##### 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 September 29, 2008
 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
 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
(Do not check if a smaller reporting company)


  Smaller reporting company o
 o þ




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##### 



COSI, INC.
 
 Page NumberPART I. FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Consolidated Balance Sheets  as of September 29, 2008 and December 31, 2007
    
    
    3Consolidated Statements of Operations  Three and nine month periods ended
September 29, 2008 and October 1, 2007
    
    
    4Consolidated Statement of Stockholders Equity  Nine month period ended
September 29, 2008
    
    
    5Consolidated Statements of Cash Flows  Nine month periods ended
September 29, 2008 and October 1, 2007
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7-13Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    14-28Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    28Item 4. Controls and Procedures
    
    
    29PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    29Item 1A. Risk Factors
    
    
    29Item 5. Other Information
    
    
    30Item 6. Exhibits
    
    
    30SIGNATURES
    
    
    31EXHIBIT INDEX
    
    
    32CERTIFICATIONS
    
    
    46-48EXHIBIT 10.1EXHIBIT 10.2EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  2




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PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 Cosi, Inc.
 
 Consolidated Balance Sheets
As of September 29, 2008 and December 31, 2007
(dollars in thousands, except share and per share data)
 September 29, 2008
    
    
    December 31, 2007(Unaudited)
    
    
    (Note 1)AssetsCurrent assets:Cash and cash equivalents
    
    $
    6,179
    
    
    $
    6,309Accounts receivable, net
    
    
    862
    
    
    
    658Inventories
    
    
    1,008
    
    
    
    1,045Prepaid expenses and other current assets
    
    
    2,570
    
    
    
    3,796Assets held for sale
    
    
    
    
    
    
    122Assets of discontinued operations
    
    
    
    
    
    
    35Total current assets
    
    
    10,619
    
    
    
    11,965Furniture and fixtures, equipment and leasehold improvements, net
    
    
    37,408
    
    
    
    42,477Intangibles, security deposits and other assets, net
    
    
    1,904
    
    
    
    1,970Total assets
    
    $
    49,931
    
    
    $
    56,412Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    1,914
    
    
    $
    2,106Accrued expenses
    
    
    10,540
    
    
    
    9,014Deferred franchise revenue
    
    
    509
    
    
    
    783Current liabilities of discontinued operations
    
    
    12
    
    
    
    285Current portion of other long-term liabilities
    
    
    428
    
    
    
    465Total current liabilities
    
    
    13,403
    
    
    
    12,653Deferred franchise revenue
    
    
    2,391
    
    
    
    2,730Other long-term liabilities, net of current portion
    
    
    6,796
    
    
    
    7,183Total liabilities
    
    
    22,590
    
    
    
    22,566Commitments and contingenciesStockholders equity:Common stock  $.01 par value; 100,000,000 shares authorized,
41,016,755 and 41,047,985 shares issued, respectively
    
    
    410
    
    
    
    411Additional paid-in capital
    
    
    276,535
    
    
    
    275,187Treasury stock, 239,543 shares at cost
    
    
    (1,198
    )
    
    
    (1,198
    )Accumulated deficit
    
    
    (248,406
    )
    
    
    (240,554
    )Total stockholders equity
    
    
    27,341
    
    
    
    33,846Total liabilities and stockholders equity
    
    $
    49,931
    
    
    $
    56,412
 The accompanying notes are an integral part of these consolidated financial statements.
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Cosi, Inc.
 
 Consolidated Statements of Operations
For the Three and Nine Month Periods Ended September 29, 2008 and October 1, 2007
(dollars in thousands, except share and per share data)
 Three Months Ended
    
    
    Nine Months EndedSeptember 29,
    
    
    October 1,
    
    
    September 29,
    
    
    October 1,2008
    
    
    2007
    
    
    2008
    
    
    2007(Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)Revenues:Restaurant net sales
    
    $
    33,975
    
    
    $
    34,226
    
    
    $
    102,641
    
    
    $
    99,959Franchise fees and royalties
    
    
    955
    
    
    
    611
    
    
    
    2,203
    
    
    
    1,448Total revenues
    
    
    34,930
    
    
    
    34,837
    
    
    
    104,844
    
    
    
    101,407Costs and expenses:Cost of food and beverage
    
    
    7,611
    
    
    
    8,099
    
    
    
    23,408
    
    
    
    23,161Restaurant labor and related benefits
    
    
    11,540
    
    
    
    11,913
    
    
    
    34,557
    
    
    
    34,638Occupancy and other restaurant operating expenses
    
    
    10,485
    
    
    
    9,924
    
    
    
    30,169
    
    
    
    28,58829,636
    
    
    
    29,936
    
    
    
    88,134
    
    
    
    86,387General and administrative expenses
    
    
    5,429
    
    
    
    5,849
    
    
    
    16,537
    
    
    
    17,971Depreciation and amortization
    
    
    2,152
    
    
    
    2,283
    
    
    
    6,319
    
    
    
    6,550Restaurant pre-opening expenses
    
    
    
    
    
    
    56
    
    
    
    100
    
    
    
    637Provision for losses on asset impairments
and disposals
    
    
    800
    
    
    
    365
    
    
    
    1,067
    
    
    
    1,310Closed store costs (benefit)
    
    
    6
    
    
    
    (62
    )
    
    
    53
    
    
    
    200Lease termination expense
    
    
    55
    
    
    
    84
    
    
    
    298
    
    
    
    277Total costs
and expenses
    
    
    38,078
    
    
    
    38,511
    
    
    
    112,508
    
    
    
    113,332Operating loss
    
    
    (3,148
    )
    
    
    (3,674
    )
    
    
    (7,664
    )
    
    
    (11,925
    )Interest income
    
    
    18
    
    
    
    105
    
    
    
    90
    
    
    
    449Interest expense
    
    
    (2
    )
    
    
    (2
    )
    
    
    (5
    )
    
    
    (6
    )Other Income
    
    
    37
    
    
    
    716
    
    
    
    39
    
    
    
    716Loss from continuing operations
    
    
    (3,095
    )
    
    
    (2,855
    )
    
    
    (7,540
    )
    
    
    (10,766
    )Discontinued operations:Loss from discontinued operations
    
    
    
    
    
    
    (147
    )
    
    
    (312
    )
    
    
    (3,842
    )Net loss
    
    $
    (3,095
    )
    
    $
    (3,002
    )
    
    $
    (7,852
    )
    
    $
    (14,608
    )Per Share Data:Loss per share, basic and dilutedContinuing operations
    
    $
    (0.08
    )
    
    $
    (0.07
    )
    
    $
    (0.19
    )
    
    $
    (0.27
    )Discontinued operations
    
    $
    
    
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    (0.10
    )Net loss
    
    $
    (0.08
    )
    
    $
    (0.08
    )
    
    $
    (0.20
    )
    
    $
    (0.37
    )Weighted average shares outstanding:
    
    
    40,103,956
    
    
    
    39,613,931
    
    
    
    40,021,556
    
    
    
    39,179,557
 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 Nine Months Ended September 29, 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
    
    
    $
    410
    
    
    $
    275,187
    
    
    
    239,543
    
    
    $
    (1,198
    )
    
    $
    (240,554
    )
    
    $
    33,846Exercise of options
    
    
    23,971
    
    
    
    
    
    
    
    54
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    54Net forfeitures of
restricted stock
    
    
    (55,330
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    1,294
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,294Exercise of warrants
    
    
    129
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,852
    )
    
    
    (7,852
    )Balance, September 29, 2008
    
    
    41,016,755
    
    
    $
    410
    
    
    $
    276,535
    
    
    
    239,543
    
    
    $
    (1,198
    )
    
    $
    (248,406
    )
    
    $
    27,342
 The accompanying notes are an integral part of these consolidated financial statements.
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Cosi, Inc.
 
 Consolidated Statements of Cash Flows
For the Nine Month Periods Ended September 29, 2008 and October 1, 2007
(dollars in thousands)
 September 29,
    
    
    October 1,2008
    
    
    2007(Unaudited)
    
    
    (Unaudited)Cash flows from operating activities:Net loss
    
    $
    (7,852
    )
    
    $
    (14,608
    )Adjustments to reconcile net loss to net cash provided by
(used in) operating activitiesDepreciation
and amortization
    
    
    6,324
    
    
    
    6,944Non-cash
portion of asset impairments and disposals
    
    
    1,155
    
    
    
    3,215Non-cash
portion of store closing costs
    
    
    24
    
    
    
    1,393Provision
for bad debts
    
    
    2
    
    
    
    1Stock-based
compensation expense
    
    
    1,294
    
    
    
    1,095Changes in
operating assets and liabilities:Accounts receivable
    
    
    (206
    )
    
    
    1,186Inventories
    
    
    65
    
    
    
    (32
    )Prepaid
expenses and other current assets
    
    
    1,227
    
    
    
    1,359Other assets
    
    
    64
    
    
    
    91Accounts
payable and  accrued expenses
    
    
    1,227
    
    
    
    (542
    )Deferred
franchise revenue
    
    
    (613
    )
    
    
    160Other
long-term liabilities
    
    
    (545
    )
    
    
    (620
    )Net cash
provided by (used in) operating activities
    
    
    2,166
    
    
    
    (358
    )Cash flows from investing activities:Capital expenditures
    
    
    (2,389
    )
    
    
    (12,104
    )Proceeds from sale of assets
    
    
    30
    
    
    
    Purchases of investments
    
    
    
    
    
    
    (20,777
    )Redemptions of investments
    
    
    
    
    
    
    39,738Net refunds of security deposits
    
    
    10
    
    
    
    411Net cash
(used in) provided by investing activities
    
    
    (2,349
    )
    
    
    7,268Cash flows from financing activities:Net proceeds from exercise of stock options
    
    
    53
    
    
    
    1,856Net cash
provided by financing activities
    
    
    53
    
    
    
    1,856Net (decrease) increase in cash and cash equivalents
    
    
    (130
    )
    
    
    8,766Cash and cash equivalents, beginning of period
    
    
    6,309
    
    
    
    938Cash and cash equivalents, end of period
    
    $
    6,179
    
    
    $
    9,704Supplemental disclosure of cash flow information:Cash paid for:Corporate franchise and income taxes
    
    $
    90
    
    
    $
    58
 The accompanying notes are an integral part of these consolidated financial statements.
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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 Nine Months Ended(in thousands)
    
    
    (in thousands)September 29,
    
    
    October 1,
    
    
    September 29,
    
    
    October 1,2008
    
    
    2007
    
    
    2008
    
    
    2007Stock option compensation expense
    
    $
    33
    
    
    $
    88
    
    
    $
    135
    
    
    $
    314Restricted stock compensation expense, net of forfeitures
    
    
    267
    
    
    
    409
    
    
    
    1,159
    
    
    
    781Total non-cash, stock-based compensation expense, net of forfeitures
    
    $
    300
    
    
    $
    497
    
    
    $
    1,294
    
    
    $
    1,095
   7




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COSI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  continued
        8




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COSI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  continued
  NOTE 3  Warrants
    NOTE 4  Earnings Per Share
  NOTE 5  Asset impairments
  9




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COSI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  continued
  Accounting for the Impairment or Disposal of
Long-Lived Assets
 NOTE 6
 Lease Termination Costs
   NOTE 7  Discontinued Operations
   10




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COSI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  continued
 Accounting
for the Impairment or Disposal of Long-Lived Assets
  As ofSeptember 29, 2008
    
    
    December 31, 2007(dollars in thousands)Current assets:Inventories
    
    $
    
    
    
    $
    27Other current assets
    
    
    
    
    
    
    8Total assets
of discontinued operations
    
    $
    
    
    
    $
    35Current liabilities:Accrued expenses
    
    $
    12
    
    
    $
    161Other current liabilities
    
    
    
    
    
    
    124Total
current liabilities of discontinued operations
    
    $
    12
    
    
    $
    285
  Three Months Ended
    
    
    Nine Months EndedSeptember 29,
    
    
    October 1,
    
    
    September 29,
    
    
    October 1,2008
    
    
    2007
    
    
    2008
    
    
    2007(dollars in thousands)
    
    
    (dollars in thousands)RevenuesRestaurant net sales
    
    $
    
    
    
    $
    777
    
    
    $
    373
    
    
    $
    2,833Costs and expensesCost of food and beverage
    
    
    
    
    
    
    228
    
    
    
    107
    
    
    
    834Restaurant labor and related benefits
    
    
    
    
    
    
    386
    
    
    
    188
    
    
    
    1,390Occupancy and other restaurant operating expenses
    
    
    
    
    
    
    294
    
    
    
    181
    
    
    
    982
    
    
    
    908
    
    
    
    476
    
    
    
    3,206Depreciation and amortization
    
    
    
    
    
    
    16
    
    
    
    5
    
    
    
    394Closed store costs
    
    
    
    
    
    
    
    
    
    
    116
    
    
    
    Asset impairments
    
    
    
    
    
    
    
    
    
    
    88
    
    
    
    3,075Total costs and expenses
    
    
    
    
    
    
    924
    
    
    
    685
    
    
    
    6,675Loss from discontinued operations
    
    $
    
    
    
    $
    (147
    )
    
    $
    (312
    )
    
    $
    (3,842
    )
  11




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COSI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  continued
 NOTE 8
 Contingencies
  NOTE 9  Income Taxes
  Accounting for Uncertainty in Income Taxes, an interpretation of FASB
Statement No. 109
   NOTE 10  New Accounting Pronouncements
 Fair Value Measures Effective Date of FASB Statement No. 157
 The Fair Value Option for Financial Assets
and Financial
 12




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COSI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  continued
 Liabilities  Including an Amendment of FASB Statement No. 115.
 Business Combinations
 Noncontrolling Interests in Consolidated
Financial Statements, an amendment of ARB 51
 13




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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 September 29, 2008 and October 1, 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 EndedSeptember 29, 2008
    
    
    October 1, 2007Company-
    
    
    
    
    
    
    
    
    
    
    Company-Owned
    
    
    Franchise
    
    
    Total
    
    
    Owned
    
    
    Franchise
    
    
    TotalRestaurants at beginning of period
    
    
    102
    
    
    
    43
    
    
    
    145
    
    
    
    113
    (a)
    
    
    22
    
    
    
    135New restaurants opened
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    6
    
    
    
    7Restaurants permanently closed
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    7
    
    
    
    1
    
    
    
    8Restaurants at end of period
    
    
    101
    
    
    
    43
    
    
    
    144
    
    
    
    107
    (b)
    
    
    27
    
    
    
    134
 
 (a)
    
    Includes nine locations that are classified as discontinued operations(b)
    
    Includes three locations that are classified as discontinued operations For the Nine Months EndedSeptember 29, 2008
    
    
    October 1, 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
    
    
    
    5
    
    
    
    15
    
    
    
    20Restaurants permanently closed
    
    
    7
    
    
    
    1
    
    
    
    8
    
    
    
    8
    
    
    
    1
    
    
    
    9Restaurants at end of period
    
    
    101
    
    
    
    43
    
    
    
    144
    
    
    
    107
    (b)
    
    
    27
    
    
    
    134
 
 (a)
    
    Includes nine locations that are classified as discontinued operations(b)
    
    Includes three locations that are classified as discontinued operations   14




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RECENT EVENTS
  CRITICAL ACCOUNTING POLICIES
   Long Lived Assets Accounting for the Impairment or Disposal of Long-Lived
Assets
 15




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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
 16




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Expected dividend yield
    
    
    0
    %Expected stock price volatility
    
    
    68
    %Average risk-free interest rate
    
    
    3.79
    %Average expected life of options
    
    5.0 years
  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
   17




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##### Table of Contents



Restaurant Net Sales.
 Franchise Fees and Royalties.
 Gift Card Sales
    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.
 18




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RESULTS OF OPERATIONS
  Three Months Ended
    
    
    Nine Months EndedSeptember 29,
    
    
    October 1,
    
    
    September 29,
    
    
    October 1,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues:Restaurant net sales
    
    
    97.3
    %
    
    
    98.2
    %
    
    
    97.9
    %
    
    
    98.6
    %Franchise fees and royalties
    
    
    2.7
    
    
    
    1.8
    
    
    
    2.1
    
    
    
    1.4Total revenue
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost and expenses:Cost of food and beverage (1)
    
    
    22.4
    
    
    
    23.7
    
    
    
    22.8
    
    
    
    23.2Restaurant labor and related benefits (1)
    
    
    34.0
    
    
    
    34.8
    
    
    
    33.7
    
    
    
    34.7Occupancy and other restaurant operating expenses (1)
    
    
    30.8
    
    
    
    29.0
    
    
    
    29.4
    
    
    
    28.687.2
    
    
    
    87.5
    
    
    
    85.9
    
    
    
    86.5General and administrative expenses
    
    
    15.5
    
    
    
    16.8
    
    
    
    15.8
    
    
    
    17.7Depreciation and amortization
    
    
    6.2
    
    
    
    6.6
    
    
    
    6.0
    
    
    
    6.5Restaurant pre-opening expenses
    
    
    
    
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.6Provision for losses on asset impairments
and disposals
    
    
    2.3
    
    
    
    1.0
    
    
    
    1.0
    
    
    
    1.3Closed store costs (benefit)
    
    
    
    
    
    
    (0.2
    )
    
    
    0.1
    
    
    
    0.2Lease termination expense
    
    
    0.2
    
    
    
    2.0
    
    
    
    0.3
    
    
    
    0.3Total
costs and expenses
    
    
    109.0
    
    
    
    110.5
    
    
    
    107.3
    
    
    
    111.8Operating loss
    
    
    (9.0
    )
    
    
    (10.5
    )
    
    
    (7.3
    )
    
    
    (11.8
    )Other income (expense):Interest income
    
    
    
    
    
    
    0.3
    
    
    
    0.1
    
    
    
    0.4Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other income
    
    
    0.1
    
    
    
    2.0
    
    
    
    
    
    
    
    0.8Loss from
continuing operations
    
    
    (8.9
    )
    
    
    (8.2
    )
    
    
    (7.2
    )
    
    
    (10.6
    )Discontinued operations:Loss from
discontinued operations
    
    
    
    
    
    
    (0.4
    )
    
    
    (0.3
    )
    
    
    (3.8
    )Net loss
    
    
    (8.9
    )
    
    
    (8.6
    )
    
    
    (7.5
    )
    
    
    (14.4
    )
 
 (1)
    
    These are expressed as a percentage of restaurant net sales versus all other
items expressed as a percentage of total revenues. 19




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##### Table of Contents



Restaurant Net Sales
 Restaurant net salesas a % of total(in thousands)
    
    revenuesQuarter ended September 29, 2008
    
    $
    33,975
    
    
    
    97.3
    %Quarter ended October 1, 2007
    
    $
    34,226
    
    
    
    98.2
    %
 as a % of total(in thousands)
    
    revenuesNine months ended September 29, 2008
    
    $
    102,641
    
    
    
    97.9
    %Nine months ended October 1, 2007
    
    $
    99,959
    
    
    
    98.6
    %
 Restaurant net sales.
  Franchise Fees and Royalties
 Franchise fees and royaltiesas a % of total(in thousands)
    
    revenuesQuarter ended September 29, 2008
    
    $
    955
    
    
    
    2.7
    %Quarter ended October 1, 2007
    
    $
    611
    
    
    
    1.8
    %
 as a % of total(in thousands)
    
    revenuesNine months ended September 29, 2008
    
    $
    2,203
    
    
    
    2.1
    %Nine months ended October 1, 2007
    
    $
    1,448
    
    
    
    1.4
    %
 Franchise fees and royalties.
  20




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##### Table of Contents



Costs and Expenses
 Cost of food and beverageas a % of restaurant(in thousands)
    
    net salesQuarter ended September 29, 2008
    
    $
    7,611
    
    
    
    22.4
    %Quarter ended October 1, 2007
    
    $
    8,099
    
    
    
    23.7
    %
 as a % of restaurant(in thousands)
    
    net salesNine months ended September 29, 2008
    
    $
    23,408
    
    
    
    22.8
    %Nine months ended October 1, 2007
    
    $
    23,161
    
    
    
    23.2
    %
 Cost of food and beverage
 Restaurant labor and related benefitsas a % of restaurant(in thousands)
    
    net salesQuarter ended September 29, 2008
    
    $
    11,540
    
    
    
    34.0
    %Quarter ended October 1, 2007
    
    $
    11,913
    
    
    
    34.8
    %
 as a % of restaurant(in thousands)
    
    net salesNine months ended September 29, 2008
    
    $
    34,557
    
    
    
    33.7
    %Nine months ended October 1, 2007
    
    $
    34,638
    
    
    
    34.7
    %
 Restaurant labor and related benefits.
 Occupancy and other restaurantoperating expensesas a % of restaurant(in thousands)
    
    net salesQuarter ended September 29, 2008
    
    $
    10,485
    
    
    
    30.9
    %Quarter ended October 1, 2007
    
    $
    9,924
    
    
    
    29.0
    %
 as a % of restaurant(in thousands)
    
    net salesNine months ended September 29, 2008
    
    $
    30,169
    
    
    
    29.4
    %Nine months ended October 1, 2007
    
    $
    28,588
    
    
    
    28.6
    %
 Occupancy and other restaurant operating expenses
 21




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##### Table of Contents



General and administrative expensesas a % of total(in thousands)
    
    revenuesQuarter ended September 29, 2008
    
    $
    5,429
    
    
    
    15.5
    %Quarter ended October 1, 2007
    
    $
    5,849
    
    
    
    16.8
    %
 as a % of total(in thousands)
    
    revenuesNine months ended September 29, 2008
    
    $
    16,537
    
    
    
    15.8
    %Nine months ended October 1, 2007
    
    $
    17,971
    
    
    
    17.7
    %
 General and administrative expenses
 Depreciation and amortizationas a % of total(in thousands)
    
    revenuesQuarter ended September 29, 2008
    
    $
    2,152
    
    
    
    6.2
    %Quarter ended October 1, 2007
    
    $
    2,283
    
    
    
    6.6
    %
 as a % of total(in thousands)
    
    revenuesNine months ended September 29,
2008
    
    $
    6,319
    
    
    
    6.0
    %Nine months ended October 1, 2007
    
    $
    6,550
    
    
    
    6.5
    %
 Depreciation and amortization
 Restaurant pre-opening expensesas a % of total(in thousands)
    
    revenuesQuarter ended September 29, 2008
    
    $
    
    
    
    0.0
    %Quarter ended October 1, 2007
    
    $
    56
    
    
    
    0.2
    %
 as a % of total(in thousands)
    
    revenuesNine months ended September 29,
2008
    
    $
    100
    
    
    
    0.1
    %Nine months ended October 1, 2007
    
    $
    637
    
    
    
    0.6
    %
 22




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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 September 29, 2008
    
    $
    800
    
    
    
    2.3
    %Quarter ended October 1, 2007
    
    $
    365
    
    
    
    1.0
    %
 as a % of total(in thousands)
    
    revenuesNine months ended September 29,
2008
    
    $
    1,067
    
    
    
    1.0
    %Nine months ended October 1, 2007
    
    $
    1,310
    
    
    
    1.3
    %
 Provision for losses on asset impairments and disposals
 Closed store costs (benefit)as a % of total(in thousands)
    
    revenuesQuarter ended September 29, 2008
    
    $
    6
    
    
    
    0.0
    %Quarter ended October 1, 2007
    
    $
    (62
    )
    
    
    (0.2
    %)
 as a % of total(in thousands)
    
    revenuesNine months ended September 29,
2008
    
    $
    53
    
    
    
    0.1
    %Nine months ended October 1, 2007
    
    $
    200
    
    
    
    0.2
    %
 Closed store costs
 23




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##### Table of Contents



Lease termination expenseas a % of total(in thousands)
    
    revenuesQuarter ended September 29, 2008
    
    $
    55
    
    
    
    0.2
    %Quarter ended October 1, 2007
    
    $
    84
    
    
    
    0.2
    %
 as a % of total(in thousands)
    
    revenuesNine months ended September 29,
2008
    
    $
    298
    
    
    
    0.3
    %Nine months ended October 1, 2007
    
    $
    277
    
    
    
    0.3
    %
 Lease termination expense
 Interest income
    
    Interest expenseas a % of total
    
    
    
    
    
    as a % of total(in thousands)
    
    revenues
    
    (in thousands)
    
    revenuesQuarter ended September 29, 2008
    
    $
    18
    
    
    
    0.0
    %
    
    $
    2
    
    
    
    0.0
    %Quarter ended October 1, 2007
    
    $
    105
    
    
    
    0.3
    %
    
    $
    2
    
    
    
    0.0
    %
 as a % of total
    
    
    
    
    
    as a % of total(in thousands)
    
    revenues
    
    (in thousands)
    
    revenuesNine months
ended September 29,
2008
    
    $
    90
    
    
    
    0.1
    %
    
    $
    5
    
    
    
    0.0
    %Nine months ended October 1, 2007
    
    $
    449
    
    
    
    0.4
    %
    
    $
    6
    
    
    
    0.0
    %
 Interest income and expense
 Other incomeas a % of total(in thousands)
    
    revenuesQuarter ended September 29, 2008
    
    $
    37
    
    
    
    0.1
    %Quarter ended October 1, 2007
    
    $
    716
    
    
    
    2.0
    %
 as a % of total(in thousands)
    
    revenuesNine months ended September 29,
2008
    
    $
    39
    
    
    
    0.0
    %Nine months ended October 1, 2007
    
    $
    716
    
    
    
    0.8
    %
 Other income.
 24




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##### Table of Contents



Loss from continuing operationsas a % of total(in thousands)
    
    revenuesQuarter ended September 29, 2008
    
    $
    3,095
    
    
    
    8.9
    %Quarter ended October 1, 2007
    
    $
    2,855
    
    
    
    8.2
    %
 as a % of total(in thousands)
    
    revenuesNine months ended September 29,
2008
    
    $
    7,540
    
    
    
    7.2
    %Nine months ended October 1, 2007
    
    $
    10,776
    
    
    
    10.6
    %
 Loss from continuing operations
 Discontinued operations
  Accounting for the Impairment or Disposal of Long-Lived Assets
 LIQUIDITY AND CAPITAL RESOURCES
    25




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26




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##### Table of Contents



Contractual Obligations
    
    Payments Due by Period (in thousands)Due 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)
    
    
    80,081
    
    
    
    3,953
    
    
    
    29,851
    
    
    
    23,215
    
    
    
    23,062Total contractual cash obligations
    
    $
    80,181
    
    
    $
    3,978
    
    
    $
    29,901
    
    
    $
    23,240
    
    
    $
    23,062
 
 (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 $4.9 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 September 29, 2008.  PURCHASE COMMITMENTS
    CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
  27




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##### Table of Contents




    
    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;
    
    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
  28




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##### Table of Contents



Item 4. Controls and Procedures
   
 Part II. OTHER INFORMATION
 
 Item 1: LEGAL PROCEEDINGS
  Charles R. Gray,
Plaintiff, vs. Cosi, Inc., Defendant
  
 Item 1A: RISK FACTORS
  29




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##### Table of Contents



We may be adversely affected by the deterioration of the credit markets.
  
 Item 5: OTHER INFORMATION
    
 Item 6: EXHIBITS
 Exhibits
 Exhibit Number
    
    DescriptionExhibit 10.1
    
    General Separation and Release Agreement by and between the Company and
Christopher Ames, dated August 26, 2008.Exhibit 10.2
    
    General Separation and Release Agreement by and between the Company and
Christopher Carroll, dated August 26, 2008.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




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##### Table of Contents



SIGNATURES
  COSI, INC.Date: November 6, 2008
    By:
    /s/ JAMES HYATTJames HyattPresident,
Chief Executive Officer, and
DirectorDate: November 6, 2008
    By:
    /s/ WILLIAM KOZIELWilliam KozielChief Financial Officer
(chief accounting officer)
Treasurer and Secretary 
 31




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##### Table of Contents



EXHIBIT INDEX
 Exhibit 10.1
    
    General Separation and Release Agreement by and between the Company and
Christopher Ames, dated August 26, 2008.Exhibit 10.2
    
    General Separation and Release Agreement by and between the Company and
Christopher Carroll, dated August 26, 2008.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.
 32