##### Table of Contents



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 June 30, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For the transition period fromto
 Commission File No. 000-50052
 COSÌ, 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
 (847) 597-8800
 þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-Accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



COSI, INC.
 
 Page NumberPART I. FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited)Consolidated Balance Sheets  as of June 30, 2008 and December 31, 2007
    
    
    3Consolidated Statements of Operations  Three and six month periods ended
June 30, 2008 and July 2, 2007
    
    
    4Consolidated Statement of Stockholders Equity  Six month period ended
June 30, 2008
    
    
    5Consolidated Statements of Cash Flows  Six month periods ended
June 30, 2008 and July 2, 2007
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    7-12Item 2.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    13-27Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    27Item 4.
    
    Controls and Procedures
    
    
    27PART II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    27Item 1A.
    
    Risk Factors
    
    
    28Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    28Item 6.
    
    Exhibits
    
    
    28SIGNATURES
    
    
    29EXHIBIT INDEX
    
    
    30CERTIFICATIONS
    
    
    31-33Exhibit 31.1Exhibit 31.2Exhibit 32.1
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 Cosi, Inc.
 
 Consolidated Balance Sheets
 As of June 30, 2008 and December 31, 2007
 (dollars in thousands, except share and per share data)
 June 30, 2008
    
    
    December 31, 2007(Unaudited)
    
    
    (Note 1)AssetsCurrent assets:Cash and cash equivalents
    
    $
    6,041
    
    
    $
    6,309Accounts receivable, net
    
    
    642
    
    
    
    658Inventories
    
    
    1,009
    
    
    
    1,045Prepaid expenses and other current assets
    
    
    3,103
    
    
    
    3,796Assets held for sale
    
    
    
    
    
    
    122Assets of discontinued operations
    
    
    
    
    
    
    35Total current assets
    
    
    10,795
    
    
    
    11,965Furniture and fixtures, equipment and leasehold improvements, net
    
    
    39,882
    
    
    
    42,477Intangibles, security deposits and other assets, net
    
    
    1,949
    
    
    
    1,970Total assets
    
    $
    52,626
    
    
    $
    56,412Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    1,742
    
    
    $
    2,106Accrued expenses
    
    
    9,950
    
    
    
    9,014Deferred franchise revenue
    
    
    474
    
    
    
    783Current liabilities of discontinued operations
    
    
    27
    
    
    
    285Current portion of other long-term liabilities
    
    
    368
    
    
    
    465Total current liabilities
    
    
    12,561
    
    
    
    12,653Deferred franchise revenue
    
    
    2,869
    
    
    
    2,730Other long-term liabilities, net of current portion
    
    
    7,059
    
    
    
    7,183Total liabilities
    
    
    22,489
    
    
    
    22,566Commitments and contingenciesStockholders equity:Common stock  $.01 par value; 100,000,000 shares authorized,
41,155,851 and 41,047,985 shares issued, respectively
    
    
    412
    
    
    
    411Additional paid-in capital
    
    
    276,234
    
    
    
    275,187Treasury stock, 239,543 shares at cost
    
    
    (1,198
    )
    
    
    (1,198
    )Accumulated deficit
    
    
    (245,311
    )
    
    
    (240,554
    )Total stockholders equity
    
    
    30,137
    
    
    
    33,846Total liabilities and stockholders equity
    
    $
    52,626
    
    
    $
    56,412
 The accompanying notes are an integral part of these consolidated financial statements.
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##### Table of Contents



Cosi, Inc.
 
 Consolidated Statements of Operations
For the Three and Six Month Periods Ended June 30, 2008 and July 2, 2007
 (dollars in thousands, except share and per share data)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    July 2,
    
    
    June 30,
    
    
    July 2,2008
    
    
    2007
    
    
    2008
    
    
    2007(Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)Revenues:Restaurant net sales
    
    $
    36,207
    
    
    $
    35,043
    
    
    $
    68,666
    
    
    $
    65,732Franchise fees and royalties
    
    
    516
    
    
    
    405
    
    
    
    1,248
    
    
    
    837Total revenues
    
    
    36,723
    
    
    
    35,448
    
    
    
    69,914
    
    
    
    66,569Costs and expenses:Cost of food and beverage
    
    
    8,261
    
    
    
    7,961
    
    
    
    15,797
    
    
    
    15,060Restaurant labor and related benefits
    
    
    11,778
    
    
    
    11,900
    
    
    
    23,016
    
    
    
    22,725Occupancy and other restaurant operating expenses
    
    
    9,930
    
    
    
    9,703
    
    
    
    19,685
    
    
    
    18,66429,969
    
    
    
    29,564
    
    
    
    58,498
    
    
    
    56,449General and administrative expenses
    
    
    6,069
    
    
    
    6,142
    
    
    
    11,106
    
    
    
    12,121Depreciation and amortization
    
    
    2,056
    
    
    
    2,207
    
    
    
    4,167
    
    
    
    4,267Restaurant pre-opening expenses
    
    
    73
    
    
    
    311
    
    
    
    100
    
    
    
    581Provision for losses on asset impairments
and disposals
    
    
    267
    
    
    
    945
    
    
    
    267
    
    
    
    945Closed store costs
    
    
    13
    
    
    
    262
    
    
    
    47
    
    
    
    262Lease termination expense
    
    
    
    
    
    
    193
    
    
    
    243
    
    
    
    193Total costs and expenses
    
    
    38,447
    
    
    
    39,624
    
    
    
    74,428
    
    
    
    74,818Operating loss
    
    
    (1,724
    )
    
    
    (4,176
    )
    
    
    (4,514
    )
    
    
    (8,249
    )Interest income
    
    
    27
    
    
    
    139
    
    
    
    72
    
    
    
    344Interest expense
    
    
    (2
    )
    
    
    (2
    )
    
    
    (3
    )
    
    
    (4
    )Loss from continuing operations
    
    
    (1,699
    )
    
    
    (4,039
    )
    
    
    (4,445
    )
    
    
    (7,909
    )Discontinued operations:Loss from discontinued operations
    
    
    (30
    )
    
    
    (3,362
    )
    
    
    (312
    )
    
    
    (3,697
    )Net loss
    
    $
    (1,729
    )
    
    $
    (7,401
    )
    
    $
    (4,757
    )
    
    $
    (11,606
    )Per Share Data:Loss per share, basic and diluted
Continuing operations
    
    $
    (0.04
    )
    
    $
    (0.10
    )
    
    $
    (0.11
    )
    
    $
    (0.20
    )Discontinued operations
    
    $
    (0.00
    )
    
    $
    (0.09
    )
    
    $
    (0.01
    )
    
    $
    (0.09
    )Net loss
    
    $
    (0.04
    )
    
    $
    (0.19
    )
    
    $
    (0.12
    )
    
    $
    (0.30
    )Weighted average shares outstanding:
    
    
    40,030,460
    
    
    
    39,353,590
    
    
    
    39,980,356
    
    
    
    38,962,370
 The accompanying notes are an integral part of these consolidated financial statements.
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Cosi, Inc.
 
 Consolidated Statement of Stockholders Equity
 For the Six Months Ended June 30, 2008
 (unaudited)
 (dollars in thousands, except share data)
 Common Stock
    
    
    Treasury StockAdditionalNumber of
    
    
    
    
    
    
    Paid In
    
    
    Number of
    
    
    
    
    
    
    AccumulatedShares
    
    
    Amount
    
    
    Capital
    
    
    Shares
    
    
    Amount
    
    
    Deficit
    
    
    TotalBalance, December 31, 2007
    
    
    41,047,985
    
    
    $
    411
    
    
    $
    275,187
    
    
    
    239,543
    
    
    $
    (1,198
    )
    
    $
    (240,554
    )
    
    $
    33,846Exercise of options
    
    
    23,696
    
    
    
    
    
    
    
    53
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    53Net issuance of restricted stock
    
    
    84,170
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    994
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    994Exercise of warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,757
    )
    
    
    (4,757
    )Balance, June 30, 2008
    
    
    41,155,851
    
    
    $
    412
    
    
    $
    276,234
    
    
    
    239,543
    
    
    $
    (1,198
    )
    
    $
    (245,311
    )
    
    $
    30,137
 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 Six Month Periods Ended June 30, 2008 and July 2, 2007
(dollars in thousands)
 June 30, 2008
    
    
    July 2, 2007(Unaudited)
    
    
    (Unaudited)Cash flows from operating activities:Net loss
    
    $
    (4,757
    )
    
    $
    (11,606
    )Adjustments to reconcile net loss to net cash provided by
(used in) operating activitiesDepreciation and amortization
    
    
    4,172
    
    
    
    4,645Non-cash portion of asset impairments and disposals
    
    
    355
    
    
    
    2,872Non-cash portion of store closing costs
    
    
    24
    
    
    
    1,455Provision for bad debts
    
    
    (2
    )
    
    
    Stock-based compensation expense
    
    
    995
    
    
    
    598Changes in operating assets and liabilities:Accounts receivable
    
    
    18
    
    
    
    872Inventories
    
    
    65
    
    
    
    (109
    )Prepaid expenses and other current assets
    
    
    691
    
    
    
    795Other assets
    
    
    43
    
    
    
    28Accounts payable and accrued expenses
    
    
    212
    
    
    
    (947
    )Deferred franchise revenue
    
    
    (170
    )
    
    
    404Other long-term liabilities
    
    
    (194
    )
    
    
    117Net cash provided by (used in) operating activities
    
    
    1,452
    
    
    
    (876
    )Cash flows from investing activities:Capital expenditures
    
    
    (1,789
    )
    
    
    (10,035
    )Proceeds from sale of assets
    
    
    30
    
    
    
    Purchases of investments
    
    
    
    
    
    
    (20,777
    )Redemptions of investments
    
    
    
    
    
    
    34,752Net (payments) refunds of security deposits
    
    
    (14
    )
    
    
    3Net cash (used in) provided by investing activities
    
    
    (1,773
    )
    
    
    3,943Cash flows from financing activities:Net proceeds from exercise of stock options
    
    
    53
    
    
    
    1,844Net cash provided by financing activities
    
    
    53
    
    
    
    1,844Net (decrease) increase in cash and cash equivalents
    
    
    (268
    )
    
    
    4,911Cash and cash equivalents, beginning of period
    
    
    6,309
    
    
    
    938Cash and cash equivalents, end of period
    
    $
    6,041
    
    
    $
    5,849Supplemental disclosure of cash flow information:Cash paid for:Corporate franchise and income taxes
    
    $
    49
    
    
    $
    62
 The accompanying notes are an integral part of these consolidated financial statements.
 6




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COSI, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Note 1  Basis of Presentation
       Note 2  Stock-Based Compensation Expense
  For the Three Months Ended
    
    
    For the Six Months Ended(in thousands)
    
    
    (in thousands)June 30,
    
    
    July 2,
    
    
    June 30,
    
    
    July 2,2008
    
    
    2007
    
    
    2008
    
    
    2007Stock option compensation expense
    
    $
    51
    
    
    $
    109
    
    
    $
    102
    
    
    $
    226Restricted stock compensation expense (benefit), net of forfeitures
    
    
    469
    
    
    
    434
    
    
    
    893
    
    
    
    372Total non-cash, stock-based compensation expense, net of forfeitures
    
    $
    520
    
    
    $
    543
    
    
    $
    995
    
    
    $
    598
   7




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COSI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  continued
     NOTE 3  Warrants
   8




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COSI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  continued
  NOTE 4  Earnings Per Share
  NOTE 5  Asset impairments
  Accounting for the Impairment or Disposal of
Long-Lived Assets
 NOTE 6  Lease Termination Costs
   9




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COSI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  continued
 NOTE 7  Discontinued Operations
    Accounting
for the Impairment or Disposal of Long-Lived Assets
  As ofJune 30, 2008
    
    
    December 31, 2007(dollars in thousands)Current assets:Inventories
    
    $
    
    
    
    $
    27Other current assets
    
    
    
    
    
    
    8Total assets of discontinued operations
    
    $
    
    
    
    $
    35Current liabilities:Accrued expenses
    
    $
    27
    
    
    $
    161Other current liabilities
    
    
    
    
    
    
    124Total current liabilities of discontinued operations
    
    $
    27
    
    
    $
    285
  10




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COSI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  continued
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    July 2,
    
    
    June 30,
    
    
    July 2,2008
    
    
    2007
    
    
    2008
    
    
    2007(dollars in thousands)
    
    
    (dollars in thousands)RevenuesRestaurant net sales
    
    $
    
    
    
    $
    1,087
    
    
    $
    373
    
    
    $
    2,056Costs and expensesCost of food and beverage
    
    
    
    
    
    
    316
    
    
    
    107
    
    
    
    607Restaurant labor and related benefits
    
    
    
    
    
    
    506
    
    
    
    188
    
    
    
    1,004Occupancy and other restaurant operating expenses
    
    
    
    
    
    
    362
    
    
    
    181
    
    
    
    689
    
    
    
    1,184
    
    
    
    476
    
    
    
    2,300Depreciation and amortization
    
    
    
    
    
    
    190
    
    
    
    5
    
    
    
    378Closed store costs
    
    
    30
    
    
    
    
    
    
    
    116
    
    
    
    Asset impairments
    
    
    
    
    
    
    3,075
    
    
    
    88
    
    
    
    3,075Total costs and expenses
    
    
    30
    
    
    
    4,449
    
    
    
    685
    
    
    
    5,753Loss from discontinued operations
    
    $
    (30
    )
    
    $
    (3,362
    )
    
    $
    (312
    )
    
    $
    (3,697
    )
  NOTE 8  Contingencies
  NOTE 9  Income Taxes
  Accounting for Uncertainty in Income Taxes, an interpretation of FASB
Statement No. 109
  11




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COSI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  continued
   NOTE 10  New Accounting Pronouncements
 Fair Value Measures Effective Date of FASB Statement No. 157
 The Fair Value Option for Financial Assets
and Financial
 Liabilities  Including an Amendment of FASB Statement No. 115.
 Business Combinations
 Noncontrolling Interests in Consolidated
Financial Statements, an amendment of ARB 51
 12




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Item 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 The following discussion and analysis of our financial condition and results of operations
for the fiscal quarters ended June 30, 2008 and July 2, 2007 should be read in conjunction
with Selected Consolidated Financial Data and our audited consolidated financial statements
and the notes to those statements that are in our 2007 Annual Report on Form 10-K. Our
discussion contains forward-looking statements based upon current expectations that involve
risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual
results and the timing of events could differ materially from those anticipated in these
forward-looking statements as a result of a number of factors, including those set forth
under Cautionary Note Regarding Forward-Looking Statements below and elsewhere in this
Quarterly Report.
 OVERVIEW
  For the Three Months EndedJune 30, 2008
    
    July 2, 2007Company-
    
    
    
    
    
    
    
    
    
    Company-Owned
    
    Franchise
    
    Total
    
    Owned
    
    Franchise
    
    TotalRestaurants at beginning of period
    
    
    102
    
    
    
    42
    
    
    
    144
    
    
    
    113
    (a)
    
    
    19
    
    
    
    132New restaurants opened
    
    
    1
    
    
    
    2
    
    
    
    3
    
    
    
    1
    
    
    
    3
    
    
    
    4Restaurants permanently closed
    
    
    1
    
    
    
    1
    
    
    
    2
    
    
    
    1
    
    
    
    
    
    
    
    1Restaurants at end of period
    
    
    102
    
    
    
    43
    
    
    
    145
    
    
    
    113
    (a)
    
    
    22
    
    
    
    135
 
 (a)
    
    Includes nine locations that are classified as discontinued operations For the Six Months EndedJune 30, 2008
    
    July 2, 2007Company-
    
    
    
    
    
    
    
    
    
    Company-Owned
    
    Franchise
    
    Total
    
    Owned
    
    Franchise
    
    TotalRestaurants at beginning of period
    
    
    107
    (b)
    
    
    34
    
    
    
    141
    
    
    
    110
    (a)
    
    
    13
    
    
    
    123New restaurants opened
    
    
    1
    
    
    
    10
    
    
    
    11
    
    
    
    4
    
    
    
    9
    
    
    
    13Restaurants permanently closed
    
    
    6
    
    
    
    1
    
    
    
    7
    
    
    
    1
    
    
    
    
    
    
    
    1Restaurants at end of period
    
    
    102
    
    
    
    43
    
    
    
    145
    
    
    
    113
    (a)
    
    
    22
    
    
    
    135
 
 (a)
    
    Includes nine locations that are classified as discontinued operations(b)
    
    Includes three locations that are classified as discontinued operations   13




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CRITICAL ACCOUNTING POLICIES
   Long Lived Assets Accounting for the Impairment or Disposal of Long-Lived
Assets
 14




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Lease Termination Charges Accounting for Costs Associated with Exit or
Disposal Activities
  Stock-Based Compensation Expense Share-Based Payment Accounting for Stock-Based
Compensation
  Expected dividend yield
    
    
    0
    %Expected stock price volatility
    
    
    68
    %Average risk-free interest rate
    
    
    3.79
    %Average expected life of options
    
    5.0 years
  15




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Accounting for Lease Obligations: Accounting for Operating Leases with Scheduled Rent Increases
 Landlord Allowances Issues Relating to
Accounting for Leases
 Income Taxes
 Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109
    Restaurant Net Sales.
 Franchise Fees and Royalties.
 Gift Card Sales
   16




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Cost of Food and Beverage.
 Restaurant Labor and Related Benefits.
 Occupancy and Other Restaurant Operating Expenses.
 General and Administrative Expenses.
 Depreciation and Amortization.
 Restaurant Pre-opening Expenses.
 17




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RESULTS OF OPERATIONS
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    July 2,
    
    
    June 30,
    
    
    July 2,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues:Restaurant net sales
    
    
    98.6
    %
    
    
    98.9
    %
    
    
    98.2
    %
    
    
    98.7
    %Franchise fees and royalties
    
    
    1.4
    
    
    
    1.1
    
    
    
    1.8
    
    
    
    1.3Total revenue
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost and expenses:Cost of food and beverage (1)
    
    
    22.8
    
    
    
    22.7
    
    
    
    23.0
    
    
    
    22.9Restaurant labor and related benefits (1)
    
    
    32.5
    
    
    
    34.0
    
    
    
    33.5
    
    
    
    34.6Occupancy and other restaurant operating expenses (1)
    
    
    27.4
    
    
    
    27.7
    
    
    
    28.7
    
    
    
    28.482.7
    
    
    
    84.4
    
    
    
    85.2
    
    
    
    85.9General and administrative expenses
    
    
    16.5
    
    
    
    17.3
    
    
    
    15.9
    
    
    
    18.2Depreciation and amortization
    
    
    5.6
    
    
    
    6.2
    
    
    
    6.0
    
    
    
    6.4Restaurant pre-opening expenses
    
    
    0.2
    
    
    
    0.9
    
    
    
    0.1
    
    
    
    0.9Provision for losses on asset impairments
and disposals
    
    
    0.7
    
    
    
    2.7
    
    
    
    0.4
    
    
    
    1.4Closed store costs
    
    
    
    
    
    
    0.7
    
    
    
    0.1
    
    
    
    0.4Lease termination expense
    
    
    
    
    
    
    0.5
    
    
    
    0.3
    
    
    
    0.3Total costs and expenses
    
    
    104.7
    
    
    
    111.8
    
    
    
    106.5
    
    
    
    112.4Operating loss
    
    
    (4.7
    )
    
    
    (11.8
    )
    
    
    (6.5
    )
    
    
    (12.4
    )Other income (expense):Interest income
    
    
    0.1
    
    
    
    0.4
    
    
    
    0.1
    
    
    
    0.5Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss from continuing operations
    
    
    (4.6
    )
    
    
    (11.4
    )
    
    
    (6.4
    )
    
    
    (11.9
    )Discontinued operations:Loss from discontinued operations
    
    
    (0.1
    )
    
    
    (9.5
    )
    
    
    (0.4
    )
    
    
    (5.5
    )Net loss
    
    
    (4.7
    )
    
    
    (20.9
    )
    
    
    (6.8
    )
    
    
    (17.4
    )
 
 (1)
    
    These are expressed as a percentage of restaurant net sales versus all other
items expressed as a percentage of total revenues. 18




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##### Table of Contents



Restaurant Net Sales
 Restaurant net salesas a % of total(in thousands)
    
    revenuesQuarter ended June 30, 2008
    
    $
    36,207
    
    
    
    98.6
    %Quarter ended July 2, 2007
    
    $
    35,043
    
    
    
    98.9
    %
 as a % of total(in thousands)
    
    revenuesSix months ended June 30, 2008
    
    $
    68,666
    
    
    
    98.2
    %Six months ended July 2, 2007
    
    $
    65,732
    
    
    
    98.7
    %
 Restaurant net sales.
  Franchise Fees and Royalties
 Franchise fees and royaltiesas a % of total(in thousands)
    
    revenuesQuarter ended June 30, 2008
    
    $
    516
    
    
    
    1.4
    %Quarter ended July 2, 2007
    
    $
    405
    
    
    
    1.1
    %
 as a % of total(in thousands)
    
    revenuesSix months ended June 30, 2008
    
    $
    1,248
    
    
    
    1.8
    %Six months ended July 2, 2007
    
    $
    837
    
    
    
    1.3
    %
 Franchise fees and royalties.
  19




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##### Table of Contents



Costs and Expenses
 Cost of food and beverageas a % of restaurant(in thousands)
    
    net salesQuarter ended June 30, 2008
    
    $
    8,261
    
    
    
    22.8
    %Quarter ended July 2, 2007
    
    $
    7,961
    
    
    
    22.7
    %
 as a % of restaurant(in thousands)
    
    net salesSix months ended June 30, 2008
    
    $
    15,797
    
    
    
    23.0
    %Six months ended July 2, 2007
    
    $
    15,060
    
    
    
    22.9
    %
 Cost of food and beverage
 Restaurant labor and related benefitsas a % of restaurant(in thousands)
    
    net salesQuarter ended June 30, 2008
    
    $
    11,778
    
    
    
    32.5
    %Quarter ended July 2, 2007
    
    $
    11,900
    
    
    
    34.0
    %
 as a % of restaurant(in thousands)
    
    net salesSix months ended June 30, 2008
    
    $
    23,016
    
    
    
    33.5
    %Six months ended July 2, 2007
    
    $
    22,725
    
    
    
    34.6
    %
 Restaurant labor and related benefits.
 Occupancy and other restaurantoperating expensesas a % of restaurant(in thousands)
    
    net salesQuarter ended June 30, 2008
    
    $
    9,930
    
    
    
    27.4
    %Quarter ended July 2, 2007
    
    $
    9,703
    
    
    
    27.7
    %
 as a % of restaurant(in thousands)
    
    net salesSix months ended June 30, 2008
    
    $
    19,685
    
    
    
    28.7
    %Six months ended July 2, 2007
    
    $
    18,664
    
    
    
    28.4
    %
 Occupancy and other restaurant operating expenses
 20




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##### Table of Contents



General and administrative expensesas a % of total(in thousands)
    
    revenuesQuarter ended June 30, 2008
    
    $
    6,069
    
    
    
    16.5
    %Quarter ended July 2, 2007
    
    $
    6,142
    
    
    
    17.3
    %
 as a % of total(in thousands)
    
    revenuesSix months ended June 30, 2008
    
    $
    11,106
    
    
    
    15.9
    %Six months ended July 2, 2007
    
    $
    12,121
    
    
    
    18.2
    %
 General and administrative expenses
 Depreciation and amortizationas a % of total(in thousands)
    
    revenuesQuarter ended June 30, 2008
    
    $
    2,056
    
    
    
    5.6
    %Quarter ended July 2, 2007
    
    $
    2,207
    
    
    
    6.2
    %
 as a % of total(in thousands)
    
    revenuesSix months ended June 30, 2008
    
    $
    4,167
    
    
    
    6.0
    %Six months ended July 2, 2007
    
    $
    4,267
    
    
    
    6.4
    %
 Depreciation and amortization
 Restaurant pre-opening expensesas a % of total(in thousands)
    
    revenuesQuarter ended June 30, 2008
    
    $
    73
    
    
    
    0.2
    %Quarter ended July 2, 2007
    
    $
    311
    
    
    
    0.9
    %
 as a % of total(in thousands)
    
    revenuesSix months ended June 30, 2008
    
    $
    100
    
    
    
    0.1
    %Six months ended July 2, 2007
    
    $
    581
    
    
    
    0.9
    %
 21




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##### Table of Contents



Restaurant pre-opening expenses
 Provision for losses on assetimpairments and disposalsas a % of total(in thousands)
    
    revenuesQuarter ended June 30, 2008
    
    $
    267
    
    
    
    0.7
    %Quarter ended July 2, 2007
    
    $
    945
    
    
    
    2.7
    %
 as a % of total(in thousands)
    
    revenuesSix months ended June 30, 2008
    
    $
    267
    
    
    
    0.4
    %Six months ended July 2, 2007
    
    $
    945
    
    
    
    1.4
    %
 Provision for losses on asset impairments and disposals
 Closed store costsas a % of total(in thousands)
    
    revenuesQuarter ended June 30, 2008
    
    $
    13
    
    
    
    0.0
    %Quarter ended July 2, 2007
    
    $
    262
    
    
    
    0.7
    %
 as a % of total(in thousands)
    
    revenuesSix months ended June 30, 2008
    
    $
    47
    
    
    
    0.1
    %Six months ended July 2, 2007
    
    $
    262
    
    
    
    0.4
    %
 Closed store costs
 22




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##### Table of Contents



Lease termination expenseas a % of total(in thousands)
    
    revenuesQuarter ended June 30, 2008
    
    $
    
    
    
    
    0.0
    %Quarter ended July 2, 2007
    
    $
    193
    
    
    
    0.5
    %
 as a % of total(in thousands)
    
    revenuesSix months ended June 30, 2008
    
    $
    243
    
    
    
    0.3
    %Six months ended July 2, 2007
    
    $
    193
    
    
    
    0.3
    %
 Lease termination expense
 Interest income
    
    Interest expenseas a % of total
    
    
    
    
    
    as a % of total(in thousands)
    
    revenues
    
    (in thousands)
    
    revenuesQuarter ended June 30, 2008
    
    $
    27
    
    
    
    0.1
    %
    
    $
    2
    
    
    
    0.0
    %Quarter ended July 2, 2007
    
    $
    139
    
    
    
    0.4
    %
    
    $
    2
    
    
    
    0.0
    %
 as a % of total
    
    
    
    
    
    as a % of total(in thousands)
    
    revenues
    
    (in thousands)
    
    revenuesSix months ended June 30, 2008
    
    $
    72
    
    
    
    0.1
    %
    
    $
    3
    
    
    
    0.0
    %Six months ended July 2, 2007
    
    $
    344
    
    
    
    0.5
    %
    
    $
    4
    
    
    
    0.0
    %
 Interest income and expense
 Loss from continuing operationsas a % of total(in thousands)
    
    revenuesQuarter ended June 30, 2008
    
    $
    1,699
    
    
    
    4.6
    %Quarter ended July 2, 2007
    
    $
    4,039
    
    
    
    11.4
    %
 as a % of total(in thousands)
    
    revenuesSix months ended June 30, 2008
    
    $
    4,445
    
    
    
    6.4
    %Six months ended July 2, 2007
    
    $
    7,909
    
    
    
    11.9
    %
 Loss from continuing operations
 23




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##### Table of Contents



Discontinued operations
  Accounting for the Impairment or Disposal of Long-Lived Assets
 LIQUIDITY AND CAPITAL RESOURCES
       24




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##### Table of Contents



Contractual Obligations
 Payments Due by Period (in thousands)Due 3rdthrough 4th
    
    
    Due Fiscal
    
    
    Due FiscalTotal
    
    
    Quarter of
    
    
    2009 through
    
    
    2011 through
    
    
    Due AfterDescription
    
    Obligations
    
    
    Fiscal 2008
    
    
    Fiscal 2010
    
    
    Fiscal 2012
    
    
    Fiscal 2012Long-term debt (1)
    
    $
    100
    
    
    $
    25
    
    
    $
    50
    
    
    $
    25
    
    
    $
    Operating leases (2) (3)
    
    
    82,605
    
    
    
    7,904
    
    
    
    29,544
    
    
    
    22,888
    
    
    
    22,269Purchase obligations (4)
    
    
    100
    
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    82,805
    
    
    $
    8,029
    
    
    $
    29,594
    
    
    $
    22,913
    
    
    $
    22,269
 
 (1)
    
    Amounts shown include aggregate scheduled interest payments of $0.02 million. The principal amount of the debt,
net of interest obligations, is included in the Other long-term liabilities, in the attached cosolidated balance sheets. This
obligation is related to a trademark infringement settlement.(2)
    
    Amounts shown are net of an aggregate $0.3 million of sub-lease rental income due under non-cancelable subleases
and include accrued contractual lease increases of approximately an aggregate $5.0 million, which are included
in Other long-term liabilities in the attached consolidated balance sheets.(3)
    
    Amounts include approximately an aggregate $0.1 million of obligations on leases
for restaurants that have been closed as of June 30, 2008.(4)
    
    Constitute primarily contractual obligations related to new restaurant construction.  PURCHASE COMMITMENTS
   25




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##### Table of Contents



CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
  
    
    the cost of our principal food products and supply and delivery shortages or
interruptions;
    
    labor shortages or increased labor costs;
    
    changes in demographic trends and consumer tastes and preferences, including
changes resulting from concerns over nutritional or safety aspects of beef, poultry,
produce or other foods or the effects of food-borne illnesses such as mad cow
disease and avian influenza or bird flu;
    
    competition in our markets, both in our business and locating suitable restaurant
sites;
    
    our operation and execution in new and existing markets;
    
    expansion into new markets, including foreign countries;
    
    our ability to attract and retain qualified franchisees;
    
    our ability to locate suitable restaurant sites in new and existing markets and
negotiate acceptable lease terms;
    
    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 existing and new restaurants;
    
    fluctuations in our quarterly results due to seasonality;
    
    increased government regulation and our ability to secure required governmental
approvals and permits;
    
    our ability to create customer awareness of our restaurants in new markets;
    
    the reliability of our customer and market studies;
 26




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##### Table of Contents




    
    cost effective and timely planning, design and build-out of new restaurants;
    
    our ability to recruit, train and retain qualified corporate and restaurant
personnel and management;
    
    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.
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
   
 Item 4. Controls and Procedures
   
 Part II. OTHER INFORMATION
 
 Item 1: LEGAL PROCEEDINGS
  27




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##### Table of Contents



Item 1A: RISK FACTORS
  
 Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
  NOMINEE
    
    FOR
    
    WITHHELDWilliam D. Forrest
    
    
    18,604,393
    
    
    
    13,916,284Robert Merritt
    
    
    32,318,247
    
    
    
    202,430
   FOR
    
    AGAINST
    
    ABSTAIN
    
    BROKER NON-VOTES32,424,769
    
    
    80,478
    
    
    
    15,431
    
    
    
    0
 
 Item 6: EXHIBITS
 Exhibits
 Exhibit Number
    
    DescriptionExhibit 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.
 28




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##### Table of Contents



SIGNATURES
  COSI, INC.
 Date: August 7, 2008
    
    By: /s/ JAMES HYATTJames HyattPresident,Chief Executive Officer, and DirectorDate: August 7, 2008
    
    By: /s/ WILLIAM KOZIELWilliam KozielChief Financial Officer (chief accounting officer)Treasurer and Secretary
 29




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##### Table of Contents



EXHIBIT INDEX
 Exhibit 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.
 30