 of approximately $0.1 million resulting from an increase in our stock price from
$6.09, as of the close of business on January 3, 2005, to a stock price of $6.16, as
of the close of business on April 4, 2005 on the remaining options outstanding
partially offset by a decrease in the total number of repriced options outstanding due
to forfeitures during the quarter. We may be required to record additional
adjustments in the future, that may be material, depending upon the movement of our
stock price. For any forfeitures, we will reverse the stock compensation expense
recorded in previous quarters related to the unvested portion of those options in the
period that the forfeitures become effective. In December 2004, the FASB issued SFAS No. 123 (revised 2004). Share-Based Payment, which is a
revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R) supersedes APB
Opinion No. 25, Accounting for Stock Issued to Employeesand amends SFAS No. 95, Statement of Cash
Flows. Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No.
123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement based on their fair values. Pro
forma disclosure is no longer an alternative. We will adopt the new standard beginning in fiscal
2006. We have not yet assessed the impact of adopting this new standard. NOTE 5  Inventories Inventories are stated at the lower of cost (First In, First Out method) or market, and consist principally of food, beverage, liquor and packaging and related food supplies. NOTE 6  Property, Equipment and Leasehold Improvements Property, equipment and leasehold improvements consist of the following: April 4,
    
    
    January 3,($ in 000s)
    
    2005
    
    
    2005Leasehold improvements
    
    
    36,932.0
    
    
    
    36,694.6Furniture and fixtures
    
    
    8,982.5
    
    
    
    8,856.7Restaurant equipment
    
    
    13,055.7
    
    
    
    12,886.0Computer and telephone equipment
    
    
    8,394.2
    
    
    
    8,254.0Construction in progress
    
    
    127.3
    
    
    
    530.167,491.7
    
    
    
    67,221.4Less: accumulated depreciation and
amortization
    
    
    (34,862.5
    )
    
    
    (33,146.9
    )Net property, equipment and leasehold
improvements
    
    
    32,629.2
    
    
    
    34,074.5
 Restaurant Impairment Charges: In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 144,
Accounting for the Impairment or Disposal of Long Lived Assets. SFAS 144 supercedes
SFAS No. 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. 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. In accordance with SFAS 144 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. We consider a history of restaurant operating
losses to be the primary indicator of potential impairment for individual restaurant
locations. We generally determine whether a restaurant location is impaired based on
expected undiscounted cash flows, primarily for the remainder of the lease term, and
then determine the impairment charge based on discounted cash flows for the same
period. No impairments were recorded during the first quarter of fiscal 2005. 9




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COSI, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  continued Note 7  Accrued Expenses Accrued expenses consist of the following: April 4,
    
    
    January 3,($ in 000s)
    
    2005
    
    
    2005Payroll and related benefits and taxes
    
    $
    2,660.5
    
    
    $
    2,304.1Professional and legal costs
    
    
    200.1
    
    
    
    553.0Taxes payable
    
    
    706.5
    
    
    
    762.3Severance payable  current portion
    
    
    160.7
    
    
    
    380.7Rent obligations
    
    
    339.7
    
    
    
    417.4Gift cards/certificates
    
    
    279.2
    
    
    
    334.7Insurance
    
    
    681.3
    
    
    
    2,216.7Other
    
    
    2,145.5
    
    
    
    2,708.5Accrued expenses
    
    $
    7,173.5
    
    
    $
    9,677.4
 Note 8  -  Long-Term Debt Notes Payable: In May 1998, we entered into a construction note payable which requires monthly
payments of $3,097 and accrues interest at a rate of 10% per year. As of April 4,
2005, the outstanding balance on the note was $69,630. The note matures in March 2007. In April 2003, we entered into a construction note payable with a landlord. The note
matures in March 2013, requires monthly payments of $1,742 and accrues interest at a
rate of 7% per annum. The outstanding balance on the note as of April 4, 2005 was
$127,744. In July 2002, we entered into an agreement to purchase a liquor license. Under the
agreement, we are required to make monthly payments of $1,528 through February 2006.
The outstanding obligation as of April 4, 2005 was $14,624. In 2001, we entered into a settlement agreement involving a trademark dispute. Under
that agreement, we are obligated to make annual payments of $25,000 per year through
2011. The present value of those future payments is included in Long-Term Debt in the
accompanying balance sheet. NOTE 9  Earnings Per Share Basic and diluted loss per common share is calculated by dividing net loss by the
weighted average common shares outstanding during the period. In-the-money stock
options and warrants to purchase an aggregate of 3,168,781 and 3,424,263 shares of
common stock were outstanding at April 4, 2005 and March 29, 2004, respectively. These
stock options and warrants outstanding were not included in the computation of diluted
earnings per share because we incurred a net loss in all periods presented and hence,
the impact would be anti-dilutive. 10




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COSI, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  continued NOTE 10  -  Lease Termination Costs In June 2002, the FASB issued SFAS 146, Accounting for Costs Associated with Exit or
Disposal Activities, which addresses accounting for any 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 prospectively to exit or disposal activities initiated
after December 31, 2002. No charges were recorded for leased termination costs during
the first quarter of fiscal 2005. Future store closings, if any, may result in lease termination charges. Charges for
lease termination costs will be dependent on our ability to improve operations in
those stores. If unsuccessful, lease termination costs will be determined through
negotiating acceptable terms with our landlords to terminate the leases for those
units, and also on our ability to locate acceptable sub-tenants or assignees for the
leases at those locations. NOTE 11  -   Contingencies From time to time, we are a defendant in litigation arising in the ordinary course of
our business, including claims resulting from slip and fall accidents, claims under
federal and state laws governing access to public accommodations, employment related
claims and claims from guests alleging illness, injury or other food quality, health
or operational concerns. To date, none of such litigation, some of which is covered by
insurance, has had a material adverse effect on our consolidated financial position,
results of operations or cash flows. 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. Based on the allegations set forth in the complaint, we
believe that the amount of recessionary damages that could be awarded to the
plaintiffs, if a judgment is rendered against us, would not exceed $24 million. In
addition, the underwriter is seeking indemnification from us for any damages
assessed against it in the Securities Act Litigation. On August 22, 2003,
lead plaintiffs filed a Second Consolidated Amended Complaint, which was
substantially similar to the Consolidated Amended Complaint. On September 22, 2003, we filed motions to dismiss the Second Consolidated Amended
Complaint in the Securities Act Litigation. Plaintiffs filed their opposition to our
motion to dismiss on October 23, 2003. We filed reply briefs on November 12, 2003. On July 30, 2004, the Court granted plaintiffs permission to replead their complaint
against us. On September 10, 2004, plaintiffs filed their Third Consolidated
Amended Complaint. Plaintiffs abandoned their claim that we 11




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COSI, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  continued misled investors about our ability to execute our growth plans. Instead, plaintiffs
claim that our offering materials failed to disclose that, at the time of the IPO,
we were researching the possibility of franchising our restaurants. On October 12,
2004, we filed a motion to dismiss plaintiffs Third Consolidated Amended Complaint. On November 19, 2004, plaintiffs filed their opposition to our motion to dismiss.
On January 11, 2005, we filed a reply brief in further support of our motion to
dismiss plaintiffs Third Consolidated Complaint. We have requested that the court
hear an oral argument on the matter. If our request for oral argument is granted,
the judge will take the arguments under submission. We have no way of predicting
when the judge will issue a ruling on the case. We cannot predict what the outcome of these lawsuits will be. It is possible that we
may be required to pay substantial damages or settlement costs that may not be covered by insurance or that may exceed the limits of any
insurance coverage, which could have a material adverse effect on our financial
condition or results of operations. We could also incur substantial legal costs, and
managements attention and resources could be diverted from our business. NOTE 12  Restricted Stock During fiscal 2003, we 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 our
Executive Chairman, we issued 1,156,407 shares of our authorized but unissued common
stock, representing 5% of our outstanding common stock on a fully diluted basis
(assuming all outstanding options and warrants are exercised) to Mr. Forrest on June
26, 2003. Pursuant to the December 29, 2003 completion of the rights offering, we
issued an additional 523,546 shares to Mr. Forrest such that Mr. Forrests ownership
of us, on a fully diluted basis, remained at 5%. Mr. Forrests rights in the shares
vest as follows: (i) 25% of the shares vested upon issuance; (ii) 25% of the shares
vested on April 1, 2004; 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 us without cause (as defined in the agreement), or
upon a change of control (as defined in the agreement). If Mr. Forrest is terminated
by us 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 us or solicit its employees. The value of
Mr. Forrests shares, based on the closing price of our common stock on the dates of
the grants, was $2,729,439, which was recorded as deferred stock compensation within
stockholders equity. Amortization of deferred stock compensation expense of
approximately $180,000 and $399,000 for the three month periods ended April 4, 2005
and March 29, 2004, respectively is included in stock compensation expense in the
accompanying consolidated statements of operations. The remaining balance is being
amortized as stock compensation expense evenly over the remaining life of Mr.
Forrests employment. 12




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##### Table of Contents



Item 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OVERVIEW We currently own and operate 92 premium convenience restaurants in 16 states and the
District of Columbia, including nine stores opened under our strategic alliance with
Federated Department Stores, Inc. Cosi restaurants are all day cafes that feature
signature bread, salads and coffee products in an environment we adjust appropriately
throughout the day. The majority of our restaurants offer breakfast, lunch, afternoon
coffee, dinner and dessert menus. We currently operate our restaurants in two formats: Cosi and Cosi Downtown. The
majority of our restaurants offer breakfast, lunch and afternoon coffee in a counter
service format. Cosi Downtown restaurants, which are located in non residential
central business districts, close for the day in the early evening, while Cosi
restaurants offer dinner and dessert in a casual dining atmosphere. The atmosphere of
Cosi is appropriately managed for each day part by changing the music and lighting
throughout the day. Our restaurants are designed to be welcoming and comfortable,
featuring oversized sofas, chairs and tables, and faux painted walls. The design
scheme of our counters and bars, menu boards as well as condiment counters and server
stations incorporate warm colors and geometric patterns, intended to create a
comfortable environment that can be easily identified by our customers. Our goal is to become the leading national premium convenience restaurant, and we are
focused on knowing our customer and their needs. We conducted a study of our target
customers and their geographic distribution to determine our market potential in
different real estate sites. Based on this study, we determined that our target customers were adults aged 18 to 34 without children and upscale suburbanites
and metro elites of all ages. We utilized these results to determine our overall market
potential. As a result, we believe we can more accurately assess the viability of
different real estate sites. Our study indicated that the top 25 markets where our
target customers are concentrated can support approximately 1,400 restaurants and the
top 75 markets where our target customers are concentrated can support up to
approximately 1,900 locations. We also developed a store design prototype that
improves our customers experience and that we believe is more efficient to operate.
This prototype was unveiled in Avon, Connecticut in March 2004. In 2004, we launched our franchising program. We completed our franchise offering
circular and are currently eligible to offer franchises in 47 states. We will seek
to offer Cosi franchises to area developers and individual franchise operators. The
initial franchise fee, payable to Cosi, for an area developer is $40,000 for the
first restaurant and $35,000 for each additional restaurant. The initial franchise
fee, payable to Cosi, for an individual franchise operator is $40,000 for the first
restaurant and $35,000 for each additional restaurant. The Company believes that offering Cosi franchised restaurants to area developers and
individual franchisees offers the prospect of strong financial returns. By franchising, we believe we
will be able to increase the presence of Cosi restaurants in various markets
throughout the country and generate additional revenue without the large upfront
capital commitments and risk associated with opening company-owned restaurants. We expect that company owned restaurants will always be an important part of our new
restaurant growth. We also believe that incorporating a franchising and area
developer model into our strategy will position us to maximize the market potential
for the Cosi brand consistent with our available capital. We currently operate nine restaurants under our strategic alliance with Federated
Department Stores, Inc. These restaurants are located in some of their largest stores
in Seattle, Atlanta, Miami, Memphis and California. 13




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##### Table of Contents



CRITICAL ACCOUNTING POLICIES The preparation of the consolidated financial statements in conformity with GAAP
requires the appropriate application of certain accounting policies, many of which
require us to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue and expenses
during the reporting period. We believe the application of our accounting policies, and the estimates inherently
required therein, are reasonable and generally accepted for companies in the
restaurant industry. We believe that the following addresses the more critical
accounting policies used in the preparation of our consolidated financial statements
and require managements most difficult and subjective judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain. Long lived assets: Statement of Financial Accounting Standards (SFAS) 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. 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. 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 periodically
review long lived asset for possible impairment. We consider a history of restaurant
operating losses to be the primary indicator of potential impairment for individual
restaurant locations. A lack of improvement at the restaurants we are monitoring, or
deteriorating results at other restaurants, could result in additional impairment
charges. Historically, we have not recorded material additional impairment charges
subsequent to the initial determination of impairment. No impairment charges were
recorded during the first quarter of fiscal 2005. Lease termination costs: For all exit activities prior to December 31, 2002, we
estimated our likely liability under contractual leases for restaurants that had
been, or would 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 146, Accounting for Costs Associated with Exit or
Disposal Activities, which addresses accounting for any 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 prospectively to exit or disposal activities initiated
after December 31, 2002. No charges were recorded for lease termination costs during
the first quarter of fiscal 2005. Stock options: In December 2002, the FASB issued SFAS 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. We have elected to continue to
follow the intrinsic value method of accounting as prescribed by APB 25 to account
for employee stock options. Pursuant to a stock option repricing previously approved
by shareholders, on December 29, 2003, 1,246,164 options with 14




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##### Table of Contents



exercise prices ranging
from $2.37 to $12.25 were repriced at $2.26 per share. In accordance with APB 25
Accounting for Stock Issued to Employeesthese options are subject to variable
accounting, which resulted in recording a charge of approximately $0.1 million during
the first quarter of fiscal 2005. Adjustments recorded in the future may be material
depending upon the movement in the stock price. In December 2004, the FASB issued SFAS No. 123 (revised 2004). Share-Based Payment,
which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation.SFAS
No. 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees
and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in SFAS No.
123(R) is similar to the approach described in SFAS No. 123. However, SFAS No.
123(R) requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the income statement based on their fair values.
Pro forma disclosure is no longer an alternative. We will adopt the new standard
beginning in fiscal 2006. We have not yet assessed the impact of adopting this new
standard. Inventories:Inventories are stated at the lower of cost (First In, First Out method) or market,
and consist principally of food, beverage, liquor and packaging and related food supplies. Property and Equipment: Our property and equipment is stated at cost. We compute
depreciation and amortization of property and equipment on a straight-line basis over
the estimated useful lives of the related assets. We amortize leasehold improvements
over the shorter of the estimated useful life or term of the lease. Accounting for Lease Obligations:In accordance with Financial Accounting Standards
Board Technical Bulletin No. 85-3, Accounting for Operating Leases with Scheduled
Rent Increases, we recognize rent expense on a straight line basis over the lease
term commencing on the date we take possession. Landlord Allowances: In accordance with Financial Accounting Standards
Board Technical Bulletin No. 88-1, Issues Relating to Accounting for Leases, we
record landlord allowances as deferred rent in other long-term liabilities on the
consolidated balance sheet and amortize on a straight line basis over the term of the
related lease. Income taxes: 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 recorded 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 April 4, 2005
and March 29, 2004, there were 83 and 78 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, non-field
bonuses and related taxes and employee benefits; travel; information systems;
training; support center rent and related occupancy costs and professional and
consulting fees. The salaries, 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. 15




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Stock compensation expense.Stock compensation expense includes the charge related
to stock option repricing as well as the amortization of deferred compensation of
restricted stock pursuant to an employment agreement with William D. Forrest, our
Executive Chairman. Depreciation and amortizationDepreciation 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 of, or
remodeling of, a restaurant. RESULTS OF OPERATIONS Our operating results for the three month period ended April 4, 2005 and March 29,
2004, expressed as a percentage of net sales, were as follows: Three Months EndedApril 4
    
    
    March 292005
    
    
    2004Net sales
    
    
    100.0
    %
    
    
    100.0
    %Costs and expenses:Cost of goods sold
    
    
    24.5
    
    
    
    26.1Restaurant operating expenses
    
    
    59.5
    
    
    
    65.5Total cost of sales
    
    
    84.0
    
    
    
    91.6General and administrative expenses
    
    
    19.0
    
    
    
    17.1Stock compensation expense
    
    
    0.9
    
    
    
    10.6Depreciation and amortization
    
    
    6.5
    
    
    
    7.0Pre-opening expenses
    
    
    0.1
    
    
    
    0.3Provision for losses on asset impairments and disposals
    
    
    
    
    
    
    1.9Lease termination benefit
    
    
    
    
    
    
    (2.8
    )Operating loss
    
    
    (10.5
    )
    
    
    (25.7
    )Other income (expense):Interest income
    
    
    0.1
    
    
    
    0.1Interest expense
    
    
    
    
    
    
    Reserve for stockholders notes receivables
    
    
    
    
    
    
    Other income
    
    
    0.1
    
    
    
    Net Loss
    
    
    (10.3
    )%
    
    
    (25.6
    )%
 Net Sales Net sales increased 9.2%, or $2.3 million, to $27.2 million in the first quarter of
fiscal 2005 from $24.9 million in the comparable quarter last year due primarily to a
9.4%, or $2.3 million increase in comparable restaurant net sales and $0.7 million in
net sales at restaurants opened subsequent to the first quarter of fiscal 2004 offset
by $0.7
million in net sales related to restaurants closed during and subsequent to the first
quarter of fiscal 2004. Also, during the first quarter of fiscal 2005, our
transaction count and average check in comparable restaurants increased 3.0% and
6.4%, respectively, compared to the same period last year. Costs and Expenses Cost of goods sold.Cost of goods sold increased by 2.7%, or $0.2 million, in the
first quarter of fiscal 2005 as compared to the same period last year. As a
percentage of net sales, cost of goods sold decreased to 24.5% of sales in the first
quarter of fiscal 2005 from 26.1% in the comparable quarter of fiscal 2004. The
decrease in cost of 16




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goods sold as a percentage of net sales was due primarily to
pricing increases implemented during fiscal 2004 and a refinement of our food and
beverage purchasing processes. We reduced cost of goods sold by becoming a primary
source buyer and by reducing distribution charges. Moreover, to stabilize these
savings and eliminate the risk of sudden movements in commodity food prices, we have
entered into several purchasing arrangements with our suppliers that include fixed
pricing components based on defined quantity commitments over a period of time.
Finally, the improvement in cost of goods sold as a percentage of net sales reflects
the impact of lower promotional and complimentary discounts in the first quarter of
fiscal 2005 as compared to the same period last year. Restaurant operating expenses. Restaurant operating expenses decreased by $0.1
million, or 0.8%, to $16.2 million in the first quarter of fiscal 2005 from $16.3
million in the first quarter of fiscal 2004. As a percentage of net sales,
restaurant operating expenses decreased to 59.5% of net sales in the first quarter of
fiscal 2005, from 65.5% in the first quarter of fiscal 2004. This decrease, as a
percentage of net sales, was primarily the result of improved labor scheduling and
optimizing the deployment of employees during peak and non-peak hours, the leveraging
of fixed occupancy costs on higher comparable store net sales and a higher charge in
the first quarter of fiscal 2004 compared to the first quarter fiscal 2005 related to
restaurant associate stock options that were repriced as of December 29, 2003 in
accordance with APB 25, Accounting for Stock Issued to Employees. General and administrative costs. General and administrative expenses increased by
21.5%, or $0.9 million, to $5.2 million in the first quarter of fiscal 2005 as
compared to $4.3 million for the same period last year due primarily to higher
payroll and related benefits resulting from our continued development of the
infrastructure required to support our expected growth of company owned and
franchised restaurants as well as the impact of the expense recorded in the first
quarter of fiscal 2005 related to the pro rata portion of the estimated annual
incentive to be paid based on achieving certain financial goals. As a percentage of
net sales, general and administrative costs were 19.0% of net sales in the first
quarter of fiscal 2005 as compared to 17.1% of net sales in the first quarter of
fiscal 2004. Stock compensation expense.During the first quarter of fiscal 2005, we recorded a
charge of $0.1 million, including $20,476 which is included in restaurant operating
expenses, in accordance with APB 25 Accounting for Stock Issued to Employees,
associated with options repriced as of December 29, 2003. In addition, we recorded a
charge of $0.2 million related to a restricted stock grant. For the three month
period ended March 29, 2004, we have recorded a charge of $2.6 million, including
$0.3 million which is included in restaurant operating expenses, in accordance with
APB 25 Accounting for Stock Issued to Employees,associated with options repriced as
of December 29, 2003 as well as a charge for $0.4 million related to a restricted
stock grant. Depreciation and amortization. Depreciation and amortization increased 1.1% to $1.8
million in the first quarter of fiscal 2005 from $1.7 million in the first quarter of
fiscal 2004 due primarily to the nine new restaurants opened in the fourth quarter of
fiscal 2004 as part of our strategic alliance with Federated Department Stores. Restaurant pre-opening expenses. Restaurant pre-opening expenses were approximately
$22,000 in the first quarter of fiscal 2005, due primarily to pre-opening occupancy
costs for one new restaurant scheduled to open in the Chicago market. Pre-opening
costs of approximately $59,000 for the first quarter of fiscal 2004 were related to
costs associated with the remodel of our restaurant in Avon, Connecticut. Loss on impairment of property and equipment and restaurant disposals. There were no
restaurant impairment
charges taken in the first quarter of fiscal 2005. During the first quarter of fiscal
2004, we recognized $0.5 million of asset impairment and store closure costs related
to an impairment charge taken for one underperforming restaurant and costs related to
the closure of one restaurant during the quarter. Lease termination costs. There were no lease termination charges taken in the first
quarter of fiscal 2005. In the first quarter of fiscal 2004, we recognized $0.7
million of income due primarily to the reversal of lease termination accruals deemed
no longer required. Reserve for notes receivable from stockholders.During the first quarter of fiscal
2005, we recorded income of approximately $17,000 related to a reserve established
for certain notes receivable from stockholders based on the market value of the
common stock, as of April 4, 2005, that was pledged as collateral for the notes. 17




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Interest income and expense. During the first quarters of fiscal 2005 and fiscal
2004, interest income was less than $0.1 million although slightly higher in fiscal
2005 as a result of interest income earned on short-term investments. Interest
expense was less than $0.1 million for both the first quarter of fiscal 2005 and
fiscal 2004. Other income. During the first quarter of fiscal 2005, we recorded other income of
approximately $21,000 due primarily to the sale of a liquor license. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents were $5.1 million on April 4, 2005, compared with $1.1
million on January 3, 2005. In addition, we had $2.0 million in short-term
investment as of April 4, 2005 compared to $10.0 million as of January 3, 2005. Our
working capital was $1.2 million on April 4, 2005, compared with working capital of
$0.8 million as of January 3, 2005. Our principal requirements for cash are for
funding working capital needs, financing construction of new restaurants, maintaining
or remodeling existing restaurants and funding the incorporation of a franchising and
area developer model into our business strategy. Net cash used in operating activities for the three month period ended April 4, 2005
was $5.5 million, compared to $5.3 million for the three month period ended March 29,
2004. The increase in cash used in operating activities was due primarily to an
increase in cash used for accrued expenses partially offset by a decrease in our net
loss of $3.6 million as compared to the first three months of fiscal 2004. Total cash provided by investing activities was $7.6 million for the three month
period ended April 4, 2005 compared to cash used in investing activities of $0.5
million for the three month period ended March 29, 2004. Total capital expenditures
for the three month period ended April 4, 2005 were $0.3 million, compared to
expenditures of $0.5 million for the comparable period in fiscal 2004. Expenditures
for the first three months of fiscal 2005 were primarily for expansion of the support
center facility in Deerfield and costs associated with new restaurants opening in the
second quarter of 2005. Also, during the first three months of fiscal 2005, we
redeemed $8.0 million of our short-term investments. Cash provided by financing activities was $1.9 million for the first three months of
fiscal 2005 due primarily to proceeds from stock options exercised. We plan to fund our working capital needs, the maintenance and remodel of our
existing restaurants and our franchising program primarily through our investments,
cash and cash equivalents on hand at the beginning of the period and our expected
internally generated cash flows produced by our restaurants. We anticipate that our
current investments, cash and cash equivalents and expected internally generated cash
flows will be sufficient to fund these cash requirements for the next twelve months.
Although we believe that we have sufficient liquidity to fund our working capital
requirements for the next twelve months, if cash flows from 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, we may have to seek additional
financing from external sources to continue funding our operations or reduce or cease
our plans to franchise new restaurants. Our new restaurant capital requirements will depend on the number and timing of those
openings within the given
year. For fiscal 2005, we currently expect to open up to 11 new restaurants. The
cash required for these new restaurants would be funded by internally generated cash
flows produced by our existing restaurants and additional financing from external
sources. If cash flows from our existing restaurants do not meet our expectations or
are otherwise insufficient to satisfy our new restaurant capital requirements or we
are unable to secure additional external financing under terms acceptable to us, we
would have to reduce the number of new restaurants or defer the timing of new
restaurant openings. We cannot predict whether additional external financing will be
available on terms acceptable to us, or at all. 18




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##### Table of Contents



We have entered into agreements that create contractual obligations. These
obligations will have an impact on future liquidity and capital resources. The table
set forth below present a summary of these obligations as of April 4, 2005. Contractual Obligations: Payments Due by Period(in thousands)Due 2nd thru
    
    
    Due
    
    
    Due
    
    
    DueTotal
    
    
    4th Quarter
    
    
    Fiscal 2006
    
    
    Fiscal 2008
    
    
    AfterDescription
    
    Obligations
    
    
    Fiscal 2005
    
    
    to Fiscal 2007
    
    
    to Fiscal 2009
    
    
    Fiscal 2009Long-term debt
    
    $
    342.2
    
    
    $
    64.1
    
    
    $
    104.9
    
    
    $
    69.4
    
    
    $
    103.8Operating leases (1)(2)
    
    
    78,032.2
    
    
    
    9,416.1
    
    
    
    24,489.2
    
    
    
    21,026.5
    
    
    
    23,100.4Employee severance
    
    
    160.7
    
    
    
    160.7
    
    
    
    
    
    
    
    
    
    
    
    Purchase obligations (3)
    
    
    288.9
    
    
    
    288.9
    
    
    
    
    
    
    
    
    
    
    
    Total contractual cash
obligations
    
    $
    78,824.0
    
    
    $
    9,929.8
    
    
    $
    24,594.1
    
    
    $
    21,095.9
    
    
    $
    23,204.2
   (1)
    Amounts shown are net of $1.7 million of sublease rental income due under non-cancelable subleases.(2)
    Includes approximately $2.5 million of obligations on leases for restaurants that have been closed as of April 4, 2005.(3)
    Primarily contractual obligations related to new restaurant construction. 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 Currently, we have an exclusive coffee supply agreement with Coffee Bean
International, Inc. that requires us to purchase all contracted coffee products from
Coffee Bean International. The agreement is effective through June 2005, but may be
terminated by us or Coffee Bean International; provided that 180 days notice is given
in advance of such termination. We are currently in discussions with Coffee Bean
International regarding the possible renewal of this agreement. We also have a long term beverage marketing agreement with the Coca Cola Company.
Under the agreement, executed during fiscal 2002, we are obligated to purchase
approximately 2.0 million gallons of fountain syrups at the then current annually
published national chain account prices. In addition, we have a contract with Maines Paper and Food Service (Maines) as the
broadline distributor that expires in January 2006. Maines supplies us with
approximately 90% of our food and paper products, primarily under pricing agreements
that we negotiate directly with the suppliers. 19




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##### Table of Contents



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:  
    the cost of our principal food products;
    labor shortages or increased labor costs;
    changes in consumer preferences and demographic trends;
    increasing competition in the fast casual dining segment of the restaurant industry;
    expansion into new markets;
    our ability to incorporate a franchising and area development model into our strategy;
    the availability and cost of additional financing, both to fund our
existing operations and to grow and open new restaurants;
    fluctuations in our quarterly results due to seasonality;
    the rate of our internal growth, and our ability to generate increased
revenue from our existing restaurants;
    our ability to generate positive cash flow from operations;
    increased government regulation;
    supply and delivery shortages or interruptions;
    market saturation due to new restaurant openings;
    inadequate protection of our intellectual property;
    adverse weather conditions which impact customer traffic at our restaurants; and
    adverse economic conditions. The words believe, may, will, should, anticipate, estimate, expect,
intend, objective, seek, plan, strive or similar words, or the negatives
of these words, identify forward-looking statements. We qualify any forward-looking
statements entirely by these cautionary factors. 20




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Item 3. Quantitative And Qualitative Disclosures About Market Risk Our market risk exposures are related to our cash, cash equivalents, investments and
interest that we pay on our debt. We have no derivative financial instruments or
derivative commodity instruments in our cash, cash equivalents and investments. We
invest our 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 we earn on our investments and,
therefore, impact our cash flow and results of operations. The impact of a
hypothetical 1% change in interest rates would be immaterial. All of our transactions are conducted, and our accounts are denominated, in United
States dollars. Accordingly, we are not exposed to foreign currency risk. 
 Item 4. Controls and Procedures Our management, with the participation of the our chief executive officer and chief
financial officer, has evaluated the effectiveness of our disclosure controls and
procedures (as such term is defined in Rule 13a-15(e) promulgated under the
Securities and Exchange Act of 1934, as amended (the Exchange Act) as of the end
of the period covered by this report. Based on such evaluation, our chief executive
officer and chief financial officer have concluded that, as of the end of such
period, our disclosure controls and procedures are effective in recording,
processing, summarizing and reporting, on a timely basis, information required to be
disclosed by us in the reports that we file or submit under the Exchange Act. There have not been any changes in our internal control over financial reporting (as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during
the first fiscal quarter to which this report relates that have materially affected,
or are reasonably likely to materially affect, our internal control over financial
reporting. 
 Part II. OTHER INFORMATION 
 Item 1: LEGAL PROCEEDINGS From time to time, we are a defendant in litigation arising in the ordinary course of
our business, including claims resulting from slip and fall accidents, claims under
federal and state laws governing access to public accommodations, employment related
claims and claims from guests alleging illness, injury or other food quality, health
or operational concerns. To date, none of such litigation, some of which is covered by
insurance, has had a material adverse effect on our consolidated financial position,
results of operations or cash flows. 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. 21




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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. Based on the allegations set forth in the complaint, we
believe that the amount of recessionary damages that could be awarded to the
plaintiffs, if a judgment is rendered against us, would not exceed $24 million. In
addition, the underwriter is seeking indemnification from us for any damages
assessed against it in the Securities Act Litigation. On August 22, 2003, lead
plaintiffs filed a Second Consolidated Amended Complaint, which was substantially
similar to the Consolidated Amended Complaint. On September 22, 2003, we filed motions to dismiss the Second Consolidated Amended
Complaint in the Securities Act Litigation. Plaintiffs filed their opposition to our
motion to dismiss on October 23, 2003. We filed reply briefs on November 12, 2003. On July 30, 2004, the Court granted plaintiffs permission to replead their complaint
against us. On September 10, 2004, plaintiffs filed their Third Consolidated
Amended Complaint. Plaintiffs abandoned their claim that we misled investors about
our ability to execute our growth plans. Instead, plaintiffs claim that our
offering materials failed to disclose that, at the time of the IPO, we were
researching the possibility of franchising our restaurants. On October 12, 2004, we
filed a motion to dismiss plaintiffs Third Consolidated Amended Complaint. On November 19, 2004, plaintiffs filed their opposition to our motion to dismiss.
On January 11, 2005, we filed a reply brief in further support of our motion to
dismiss plaintiffs Third Consolidated Complaint. We have requested that the court
hear an oral argument on the matter. If our request for oral argument is granted,
the judge will take the arguments under submission. We have no way of predicting
when the judge will issue a ruling on the case. We cannot predict what the outcome of these lawsuits will be. It is possible that we
may be required to pay substantial damages or settlement costs that may not be covered by insurance or may exceed the limits of any of our
insurance coverage, which could have a material adverse effect on our financial
condition or results of operations. We could also incur substantial legal costs, and
managements attention and resources could be diverted from our business. Currently, there are no other material pending legal proceedings against us. 
 Item 5. OTHER INFORMATION On May 9, 2005, we entered into an employment agreement with Kevin Armstrong.
Pursuant to the agreement, Mr. Armstrong will continue to serve as our Chief
Executive Officer and President of the Company. In consideration for
Mr. Armstrongs continued service as our Chief Executive Officer and President, we will pay to
Mr. Armstrong, retroactively effective as of January 4, 2005, an annual base salary
in the gross amount of $350,000, payable in bi-weekly installments. He will also
have the ability to earn a bonus of up to 100% of his annual base salary. We will
reimburse him all reasonable out-of-pocket expenses incurred by him in the
performance of his services under the employment agreement. Mr. Armstrong is
entitled to health benefits and life and long-term disability insurance in amounts
standard for all of the Companys employees. In addition, Mr. Armstrong may
participate in the Companys 401(k) retirement plan and the Company will match his
contributions at 25% up to 4% of his base salary. Mr. Armstrong agreed that, during
the term of his employment with the Company and for a period of 12 months
thereafter, he will not compete with the Company or solicit its employees. Also on May 9, 2005, we issued 300,000 shares of our authorized but unissued common
stock to Mr. Armstrong. Mr. Armstrongs rights in the shares vest as follows: (i)
twenty percent (20%) of the shares vested upon issuance; and (ii) an additional 20%
of the shares will vest on each of May 9, 2006, May 9, 2007, May 9, 2008 and May 9,
2009, provided that at each such date Mr. Armstrong continues to be employed by the
Company. In addition, Mr.
Armstrong may also receive an additional grant of an aggregate of 800,000 shares of
our authorized but unissued common stock, to be awarded over fiscal years 2006,
2007, 2008 and 2009, pursuant to the Cosi, Inc. 2005 Omnibus Long-Term Incentive
Plan and in accordance with the terms and conditions prescribed by the Compensation
Committee of our Board of Directors, including, without limitation, timing, vesting
and performance measures applicable to each such grant. 22




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All shares from the employment agreement and all options previously granted to Mr.
Armstrong pursuant to his previous employment agreement with the Company that are
not then vested will fully vest upon the termination of his employment by Cosi
without cause (as defined in his employment agreement), or upon a change of control
(as defined in the employment agreement). If Mr. Armstrong voluntarily terminates
his employment or is terminated by Cosi for cause (as defined in the employment
agreement), all unvested shares at the time of termination will be forfeited. We
will pay to Mr. Armstrong 12 months severance if Mr. Armstrongs employment with
the Company is involuntarily terminated for any reason other than by Cosi for cause
(as defined in the employment agreement). 
 Item 6: EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: ExhibitNumber
    
    DescriptionExhibit 10.1
    
    Separation and Release Agreement between Cosi, Inc. and Jonathan M.
Wainwright, Jr. dated January 3, 2005. (Filed as Exhibit 10.1 to the Companys
Current Report on Form 8-K dated January 6, 2005).Exhibit 10.5.11
    
    Employment Agreement between Cosi, Inc. and Kevin Armstrong, dated as
of May 9, 2005Exhibit 31.1
    
    Certification of the Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.Exhibit 31.2
    
    Certification of the Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.Exhibit 32.1
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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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.Date: May 11, 2005
    
    By: /s/ KEVIN ARMSTRONGKevin ArmstrongChief Executive OfficerDate: May 11, 2005
    
    By: /s/ CYNTHIA JAMISONCynthia JamisonChief Financial Officer (chief accounting
officer)Treasurer and Secretary
 24