-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MuYiWWzJup0tUNLxRMHAaRbwA+3Ot7J/TfjbmLq5Z93fs0YMs5OTbmjgz+OjZPt5 AjSUBBG2fN5wSAAlEDEqXA== 0000950137-08-003788.txt : 20080317 0000950137-08-003788.hdr.sgml : 20080317 20080317161934 ACCESSION NUMBER: 0000950137-08-003788 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20071231 FILED AS OF DATE: 20080317 DATE AS OF CHANGE: 20080317 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COSI INC CENTRAL INDEX KEY: 0001171014 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 061393745 STATE OF INCORPORATION: DE FISCAL YEAR END: 0101 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-50052 FILM NUMBER: 08693184 BUSINESS ADDRESS: STREET 1: COSI INC STREET 2: 1751 LAKE COOK ROAD SUITE 650 CITY: DEERFIELD STATE: IL ZIP: 60015 BUSINESS PHONE: 847-597-3200 MAIL ADDRESS: STREET 1: 1751 LAKE COOK ROAD STREET 2: SUITE 650 CITY: DEERFIELD STATE: IL ZIP: 60015 10-K 1 c24897e10vk.htm ANNUAL REPORT e10vk
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form 10-K
 
     
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended December 31, 2007
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.
(Exact name of registrant as specified in its charter)
 
     
Delaware   06-1393745
(State or other jurisdiction of
incorporation or organization) 		  (I.R.S. Employer
Identification No.)
 
1751 Lake Cook Road, Suite 600, Deerfield, Illinois 60015
Telephone Number (847) 597-8800
 
Securities registered pursuant to Section 12(b) of the Act:
 
 
Title of Class
 
Common Stock
($.01 par value)
 
Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ
 
Indicate by a check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of Exchange Act.  Yes o     No þ
 
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K .  Yes o     No þ
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
             
Large accelerated filer o
  Accelerated filer þ   Non-accelerated filer o   Smaller reporting company o
             
    (Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
 
The aggregate market value of voting stock held by non-affiliates of the registrant was approximately $82,024,567 as of July 2, 2007 based upon the closing price of the registrant’s common stock on the Nasdaq Global Market reported for July 2, 2007. Shares of voting stock held by each executive officer and director and by each person who, as of such date, may be deemed to have beneficially owned more than 5% of the outstanding voting stock have been excluded. This determination of affiliate status is not necessarily a conclusive determination of affiliate status for any other purpose.
 
41,018,073 shares of the registrant’s common stock were outstanding on March 12, 2008.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Part III of this Form 10-K incorporates certain information from the Registrant’s definitive proxy statement for its Annual Meeting of Stockholders expected to be held on May 12, 2008. The definitive proxy statement will be filed by the Registrant with the Securities and Exchange Commission no later than 120 days from the end of the Registrant’s fiscal year ended December 31, 2007.
 

 

 
TABLE OF CONTENTS
 
                 
Item
 
Description
  Page
 
 
1.
    Business     3  
 
1A.
    Risk Factors     7  
 
1B.
    Unresolved Staff Comments     16  
 
2.
    Properties     16  
 
3.
    Legal Proceedings     19  
 
4.
    Submission of Matters to a Vote of Security Holders     19  
 
PART II
 
5.
    Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities     20  
 
6.
    Selected Financial Data     22  
 
7.
    Management’s Discussion and Analysis of Financial Condition and Results of Operations     23  
 
7A.
    Quantitative and Qualitative Disclosures about Market Risk     41  
 
8.
    Financial Statements and Supplementary Data     41  
 
9.
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     41  
 
9A.
    Controls and Procedures     41  
 
9B.
    Other Information     42  
 
PART III
 
10.
    Directors, Executive Officers and Corporate Governance     43  
 
11.
    Executive Compensation     43  
 
12.
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     43  
 
13.
    Certain Relationships and Related Transactions and Director Independence     43  
 
14.
    Principal Accounting Fees and Services     43  
 
PART IV
 
15.
    Exhibits and Financial Statement Schedules     44  
 Consent
 Certification
 Certification
 Certification


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PART I
 
Item 1.   BUSINESS
 
General
 
Cosi, Inc., a Delaware corporation incorporated on May 15, 1998, owns, operates and franchises premium convenience restaurants which sell high-quality hot and cold sandwiches, freshly-tossed salads, Cosi bagels, pizzas, S’mores and other desserts, and a variety of coffees along with other soft drink beverages, teas and alcoholic beverages. Our restaurants are located in a wide range of markets and trade areas, including business districts and residential communities in both urban and suburban locations. We believe that we have created significant brand equity in our markets and that we have demonstrated the appeal of our concept to a wide variety of customers.
 
As of December 31, 2007, there were 141 Cosi owned and franchised restaurants operating in 19 states, the District of Columbia, and the United Arab Emirates (UAE).
 
Our internet website is www.getcosi.com. We make available free-of-charge through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file or furnish such materials to the Securities and Exchange Commission (“SEC”). In addition, our internet website includes, among other things, our corporate governance principles, charters of various committees of the Board of Directors, and our code of business conduct and ethics applicable to all employees, officers and directors. Copies of these documents may be obtained free of charge from our internet website. Any stockholder also may obtain copies of these documents, free of charge, by sending a request in writing to: Cosi, Inc., c/o Investor Relations, 1751 Lake Cook Road, Suite 600, Deerfield, Illinois 60015.
 
Business Strategy
 
Our goal is to become a leading national premium convenience restaurant company, and we are focused on knowing our customers and their needs. We believe that our target customers are adults aged 18 to 34, upscale suburbanites and metro elites of all ages, and that there are approximately 40 million heads of households in this demographic mix. Based on our market analysis we believe that the top 75 markets where our target customers are concentrated can support up to approximately 1,900 Cosi restaurants.
 
We plan to become a leading national premium convenience restaurant by:
 
Offering an innovative menu appealing to our target customer.  Our restaurants offer innovative savory, freshly made-to-order products featuring our authentic hearth-baked crackly crust signature Cosi bread and high quality distinctive ingredients. We maintain a pipeline of new menu offerings that are introduced seasonally through limited time offerings to keep our products relevant to our target customers.
 
Providing customers with an exceptional service and dining experience.  Our restaurants are designed to provide a memorable dining experience in a warm, welcoming environment offering free internet access through a managed Wi-Fi network. We seek to train our partners to provide the highest level of friendly customer service. We believe that we provide an “affordable luxury” that our customers can enjoy everyday.
 
Expanding marketing initiatives to build brand awareness.  We focus our marketing efforts on building brand awareness and increasing frequency of visits. We do this through the development of a marketing calendar that focuses on four time periods (Winter, Spring, Summer, and Holiday), improved merchandising to better influence the purchasing behavior of our customers and reduce ordering complexity, developing marketing at the local store level and at grand openings, our CosiCard loyalty program, print advertising, and targeted direct-mail marketing campaigns.
 
Increasing comparable restaurant sales and average unit volumes.  We seek to increase comparable restaurant sales and average unit volumes by introducing new menu items, expanding our catering sales, increasing sales across all dayparts and running seasonal product promotions. Comparable restaurant sales for our company-owned restaurants during each of the last three fiscal years of 2007, 2006, and 2005 increased 0.2%, 0.3%, and 6.9% respectively.


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Operating our restaurants efficiently.  We have developed operating disciplines that are designed to optimize the cost structure of our restaurants and to be applied consistently across our restaurants, and we continually seek to refine and improve upon those disciplines.
 
Growth Strategy
 
We plan to grow in both existing and new markets through the following:
 
Build a system of franchised restaurants and develop company-owned restaurants.  We expect that company-owned restaurants (restaurants that we own as opposed to franchised restaurants) will always be an important part of our new restaurant growth; however, our franchising and area developer model will be key components of our growth strategy. We will continue to pursue company-owned development to achieve critical mass in our core markets while focusing on expanding our franchise system. We launched our franchising program in fiscal 2004 and continue to grow our franchise system through the development of new restaurants by new franchisees. We require that our franchisees have experience in multi-unit restaurant operations and development. We believe that our concept, growth opportunity and potential for strong unit-level economics will enable us to attract experienced and well-capitalized area developers. We are currently eligible to offer franchises in 47 states and the District of Columbia. We have secured franchise commitments from 31 area developers for 374 restaurants, for which we have received $4.4 million in deposits, including 34 restaurants existing as of the end of fiscal 2007, and one international license agreement covering six countries in the Persian Gulf.
 
Pursue foodservice strategic alliances.  We will continue to explore strategic alliances with our Cosi Pronto (our grab-and-go concept) and full service concepts in educational institutions, airports, train stations and other public venues that meet our operating and financial criteria. We believe that this is an attractive opportunity as evidenced by our partnership with Aramark Educational Services, LLC for the operation of the Cosi restaurant located at St. Joseph’s University in Philadelphia, PA.
 
Cosi Product Offerings
 
We offer proprietary food and beverage products for three major dayparts — breakfast, lunch and dinner. Our food menu includes Cosi bagels, sandwiches, salads, soups, appetizers, melts, Flatbread pizzas, S’mores and other desserts. We feature our authentic hearth-baked crackly crust signature Cosi bread in two varieties, our original Rustica and our Etruscan Whole Grain. Our beverage menu features a variety of house coffees and other specialty coffee drinks, soft drinks, bottled beverages which include premium still and sparkling waters, and teas. We also offer beer and wine at most of our locations and an additional limited selection of alcoholic beverages in some locations.
 
All our restaurants offer catering service for the breakfast and lunch dayparts. Our catering offerings include breakfast baskets, lunch buffets, dessert platters, and include most of our menu offerings. We operate call centers in the New York City and Chicago metropolitan areas and our catering orders for these two major metropolitan areas are produced at central catering hubs. We offer set up and delivery by Cosi personnel to all our catering customers.
 
We periodically introduce new menu segments and products in order to keep our product offerings relevant to consumers in each daypart. New recipes are developed by our food and beverage team. These recipes are thoroughly evaluated, both internally and through consumer input.
 
People
 
On December 31, 2007, we had 107 company-owned restaurants and approximately 2,811 employees, of whom approximately 96 served in administrative or executive capacities, 295 served as restaurant management employees and 2,420 were hourly restaurant employees. None of our employees are covered by a collective bargaining agreement and we have never experienced an organized work stoppage or strike. We believe that our compensation packages are competitive and our relations with our employees are good.


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Restaurant Operations
 
Management Structure.  The restaurant operations team is built around regional centers, led by Regional Vice Presidents, who report to the Chief Operating Officer, who then reports to the Chief Executive Officer. Regional Vice Presidents are responsible for all operations, training, recruiting and human resources within their region. Regional Vice Presidents are also responsible for the financial plan for their region and for the people development plan to support the growth in their region. The Vice President of Operations Services and Programs is responsible for developing infrastructure standards and procedures across the system for the benefit of the entire brand.
 
Sales Forecasting.  Regional Vice Presidents and District Managers have real-time access to sales forecasts and actual sales information through our web-based reporting system. This allows the entire management team to plan staffing requirements on a weekly, daily and even hourly basis to effectively serve our customers.
 
Product Quality.  Our food and beverage quality is managed at four critical stages: sourcing, distribution, line readiness and product preparation. Products are delivered to the restaurants several times each week so that all restaurants maintain fresh quality products. Because our restaurants serve a different variety of products during different dayparts, a specific line readiness checklist is completed to ensure that the products have been rotated, prepared and staged correctly. Finally, our partner training program includes certification in both product knowledge and product preparation standards.
 
Food and Labor Cost Controls.  Our information system allows us to track actual versus theoretical cost of goods sold. Detailed reports are available at the restaurant level showing variances on an item-by-item basis. The system is interfaced into our accounts payable and general ledger systems so that restaurant managers have control of their operations and can be held accountable for their results.
 
Our labor management standards help our managers control labor and ensure that staffing levels are appropriate to meet our service standards. Our reporting system provides our multi-unit managers with performance reports that help them make staffing adjustments during the course of the week. All labor scheduling is approved by a District Manager and unit level performance is reviewed weekly.
 
For manager and support controllables, we use either a fixed dollar budget standard or a percentage of net sales approach to plan expenditures effectively. Actual performance for each of these expense items is compared to budget on a weekly basis to help ensure accountability and operational alignment with financial planning efforts.
 
We believe that the combination of these structured restaurant operating systems and technologies allow our restaurant managers to focus their time more effectively on the day-to-day drivers of our business.
 
Management Information Systems
 
We use a select group of service providers to supplement our information technology infrastructure. This provides us access to up-to-date technology and the flexibility to adjust service levels as needed. Our strategy includes utilizing web-based technology to provide timely information to operate the business.
 
The systems are structured for the integration of data from the point-of-sale and back-office modules in the restaurants to our financial and inventory management systems. Key information relating to restaurant operations is uploaded onto a secure website five times a day for review and pre-selected reports are electronically distributed to our operations team.
 
We have a disaster recovery plan in place for all critical hardware, software, data and related processes. The plan encompasses scheduled back-ups, off-site storage, security, data integrity and redundant facilities for our servers and storage area networks.
 
Purchasing
 
We have relationships with some of the country’s best food, paper, and beverage providers to provide our restaurants with high quality proprietary food items at competitive prices. We source and negotiate prices directly with these suppliers and distribute these products to our restaurants primarily through a national network of independent distributors. We do not utilize a commissary system. Our inventory control system allows each


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restaurant to place orders electronically with our master distributor and then transmit the invoice electronically to our accounts payable system. Our scalable system eliminates duplicate work and we believe it gives our management tight control of costs while ensuring quality and consistency across all restaurants.
 
We have an agreement with Distribution Market Advantage, Inc. that provides us access to a national network of independent distributors. Under this agreement, which expires in November 2010, the independent distributors will supply us with approximately 77% of our food and paper products, primarily under pricing agreements that we negotiate directly with the suppliers.
 
We have a long-term beverage marketing agreement with the Coca-Cola Company. We received a marketing allowance under this agreement, which is being recognized as a reduction to expense ratably based on actual products purchased. Although we are eligible to receive additional amounts under the agreement if certain purchase levels are achieved, no additional amounts have been received or recorded as of December 31, 2007.
 
We purchase all contracted coffee products through a single supplier, Coffee Bean International, Inc. (“Coffee Bean International”), under an agreement that expires in June 2010. In the event of a business interruption, Coffee Bean International is required to utilize the services of a third-party roaster to fulfill its obligations. If the services of a third-party roaster are used, Coffee Bean International will guarantee that the product fulfillment standards stated in our contract will remain in effect throughout such business interruption period. Either party may terminate the agreement by written notice in accordance and subject to the terms of the agreement.
 
Our primary suppliers and independent distributors have parallel facilities and systems to minimize the risk of any disruption of our supply chain.
 
Competition
 
The restaurant industry is intensely competitive and we compete with many well-established food service companies, including other sandwich retailers, specialty coffee retailers, bagel shops, fast food restaurants, delicatessens, cafes, bars, take-out food service companies, supermarkets and convenience stores. The principal factors on which we compete are taste, quality and price of product offered, customer service, atmosphere, location and overall guest experience. Our competitors change with each daypart, ranging from coffee bars and bakery cafes in the morning daypart, to fast food restaurants and cafes during the lunch daypart, to casual dining chains during the dinner daypart. Many of our competitors or potential competitors have substantially greater financial and other resources than we do which may allow them to react more quickly to changes in pricing, marketing and the quick-service restaurant industry. We also compete with other employers in our markets for hourly workers and may be subject to higher labor costs. We believe that our concept, attractive price-value relationship and quality of products and service allow us to compete favorably with our competitors.
 
Intellectual Property
 
We have the following U.S. Trademark registrations: “Cosi”, “Cosi (with our hearth design)”, “Cosi Break Bar”, “Cosi-Dillas”, “Squagels”, “Xando”, “Cosi Pronto”, “Cosi Corners”, “Warm ’n Cosi Melts”, “Cosi Downtown”, and “Simply Good Taste.”
 
We have U.S. Trademark applications pending for the following trademarks: “Cosi (with our hearth design)”, “CosiCard”, “Hearth-Baked Dinners”, and “Relax. Catering by Cosi (& Design)”. “Artic”, “Slim Latte”, and “Cosi Lighter Side” are unregistered trademarks.
 
We have registered the trademark “Cosi” in 13 foreign jurisdictions with respect to goods and services. We also have trademark applications pending for registration for the trademark “Cosi” in the European Community and five other foreign jurisdictions, and we have applications pending for registration for the trademark “Cosi (with our hearth design)” and “Simply Good Taste” in two foreign jurisdictions.
 
Governmental Regulation
 
Our restaurants are subject to regulation by federal agencies and to licensing and regulation by state, local and where applicable, foreign health, sanitation, building, zoning, safety, fire and other departments relating to the


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development and operation of restaurants. These regulations include matters relating to environmental, building, construction and zoning requirements, franchising and the preparation and sale of food and alcoholic beverages. In addition, our facilities are licensed and subject to regulation under state and local fire, health and safety codes.
 
Our restaurants that sell alcoholic beverages are required to obtain a license from a state authority and, in certain locations, county and/or municipal authorities. Typically, licenses must be renewed annually and may be revoked or suspended for cause at any time. Alcoholic beverage control regulations relate to numerous aspects of the daily operations of each of our restaurants, including minimum age of patrons and employees, hours of operation, advertising, wholesale purchasing, inventory control and handling, and storage and dispensing of alcoholic beverages. We have not encountered any material problems relating to alcoholic beverage licenses to date. The failure to receive or retain a liquor license in a particular location could adversely affect that restaurant and may impact our ability to obtain such a license elsewhere.
 
We are subject to “dram shop” statutes in the states in which our restaurants sell alcoholic beverages. These statutes generally provide a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated individual. We carry liquor liability coverage as part of our existing comprehensive general liability insurance, which we believe is consistent with coverage carried by other entities in the restaurant industry. Although we are covered by insurance, a judgment against us under a dram-shop statute in excess of our liability coverage could have a material adverse effect on us.
 
Our operations are also subject to federal and state laws governing such matters as wages, working conditions, citizenship requirements and overtime. Some states have set minimum wage requirements higher than the federal level. Some of our hourly personnel at our restaurants are paid at rates based on the applicable minimum wage, and increases in the minimum wage will directly affect our labor costs. We are also subject to the Americans with Disabilities Act of 1990, which, among other things, prohibits discrimination on the basis of disability in public accommodations and employment. We are required to comply with the Americans with Disabilities Act and regulations relating to accommodating the needs of the disabled in connection with the construction of new facilities and with significant renovations of existing facilities.
 
Item 1A.   RISK FACTORS
 
Risks Related to Our Growth Strategy
 
We may not be able to achieve our planned expansion. If we or our franchisees are unable to successfully open new restaurants, our revenue growth rate and profits may be reduced.
 
To successfully expand our business, we and our franchisees must open new restaurants on schedule and in a profitable manner. In the past, we have experienced delays in restaurant openings and may experience similar delays in the future. Delays or failures in opening new restaurants could hurt our ability to meet our growth objectives, which may affect the expectations of securities analysts and others and thus our stock price. We cannot guarantee that we or our franchisees will be able to achieve our expansion goals or that new restaurants will be operated profitably. Further, any restaurants that we or our franchisees open may not obtain operating results similar to those of our existing restaurants. Our ability to expand successfully will depend on a number of factors, many of which are beyond our control. These factors include, but are not limited to:
 
  •  locating suitable restaurant sites in new and existing markets;
 
  •  negotiating acceptable lease terms;
 
  •  generating positive cash flow from existing and new restaurants;
 
  •  successful operation and execution in new and existing markets;
 
  •  recruiting, training and retaining qualified corporate and restaurant personnel and management;
 
  •  attracting and retaining qualified franchisees;
 
  •  cost effective and timely planning, design and build-out of restaurants;
 
  •  the reliability of our customer and market studies;


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  •  the reliability of our site identification studies;
 
  •  consumer trends;
 
  •  obtaining and maintaining required local, state, federal and where applicable, foreign governmental approvals and permits related to the construction of the sites and the sale of food and alcoholic beverages;
 
  •  creating customer awareness of our restaurants in new markets;
 
  •  competition in our markets, both in our business and in locating suitable restaurant sites;
 
  •  the cost of our principal food products and supply and delivery shortages or interruptions;
 
  •  weather conditions; and
 
  •  general economic conditions.
 
We must identify and obtain a sufficient number of suitable new restaurant sites for us to sustain our revenue growth rate.
 
We require that all proposed restaurant sites, whether company-owned or franchised, meet site-selection criteria established by us. We and our franchisees may not be able to find sufficient new restaurant sites to support our planned expansion in future periods. We face significant competition from other restaurant companies and retailers for sites that meet our criteria and the supply of sites may be limited in some markets. As a result of these factors, our costs to obtain and lease sites may increase, or we may not be able to obtain certain sites due to unacceptable costs. Our inability to obtain suitable restaurant sites at reasonable costs may reduce our growth rate, which may affect the expectations of securities analysts and others and thus our stock price.
 
Our expansion in existing markets can cause sales in some of our existing restaurants to decline, which could result in restaurant closures.
 
As part of our expansion strategy, we and our franchisees intend to open new restaurants in our existing markets. Since we typically draw customers from a relatively small radius around each of our restaurants, the sales performance and customer counts for restaurants near the area in which a new restaurant opens may decline due to cannibalization, which could result in restaurant closures. In addition, new restaurants added in existing markets may not achieve the same operating performance as our existing restaurants.
 
Our expansion into new markets may present increased risks due to our unfamiliarity with the area. The restaurants we open in new geographic regions may not achieve market acceptance.
 
Some of our new franchised restaurants and company-owned restaurants are located in areas where we have little or no meaningful experience. Those markets may have different demographic characteristics, competitive conditions, consumer tastes and discretionary spending patterns than our existing markets that may cause our new restaurants to be less successful than restaurants in our existing markets. An additional risk in expansion into new markets is the lack of market awareness of the Cosi brand. Restaurants opened in new markets may open at lower average weekly sales volumes than restaurants opened in existing markets and may have higher restaurant-level operating expense ratios than in existing markets. Sales at restaurants opened in new markets may take longer to reach mature average annual company-owned restaurant sales, if at all, thereby affecting the profitability of these restaurants.
 
We have entered into an international license agreement with a licensee for the development of Cosi restaurants in six countries in the Persian Gulf. They currently operate three franchise locations in the United Arab Emirates. As these franchise locations and future foreign locations open, the Company’s international operations will be subjected to various factors of uncertainty. The Company’s business outside of the United States is subject to a number of additional factors, including international economic and political conditions, differing cultures and consumer preferences, currency regulations and fluctuations, diverse government regulations and tax systems, uncertain or differing interpretations of rights and obligations in connection with international license agreements and the collection of royalties from international licensees, the availability and cost of land and


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construction costs, and the availability of experienced management, appropriate franchisees, and joint venture partners. Although we believe that we have developed the support structure required for international growth, there is no assurance that such growth will occur or that international operations will be profitable.
 
We may not be able to successfully incorporate a franchising and area developer model into our strategy.
 
We have and will continue to incorporate a franchising and area developer model into our business strategy in certain selected markets. We did not use a franchising or area developer model prior to fiscal 2004, and we may not be as successful as predicted in attracting franchisees and developers to the Cosi concept or identifying franchisees and developers that have the business abilities or access to financial resources necessary to open our restaurants or to successfully develop or operate our restaurants in a manner consistent with our standards. Incorporating a franchising and area developer model into our strategy also requires us to devote significant management and financial resources to support the franchise of our restaurants. Our future performance will depend on our franchisees’ ability to execute our concept and capitalize upon our brand recognition and marketing. We may not be able to recruit franchisees who have the business abilities or financial resources necessary to open restaurants on schedule, or who will conduct operations in a manner consistent with our concept and standards. Our franchisees may not be able to operate restaurants in a profitable manner. If we are not successful in incorporating a franchising or area developer model into our strategy, we may experience delays in our growth or may not be able to expand and grow our business.
 
If our franchisees cannot develop or finance new restaurants, build them on suitable sites or open them on schedule, our growth and success may be impeded.
 
Our growth depends in large part upon our ability to establish a successful and effective franchise program and to attract qualified franchisees. If our franchisees are unable to locate suitable sites for new restaurants, negotiate acceptable lease or purchase terms, obtain the necessary financial or management resources, meet construction schedules or obtain the necessary permits and government approvals, our growth plans may be negatively affected. We cannot assure you that any of the restaurants our franchisees open will be profitable.
 
Additional foodservice strategic alliances may not be successful and may materially adversely affect our business and results of operations.
 
We may decide to enter into additional alliances with third parties to develop foodservice strategic alliances in select markets or through select channels. Identifying strategic partners, negotiating agreements and building such alliances may divert management’s attention away from our existing businesses and growth plans. If we are not successful in forming additional foodservice strategic alliances, we may experience delays in our growth and may not be able to expand and grow our business. If we do form additional strategic alliances, we cannot assure you that the restaurants opened pursuant to these strategic alliances will be profitable.
 
Any inability to manage our growth effectively could materially adversely affect our operating results.
 
Failure to manage our growth effectively could harm our business. We have grown significantly since our inception and intend to grow substantially in the future both through a franchising strategy and opening new company-owned restaurants. Our existing restaurant management systems, financial and management controls and information systems may not be adequate to support our planned expansion. Our ability to manage our growth effectively will require us to continue to enhance these systems, procedures and controls. We must attract and retain talented operating personnel to maintain the quality and service levels at our existing and future restaurants. We may not be able to effectively manage these or other aspects of our expansion. We cannot assure you that we will be able to respond on a timely basis to all of the changing demands that our planned expansion will impose on management and on our existing infrastructure. If we are unable to manage our growth effectively, our business, results of operations and financial condition could be materially adversely impacted.


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If we are unable to successfully integrate future acquisitions, our business could be negatively impacted. Any acquisitions may also be costly.
 
We may consider future strategic acquisitions. Acquisitions involve numerous risks, including difficulties assimilating new operations and products. In addition, acquisitions may require significant management time and capital resources. We cannot assure you that we will have access to the capital required to finance potential acquisitions on satisfactory terms, that any acquisition would result in long-term benefits to us, or that management would be able to manage effectively the resulting business. Future acquisitions are likely to result in the incurrence of additional indebtedness, which could contain restrictive covenants, or the issuance of additional equity securities, which could dilute our existing stockholders. We may also pay too much for a concept that we acquire relative to the actual economic return obtained. If our integration efforts are unsuccessful, our business and results of operations could suffer.
 
Risks Related to Our Business
 
If we are unable to execute our business strategy, we could be materially adversely affected.
 
Our ability to successfully execute our business strategy will depend on a number of factors, some of which are beyond our control, including, but not limited to:
 
  •  our ability to generate positive cash flow from operations;
 
  •  identification and availability of suitable restaurant sites;
 
  •  competition for restaurant sites and customers;
 
  •  negotiation of favorable leases;
 
  •  management of construction and development costs of new and renovated restaurants;
 
  •  securing required governmental approvals and permits;
 
  •  recruitment and retention of qualified operating personnel;
 
  •  successful operation and execution in new and existing markets;
 
  •  recruiting, training and retaining qualified corporate and restaurant personnel and management;
 
  •  identification of under-performing restaurants and our ability to improve or efficiently close under-performing restaurants, including securing favorable lease termination terms;
 
  •  the rate of our internal growth, and our ability to generate increased revenue from existing restaurants;
 
  •  our ability to incorporate a franchising and area developer model into our strategy;
 
  •  competition in new and existing markets;
 
  •  the reliability of our customer and market studies;
 
  •  consumer trends;
 
  •  the cost of our principal food products and supply and delivery shortages or interruptions;
 
  •  weather conditions; and
 
  •  general regional, national and where applicable, foreign economic conditions.
 
Each of these factors could delay or prevent us from successfully executing our business strategy, which could adversely affect our growth, revenues and our results of operations.
 
During our operating history, we have been unable to achieve profitability.
 
In fiscal 2007, we incurred net losses of $20.8 million, and, since we were formed, we have incurred net losses of approximately $240.6 million through the end of fiscal 2007 primarily due to funding operating losses which


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have included significant impairment charges, the cost of our merger in 1999 and new restaurant opening expenses. We intend to continue to expend significant financial and management resources on the development of additional restaurants, both franchised and company-owned. We cannot predict whether we will be able to achieve or sustain revenue growth, profitability or positive cash flow in the future. See “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” and the financial statements included in this Annual Report on Form 10-K for information on the history of our losses.
 
If internally generated cash flow from our restaurants does not meet our expectations, our business, results of operations and financial condition could be materially adversely affected.
 
Our cash resources, and therefore our liquidity, are highly dependent upon the level of internally generated cash from operations and upon future financing transactions. Although we believe that we have sufficient liquidity to fund our working capital requirements for the next twelve months, if cash flows from our existing restaurants or cash flows from new restaurants that we open do not meet our expectations or are otherwise insufficient to satisfy our cash needs or expansion plans, we may have to seek additional financing from external sources to continue funding our operations or reduce or cease our plans to open or franchise new restaurants. We cannot predict whether such financing will be available on terms acceptable to us, or at all.
 
We may need additional capital in the future and it may not be available on acceptable terms.
 
Our business may require significant additional capital in the future to, among other things, fund our operations, increase the number of company-owned or franchised restaurants, expand the range of services we offer and finance future acquisitions and investments. There is no assurance that financing will be available on terms acceptable to us, or at all. Our ability to obtain additional financing will be subject to a number of factors, including market conditions, our operating performance and investor sentiment. These factors may make the timing, amount, terms and conditions of additional financings unattractive to us. If we are unable to raise additional capital, our business, results of operations and financial condition could be materially adversely affected.
 
Our franchisees could take actions that could harm our business.
 
Franchisees are independent operators and are not our employees. Although we have developed criteria to evaluate and screen prospective franchisees, we are limited in the amount of control we can exercise over our licensed franchisees, and the quality of franchised restaurant operations may be diminished by any number of factors beyond our control. Franchisees may not have the business acumen or financial resources necessary to successfully operate restaurants in a manner consistent with our standards and requirements and may not hire and train qualified managers and other restaurant personnel. Poor restaurant operations may affect each restaurant’s sales. Our image and reputation, and the image and reputation of other franchisees, may suffer materially and system-wide sales could significantly decline if our franchisees do not operate successfully.
 
We could face liability from our franchisees.
 
A franchisee or government agency may bring legal action against us based on the franchisee/franchisor relationships. Various state, federal and, where applicable, foreign laws govern our relationship with our franchisees and potential sales of our franchised restaurants. If we fail to comply with these laws, we could be liable for damages to franchisees and fines or other penalties. Expensive litigation with our franchisees or government agencies may adversely affect both our profits and our important relations with our franchisees.
 
Our financial results are affected by the financial results of our franchisees.
 
We receive royalties from our franchisees. Our financial results are therefore somewhat contingent upon the operational and financial success of our franchisees, including implementation of our strategic plans, as well as their ability to secure adequate financing. If sales trends or economic conditions worsen for our franchisees, their financial health may worsen and our collection rates may decline. Additionally, refusal on the part of franchisees to renew their franchise agreements may result in decreased royalties. Entering into restructured franchise agreements may result in reduced franchise royalty rates in the future.


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Our restaurants are currently concentrated in the Northeastern and Mid-Atlantic regions of the United States, particularly in the New York City and Washington DC area. Accordingly, we are highly vulnerable to negative occurrences in these regions.
 
We currently operate 70 company-owned restaurants in Northeastern and Mid-Atlantic states, of which 30 are located in the New York City and Washington DC central business districts. As a result, we are particularly susceptible to adverse trends and economic conditions in these areas. In addition, given our geographic concentration, negative publicity regarding any of our restaurants could have a material adverse effect on our business and operations, as could other regional occurrences impacting the local economies in these markets.
 
You should not rely on past increases in our average unit volumes as an indication of our future results of operations because they may fluctuate significantly.
 
A number of factors have historically affected, and will continue to affect, our average unit sales, including, among other factors:
 
  •  our ability to execute our business and growth strategy effectively;
 
  •  introduction of new menu items;
 
  •  sales performance by our new and existing restaurants;
 
  •  management turnover in the restaurants;
 
  •  competition;
 
  •  general regional, national and where applicable, foreign economic conditions;
 
  •  weather conditions; and
 
  •  consumer trends.
 
It is not reasonable to expect our average unit volumes to increase at rates achieved over the past several years. Changes in our average unit volumes could cause the price of our common stock to fluctuate substantially.
 
Seasonality, inclement weather and other variable factors may adversely affect our sales and results of operations and could cause our quarterly results to fluctuate and fall below expectations of securities analysts and investors, resulting in a decline in our stock price.
 
Our business is subject to significant seasonal fluctuations and weather influences on consumer spending and dining out patterns. Inclement weather may result in reduced frequency of dining at our restaurants. Customer counts (and consequently revenues) are generally highest in spring and summer months and lowest during the winter months because of the high proportion of our restaurants located in the Northern part of the country where inclement winter weather affects customer visits. As a result, our quarterly and yearly results have varied in the past, and we believe that our quarterly operating results will vary in the future. Other factors such as unanticipated increases in labor, commodities, energy, insurance or other operating costs may also cause our quarterly results to fluctuate. For this reason, you should not rely upon our quarterly operating results as indications of future performance.
 
Our operations depend upon governmental licenses and we may face liability under “dram shop” statutes.
 
We are subject to extensive federal, state, local and where applicable, foreign government regulations, including regulations relating to alcoholic beverage control, the preparation and sale of food, public health and safety, sanitation, building, zoning and fire codes. Our business depends upon obtaining and maintaining required food service and/or liquor licenses for each of our restaurants. If we fail to obtain or maintain all necessary licenses, we may be forced to delay or cancel new restaurant openings and close or reduce operations at existing locations. In addition, our sale of alcoholic beverages subjects us to “dram shop” statutes in some states. These statutes allow an injured person to recover damages from an establishment that served alcoholic beverages to an intoxicated person. Although we take significant precautions to ensure that all employees are trained in the responsible service of


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alcohol and maintain insurance policies in accordance with all state regulations regarding the sale of alcoholic beverages, the misuse of alcoholic beverages by customers may create considerable risks for us. If we are the subject of a judgment substantially in excess of our insurance coverage, or if we fail to maintain our insurance coverage, our business, financial condition, operating results or cash flows could be materially and adversely affected. See “Business — Government Regulation” in this Annual Report on Form 10-K for a discussion of the regulations with which we must comply.
 
Our failure or inability to enforce our trademarks or other proprietary rights could adversely affect our competitive position or the value of our brand.
 
We own certain common law trademark rights and a number of federal and international trademark and service mark registrations, and proprietary rights to certain of our core menu offerings. We believe that our trademarks and other proprietary rights are important to our success and our competitive position. We, therefore, devote appropriate resources to the protection of our trademarks and proprietary rights. The protective actions that we take, however, may not be enough to prevent unauthorized usage or imitation by others, which might cause us to incur significant litigation costs and could harm our image or our brand or competitive position.
 
We also cannot assure you that third parties will not claim that our trademarks or offerings infringe the proprietary rights of third parties. Any such claim, whether or not it has merit, could be time-consuming, result in costly litigation, cause product delays or require us to enter into royalty or licensing agreements. As a result, any such claim could have a material adverse effect on our business, results of operations and financial condition.
 
We hold significant amounts of illiquid assets and may have to dispose of them on unfavorable terms.
 
As of the end of fiscal 2007, we had $42.5 million in net fixed assets that we have defined as illiquid assets, which includes leasehold improvements, equipment and furniture and fixtures. These assets cannot be converted into cash quickly and easily. We may be compelled based on a significant underperformance of a specific location or market to dispose of these illiquid assets on unfavorable terms, which could have a material adverse effect on our business.
 
We may face litigation that could have a material adverse effect on our business, financial condition and results of operations.
 
From time to time, we are a defendant in litigation arising in the ordinary course of our business. Our customers may file complaints or lawsuits against us alleging that we are responsible for an illness or injury they suffered at or after a visit to a Cosi restaurant, or alleging that there was a problem with food quality or operations at a Cosi restaurant. We may also be subject to a variety of other claims arising in the ordinary course of our business, including personal injury claims, contract claims, claims from franchisees and claims alleging violations of federal, state and where applicable, foreign law regarding workplace and employment matters, discrimination and similar matters. We could also become subject to class action lawsuits related to these matters in the future. 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.
 
Regardless of whether any future claims against us are valid or whether we are found to be liable, claims may be expensive to defend and may divert our management’s attention away from our operations and hurt our performance. The outcome of litigation, particularly class action lawsuits and regulatory actions, is difficult to assess or quantify. Plaintiffs in these types of lawsuits may seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss relating to such lawsuits may remain unknown for substantial periods of time. A judgment significantly in excess of our insurance coverage for any claims could materially adversely affect our financial condition or results of operations. There may also be adverse publicity associated with litigation that could decrease customer acceptance of our services or those of our franchisees, regardless of whether the allegations are valid or whether we are ultimately found liable. As a result, litigation may have a material adverse affect our business, financial condition and results of operations. Moreover, complaints, litigation or adverse publicity experienced by one or more of our franchisees could also hurt our business as a whole.


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We have some new members on our management team that do not have proven success with the Company.
 
The following are members of our management team who have been in their positions for a relatively short period of time:
 
Chief Operating Officer, joined Cosi in December 2006; and
 
Chief Executive Officer and President, joined Cosi in September 2007.
 
These new members of management do not have previous experience with us, and we cannot assure you that they will fully integrate themselves into our business or that they will effectively manage our business affairs. Our failure to assimilate the new members of management, the failure of the new members of management to perform effectively, or the loss of any of the new members of management could have a material adverse effect on our business, financial condition and results of operations.
 
If we are unable to protect our customers’ credit card data, we could be exposed to data loss, litigation and liability, and our reputation could be significantly harmed.
 
In connection with credit card sales, we transmit confidential credit card information securely over public networks and store it in our data warehouse. Third parties may have the technology or know-how to breach the security of this customer information, and our security measures may not effectively prohibit others from obtaining improper access to this information. If a person is able to circumvent our security measures, he or she could destroy or steal valuable information or disrupt our operations. Any security breach could expose us to risks of data loss, litigation and liability and could seriously disrupt our operations and any resulting negative publicity could significantly harm our reputation.
 
We rely on computer systems and information technology to run our business. Any material failure, interruption or security breach of our computer systems or information technology may adversely affect the operation of the business and our results of operations.
 
Computer viruses or terrorism may disrupt our operations and harm our operating results. Despite our implementation of security measures, all of our technology systems are vulnerable to disability or failures due to hacking, viruses, acts of war or terrorism, and other causes. If our technology systems were to fail and we were unable to recover in a timely way, we would be unable to fulfill critical business functions, which could have a material adverse effect on our business, operating results, and financial condition.
 
Risks Relating to the Food Service Industry
 
Our business is affected by changes in consumer preferences.
 
Our success depends, in part, upon the popularity of our food and beverage products, our ability to develop new menu items that appeal to consumers and what we believe is an emerging trend in consumer preferences toward premium convenience restaurants. We depend on consumers who prefer made-to-order food in a sophisticated environment and are willing to pay a premium price for our products. We also depend on trends toward consumers eating away from home more often. Shifts in consumer preferences away from our restaurants or cuisine, our inability to develop new menu items that appeal to consumers or changes in our menu that eliminate items popular with some consumers could harm our business and future profitability.
 
A slowdown in the United States economy or an uncertain economic outlook could lead to reduced consumer spending at our restaurants and decreased demand for our products.
 
Consumer spending habits, including spending at our restaurants, are affected by, among other things, prevailing economic conditions, levels of employment, salary levels, wage rates, increase in fuel and other energy costs, conditions in residential real estate and mortgage markets, availability of consumer credit, consumer confidence, and consumer perception of economic conditions. A general slowdown in the United States economy, an uncertain economic outlook, deteriorating conditions in the residential real estate and mortgage markets and


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escalating energy costs could adversely affect consumer spending habits and customer traffic, which could result in a reduction in our net sales. A prolonged economic downturn could have a material adverse effect on our business, financial condition, and results of operations. Cosi, as an “affordable luxury,” may be disproportionally affected by a slowdown in the United States economy or an uncertain economic outlook.
 
Natural disasters, war, acts of terrorism or other armed conflict, or the threat of either on the United States or international economies may cause a decline in discretionary consumer spending, which would negatively affect our business.
 
Our success depends to a significant extent on discretionary consumer spending, which is influenced by general economic and political conditions and the availability of discretionary income. Discretionary consumer spending may decline in the event of a natural disaster, war, acts of terrorism or other armed conflict. Accordingly, we may experience declines in sales during periods of uncertainty like that which followed the September 11, 2001 terrorist attacks on the United States. In addition, economic uncertainty due to military action overseas, such as in Iraq and post-war military, diplomatic or financial responses, may lead to further declines in sales. Any decline in consumer spending or economic conditions could reduce customer traffic or impose practical limits on pricing, either of which could have a material adverse effect on our sales, results of operations, business and financial condition. In the event of a natural disaster or acts of terrorism in the United States, or the threat of either, we may be required to suspend operations in some or all of our stores, which could have a material adverse impact on our business, financial condition, and results of operation.
 
Our success depends on our ability to compete with many food service businesses.
 
The restaurant industry is intensely competitive and we compete with many well-established food service companies on the basis of taste, quality and price of product offered, customer service, atmosphere, location and overall guest experience. We compete with other sandwich retailers, specialty coffee retailers, bagel shops, fast-food restaurants, delicatessens, cafes, bars, take-out food service companies, supermarkets and convenience stores. Our competitors change with each daypart (breakfast, lunch and dinner), ranging from coffee bars and bakery cafes during the breakfast and lunch dayparts to casual dining chains during the dinner daypart. Aggressive pricing by our competitors or the entrance of new competitors into our markets could reduce our sales and profit margins.
 
Many of our competitors or potential competitors have substantially greater financial and other resources than we do, which may allow them to react to changes in pricing, marketing and the quick-service restaurant industry better than we can. As competitors expand their operations, we expect competition to intensify. We also compete with other employers in our markets for hourly workers and may be subject to higher labor costs.
 
Changes in food and supply costs could adversely affect our results of operations.
 
Our restaurants receive frequent deliveries of products. Most of these deliveries are made by distributors who are part of a national network of independent distributors with whom we have a distribution agreement. These independent distributors supply us with approximately 77% of our food and paper products under an agreement which expires in November 2010. Our profitability depends in part on our ability to anticipate and react to changes in food and supply costs, such as the recent volatility in certain commodity markets. Certain commodities such as wheat and dairy and dairy related products have experienced significant increases in prices and these increases could have an adverse effect on us during fiscal 2008 and in future fiscal years. Although many of our products are made to our specifications, we believe that alternative distribution sources are available for the majority of our ingredients and products.
 
We believe that we have adequate sources of supply for our ingredients and products to support our restaurant operations and if necessary we can make menu modifications to address any material supply issues. However, there are many factors which can cause shortages or interruptions in the supply of our ingredients and products including weather, unanticipated demand, labor, production or distribution problems, quality issues and cost, some of which are beyond our control, and which could have an adverse effect on our business and results of operations.


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Health concerns relating to the consumption of beef, poultry, produce or other food products could adversely affect the price and availability of beef, poultry, produce, and other food products, consumer preferences and our results of operations and stock price.
 
Since 2004, Asian and European countries have experienced outbreaks of avian flu, or “bird flu.” Additional instances of avian flu or other food-borne illnesses, such as “mad cow disease,” E.coli or hepatitis A could adversely affect the price and availability of beef, poultry or other food products. As a result, we could experience a significant increase in cost of food.
 
In addition, like other restaurant chains, consumer preferences could be affected by health concerns about the consumption of poultry, beef, or produce, the key ingredients in many of our menu items, or by negative publicity concerning food quality, illness and injury generally, such as negative publicity concerning, E.coli, “mad cow disease” or “bird flu”, publication of government or industry findings about food products we serve or other health concerns or operating issues stemming from the food served in our restaurants. Our operational controls and training may not be fully effective in preventing all food-borne illnesses. Some food-borne illness incidents could be caused by food suppliers and transporters and would be outside of our control. If our food suppliers and transporters do not comply with governmental health regulations, they may not be able to deliver food products or we may be subject to food product recalls. Any negative publicity, health concerns or specific outbreaks of food-borne illnesses attributed to one or more of our restaurants, or the perception of an outbreak, could result in a decrease in customer traffic to our restaurants and could have a material adverse effect on our sales, results of operations, business, financial condition and stock price.
 
The food service industry is affected by litigation and publicity concerning food quality, health and other issues, which can cause customers to avoid our products and result in liabilities.
 
Food service businesses can be adversely affected by litigation and complaints from customers or government authorities resulting from food quality, illness, injury or other health concerns or operating issues stemming from one restaurant or a limited number of restaurants. Adverse publicity about these allegations may negatively affect us, regardless of whether the allegations are true, by discouraging customers from buying our products. We could also incur significant liabilities if a lawsuit or claim results in a decision against us or if we incur litigation costs, regardless of the result.
 
Our business could be adversely affected by increased labor costs or labor shortages.
 
Labor is a primary component in the cost of operating our business. We devote significant resources to recruiting and training our managers and employees. Increased labor costs, due to competition, increased minimum wage or employee benefits costs or otherwise, would adversely impact our operating expenses. In addition, our success depends on our ability to attract, motivate and retain qualified employees, including restaurant managers and staff, to keep pace with our needs. If we are unable to do so, our results of operations may be adversely affected.
 
Item 1B.   UNRESOLVED STAFF COMMENTS
 
We have received no written comments regarding our periodic or current reports from the staff of the Securities and Exchange Commission that were issued 180 days or more preceding the end of our 2007 fiscal year and that remain unresolved.
 
Item 2.   PROPERTIES
 
Our principal executive offices are located at 1751 Lake Cook Road, Suite 600, Deerfield, Illinois 60015. The lease for our executive offices expires in September 2012. We believe the offices are adequate to accommodate our current needs and anticipated growth.
 
All of our restaurants are located on leased properties. Each lease typically has a 10-year base rent period, with various renewal options. Each lease requires a base rent, and some locations provide for contingent rental payments. At most locations, we reimburse the landlord for a proportionate share of either the landlord’s taxes or yearly increases in the landlord’s taxes.


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The following table lists existing company-owned restaurants, by region, as of December 31, 2007:
 
             
Street Address
 
City
 
Date Opened
 
Format
 
MIDATLANTIC
234 South 15th Street
  Philadelphia, PA   September-96   Cosi
325 Chestnut Street
  Philadelphia, PA   April-97   Cosi
1350 Connecticut Avenue
  Washington, DC   September-97   Cosi
1128 Walnut Street
  Philadelphia, PA   December-97   Cosi
1647 20th Street NW
  Washington, DC   August-98   Cosi
140 South 36th Street
  Philadelphia, PA   August-98   Cosi
761 Lancaster Avenue
  Bryn Mawr, PA   September-98   Cosi
301 Pennsylvania Avenue SE
  Washington, DC   March-99   Cosi
2050 Wilson Boulevard
  Arlington, VA   April-99   Cosi
215 Lombard Street
  Philadelphia, PA   May-99   Cosi
1700 Pennsylvania Avenue
  Washington, DC   August-99   Cosi Downtown
1700 Market Street
  Philadelphia, PA   September-99   Cosi Downtown
700 King Street
  Alexandria, VA   May-00   Cosi
700 11th Street
  Washington, DC   May-00   Cosi
4250 Fairfax Drive
  Arlington, VA   June-00   Cosi
1919 M Street
  Washington, DC   September-00   Cosi
201 South 18th Street
  Philadelphia, PA   October-00   Cosi
1001 Pennsylvania Avenue NW
  Washington, DC   October-00   Cosi Downtown
7251 Woodmont Avenue
  Bethesda, MD   December-00   Cosi
11909 Democracy Drive
  Reston, VA   May-01   Cosi
4074 The Strand West
  Columbus, OH   October-01   Cosi
1501 K Street NW
  Washington, DC   December-01   Cosi Downtown
1875 K Street
  Washington, DC   July-02   Cosi Downtown
6390 Sawmill Road
  Columbus, OH   September-02   Cosi
601 Pennsylvania Ave. NW
  Washington, DC   September-02   Cosi
1275 K Street
  Washington, DC   September-02   Cosi
2212 East Main Street
  Bexley, OH   September-02   Cosi
1478 Bethel Road
  Columbus, OH   November-02   Cosi
295 Main Street
  Exton, PA   November-02   Cosi
7166 N. High Street
  Worthington, OH   December-02   Cosi
5252 Wisconsin Ave, NW
  Washington, DC   December-02   Cosi
177 Kentlands Blvd
  Gaithersburg, MD   January-03   Cosi
1333 H Street, NW
  Washington DC   January-03   Cosi Downtown
1310 Polaris Parkway
  Columbus, OH   February-03   Cosi
1801 N. Lynn Street
  Arlington, VA   November-05   Cosi
4025 Welsh Road
  Willow Grove, PA   December-05   Cosi
50 Yorktown Plaza
  Elkins Park, PA   April-06   Cosi
833 Chestnut
  Philadelphia, PA   June-06   Cosi
9177 Reisterstown Road
  Owing Mills, MD   June-06   Cosi
424 West Swedesford Road
  Berwyn, PA   June-06   Cosi
100 South Charles
  Baltimore, MD   July-06   Cosi
513 West Broad Street
  Falls Church, VA   October-06   Cosi


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Street Address
 
City
 
Date Opened
 
Format
 
3503 Fairfax Drive, Suite 200
  Arlington, VA   November-06   Cosi
201 N. Washington #290
  Rockville, MD   March-07   Cosi
2955 Market St. 
  Philadelphia, PA   July-07   Cosi
 
MIDWEST
116 S. Michigan Avenue
  Chicago, IL   September-00   Cosi
55 E. Grand Street
  Chicago, IL   October-00   Cosi
230 W. Washington Street
  Chicago, IL   November-00   Cosi Downtown
203 North LaSalle Street
  Chicago, IL   May-01   Cosi Downtown
28 East Jackson Boulevard
  Chicago, IL   January-03   Cosi Downtown
301 South State Street
  Ann Arbor, MI   May-01   Cosi
1101 Lake Street
  Oak Park, IL   June-01   Cosi
101 North Old Woodward Avenue
  Birmingham, MI   August-01   Cosi
25 E. Hinsdale
  Hinsdale, IL   December-01   Cosi
8775 N. Port Washington Road
  Fox Point, WI   December-01   Cosi
230 West Monroe Street
  Chicago, IL   May-02   Cosi Downtown
301 East Grand River Avenue
  East Lansing, MI   May-02   Cosi
84 W. Adams Road
  Rochester Hills, MI   September-02   Cosi
28674 Telegraph Road
  Southfield, MI   November-02   Cosi
37652 Twelve Mile Road
  Farmington Hills, MI   December-02   Cosi
15131 LaGrange Road
  Orland Park, IL   December-02   Cosi
233 North Michigan Avenue
  Chicago, IL   December-02   Cosi Downtown
33 N Dearborn
  Chicago, IL   June-05   Cosi Downtown
1740 Sherman Avenue
  Evanston, IL   September-05   Cosi
17848 Gardenway NE
  Woodinville, WA   November-05   Cosi
1825 2nd Street
  Highland Park, IL   December-05   Cosi
7545 166th Avenue NE
  Redmond, WA   June-06   Cosi
1023 West Belmont
  Chicago, IL   June-06   Cosi
18 West 066 22nd Street
  Oak Brook Terrace, IL   August-06   Cosi
2200 North Clark
  Chicago, IL   August-06   Cosi
15522 Main Street, #P101-102
  Mill Creek, WA   September-06   Cosi
8310 Greenway Boulevard, #106
  Middleton, WI   September-06   Cosi
250 State Street
  Madison, WI   September-06   Cosi
910 North Milwaukee Avenue, Suite A
  Lincolnshire, IL   November-06   Cosi
220 South Washington Street
  Naperville, IL   December-06   Cosi
21720 W. Long Grove Rd. 
  Deer Park, IL   March-07   Cosi

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Street Address
 
City
 
Date Opened
 
Format
 
NORTHEAST
257 Park Avenue South
  New York, NY   February-97   Cosi
38 East 45th Street
  New York, NY   February-97   Cosi Downtown
11 West 42nd Street
  New York, NY   June-97   Cosi Downtown
60 East 56th Street
  New York, NY   September-97   Cosi Downtown
3 World Financial Center
  New York, NY   January-98   Cosi Downtown
504 Avenue of the Americas
  New York, NY   March-98   Cosi
55 Broad Street
  New York, NY   March-98   Cosi Downtown
54 Pine Street
  New York, NY   May-98   Cosi Downtown
1633 Broadway
  New York, NY   July-98   Cosi Downtown
61 West 48th Street
  New York, NY   August-98   Cosi Downtown
685 Third Avenue
  New York, NY   June-99   Cosi Downtown
970 Farmington Avenue
  W. Hartford, CT   August-99   Cosi
461 Park Avenue South
  New York, NY   January-00   Cosi
50 Purchase Street
  Rye, NY   March-00   Cosi
841 Broadway
  New York, NY   September-00   Cosi
15 S. Moger Avenue
  Mt. Kisco, NY   December-00   Cosi
77 Quaker Ridge Road
  New Rochelle, NY   November-01   Cosi
1298 Boston Post Road
  Larchmont, NY   December-01   Cosi
471 Mount Pleasant Road
  Livingston, NJ   September-02   Cosi
29 Washington Street
  Morristown, NJ   December-02   Cosi
385 West Main Street
  Avon, CT   December-02   Cosi
498 7th Avenue
  New York, NY   December-02   Cosi
700 6th Avenue
  New York, NY   February-03   Cosi
980 Boston Post Road
  Darien, CT   October-05   Cosi
129 West Putnam Avenue
  Greenwich, CT   February-06   Cosi
441 South Oyster Bay Road
  Plainview, NY   June-06   Cosi
1209 High Ridge Road
  Stamford, CT   July-06   Cosi
44 Great Neck Road
  Great Neck, NY   July-06   Cosi
53 E. 8th St. 
  New York, NY   April-07   Cosi
2186 Broadway
  New York, NY   June-07   Cosi
230 Tresser Blvd. Ste 005
  Stamford, CT   November-07   Cosi
 
Item 3.   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 accommodation or privacy and data security and protection, 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.
 
Item 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this annual report.

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PART II
 
Item 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, STOCK AND RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
 
On November 22, 2002, our common stock began trading on the Nasdaq Global Market System (“Nasdaq”) under the symbol “COSI.” The closing price of our common stock on Nasdaq was $2.74 on March 12, 2008.
 
Stock Price Information
 
Set forth below are the high and low closing sale prices for shares of our common stock for each quarter during fiscal 2007 and 2006 as reported by Nasdaq.
 
                                 
    Fiscal 2007     Fiscal 2006  
Fiscal Quarter:
  High     Low     High     Low  
 
First Quarter
  $ 6.67     $ 5.10     $ 10.99     $ 8.34  
Second Quarter
  $ 5.74     $ 4.47     $ 10.94     $ 6.04  
Third Quarter
  $ 5.02     $ 3.24     $ 6.81     $ 4.27  
Fourth Quarter
  $ 3.89     $ 2.10     $ 5.61     $ 4.27  
 
Stockholders
 
The number of our common stockholders of record as of February 22, 2008 was 93. This number excludes stockholders whose stock is held in nominee or street name by brokers.
 
Dividend Policy
 
We have never paid cash dividends on our common stock and we do not currently intend to pay any dividends.


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Securities Authorized for Issuance Under Equity Compensation Plans
 
The information relating to securities authorized for issuance under our equity compensation plans is disclosed in Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”.
 
Set forth below is a graph comparing the cumulative total stockholder return on Così’s common stock with the NASDAQ Composite Index and the Standard & Poor’s Small Cap Restaurant Index for the period covering Così’s initial public offering on November 22, 2002, through the end of Così’s 2007 fiscal year on December 31, 2007. The Company’s common stock trades on NASDAQ under the symbol “COSI.” The graph assumes an investment of $100.00 made at the opening of trading on November 22, 2002, in (i) Così’s common stock, (ii) the stocks comprising the NASDAQ Composite Index, and (iii) stocks comprising the Standard & Poor’s Small Cap Restaurant Index.
 
Cumulative Total Return
 
(Performance Graph)
 
Recent Sales of Unregistered Securities
 
We sold the following unregistered securities in reliance upon the exemption from registration provided pursuant to section 4(2) of The Securities Act of 1933, as amended.
 
(a)   Exercises of Warrants
 
On February 16, 2007, we sold 47,384 shares of our common stock to a shareholder for an aggregate consideration of $0.3 million pursuant to the exercise of warrants. Using the net exercise method, a net of 699 shares were issued and 46,685 shares were surrendered.


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Item 6.   SELECTED FINANCIAL DATA
 
The following table sets forth our summary of selected consolidated financial data, which should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and the related notes included elsewhere in this Report. The selected statement of operations data for fiscal 2007, 2006 and 2005 and selected balance sheet data for fiscal 2007 and 2006 are derived from our audited consolidated financial statements that are included in this Report. The following historical results of consolidated operations are not necessarily indicative of results to be expected for any subsequent period.
 
                                         
    Fiscal Year  
    2007     2006     2005     2004     2003  
    (In thousands, except per share data)  
 
Consolidated Statement of Operations Data:
                                       
Revenues
                                       
Restaurant net sales
  $ 132,414.1     $ 122,849.3     $ 114,036.3     $ 110,039.8     $ 107,257.4  
Franchise fees and royalties
    2,142.2       849.2       100.5       —       —  
                                         
Total revenues
    134,556.3       123,698.5       114,136.8       110,039.8       107,257.4  
Costs and expenses:
                                       
Cost of food and beverage
    30,972.5       28,170.5       27,103.6       27,819.7       29,713.9  
Restaurant labor and related benefits
    45,994.7       40,781.5       37,263.7       38,428.2       37,996.9  
Occupancy and other restaurant operating expenses
    38,369.0       32,044.7       27,726.3       27,719.9       29,324.9  
                                         
      115,336.2       100,996.7       92,093.6       93,967.8       97,035.7  
General and administrative expenses
    21,019.4       21,910.5       21,320.4       21,718.4 (2)     22,274.4  
Stock-based compensation expense(1)
    1,953.9       4,977.7       2,944.2       2,855.3       893.7  
Depreciation and amortization
    8,823.2       7,196.3       6,515.9       6,873.7       7,852.5  
Restaurant pre-opening expenses
    710.3       1,450.8       823.7       64.3       389.8  
Provision for losses on asset impairments and disposals
    3,844.7       248.7       675.4       1,405.5       8,531.8  
Closed store costs
    261.9       —       —       —       —  
Lease termination expense (benefit), net
    346.9       (231.5 )     (178.8 )     (588.8 )     (3,391.2 )
Gain on sale of assets
    (23.3 )     (482.3 )     (1,431.7 )     —       —  
                                         
Operating loss
    (17,716.9 )     (12,368.4 )     (8,625.9 )     (16,256.4 )     (26,329.3 )
Other income (expense):
                                       
Interest income
    524.1       1,411.5       802.0       159.0       40.5  
Interest expense
    (42.3 )     (9.3 )     (34.0 )     (62.4 )     (316.8 )
Allowance for stockholders’ notes receivables
    —       —       (261.1 )     (1,266.0 )     —  
Other income (expense)
    704.8       77.5       103.6       (102.5 )     112.0  
                                         
Total other income (expense)
    1,186.6       1,479.7       610.5       (1,271.9 )     (164.3 )
                                         
Loss from continuing operations
    (16,530.3 )     (10,888.7 )     (8,015.4 )     (17,528.3 )     (26,493.6 )
Discontinued operations:
                                       
Operating loss from discontinued operations
    (903.1 )     (1,182.9 )     (1,905.6 )     (504.0 )     —  
Asset impairments of discontinued operations
    (3,350.1 )     (256.0 )     (3,205.0 )     (341.1 )     —  
                                         
Loss from discontinued operations
    (4,253.2 )     (1,438.9 )     (5,110.6 )     (845.1 )     —  
                                         
Net loss
  $ (20,783.5 )   $ (12,327.6 )   $ (13,126.0 )   $ (18,373.4 )   $ (26,493.6 )
                                         
Loss per share — basic and diluted
                                       
Continuing operations
  $ (0.42 )   $ (0.28 )   $ (0.23 )   $ (0.59 )   $ (1.53 )
Discontinued operations
  $ (0.11 )   $ (0.04 )   $ (0.15 )   $ (0.03 )   $ —  
                                         
Net loss
  $ (0.53 )   $ (0.32 )   $ (0.38 )   $ (0.62 )   $ (1.53 )
                                         
Weighted average shares used in computing net loss per common share — basic and diluted
    39,332       38,207       34,929       29,432       17,304  
                                         
 
 
(1) FAS 123R adopted in 2006
 
(2) Includes $1.0 million in expenses related to the relocation of our corporate office from New York to Deerfield, IL


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    Fiscal Year  
    2007     2006     2005     2004     2003  
    (In thousands, except per share data)  
 
Selected Balance Sheet Data:
                                       
Cash and cash equivalents
  $ 6,308.5     $ 938.4     $ 1,952.3     $ 1,089.7     $ 7,957.0  
Investments
  $ —     $ 18,961.5     $ 32,917.5     $ 9,961.6     $ —  
Total assets
  $ 56,412.1     $ 75,757.1     $ 76,544.0     $ 51,138.3     $ 47,946.6  
Total stockholders’ equity
  $ 33,845.8     $ 50,631.3     $ 56,208.4     $ 29,152.4     $ 22,834.1  
Selected Statement of Cash Flow Data:
                                       
Cash flow (used in) provided by in operating activities
  $ (2,369.9 )   $ 3,949.2     $ (4,249.4 )   $ (9,631.1 )   $ (11,387.7 )
Cash flow provided by (used in) investing activities
  $ 5,727.4     $ (6,674.1 )   $ (31,535.8 )   $ (17,267.9 )   $ (3,754.8 )
Cash flow provided by financing activities
  $ 2,012.6     $ 1,711.0     $ 36,647.7     $ 20,031.7     $ 10,067.2  
Selected Operating Data:
                                       
Company-owned restaurants open at the end of the fiscal year
    107       110       96       92       89  
 
Item 7.   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 years ended December 31, 2007, January 1, 2007 and January 2, 2006 should be read in conjunction with “Selected Consolidated Financial Data” and our audited consolidated financial statements and the notes to those statements that are included elsewhere in this Annual Report. 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 Annual Report.
 
Business Overview
 
Systemwide Restaurants:
 
                                                                         
    Fiscal Year  
    2007     2006     2005  
    Company-
 		                Company-
 		                Company-
 		             
    Owned     Franchise     Total     Owned     Franchise     Total     Owned     Franchise     Total  
 
Restaurants at beginning of period
    110 (c)     13       123       96 (b)     5       101       92 (a)     —       92  
New restaurants opened
    6       22       28       21       8       29       8       5       13  
Restaurants permanently closed
    9       1       10       7       —       7       4       —       4  
                                                                         
Restaurants at end of period
    107 (d)     34       141       110 (c)     13       123       96 (b)     5       101  
                                                                         
 
 
(a) Includes four locations that are classified as discontinued operations.
 
(b) Includes seven locations that are classified as discontinued operations.
 
(c) Includes nine locations that are classified as discontinued operations.
 
(d) Includes three locations that are classified as discontinued operations.


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There are currently 106 company-owned and 42 franchise premium convenience restaurants operating in 19 states, the District of Columbia, and the United Arab Emirates (UAE), of which eight franchised restaurants opened subsequent to fiscal 2007; seven in the United States and one in the UAE. In addition, we closed one company-owned restaurant in Chicago subsequent to fiscal 2007. Our restaurants offer innovative savory made-to-order products featuring our authentic hearth-baked crackly crust signature Cosi bread and fresh distinctive ingredients. We maintain a pipeline of new menu offerings that are introduced seasonally through limited time offerings to keep our products relevant to our target customers. Our menu features high-quality sandwiches, freshly-tossed salads, Cosi bagels, hot melts, Flatbread pizzas, S’mores and other desserts, and a variety of coffees along with other soft drink beverages, bottled beverages including premium still and sparkling water, teas, alcoholic beverages, and other specialty coffees. Our restaurants offer lunch and afternoon coffee in a counter service format, with most offering breakfast and/or dinner and dessert menus as well. We operate our company-owned restaurants in two formats: Cosi and Cosi Downtown. Cosi Downtown restaurants, which are located in nonresidential central business districts, close for the day in the early evening, while Cosi restaurants offer dinner and dessert in a casual dining atmosphere.
 
We are currently eligible to offer franchises in 47 states and the District of Columbia. We offer franchises to area developers and individual franchise operators. The initial franchise fee, payable to us, for both an area developer and an individual franchise operator, is $40,000 for the first restaurant and $35,000 for each additional restaurant.
 
We believe that offering Cosi franchised restaurants to area developers and individual franchisees offers the prospects of strong financial returns. By franchising, we believe we will be able to increase the presence of our 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. As of December 31, 2007, we had secured franchise commitments from 31 area developers for 374 restaurants, for which we have received $4.4 million in deposits, including 34 restaurants existing as of the end of fiscal 2007, and an international licensing agreement with a licensee in the Persian Gulf.
 
We are currently licensing the right to develop and operate Cosi franchised restaurants in certain foreign jurisdictions in compliance with applicable local rules and regulations there.
 
We believe that incorporating a franchising and area developer model into our strategy will position us to maximize the market potential for the Cosi brand and concept consistent with our available capital and we expect that company-owned restaurants (restaurants that we own as opposed to franchised restaurants) will always be an important part of our new restaurant growth.
 
During the third quarter of fiscal 2007, the Company reached an agreement with Macy’s Inc. (“Macy’s”) relating to the six Cosi restaurants operated within Macy’s stores. Under the terms of the agreement, Cosi ceased operations and closed those locations on August 19, 2007. Macy’s purchased the fixed assets and leasehold improvements at these locations for a total consideration of approximately $0.7 million.
 
During fiscal 2007, we opened six new company-owned restaurants and permanently closed nine company-owned restaurants; six that operated in the Macy’s department stores, one restaurant each in Maryland and New Jersey, and one restaurant in New York City that had an expiring lease and where we opened a new restaurant in the immediate vicinity subsequent to its closing.
 
Cosi has reached an agreement in principle with a third party in the Seattle, Washington area to sell the assets of all three company-owned locations currently operating there. Under the terms of the agreement, Cosi will transfer rights to the assets and leasehold improvements for minimal cash consideration and the purchaser will assume the tenant obligations under the real estate operating leases and operate these locations under a different brand. The assets at these locations have been previously impaired in their entirety and we do not anticipate that we will realize any gain from this transaction. Cosi expects to exit these locations by the end of the second quarter of fiscal 2008.
 
Critical Accounting Policies
 
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires the appropriate application of certain accounting


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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”) No. 144, Accounting for the Impairment or Disposal of Long Lived Assets, 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 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 whenever we determine impairment factors are present and at least annually. We consider a history of poor financial operating performance to be the primary indicator of potential impairment for individual restaurant locations. We determine whether a restaurant location is impaired based on expected undiscounted cash flows, generally for the remainder of the lease term, and then determine the impairment charge based on discounted cash flows for the same period. During fiscal 2007, we recorded impairment charges of approximately $7.2 million of which $3.4 million is related to the closed Macy’s locations and the locations in Seattle, Washington which are classified as discontinued operations, and $3.8 million related to underperforming locations including one restaurant in Chicago that was closed during the first quarter of fiscal 2008.
 
Lease termination charges:  Statement for Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities, 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. For all exit activities, we estimate our likely liability under contractual leases for restaurants that have been closed. Such estimates have affected the amount and timing of charges to operating results 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. During fiscal 2007, we recorded lease termination charges of approximately $0.3 million related to a location where, due to the enforcement of restrictions in a zoning overlay district, Cosi was denied the necessary permits to build a restaurant and we exercised the exit provision under the lease and to an underperforming restaurant in Chicago were we exercised the early exit provision of the lease.
 
Stock-based compensation:  As of January 3, 2006, we have adopted the fair value recognition provision of SFAS 123R, Share-Based Payment, which generally requires, among other things, that all employee share-based compensation be measured using the fair value method and that all of the resulting compensation cost be recognized in the financial statements. We selected the modified prospective method of adoption. Under SFAS 123R, our stock compensation expense is recognized on a straight-line basis over the requisite service period of the award, which is the vesting term. We measure the estimated fair value of our granted stock options using a Black-Scholes pricing model and of our restricted stock based on the fair market value of a share of registered stock on the date of the grant. The operating results for fiscal years 2007 and 2006 reflect the adoption of SFAS 123R.
 
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. We include any rent escalations, rent abatements during construction periods and other rent holidays in our straight-line rent calculation.
 
Landlord allowances:  In accordance with Financial Accounting Standards Board Technical Bulleting (“FASB”) 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 sheets and amortize them on a straight-line basis over the term of the related lease.


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Income taxes:  We have recorded a full valuation allowance to reduce our deferred tax assets related to net operating loss carry-forwards. Our determination of the valuation allowance is based on an evaluation of whether it is more likely than not that we will be able to utilize the net operating loss carry-forward, based on the Company’s operating results. A positive adjustment to income will be recorded in future years if we determine that it is more likely than not that we will realize these deferred tax assets.
 
We have adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”) as of January 2, 2007. FIN 48 prescribes a comprehensive financial statement model of how a company should recognize, measure, present and disclose uncertain tax positions that the company has taken or expects to take in its income tax returns. FIN 48 requires that only income tax benefits that meet the “more likely than not” recognition threshold be recognized or continue to be recognized on the effective date. Initial recognition amounts would be reported as a cumulative effect of a change in accounting principle.
 
No adjustment was made to the beginning retained earnings balance, as the ultimate deductibility of all tax positions is highly certain but there is uncertainty about the timing of such deductibility. No interest or penalties have been accrued relative to tax positions due to the Company having either a tax loss or net operating loss carry-forwards to offset any taxable income in all subject years. As a result, no liability for uncertain tax positions was recorded as of December 31, 2007.
 
Should the Company need to accrue interest or penalties on uncertain tax positions, it would recognize the interest as interest expense and the penalties as a general and administrative expense.
 
Revenue
 
Restaurant net sales.  Our company-owned restaurant sales are composed almost entirely of food and beverage sales. We record revenue at the time of the purchase of our products by our customers.
 
Franchise fees and royalties.  Franchise fees and royalties include fees earned from franchise agreements entered into with area developers and franchise operators, fees earned from our international license agreements, and royalties received based on sales generated at franchise restaurants. We recognize the franchise fee in the period in which each franchise location opens. We recognize franchise royalties in the period in which sales are made by our franchise operators.
 
Gift card sales.  We offer our customers the opportunity to purchase gift cards at our restaurants and through our website. Customers can purchase these cards at varying dollar amounts. At the time of purchase by the customer, we record a gift card liability for the face value of the card purchased. We recognize the revenue and reduce the gift card liability when the gift card is redeemed. We do not reduce our recorded liability for potential non-use of purchased gift cards.
 
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. We remove from the comparable restaurant base any restaurant that is temporarily shut down for remodeling for a complete period in the period that it is shut down. At fiscal years ended December 31, 2007, January 1, 2007, and January 2, 2006 there were 95, 81, and 79 restaurants in our comparable restaurant base, respectively.
 
Costs and Expenses
 
Cost of food and beverage.  Cost of food and beverage is composed of food and beverage costs. Food and beverage costs are variable based on the supply and demand of commodities and also fluctuate with changes in sales volume and product mix.
 
Restaurant labor and related benefits.  The costs of labor and related benefits include direct hourly and management wages, bonuses, payroll taxes, health insurance and all other fringe benefits.


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Occupancy and other restaurant operating expenses.  Occupancy and other operating expenses include direct restaurant-level operating expenses, including the cost of paper and packaging, 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, bonuses 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.
 
Stock compensation expense.  Stock compensation expense includes the charges related to recognizing the fair value of stock options and restricted stock as compensation for awards to certain key employees and non-employee directors, except the costs related to compensation for restaurant employees which are included in restaurant labor and related benefits.
 
Depreciation and amortization.  Depreciation and amortization principally consists of depreciation of 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 costs, 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. Pre-opening expenses also include rent expense recognized on a straight-line basis from the date we take possession through the period of construction, remodeling and fixturing prior to opening the restaurant.


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Results of Operations
 
The following table sets forth our operating results as a percent of total revenues, except where otherwise noted, for the periods indicated:
 
                         
    Fiscal Year  
    2007     2006     2005  
 
Revenues:
                       
Restaurant net sales
    98.4 %     99.3 %     99.9 %
Franchise fees and royalties
    1.6       0.7       0.1  
                         
Total revenues
    100.0       100.0       100.0  
                         
Cost and expenses:
                       
Cost of food and beverage(1)
    23.4       22.9       23.8  
Restaurant labor and related benefits(1)
    34.7       33.2       32.7  
Occupancy and other restaurant operating expenses(1)
    29.0       26.1       24.3  
                         
      87.1       82.2       80.8  
General and administrative expenses
    15.6       17.7       18.7  
Stock-based compensation expense
    1.5       4.0       2.6  
Depreciation and amortization
    6.6       5.8       5.7  
Restaurant pre-opening expenses
    0.5       1.2       0.7  
Provision for losses on asset impairments and disposals
    2.9       0.2       0.5  
Closed store costs
    0.2       —       —  
Lease termination expense (benefit), net
    0.3       (0.2 )     (0.2 )
Gain on sale of assets
    —       (0.4 )     (1.1 )
                         
Total costs and expenses
    113.2       110.0       107.5  
                         
Operating loss
    (13.2 )     (10.0 )     (7.5 )
Other income (expense):
                       
Interest income
    0.4       1.1       0.7  
Interest expense
    —       —       (0.1 )
Allowance for stockholders’ notes receivables
    —       —       (0.2 )
Other income
    0.5       0.1       0.1  
                         
Loss from continuing operations
    (12.3 )     (8.8 )     (7.0 )
Discontinued operations:
                       
Operating loss from discontinued operations
    (0.7 )     (1.0 )     (1.7 )
Asset impairments of discontinued operations
    (2.4 )     (0.2 )     (2.8 )
                         
Loss from discontinued operations
    (3.1 )     (1.2 )     (4.5 )
                         
Net loss
    (15.4 )     (10.0 )     (11.5 )
                         
 
 
(1) These are expressed as a percentage of restaurant net sales versus all other items expressed as a percentage of total revenues.


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Fiscal Year 2007 (52 weeks) compared to Fiscal Year 2006 (52 weeks)
 
Restaurant Net Sales
 
                 
    Restaurant Net Sales
        As a % of Total
    (In Thousands)   Revenues
 
Fiscal 2007
  $ 132,414.1       98.4 %
Fiscal 2006
  $ 122,849.3       99.3 %
 
Restaurant net sales increased 7.8% in fiscal 2007. This increase was due primarily to $12.7 million in net sales at new restaurants not yet in the comparable restaurant base, as of December 31, 2007, and a 0.2%, or $0.3 million, increase in comparable restaurant net sales, partially offset by a decrease of approximately $1.8 million in net sales associated with two company-owned restaurants sold to franchisees during the fourth quarter of fiscal 2006, the decline of $1.2 million in net sales related to restaurants closed subsequent to fiscal 2006, and a decline of $0.4 million in net sales related to restaurants temporarily closed for remodeling during fiscals 2006 and 2007. For comparable restaurants in fiscal 2007, our average check increased 3.4% and our transaction count decreased by 3.1%, compared to fiscal 2006. The 3.4% increase in average guest check is due primarily to an increase in catering transactions, a favorable shift in sales mix and the impact of a price increase that was taken during the second quarter of fiscal 2006. The increase in our average guest check was almost entirely offset by a decrease in guest traffic as compared to fiscal 2006.
 
Franchise Fees and Royalties
 
                 
    Franchise Fees and Royalties
        As a % of Total
    (In Thousands)   Revenues
 
Fiscal 2007
  $ 2,142.2       1.6 %
Fiscal 2006
  $ 849.2       0.7 %
 
Franchise fees and royalties during fiscal 2007 consist of $1.3 million in royalties from franchise restaurants operated during fiscal 2007 and $0.8 million in fees related to the 22 franchise restaurants that opened during fiscal 2007, including $0.09 million related to the licensing fees earned under the international licensing agreement for the locations in the UAE. Franchise fees and royalties during fiscal 2006 consisted of $0.4 million in royalties from franchise restaurants operated during fiscal 2006 and $0.4 million in fees related to the eight franchise restaurants that opened during fiscal 2006, including fees related to the conversion of two company-owned restaurants to franchise restaurants during fiscal 2006, one each in Connecticut and New Jersey, and three Boston restaurants converted to franchise restaurants at the end of fiscal 2005.
 
Costs and Expenses
 
                 
    Cost of Food and Beverage
        As a % of
        Restaurant Net
    (In Thousands)   Sales
 
Fiscal 2007
  $ 30,972.5       23.4 %
Fiscal 2006
  $ 28,170.5       22.9 %


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Cost of food and beverage.  The increase in food and beverage costs as a percentage of restaurant net sales is due primarily to year over year increased pricing pressure on certain commodities, like wheat, dairy and dairy related products, as well as the impact of an unfavorable shift in beverage sales mix, and higher promotional discounts compared to fiscal 2006.
 
                 
    Restaurant Labor and Related Benefits
        As a % of
        Restaurant Net
    (In Thousands)   Sales
 
Fiscal 2007
  $ 45,994.7       34.7 %
Fiscal 2006
  $ 40,781.5       33.2 %
 
Restaurant labor and related benefits.  The increase in restaurant labor and related benefits as a percentage of restaurant net sales during fiscal 2007 is due primarily to higher labor costs as a percentage of restaurant net sales in new restaurants opened since the second quarter of fiscal 2006 that have not yet reached maximum sales or operating efficiency and a slight deleveraging of labor costs against a relatively flat sales performance at comparable locations during fiscal 2007 as compared to fiscal 2006.
 
                 
    Occupancy and Other Restaurant Operating Expenses
        As a % of
        Restaurant Net
    (In Thousands)   Sales
 
Fiscal 2007
  $ 38,369.0       29.0 %
Fiscal 2006
  $ 32,044.7       26.1 %
 
Occupancy and other restaurant operating expenses  The increase in restaurant occupancy and other restaurant operating expenses as a percentage of restaurant net sales during fiscal 2007 is due primarily to the impact of fixed occupancy costs against sales at new restaurants that have not yet reached expected sales levels, higher costs for repairs and maintenance, the impact of relatively flat sales performance at comparable locations on occupancy costs, and slightly higher costs for paper and packaging.
 
                 
    General and Administrative Costs
        As a % of
    (In Thousands)   Total Revenues
 
Fiscal 2007
  $ 21,019.2       15.6 %
Fiscal 2006
  $ 21,910.5       17.7 %
 
General and administrative costs.  The reduction in general and administrative costs during fiscal 2007 as compared to fiscal 2006 is due to lower costs associated with litigation, labor savings, including the impact of an administrative workforce reduction during the third quarter of fiscal 2007, and lower professional and consulting fees partially offset by higher recruiting costs primarily related to the search to select and appoint a new Chief Executive Officer.
 
                 
    Stock-Based Compensation Expense
        As a % of
    (In Thousands)   Total Revenues
 
Fiscal 2007
  $ 1,953.9       1.5 %
Fiscal 2006
  $ 4,977.7       4.0 %


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Stock-based compensation expense.  Stock-based compensation costs during fiscal 2007 consisted of approximately $1.6 million related to the vesting of restricted stock grants. In addition, we recorded a charge of approximately $0.4 million, in accordance with SFAS No. 123R, associated with the fair value of employee stock options that vested during fiscal 2007, including approximately $0.01 million which is included in restaurant labor and related benefits. During fiscal 2006, we recorded a charge of approximately $3.9 million related to the vesting of restricted stock grants. In addition, we recorded a charge of approximately $1.1 million, in accordance with SFAS No. 123R, associated with the fair value of employee stock options that vested during fiscal 2006, including approximately $0.04 million which is included in restaurant labor and related benefits.
 
                 
    Depreciation and Amortization
        As a % of
    (In Thousands)   Total Revenues
 
Fiscal 2007
  $ 8,823.2       6.6 %
Fiscal 2006
  $ 7,196.3       5.8 %
 
Depreciation and amortization.  The higher depreciation and amortization costs in 2007 as compared to 2006 are due primarily to the opening of new company-owned restaurants during and subsequent to fiscal 2006. The increase in depreciation and amortization expense was partially offset by the impact of impairments recorded during fiscal 2006 and the second quarter of fiscal 2007 as well as the continued depreciation and amortization of our comparable restaurant base.
 
                 
    Restaurant Pre-opening Expenses
        As a % of
    (In Thousands)   Total Revenues
 
Fiscal 2007
  $ 710.3       0.5 %
Fiscal 2006
  $ 1,450.8       1.2 %
 
Restaurant pre-opening expenses.  Restaurant pre-opening expenses were $0.7 million during fiscal 2007, due primarily to occupancy, pre-opening payroll, supplies and training costs for six new restaurants opened during fiscal 2007. During fiscal 2007, 54.8% of restaurant pre-opening expenses were for occupancy costs incurred prior to the opening of the restaurants. Restaurant pre-opening expenses were $1.5 million in fiscal 2006, due primarily to pre-opening payroll, supplies and training costs for 21 new restaurants opened during fiscal 2006 and one new restaurant that opened in the first quarter of fiscal 2007. During fiscal 2006, 42% of restaurant pre-opening expenses were for occupancy costs incurred prior to the opening of the restaurants.
 
                 
    Provision for Losses on Asset
    Impairments and Disposals
        As a % of
    (In Thousands)   Total Revenues
 
Fiscal 2007
  $ 3,844.7       2.9 %
Fiscal 2006
  $ 248.7       0.2 %
 
Provision for losses on asset impairments and disposals.  The asset impairment charges of $3.8 million recorded in fiscal 2007 are related to seven underperforming locations that we have determined to be impaired, of which one is in the Mid-Atlantic region and three each are in the Northeast and Midwest regions. In addition, during fiscal 2007, we recorded impairment charges of $3.4 million related to Macy’s and Seattle locations, which are reported in discontinued operations. During fiscal 2006, we recorded asset disposal charges of approximately $0.2 million.
 
                 
    Closed Store Costs
        As a % of
    (In Thousands)   Total Revenues
 
Fiscal 2007
  $ 261.9       0.2 %
Fiscal 2006
    —       —  


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Closed store costs.  Closed store costs during fiscal 2007 are related to one restaurant in New York City that closed at the lease expiration and was relocated within the immediate area during the second quarter of fiscal 2007, one underperforming location in New Jersey where the lease expired and we exited the location, as well as one underperforming location in Maryland where the lease was scheduled to expire in fiscal 2008 and where we negotiated an early exit agreement with the landlord. We did not have any closed store costs during fiscal 2006.
 
                 
    Lease Termination Expense (Benefit)
        As a % of
    (In Thousands)   Total Revenues
 
Fiscal 2007
  $ 346.9       0.3 %
Fiscal 2006
  $ (231.5 )     (0.2 )%
 
Lease termination expense (benefits), net.  The lease termination expense during fiscal 2007 relates to a location where, due to the enforcement of restrictions in a zoning overlay district, Cosi was denied the necessary permits to build a restaurant and we exercised the exit provision under the lease, and to an underperforming restaurant in Chicago where we exercised an early exit provision of the lease and exited the location in the first quarter of fiscal 2008. During fiscal 2006, we recognized lease termination income due primarily to the reversal of accruals deemed no longer necessary.
 
                 
    Gain on Sale of Assets
        As a % of
    (In Thousands)   Total Revenues
 
Fiscal 2007
  $ 23.3       0.0 %
Fiscal 2006
  $ 482.3       0.4 %
 
Gain on sale of assets.  The gain recognized during fiscal 2007 is related to the sale of a liquor license. The gain recognized during fiscal 2006 was related to the sale of a company-owned restaurant in New Jersey sold to a franchise area developer during the fourth quarter of fiscal 2006.
 
                                 
    Interest Income   Interest Expense
        As a % of
 		      As a % of
    (In Thousands)   Total Revenues   (In Thousands)   Total Revenues
 
Fiscal 2007
  $ 524.1       0.4 %   $ 42.3       0.0 %
Fiscal 2006
  $ 1,411.5       1.1 %   $ 9.3       0.0 %
 
Interest income and expense.  The decrease in interest income during fiscal 2007 as compared to fiscal 2006 is due primarily to lower average levels of short-term investments during fiscal 2007. During both fiscal 2007 and fiscal 2006, interest expense was insignificant.
 
                 
    Other Income (Expense)
        As a % of
    (In Thousands)   Total Revenues
 
Fiscal 2007
  $ 704.8       0.5 %
Fiscal 2006
  $ 77.5       0.1 %
 
Other income (expense).  Other income during fiscal 2007 is due primarily to the cash settlement on an insurance claim related to a location that we operated in The World Trade Center on September 11, 2001. In fiscal 2006, other income was due primarily to the receipt of payment on an insurance claim related to the two stores impacted by Hurricane Wilma.
 
                 
    Loss from Continuing Operations
        As a % of
    (In Thousands)   Total Revenues
 
Fiscal 2007
  $ (16,530.3 )     (12.3 )%
Fiscal 2006
  $ (10,888.7 )     (8.8 )%


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Loss from Continuing Operations.  The increase in our loss from continuing operations during fiscal 2007, as compared to fiscal 2006, is due primarily to a decrease in restaurant operating margins driven mainly by operating inefficiencies at restaurants opened since the second quarter of fiscal 2006, higher food and labor costs, non-cash charges for asset impairments, higher depreciation and amortization costs, higher lease termination charges, and higher closed store costs.
 
Discontinued Operations.  During the third quarter of fiscal 2007, Cosi reached an agreement with Macy’s Inc. (“Macy’s”) relating to six Cosi restaurants that were operated within Macy’s stores. Under the terms of the agreement, Cosi ceased operations and closed those locations on August 19, 2007. Macy’s purchased the fixed assets and leasehold improvements at these locations for a total consideration of approximately $0.7 million.
 
In addition, Cosi has reached an agreement in principle with a third party in the Seattle, Washington area to sell the assets of three underperforming company-owned locations currently operating there. Under the terms of the agreement, Cosi will transfer rights to the assets and leasehold improvements for minimal cash consideration and the new owner will assume the tenant obligations under the real estate operating leases and operate these locations under a different brand. The assets at these locations have been previously impaired in their entirety and we do not anticipate that we will realize any gain from this transaction. Cosi expects to exit these locations during by the end of the second quarter of fiscal 2008.
 
In accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Macy’s and Seattle locations qualify as discontinued operations, and accordingly we have reported the results of operations of this group in discontinued operations in the accompanying consolidated financial statements for all periods presented.
 
We recorded a charge of $3.4 million during fiscal 2007 related to the impairment of the assets at the Seattle and Macy’s locations, which is also reported in discontinued operations in the accompanying consolidated financial statements.
 
Fiscal Year 2006 (52 weeks) compared to Fiscal Year 2005 (52 weeks)
 
Restaurant Net Sales
 
                 
    Restaurant Net Sales
        As a % of
    (In Thousands)   Total Revenues
 
Fiscal 2006
  $ 122,849.3       99.3 %
Fiscal 2005
  $ 114,036.3       99.9 %
 
Restaurant net sales.  The increase in restaurant net sales during fiscal 2006, as compared to fiscal 2005, was due primarily to $14.6 million in net sales at new restaurants not yet in the comparable restaurant base, as of January 1, 2007, and a 0.3%, or $0.3 million, increase in comparable restaurant net sales, partially offset by the loss of approximately $4.1 million in net sales associated with the five company-owned restaurants sold to franchise area developers in fiscal 2005 and 2006 and $2.0 million in net sales related to restaurants closed during and subsequent to fiscal 2005, including restaurants temporarily closed for remodel during fiscal 2006. Also, for fiscal 2006, our average check in comparable restaurants increased 3.1% and our transaction count in comparable restaurants decreased by 2.8%, compared to fiscal 2005. The 3.1% increase in average guest check is due primarily to the impact of a 1.6% increase in pricing and a 1.5% favorable shift in sales mix.
 
Franchise Fees and Royalties
 
                 
    Franchise Fees and Royalties
        As a % of
    (In Thousands)   Total Revenues
 
Fiscal 2006
  $ 849.2       0.7 %
Fiscal 2005
  $ 100.5       0.1 %


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Franchise fees and royalties.  Franchise fees and royalties during fiscal 2006 consist of $0.4 million in royalties from the thirteen franchise restaurants operated during fiscal 2006 and $0.4 million in fees related to the eight franchise restaurants that opened during fiscal 2006, including fees related to the conversion of two company-owned restaurants to franchise restaurants during fiscal 2006, one each in Connecticut and New Jersey, and three Boston restaurants converted to franchise restaurants at the end of fiscal 2005. Franchise fees and royalties during fiscal 2005 consisted of $0.05 million in royalties and $0.05 million in fees, related to two franchise locations that were opened and operated during fiscal 2005.
 
Costs and Expenses
 
                 
    Cost of Food and Beverage
        As a % of
    (In Thousands)   Restaurant Net Sales
 
Fiscal 2006
  $ 28,170.5       22.9 %
Fiscal 2005
  $ 27,103.6       23.8 %
 
Cost of food and beverage.  During fiscal 2006, we were able to realize advantageous pricing opportunities as a primary source buyer which contributed to the decrease in food and beverage costs as a percentage of restaurant net sales as compared to fiscal 2005. We also benefited from the distribution agreement entered into with Distribution Marketing Advantage, Inc. in late fiscal 2005, which provides us broader access to a nationwide network of independent distributors, as well as the impact of more effective field execution related to management of inventory from receipt at the restaurants through the preparation process.
 
                 
    Restaurant Labor and Related Benefits
        As a % of
    (In Thousands)   Restaurant Net Sales
 
Fiscal 2006
  $ 40,781.5       33.2 %
Fiscal 2005
  $ 37,263.7       32.7 %
 
Restaurant labor and related benefits.  The increase in restaurant labor and related benefits as a percentage of restaurant net sales in fiscal 2006, as compared to fiscal 2005, was due primarily to higher labor costs as a percentage of restaurant net sales in new restaurants still in their initial operating stage, partially offset by lower stock-based compensation expense and lower incentive compensation expenses. Employee benefit expense as a percentage of restaurant net sales was comparable for both periods.
 
                 
    Occupancy and Other Restaurant Operating Expenses
        As a % of
    (In Thousands)   Restaurant Net Sales
 
Fiscal 2006
  $ 32,044.7       26.1 %
Fiscal 2005
  $ 27,726.3       24.3 %
 
Occupancy and other restaurant operating expenses.  The increase in occupancy and other restaurant operating expenses as a percentage of restaurant net sales in fiscal 2006, as compared to fiscal 2005, was due primarily to planned increases in marketing expenditures as well as higher real estate and personal property taxes, and higher property and general liability insurance costs during fiscal 2006.
 
                 
    General and Administrative Expenses
        As a % of
    (In Thousands)   Total Revenues
 
Fiscal 2006
  $ 21,910.5       17.7 %
Fiscal 2005
  $ 21,320.4       18.7 %


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Table of Contents

General and administrative expenses.  The increase in general and administrative expenses during fiscal 2006 is due primarily to higher legal costs resulting from one-time charges for litigation that was concluded in the third quarter of 2006 and slightly higher payroll and related benefits relating to the execution of our growth initiatives, partially offset by lower incentive compensation expense, lower general insurance costs and lower costs for computer hardware and software maintenance during fiscal 2006 as compared to fiscal 2005.
 
                 
    Stock-Based Compensation Expense
        As a % of
    (In Thousands)   Total Revenues
 
Fiscal 2006
  $ 4,977.7       4.0 %
Fiscal 2005
  $ 2,944.2       2.6 %
 
Stock-based compensation expense.  During fiscal 2006, we recorded a charge of approximately $3.9 million related to the vesting of restricted stock grants. In addition, we recorded a charge of approximately $1.1 million in accordance with SFAS No. 123R associated with the fair value of employee stock options that vested during fiscal 2006, including approximately $0.04 million which is included in restaurant labor and related benefits. During fiscal 2005, we recorded a charge of approximately $1.0 million related to the vesting of restricted stock grants. In addition, we recorded a charge of approximately $2.2 million, including approximately $0.4 million which is included in restaurant labor and related benefits, in accordance with APB 25, Accounting for Stock Issued to Employees, associated with options re-priced as of December 29, 2003.
 
                 
    Depreciation and Amortization
        As a % of
    (In Thousands)   Total Revenues
 
Fiscal 2006
  $ 7,196.3       5.8 %
Fiscal 2005
  $ 6,515.9       5.7 %
 
Depreciation and amortization.  The increase in depreciation and amortization expense during fiscal 2006, as compared to fiscal 2005, is due primarily to the opening of new company-owned restaurants during and subsequent to fiscal 2005. The increase in depreciation and amortization expense was partially offset by the impact of impairments recorded in the fourth quarter of fiscal 2005 and the continued depreciation and amortization of our comparable restaurant base.
 
                 
    Restaurant Pre-opening Expenses
        As a % of
    (In Thousands)   Total Revenues
 
Fiscal 2006
  $ 1,450.8       1.2 %
Fiscal 2005
  $ 823.7       0.7 %
 
Restaurant pre-opening expenses.  Restaurant pre-opening expenses in fiscal 2006 were due primarily to pre-opening payroll, supplies and training costs for 21 new restaurants opened during fiscal 2006 and one new restaurant that opened in the first quarter of fiscal 2007. During fiscal 2006, 42% of restaurant pre-opening expenses were for occupancy costs incurred prior to the opening of the restaurants. During fiscal 2005, pre-opening expenses were related to eight new company-owned restaurants opened during fiscal 2005 and two new company-owned restaurants that opened in January 2006. During fiscal 2005, 46% of restaurant pre-opening expenses were for occupancy costs incurred prior to the opening of the restaurants.
 
                 
    Provision for Losses on Asset Impairments and Disposals
        As a % of
    (In Thousands)   Total Revenues
 
Fiscal 2006
  $ 248.7       0.2 %
Fiscal 2005
  $ 675.4       0.5 %


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Table of Contents

Provision for losses on asset impairments and disposals.  During fiscal 2006, we recorded asset disposal charges of approximately $0.2 million and an asset impairment charge of approximately $0.3 million related to a Macy’s location which is reported in discontinued operations. During fiscal 2005, we recorded impairment charges of $0.7 million for two underperforming company-owned locations. In addition, we recorded asset impairment charges of approximately $3.2 million related to eight Macy’s locations which is reported in discontinued operations.
 
                 
    Lease Termination (Benefit) Expense, net
        As a % of
    (In Thousands)   Total Revenues
 
Fiscal 2006
  $ (231.5 )     (0.2 )%
Fiscal 2005
  $ (178.8 )     (0.2 )%
 
Lease termination (benefit) expense, net.  During both fiscal 2006 and fiscal 2005, we recognized approximately $0.2 million in lease termination income due primarily to the reversal of accruals deemed no longer necessary.
 
                 
    Gain on Sale of Assets
        As a % of
    (In Thousands)   Total Revenues
 
Fiscal 2006
  $ (482.3 )     (0.4 )%
Fiscal 2005
  $ (1,431.7 )     (1.1 )%
 
Gain on sale of assets.  The income recognized during fiscal 2006 as gain on sale of assets is related to the sale of a company-owned restaurant in New Jersey to a franchise area developer during the fourth quarter of fiscal 2006. During fiscal 2005, we recognized a gain on the sale of three Boston locations that were sold to a franchise area developer during the fourth quarter of fiscal 2005.
 
                 
    Allowance for Stockholders’ Notes Receivables
        As a % of
    (In Thousands)   Total Revenues
 
Fiscal 2006
    —       —  
Fiscal 2005
  $ (261.1 )     (0.2 )%
 
Allowance for stockholders’ notes receivables.  During fiscal 2005, notes receivable from stockholders matured and in lieu of cash payment, the stockholders surrendered the common stock that had been pledged as collateral for the notes. Accordingly, we recorded a charge of approximately $0.3 million based on the opening market price of the common stock on April 9, 2005, the day the shares were surrendered.
 
                                 
    Interest Income   Interest Expense
        As a % of
 		      As a % of
    (In Thousands)   Total Revenues   (In Thousands)   Total Revenues
 
Fiscal 2006
  $ 1,411.5       1.1 %   $ (9.3 )     0.0 %
Fiscal 2005
  $ 802.0       0.7 %   $ (34.0 )     (0.1 )%
 
Interest income and expense.  The higher interest income during fiscal 2006, as compared to fiscal 2005, was due to higher average short-term investments, due primarily to the proceeds of the secondary public offering in June 2005. Interest expense for both fiscal 2006 and fiscal 2005 was insignificant.
 
                 
    Other Income (Expense)
        As a % of
    (In Thousands)   Total Revenues
 
Fiscal 2006
  $ 77.5       0.1 %
Fiscal 2005
  $ 103.6       0.1 %


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Table of Contents

Other income (expense).  During fiscal 2006, we recorded other income of approximately $0.1 million due primarily from proceeds from an insurance claim related to two stores impacted by Hurricane Wilma. In fiscal 2005, we recorded other income of $0.1 million due to the sale of a liquor license and a tax refund.
 
                 
    Loss from Continuing Operations
        As a % of
    (In Thousands)   Total Revenues
 
Fiscal 2006
  $ (10,888.7 )     (8.8 )%
Fiscal 2005
  $ (8,015.4 )     (7.0 )%
 
Loss from continuing operations.  The increase in our loss from continuing operations during fiscal 2006, as compared to fiscal 2005, is due primarily to a decrease in restaurant operating margins driven mainly by operating inefficiencies at restaurants opened since the second quarter of fiscal 2006, higher charges for stock-based compensation, higher food and labor costs, higher depreciation and amortization costs, partially offset by lower non-cash charges for asset impairments.
 
Liquidity and Capital Resources
 
Cash, cash equivalents, and short-term investments were $6.3 million on December 31, 2007, compared with $19.9 million on January 1, 2007. We had negative working capital of ($0.6) million on December 31, 2007, compared with positive working capital of $16.2 million as of January 1, 2007. The decrease in working capital was primarily a function of deploying capital for construction of new restaurants, remodeling and maintaining existing restaurants as well as funding the operating loss for fiscal 2007. Our principal requirements for cash are for working capital needs, maintaining existing restaurants, and financing construction of new restaurants.
 
Net cash used in operating activities during fiscal 2007 was $2.4 million compared to $4.0 million of net cash provided by operating activities in fiscal 2006. The increase in cash used by operating activities during fiscal 2007 was the result of funding a higher operating loss and a decrease in fees received year over year from the execution of franchise area developer agreements.
 
Total cash provided by investing activities was $5.7 million in fiscal 2007 compared to cash used in investing activities of $6.7 million during fiscal 2006. During fiscal 2007 we had $19.0 million of net redemptions of short-term investments as compared to $14.0 million of net redemptions during fiscal 2006.
 
Total capital expenditures during fiscal 2007 were $13.7 million, compared to expenditures of $21.3 million during fiscal 2006. During fiscal 2007, approximately $7.0 million or 50.7% was spent on new company-owned restaurants that opened during and subsequent to the fourth quarter of fiscal 2006, and $5.6 million or 40.8% was spent on remodeling and maintenance costs associated with existing locations. During fiscal 2007, we remodeled 15 restaurants in varying degrees. Expenditures for fiscal 2006 were primarily associated with new company-owned restaurants opened during and subsequent to the fourth quarter of fiscal 2005.
 
The cash provided by financing activities of $2.0 million in fiscal 2007 was due to proceeds from the exercise of stock options. During fiscal 2006, the cash provided by financing activities of $1.7 million was from the exercise of stock options and warrants.
 
For fiscal 2008, we expect to open a limited number of new company-owned restaurants. We currently have two signed leases of which one is currently under construction and expected to open during the second quarter of fiscal 2008. We estimate the cost to open each company-owned restaurant is approximately $800,000, net of landlord contributions and including pre-opening expenses. We do not expect to incur any significant remodeling capital costs during 2008 as we have already remodeled 18 locations in varying degrees in the last 18 months. However, we do expect to incur capital maintenance costs on existing restaurants. We expect to fund our new company-owned restaurant construction costs and any required capital maintenance costs on existing locations from cash and cash equivalents on hand, expected cash flows generated by both existing and new company-owned restaurants and expected franchise fees and royalties.
 
We believe that our current cash and cash equivalents, and expected cash flows from company-owned restaurant operations and franchise fees and royalties, will be sufficient to fund our cash requirements for working capital needs in existing restaurant locations for the next twelve months. In analyzing our cash outlays during fiscal


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2007, cash used in operations was $2.4 million while cash used to fund capital expenditures was $13.7 million. We don not anticipate the same level of cash outlays for capital expenditures during fiscal 2008. In addition, during fiscal 2007, we entered into franchise agreements with area developers which generated upfront franchising fees of approximately $0.6 million. We also believe that although cash and cash equivalent balances will decline slightly during the first quarter of 2008 due primarily to the impact of seasonality on operations we expect cash and cash equivalent levels to increase in subsequent quarters where we historically have more favorable seasonality. However, if our existing and new company-owned restaurants do not generate the cash flow levels that we expect, if we do not open new company-owned and franchise restaurants according to our expectations, or if we do not generate the franchise fees and royalties that we currently expect, then we may need to reduce the number and/or change the timing of new company-owned restaurant openings, initiate further labor reductions in general and administrative support functions, seek to sell certain company-owned locations to franchisees or other third parties or seek other sources of debt or equity funding.
 
Contractual Obligations:
 
We have entered into agreements that create contractual obligations. These obligations will have an impact on future liquidity and capital resources. The table below presents a summary of these obligations as of December 31, 2007.
 
                                         
    Payments Due by Period  
                Due
 		    Due
 		    Due
 		 
    Total
 		    Due
 		    Fiscal 2009
 		    Fiscal 2011
 		    After
 		 
Description
  Obligations     Fiscal 2008     to Fiscal 2010     to Fiscal 2012     Fiscal 2012  
    (In thousands)  
 
Long-term liabilities(1)
  $ 100.0     $ 25.0     $ 50.0     $ 25.0     $ —  
Operating leases(2)(3)
    85,415.5       15,382.8       28,126.9       21,359.6       20,546.2  
                                         
Total contractual cash obligations
  $ 85,515.5     $ 15,407.8     $ 28,176.9     $ 21,384.6     $ 20,546.2  
                                         
 
 
(1) Amounts shown include aggregate scheduled interest payments of $0.02 million.
 
(2) Amounts shown are net of $0.5 million of total sublease rental income due under non-cancelable subleases.
 
(3) Amounts shown include approximately $0.3 million of obligations on leases for restaurants that are closed as of December 31, 2007.
 
Off-Balance Sheet Arrangements
 
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.


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Selected Quarterly Financial Data
 
Quarterly results are determined in accordance with the accounting policies used for annual data and include certain items based upon estimates for the entire year. All quarters in fiscal 2007 and 2006 include results for 13 weeks. The unaudited selected quarterly results for fiscal 2007 and 2006 are shown below:
 
                                 
    First
 		    Second
 		    Third
 		    Fourth
 		 
    Quarter     Quarter     Quarter     Quarter  
    (Dollars in thousands, except share data)  
 
Fiscal 2007
                               
Total revenues
  $ 31,121.3     $ 35,448.1     $ 34,837.5     $ 33,149.4  
Total costs and expenses
    35,197.8       39,623.3       38,489.4       38,962.7  
                                 
Net loss
  $ (4,205.0 )   $ (7,400.6 )   $ (3,002.4 )   $ (6,175.5 )
                                 
Basic and diluted loss per share:
  $ (0.11 )   $ (0.19 )   $ (0.08 )   $ (0.16 )
                                 
Fiscal 2006
                               
Total revenues
  $ 29,021.1     $ 31,839.4     $ 32,128.3     $ 30,709.7  
Total costs and expenses
    32,927.9       32,737.7       35,110.8       35,290.5  
                                 
Net loss
  $ (3,928.3 )   $ (748.9 )   $ (2,855.4 )   $ (4,795.0 )
                                 
Basic and diluted loss per share:
  $ (0.10 )   $ (0.20 )   $ (0.07 )   $ (0.12 )
                                 
 
New Accounting Pronouncements
 
In February 2007, the Financial Accounting Standards Board (FASB), issued Statement of Financial Accounting Standards (SFAS) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115. Under SFAS No. 159, a company may elect to measure eligible financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. If elected, SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Should Cosi elect to adopt this standard, it is not expected that adoption would have a material impact on our future consolidated financial statements.
 
In September 2006, the FASB issues SFAS No. 157, Fair Value Measures. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measures required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. We are reviewing the impact, if any, that SFAS No. 157 may have on our future consolidated financial statements. We do not expect that this standard will have a material impact on our future consolidated financial statements.
 
In December 2007, the FASB issued SFAS No. 141R, Business Combinations. SFAS No. 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141R is effective for financial statements issued for fiscal years beginning after December 15, 2008. Cosi will adopt this standard for our fiscal year 2009. At this point, we do not anticipate that SAFS No. 141R will have an impact on our consolidated financial statements when effective.
 
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB 51. SFAS No. 160 changes the accounting and reporting for minority interests. Minority interests will be reclassified as noncontrolling interests and reported as a component of equity separate from the parent company’s equity and purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transaction. In addition, net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement and upon a loss of control, the interest sold,


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as well as any interest retained, will be recorded at fair value with any gain or loss recognized in earnings. SFAS No. 160 is effective for financial statements issued for fiscal years beginning after December 15, 2008. Cosi will adopt this standard for our fiscal year 2009. At this point, we do not anticipate that SAFS No. 160 will have an impact on our consolidated financial statements when effective.
 
CAUTIONARY NOTE REGARDING   FORWARD LOOKING STATEMENTS
 
We caution that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained or incorporated by reference in this Form 10-K and Annual Report or made by our management involve risks and uncertainties and are subject to change based on various important factors, many of which may be beyond our control. Accordingly, our future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Any such forward-looking statements are subject to risks and uncertainties, including those described in Item 1A of this Report. If any of these risks or uncertainties actually occurs, our business, financial condition or operating results could be materially and adversely affected, and the trading price of our common stock could decline. We do not undertake to publicly update or revise our forward-looking statements even if our future changes make it clear that any projected results expressed or implied therein will not be realized.
 
Listed below are just some of the factors that would impact our 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, E.coli, “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 new and 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.


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The words “believe,” “may,” “will,” “should,” “anticipate,” “estimate,” “expect,” “intend,” “objective,” “seek,” “plan,” “strive,” “project” or similar words, or the negatives of these words, identify forward-looking statements. We qualify any forward-looking statements entirely by these cautionary factors.
 
Item 7A:   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Interest Rate Risk
 
Our market risk exposures are related to our cash and cash equivalents and interest that we may pay on debt. We have no derivative financial commodity instruments. 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 flows and results of operations. A hypothetical one percentage point interest change from those in effect during fiscal 2007 would have resulted in interest income fluctuating by approximately $0.02 million. In fiscals 2007 and 2006, interest income was $0.5 million and $1.4 million, respectively.
 
Foreign Currency Risk
 
As of fiscal 2007, all of our transactions are conducted, and our accounts denominated, in U.S. dollars. Accordingly, we are not exposed to foreign currency risk.
 
Inflation
 
The primary inflationary factors affecting our business are food and labor costs. Some of our food costs are subject to fluctuations in commodity prices. Volatility in the commodity markets such as the wheat and dairy markets can have an adverse impact on our results from operations. Some of our hourly personnel at our restaurants are paid at rates based on the applicable minimum wage, and increases in the minimum wage will directly affect our labor costs. Many of our leases require us to pay taxes, maintenance, repairs, insurance, and utilities, all of which are generally subject to inflationary increases. Historically, inflation has not had a material impact on our results of operation.
 
Item 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
The consolidated financial statements required to be filed hereunder are set forth on pages 61 through 89 of this Report.
 
Item 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
None.
 
Item 9A.   CONTROLS AND PROCEDURES
 
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our “disclosure controls and procedures” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the fiscal year covered by this report. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective (i) to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) to ensure that information required to be disclosed by us in the reports that we submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.


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Management’s Report on Internal Controls Over Financial Reporting
 
We are responsible for the preparation and integrity of the consolidated financial statements appearing in this our Annual Report on Form 10-K. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States and include amounts based on management’s estimates and judgments. All other financial information in this report has been presented on a basis consistent with the information included in the financial statements.
 
We are also responsible for establishing and maintaining adequate internal controls over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). We maintain a system of internal controls that is designed to provide reasonable assurance as to the fair and reliable preparation and presentation of the consolidated financial statements, as well as to safeguard assets from unauthorized use or disposition.
 
Our control environment is the foundation for our system of internal controls over financial reporting and is embodied in our Corporate Governance Policy. It sets the tone of our organization and includes factors such as integrity and ethical values. Our internal controls over financial reporting are supported by formal policies and procedures which are reviewed, modified and improved as changes occur in business conditions and operations.
 
The Audit Committee of the Board of Directors, on behalf of the shareholders, oversees management’s financial reporting responsibilities. The Audit Committee, which is composed solely of independent outside directors, meets periodically with the independent auditors, management and our Director of Internal Audit to review matters relating to financial reporting, internal accounting controls and auditing. The independent registered public accountants, the Director of Internal Audit and our Chief Compliance Officer advise the committee of any significant matters resulting from their audits or reviews and have free access to the committee without management being present. The Chief Compliance Officer, the independent registered public accountants and the Director of Internal Audit have free and full access to senior management and the Audit Committee at any time.
 
We assessed the effectiveness of the Company’s system of internal controls over financial reporting as of December 31, 2007. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control — Integrated Framework. We have concluded that, as of December 31, 2007, the Company’s system of internal controls over financial reporting was effective to provide reasonable assurance regarding the reliability of the financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
 
Our system of internal controls over financial reporting as of December 31, 2007, has been audited by BDO Seidman, LLP, the independent registered public accounting firm who also audited our consolidated financial statements. BDO Seidman, LLP’s attestation report on our system of internal controls over financial reporting is included herein.
 
Changes in Internal Control Over Financial Reporting
 
There were not any changes in our internal controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended December 31, 2007, to which this report relates, that have materially affected, or are reasonably likely to affect, our internal controls over financial reporting.
 
Item 9B.  OTHER INFORMATION
 
None.


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PART III
 
Item 10.   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
The information required by this Item will be set forth in our definitive proxy statement for our Annual Meeting of Stockholders expected to be held on May 12, 2008 (the “Proxy Statement”), and is incorporated herein by reference.
 
Item 11.   EXECUTIVE COMPENSATION
 
The information required by this Item will be set forth in the Proxy Statement, and is incorporated herein by reference.
 
Item 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
The information required by this Item will be set forth in the Proxy Statement, and is incorporated herein by reference.
 
Item 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
The information required by this Item will be set forth in the Proxy Statement, and is incorporated herein by reference.
 
Item 14.   PRINCIPAL ACCOUNTING FEES AND SERVICES
 
The information required by this Item will be set forth in the Proxy Statement, and is incorporated herein by reference.


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PART IV
 
Item 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
(a) The following documents are filed as part of this Report:
 
1. The Financial Statements required to be filed hereunder are listed in the Index to Financial Statements on page 60 of this Report
 
(b) Exhibits
 
         
Exhibit
 		   
Number
 
Description of Exhibit
 
  2 .1   Merger Agreement by and among Xando, Incorporated, Xando Merger Corp. and Cosi Sandwich Bar, Inc. dated as of October 4, 1999 (Filed as Exhibit 2.1 to the Company’s Registration Statement on Form S-1, file #333-86390).
  3 .1   Amended and Restated Certificate of Incorporation of Cosi, Inc. (Filed as Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the period ended December 30, 2002).
  3 .2   Amended and Restated By-Laws of Cosi, Inc. (Filed as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 1, 2007).
  4 .1   Form of Certificate of Common Stock (Filed as Exhibit 4.1 to the Company’s Registration Statement on Form S-1, file #333-86390).
  4 .2   Rights Agreement between Cosi, Inc. and American Stock Transfer and Trust Company as Rights Agent dated November 21, 2002 (Filed as Exhibit 4.2 to the Company’s Annual Report on Form 10-K for the period ended December 30, 2002).
  4 .3   Amended and Restated Registration Agreement, dated as of March 30, 1999 (Filed as Exhibit 4.3 to the Company’s Registration Statement on Form S-1, file #333-86390).
  4 .4   Supplemental Registration Rights Agreement, dated as of August 5, 2003 by and among the Company and the parties thereto (Filed as Exhibit 4.4.2 to the Company’s Registration Statement on Form S-1, file #333-107689).
  4 .5   Amendment No. 1 to Rights Agreement dated as of November 21, 2002, between Cosi, Inc. and American Stock Transfer and Trust Company, as rights agent (Filed as Exhibit 4.3 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2003).
  4 .6   Investment Agreement, dated as of August 5, 2003, among the Company, Eric J. Gleacher, Charles G. Phillips, LJCB Nominees Pty Ltd, and ZAM Holdings, L.P. (Filed as Exhibit 4.9 to the Company’s Registration Statement on Form S-1/A, file #333-107689).
  4 .7   Letter Agreement, dated as of August 5, 2003, among the Company, Eric J. Gleacher, Charles G. Phillips, LJCB Nominees Pty Ltd, and ZAM Holdings, L.P. (Filed as Exhibit 4.10 to the Company’s Registration Statement on Form S-1/A, file #333-107689).
  10 .1   Cosi, Inc. 2005 Omnibus Long-Term Incentive Plan (Filed as Exhibit C to the Company’s Proxy Statement on Schedule 14A filed on March 31, 2005, file #000-50052).
  10 .2   Cosi Employee Stock Purchase Plan (Filed as Exhibit 10.2 to the Company’s Registration Statement on Form S-1, file #333-86390).
  10 .3   Cosi Non-Employee Director Stock Incentive Plan (Filed as Exhibit 10.3 to the Company’s Registration Statement on Form S-1, file #333-86390).
  10 .4   Cosi Sandwich Bar, Inc. Incentive Stock Option Plan (Filed as Exhibit 10.4 to the Company’s Registration Statement on Form S-1, file #333-86390).
  10 .5.3   Employment agreement between Cosi, Inc. and Kevin Armstrong, dated May 9, 2005 (Filed as Exhibit 10.5.11 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended April 4, 2005).
  10 .5.4   Separation and Release Agreement between Cosi, Inc. and Cynthia Jamison, dated August 17, 2005 (Filed as Exhibit 10.1 to the Company’s Current report on Form 8-K, dated August 23, 2005).
  10 .5.5   Employment Agreement between Cosi, Inc. and William D. Forrest, dated December 12, 2005 (Filed as Exhibit 10.1 to the Company’s Current report on Form 8-K, dated December 16, 2005).


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Exhibit
 		   
Number
 
Description of Exhibit
 
  10 .5.6   Terms of Employment between Cosi, Inc. and William E. Koziel, effective as of August 17, 2005 as described in the Company’s Current Report on Form 8-K (Filed on August 23, 2005).
  10 .5.7   Terms of Employment between Cosi, Inc. and Christopher Carroll, effective as of May 22, 2006 as described in the Company’s Current Report of Form 8-K (Filed on May 25, 2006).
  10 .5.8   Terms of Employment between Cosi, Inc. and Christopher Ames, effective as of November 13, 2006 as described in the Company’s Current Report on Form 8-K (Filed on November 17, 2006).
  10 .5.9   Terms of Employment between Cosi, Inc. and Robert Merritt, effective as of March 12, 2007 as described in the Company’s Current Report on Form 8-K (Filed on March 12, 2007).
  10 .5.10   General separation and release agreement by and between the Company and Patrick Donnellan, dated August 8, 2007 (Filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 1, 2007).
  10 .5.11   Employment agreement, dated as of September 15, 2007 by and between the Company and James F. Hyatt (Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated September 18, 2007).
  10 .5.12   General separation and release agreement by and between the Company and Gilbert Melott, dated October 17, 2007 (Filed as Exhibit 10.2 to the company’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 1, 2007),
  10 .6.1   Foodservice Distribution Agreement between Cosi, Inc. and Distribution Market Advantage, Inc. dated as of November 1, 2005.(1)
  10 .7.1   Cosi, Inc. Form of Franchise Agreement (Filed as Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 4, 2005).
  10 .7.2   Cosi, Inc. Form of Area Developer Franchise Agreement (Filed as Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 4, 2005).
  10 .8   Form of Senior Secured Note and Warrant Purchase Agreement (Filed as Exhibit 10.7 to the Company’s Registration on Form S-1, file #333-86390).
  10 .9   Securities Purchase Agreement dated as of April 27, 2004 (Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated April 28, 2004).
  10 .10   Form of Restricted Stock Award Agreement (Filed as Exhibit 10.1 to the Company’s Current Report of Form 8-K, dated June 6, 2005).
  16     Letter from Ernst & Young LLP to the Securities and Exchange Commission, dated as of August 13, 2004, acknowledging its agreement with the statements made in Current Report on Form 8-K (Filed as Exhibit 16 to the Company’s Current Report on Form 8-K, dated August 13, 2004).
  21     Subsidiaries of Cosi, Inc. (Filed as Exhibit 21.1 to the Company’s Registration Statement on Form S-1, file #333-86390) .
  23 .1   Filed herewith Consent of BDO Seidman, LLP, Registered Public Accounting Firm.
  31 .1   Filed herewith Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31 .2   Filed herewith Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32 .1   Filed herewith Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
(1) Portions of Exhibit 10.6.1 have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
         
    Page
 
    47  
    48  
    49  
    50  
    51  
    52  
    53-70  


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Report of Independent Registered Public Accounting Firm
 
Board of Directors and Stockholders
Cosi, Inc.
Deerfield, Illinois
 
We have audited the accompanying consolidated balance sheets of Cosi, Inc. as of December 31, 2007 and January 1, 2007 and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cosi, Inc. at December 31, 2007 and January 1, 2007, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.
 
As described in Note 1 to the consolidated financial statements, effective January 3, 2006, Cosi, Inc. adopted the fair value method of accounting provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share Based Payment.”
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Cosi, Inc.’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 14, 2008 expressed an unqualified opinion thereon.
 
/s/  BDO Seidman, LLP
 
Chicago, Illinois
March 14, 2008


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Report of Independent Registered Public Accounting Firm on
Internal Control Over Financial Reporting
 
Board of Directors and Shareholders
Cosi, Inc.
Deerfield, Illinois
 
We have audited Cosi Inc.’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Cosi Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying, “Item 9A, Management’s Report on Internal Control Over Financial Reporting”. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, Cosi, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the COSO criteria.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Cosi, Inc. as of December 31, 2007 and January 1, 2007, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007 and our report dated March 14, 2008 expressed an unqualified opinion on those consolidated financial statements.
 
/s/  BDO Seidman, LLP
 
Chicago, Illinois
March 14, 2008


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Cosi, Inc.
 
Consolidated Balance Sheets
As of December 31, 2007 and January 1, 2007
 
                 
    December 31,
 		    January 1,
 		 
    2007     2007  
    (Dollars in thousands)  
 
ASSETS
Current assets:
               
Cash and cash equivalents
  $ 6,308.5     $ 938.4  
Investments
    —       18,961.5  
Accounts receivable, net
    657.8       1,950.9  
Inventories
    1,045.7       915.0  
Prepaid expenses and other current assets
    3,795.7       4,032.8  
Assets held for sale
    121.9       —  
Assets of discontinued operations
    35.8       4,526.4  
                 
Total current assets
    11,965.4       31,325.0  
Furniture and fixtures, equipment and leasehold improvements, net
    42,476.6       41,879.8  
Intangibles, security deposits and other assets
    1,970.0       2,552.3  
                 
Total assets
  $ 56,412.0     $ 75,757.1  
                 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
               
Accounts payable
  $ 2,105.8     $ 4,898.1  
Accrued expenses
    9,014.3       8,240.4  
Deferred franchise revenue
    782.5       1,172.5  
Current liabilities of discontinued operations
    285.4       383.5  
Current portion of other long-term liabilities
    465.1       536.9  
                 
Total current liabilities
    12,653.1       15,231.4  
Deferred franchise revenue
    2,730.0       2,345.0  
Other long-term liabilities, net of current portion
    7,183.1       7,549.4  
                 
Total liabilities
    22,566.2       25,125.8  
                 
Commitments and contingencies
               
Stockholders’ equity:
               
Common stock — $.01 par value; 100,000,000 shares authorized, 41,052,170 and 39,910,114 shares issued, respectively
    410.5       399.1  
Additional paid-in capital
    275,186.9       271,200.3  
Treasury stock, 239,543 shares at cost
    (1,197.7 )     (1,197.7 )
Accumulated deficit
    (240,553.9 )     (219,770.4 )
                 
Total stockholders’ equity
    33,845.8       50,631.3  
                 
Total liabilities and stockholders’ equity
  $ 56,412.0     $ 75,757.1  
                 
 
The accompanying notes are an integral part of these consolidated financial statements.


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Cosi, Inc
 
Consolidated Statements of Operations
For the Fiscal Years Ended December 31, 2007, January 1, 2007 and January 2, 2006
 
                         
    December 31,
 		    January 1,
 		    January 2,
 		 
    2007     2007     2006  
    (Dollars in thousands, except per share data)  
 
Revenues:
                       
Restaurant net sales
  $ 132,414.1     $ 122,849.3     $ 114,036.3  
Franchise fees and royalties
    2,142.2       849.2       100.50  
                         
Total revenues
    134,556.3       123,698.5       114,136.8  
                         
Costs and expenses:
                       
Cost of food and beverage
    30,972.5       28,170.5       27,103.6  
Restaurant labor and related benefits
    45,994.7       40,781.5       37,263.7  
Occupancy and other restaurant operating expenses
    38,369.0       32,044.7       27,726.3  
                         
      115,336.2       100,996.7       92,093.6  
General and administrative expenses
    21,019.4       21,910.5       21,320.4  
Stock-based compensation expense
    1,953.9       4,977.7       2,944.2  
Depreciation and amortization
    8,823.2       7,196.3       6,515.9  
Restaurant pre-opening expenses
    710.3       1,450.8       823.7  
Provision for losses on asset impairments and disposals
    3,844.7       248.7       675.4  
Closed store costs
    261.9       —       —  
Lease termination expense (benefit), net
    346.9       (231.5 )     (178.8 )
Gain on sale of assets
    (23.3 )     (482.3 )     (1,431.7 )
                         
Total costs and expenses
    152,273.2       136,066.9       122,762.7  
                         
Operating loss
    (17,716.9 )     (12,368.4 )     (8,625.9 )
Interest income
    524.1       1,411.5       802.0  
Interest expense
    (42.3 )     (9.3 )     (34.0 )
Allowance for stockholders’ notes receivables
    —       —       (261.1 )
Other income
    704.8       77.5       103.6  
                         
Loss from continuing operations
    (16,530.3 )     (10,888.7 )     (8,015.4 )
Discontinued operations:
                       
Operating loss from discontinued operations
    (903.1 )     (1,182.9 )     (1,905.6 )
Asset impairments of discontinued operations
    (3,350.1 )     (256.0 )     (3,205.0 )
                         
Loss from discontinued operations
    (4,253.2 )     (1,438.9 )     (5,110.6 )
                         
Net loss
    (20,783.5 )     (12,327.6 )     (13,126.0 )
                         
Per Share Data:
                       
Loss per share, basic an diluted
                       
Continuing operations
  $ (0.42 )   $ (0.28 )   $ (0.23 )
Discontinued operations
  $ (0.11 )   $ (0.04 )   $ (0.15 )
                         
    $ (0.53 )   $ (0.32 )   $ (0.38 )
                         
Weighted average common shares outstanding
    39,332,226       38,207,173       34,928,990  
 
The accompanying notes are an integral part of these consolidated financial statements.


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Cosi, Inc.
 
Consolidated Statements of Stockholders’ Equity
For the Fiscal Years Ended December 31, 2007, January 1, 2007 and January 2, 2006
 
                                                                                 
    Common Stock           Treasury Stock                          
                Additional
 		    Unearned
 		    Shares of
 		    Amount
 		    Stockholders
 		                   
    Number of
 		          Paid In
 		    Stock
 		    Treasury
 		    Treasury
 		    Notes
 		    Accumulated
 		             
    Shares     Amount     Capital     Compensation     Stock     Stock     Receivable     Deficit     Total        
    (Dollars in thousands, except share data)        
 
Balance, January 3, 2005
    30,819,716     $ 308.2     $ 225,519.7     $ (900.0 )     —       —     $ (1,458.8 )   $ (194,316.8 )   $ (29,152.3 )        
Issuance of common stock, net of issuance costs
    5,837,563       58.4       34,253.9                                               34,312.3          
Issuance of restricted stock, net of forfeitures
    885,610       8.9       5,271.3       (5,155.1 )                                     125.0          
Stock compensation
                    844.7                                               844.7          
Amortization of unearned stock compensation
                            2,188.7                                       2,188.7          
Exercise of warrants
    115,958       1.2       (1.2 )                                             —          
Exercise of stock options
    819,949       8.2       2,442.0                                               2,450.2          
Allowance for stockholders notes receivable
                                                    261.1               261.1          
Return of shares for notes receivable from stockholders
                                    239,543       (1,197.7 )     1,197.7               —          
Net loss
                                                            (13,126.0 )     (13,126.0 )        
                                                                                 
Balance, January 2, 2006
    38,478,796       384.8       268,330.5       (3,866.4 )     239,543       (1,197.7 )     —       (207,442.8 )     56,208.4          
Adoption of FAS 123R
                    (3,866.4 )     3,866.4                                       —          
Issuance of restricted stock, net of forfeitures
    815,000       8.2       (8.2 )                                             —          
Stock-based compensation
    11,376       0.1       5,020.6                                               5,020.7          
Exercise of warrants
    263,302       2.6       440.6                                               443.2          
Exercise of stock options
    341,640       3.4       1,283.2                                               1,286.6          
Net loss
                                                            (12,327.6 )     (12,327.6 )        
                                                                                 
Balance, January 1, 2007
    39,910,114       399.1       271,200.3       —       239,543       (1,197.7 )     —       (219,770.4 )     50,631.3          
Issuance of restricted stock, net of forfeitures
    147,932       1.4       (1.4 )                                             —          
Stock-based compensation
                    1,968.4                                               1,968.4          
Exercise of warrants
    699       0.1       (0.1 )                                             —          
Exercise of stock options
    989,240       9.9       2,019.7                                               2,029.6          
Net loss
                                                            (20,783.5 )     (20,783.5 )        
                                                                                 
Balance, December 31, 2007
    41,047,985     $ 410.5     $ 275,186.9     $ —       239,543     $ (1,197.7 )   $ —     $ (240,553.9 )   $ 33,845.8          
                                                                                 
 
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 Fiscal Years Ended December 31, 2007, January 1, 2007 and January 2, 2006
 
                         
    December 31,
 		    January 1,
 		    January 2,
 		 
    2007     2007     2006  
    (In thousands)  
 
Cash flows from operating activities:
                       
Net loss
  $ (20,783.5 )   $ (12,327.6 )   $ (13,126.0 )
Adjustments to reconcile net loss to net cash (used in)
                       
provided by operating activities
                       
Depreciation and amortization
    9,232.7       7,767.3       7,425.1  
Gain on sale of assets
    (23.3 )     (482.3 )     (1,431.7 )
Non-cash portion of asset impairments and disposals
    7,194.8       504.7       3,828.1  
Non-cash portion of store closing costs
    370.3       —       —  
Provision for bad debts
    0.8       4.5       147.5  
Stock-based compensation expense
    1,968.4       5,020.6       3,033.4  
Allowance for stockholders’ notes receivable
    —       —       261.1  
Changes in operating assets and liabilities:
                       
Accounts receivable
    1,292.3       (1,459.1 )     (30.6 )
Inventories
    (86.6 )     (72.3 )     (24.1 )
Prepaid expenses and other current assets
    237.1       (360.0 )     (1,357.6 )
Other assets
    170.9       306.8       (799.0 )
Accounts payable and accrued expenses
    (1,073.9 )     1,159.8       (1,889.0 )
Deferred franchise revenue
    (5.0 )     3,007.5       510.0  
Lease termination reserve
    (171.3 )     (194.8 )     (311.4 )
Other liabilities
    (693.6 )     1,074.1       (485.1 )
                         
Net cash (used in) provided by operating activities
    (2,369.9 )     3,949.2       (4,249.2 )
                         
Cash flows from investing activities:
                       
Capital expenditures
    (14,362.7 )     (21,307.2 )     (9,768.6 )
Proceeds from sale of assets
    650.0       775.0       1,284.1  
Purchases of investments
    (20,776.8 )     (171,682.5 )     (145,433.7 )
Redemptions of investments
    39,738.3       185,638.5       122,477.7  
Return (payment) of security deposits, net
    478.6       (97.9 )     (95.3 )
                         
Net cash provided by (used in) investing activities
    5,727.4       (6,674.1 )     (31,535.8 )
                         
Cash flows from financing activities:
                       
Proceeds from issuance of common stock
    2,029.6       1,286.6       36,887.4  
Exercises of warrants
    —       443.2       —  
Principal payments on long-term debt
    (17.0 )     (18.8 )     (239.7 )
                         
Net cash provided by financing activities
    2,012.6       1,711.0       36,647.7  
                         
Net increase (decrease) in cash and cash equivalents
    5,370.1       (1,013.9 )     862.6  
Cash and cash equivalents, beginning of year
    938.4       1,952.3       1,089.7  
                         
Cash and cash equivalents, end of year
  $ 6,308.5     $ 938.4     $ 1,952.3  
                         
Supplemental disclosures of cash flow information:
                       
Cash paid for:
                       
Interest
  $ 42.3     $ 9.3     $ 24.3  
                         
Corporate franchise and income taxes
  $ 300.0     $ 268.0     $ 206.9  
                         
 
The accompanying notes are an integral part of these consolidated financial statements.


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COSI, INC.
 
For the Fiscal Years Ended December 31, 2007, January 1, 2007 and January 2, 2006
 
1.   Organization and Summary of Significant Accounting Policies
 
Organization
 
Cosi, Inc., a Delaware corporation, owns, operates, and franchises premium convenience dining restaurants which sell high-quality sandwiches, salads and coffees along with a variety of other soft drink beverages, teas, baked goods and alcoholic beverages. As of December 31, 2007 there were 107 company-owned and 34 franchise restaurants operating in 19 states, the District of Columbia, and the United Arab Emirates (UAE).
 
On June 20, 2005, we completed a public offering of our common stock, issuing 5,837,563 shares at $6.30 per share, including the underwriters’ exercise of their over-allotment option to purchase an additional 761,421 shares of common stock. This issuance provided us with gross proceeds of approximately $36.8 million.
 
Fiscal Year
 
Our fiscal year ends on the Monday closest to December 31. Fiscal years ended December 31, 2007, January 1, 2007 and January 2, 2006 are referred to as fiscal 2007, 2006 and 2005, respectively. Fiscal years 2007, 2006, and 2005 each included 52 weeks.
 
Basis of Presentation
 
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated.
 
Cash and Cash Equivalents
 
We consider all short-term investments with a maturity of three months or less from the date of purchase to be cash equivalents.
 
Investments
 
As of January 1, 2007, we had certain debt securities outstanding as investments, which consisted of debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies. We had no investments at December 31, 2007.
 
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 investments, we classify all marketable debt securities as held-to-maturity and account for these investments at amortized cost, which approximates fair value. The amortized principal amount of investments at January 1, 2007 was $19.0 million, and the weighted average interest rate was 4.84%. The amortized principal amount approximated fair value at January 1, 2007. All investments matured within one year. None of the short-term investments purchased during 2006 were sold prior to their maturity.
 
Investments consisted of the following:
 
                         
          Accrued
 		       
    Cost Basis     Interest     Total  
    (In thousands)  
 
January 1, 2007
                       
Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies
  $ 18,679.6     $ 281.9     $ 18,961.5  
                         
    $ 18,679.6     $ 281.9     $ 18,961.5  
                         


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COSI, INC.
 
Notes to Consolidated Financial Statements — (Continued)
 
Concentration of Credit Risks
 
Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash deposits, investments and accounts receivable. We place our cash deposits in Federal Insurance Corporation (“FDIC”) insured financial institutions, US government and government sponsored agency securities, auction rate securities, commercial paper and money market funds. Cash deposits may exceed FDIC insured levels from time to time.
 
Our accounts receivable consist principally of trade or “house” accounts representing corporate customers, amounts due from franchisees, and amounts due from certain landlords for reimbursement of tenant improvements. We have established credit procedures and analyses to control the granting of credit to customers.
 
Accounts Receivable
 
Trade accounts receivable are stated at net realizable value. The Company maintains a reserve for potential uncollectible accounts based on historical trends and known current factors impacting the Company’s customers.
 
Inventories
 
Inventories are stated at the lower of cost, determined by a weighted average valuation method, or market, and consist principally of food, beverage, liquor, packaging and related food supplies.
 
Assets Held for Sale
 
Assets held for sale consists of property and equipment at the three Seattle, Washington restaurants where the decision has been made to sell these assets and exit these locations. Assets held for sale are reported at their salvage value less costs to sell.
 
Furniture and Fixtures, Equipment and Leasehold Improvements
 
Furniture and fixtures, equipment and leasehold improvements are stated at cost. Depreciation of furniture and fixtures and equipment is computed using the straight-line method over estimated useful lives that range from two to ten years. Leasehold improvements are amortized using the straight-line method over the shorter of their estimated useful lives or the term of the related leases.
 
Upon retirement or sale, the cost of assets disposed of and their related accumulated depreciation are removed from the accounts. Any resulting gain or loss is credited or charged to operations. Maintenance and repairs are charged to expense when incurred, while betterments are capitalized.
 
Long-Lived Assets
 
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 consistent history of poor financial operating performance to be the primary indicator of potential impairment for individual restaurant locations. We determine whether a restaurant location is impaired based on expected undiscounted cash flows, generally for the remainder of the original lease term, and then determine the impairment charge based on discounted cash flows for the same period.
 
During the third quarter of fiscal 2007, the Company reached an agreement with Macy’s Inc. (“Macy’s”) relating to the six Cosi restaurants operated within Macy’s stores. Under the terms of the agreement, Cosi ceased operations and closed those locations on August 19, 2007. Macy’s purchased the fixed assets and leasehold improvements at these locations for a total consideration of approximately $0.7 million.
 
Cosi has reached an agreement in principle with a third party in the Seattle, Washington area to sell the assets of three company-owned locations currently operating there. Under the terms of the agreement, Cosi will transfer


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COSI, INC.
 
Notes to Consolidated Financial Statements — (Continued)
 
rights to the assets and leasehold improvements for minimal cash consideration and the owner will assume the tenant obligations under the real estate operating leases and operate these locations under a different brand. The assets at these locations have been previously impaired in their entirety and we do not anticipate realizing any gain from this transaction. Cosi expects to exit these locations by the end of the second quarter of fiscal 2008.
 
During fiscal 2007, we recorded asset impairment charges of $7.2 million of which $3.8 million are related to seven underperforming locations that we have determined to be impaired; of which one is in the Mid-Atlantic region and three each in the Northeast and Midwest regions. The other $3.4 million is related to Macy’s and Seattle locations, which are reported in discontinued operations. During fiscal 2006, we recorded asset disposal charges of approximately $0.2 million and asset impairment charges of approximately $0.3 million related to one Macy’s location, which is reported in discontinued operations. During fiscal 2005 we recorded total asset impairment charges of $3.9 million of which $3.2 million was related to Macy’s locations and approximately $0.7 million to two additional underperforming locations.
 
Accounting for Lease Obligations
 
We recognize rent expense on a straight-line basis over the lease term commencing on the date we take possession. We record landlord allowances as deferred rent in other long-term liabilities on the consolidated balance sheets and amortize them on a straight-line basis over the term of the related lease.
 
Intangibles, Security Deposits and Other Assets
 
Intangibles and other assets consist of costs associated with obtaining liquor licenses, trademarks and logos. Liquor licenses are stated at cost which is not in excess of market value. Security deposits primarily consist of deposits placed on leased locations.
 
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, we review indefinite-lived intangible assets for impairment on an annual basis, or more often if events or changes in circumstances indicate that the carrying amounts of those assets may not be recoverable. Other intangibles with indefinite lives are not amortized.
 
Lease Termination Charges
 
Future store closings, if any, resulting from our decision to close underperforming locations prior to their scheduled lease expiration dates, may result in additional lease termination charges. For all exit activities, we estimate our likely liability under contractual leases for restaurants that have been closed. Such estimates have affected the amount and timing of charges to operating results 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. The Company recognizes 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.
 
During fiscal 2007, we recorded lease termination charges of $0.3 million related to a location where, due to the enforcement of restrictions in a zoning overlay district, Cosi was denied the necessary permits to build a restaurant and we have exercised the exit provision under the lease and to an underperforming restaurant in Chicago where we have exercised the early exit provision of the lease. During fiscal 2006 and 2005, we recognized approximately $0.2 million in income each year due primarily to the reversal of accruals that were no longer required.


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COSI, INC.
 
Notes to Consolidated Financial Statements — (Continued)
 
A summary of lease termination reserve activity is as follows:
 
         
    (In thousands)  
 
Balance as of January 3, 2005
  $ 937.0  
Benefit from reversal of prior charges
    (178.8 )
Deductions
    (16.0 )(a)
         
Balance as of January 2, 2006
    742.2  
Benefit from reversal of prior charges
    (231.5 )
Deductions
    (80.0 )(a)
         
Balance as of January 1, 2007
  $ 430.7  
         
Charged to costs and expenses
    346.9  
Deductions
    (518.1 )(a)
         
Balance as of December 31, 2007
  $ 259.5  
         
 
 
(a) Payments to landlords for lease obligations.
 
Other Liabilities
 
Other liabilities consist of deferred rent, landlord allowances and accrued lease termination costs (see Note 12).
 
Income Taxes
 
Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. We have recorded a full valuation allowance to reduce our deferred tax assets related to net operating loss carry-forwards. Our determination of the valuation allowance is based on an evaluation of whether it is more likely than not that we will be able to utilize the net operating loss carry-forward based on the Company’s operating results. A positive adjustment to income will be recorded in future years if we determine that it is more likely than not that we will realize these deferred tax assets.
 
We have adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”) as of January 2, 2007. FIN 48 prescribes a comprehensive financial statement model of how a company should recognize, measure, present and disclose uncertain tax positions that the company has taken or expects to take in its income tax returns. FIN 48 requires that only income tax benefits that meet the “more likely than not” recognition threshold be recognized or continue to be recognized on the effective date. Initial recognition amounts would be reported as cumulative effect of a change in accounting principle.
 
No adjustment was made to the beginning retained earnings balance, as the ultimate deductibility of all tax positions is highly certain but there is uncertainty about the timing of such deductibility. No interest or penalties have been accrued relative to tax positions due to the Company having either a tax loss or net operating loss carry-forwards to offset any taxable income in all subject years. As a result, no liability for uncertain tax positions was recorded as of December 31, 2007.
 
Should the company need to accrue interest or penalties on uncertain tax positions, it would recognize the interest as interest expense and the penalties as a general and administrative expense.


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COSI, INC.
 
Notes to Consolidated Financial Statements — (Continued)
 
Revenue Recognition
 
Restaurant Net Sales.  Our company-owned and operated restaurant sales are composed almost entirely of food and beverage sales. We record revenue at the time of the purchase of our products by our customers.
 
Franchise Fees and Royalties.  Franchise fees and royalties include fees earned from franchise agreements entered into with area developers and franchise operators, fees earned from our international license agreements, and royalties received based on sales generated at all franchise restaurants. We recognize the franchise fee in the period in which each franchise location opens. We recognize franchise royalties in the period in which sales are made by our franchise operators.
 
Gift Card Sales.  We offer our customers the opportunity to purchase gift cards at our restaurants and through our website. Customers can purchase these cards at varying dollar amounts. At the time of purchase by the customer, we record a gift card liability for the face value of the card purchased. We recognize the revenue and reduce the gift card liability when the gift card is redeemed. We do not reduce our recorded liability for potential non-use of purchased gift cards.
 
Gain on Sale of Assets
 
During fiscal 2007, we recognized income of $0.02 million related to the sale of a liquor license. During fiscal 2006, we recognized income of $0.5 million for the gain on the sale of a company-owned New Jersey restaurant to a franchise area developer during the fourth quarter of fiscal 2006. During fiscal 2005, we recognized income of $1.4 million for the gain on the sale of three Boston locations that were sold to a franchisee during the fourth quarter of fiscal 2005.
 
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 costs, the costs of food and labor used during the period before opening, the costs of initial quantities of supplies and other direct costs related to the opening of, or remodeling of, a restaurant. Pre-opening expenses also include rent expense recognized on a straight-line basis from the date we take possession through the period of construction, remodeling and fixturing prior to opening the restaurants.
 
Advertising Costs
 
Domestic franchise-operated Cosi restaurants contribute 1% of their sales to a national marketing fund and are also required to spend 1% of their sales in their local markets on advertising. Our international franchise-operated restaurants contribute 0.5% of their sales to an international marketing fund. The Company contributes 1% of sales from company-owned restaurants to the national marketing fund. The Company’s contributions to the national marketing fund as well as its own local market media costs are recorded as part of occupancy and other operating expenses in the Company’s consolidated statements of operations. Advertising costs are expensed as incurred and approximated $1.9 million, $1.7 million and $1.0 million for fiscal years 2007, 2006 and 2005, respectively.
 
Net Loss Per Share
 
Basic and diluted net loss per common share is computed by dividing the net loss by the weighted-average number of common shares and dilutive common share equivalents, if any, outstanding during the period. In-the-money stock options and warrants to purchase an aggregate of 32,744, 1,944,142, and 5,011,509 shares of common stock were outstanding at December 31, 2007, January 1, 2007 and January 2, 2006, respectively. There were 919,800, 1,149,700, and 688,000 shares of unvested restricted shares outstanding at December 31, 2007, January 1, 2007 and January 2, 2006, respectively. These stock options, outstanding warrants and unvested shares 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. Out-of-the-money stock options and warrants to


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COSI, INC.
 
Notes to Consolidated Financial Statements — (Continued)
 
purchase an aggregate of 1,780,863, 3,463,258, and 1,339,852 shares of common stock were outstanding at December 31, 2007, January 1, 2007, and January 2, 2006, respectively.
 
Stock-Based Compensation
 
As of January 3, 2006, we adopted the fair value recognition provision of SFAS 123R, Share-Based Payment, which generally requires, among other things, that all employee share-based compensation be measured using a fair value method and that all of the resulting compensation cost be recognized in the financial statements. We selected the modified prospective method of adoption. Under SFAS 123R, our stock-based compensation expense is recognized on a straight-line basis over the requisite service period of the award, which is the vesting term. As a result, we recognized stock option compensation expense of $0.4 million and $1.1 million, during fiscal 2007 and fiscal 2006, respectively. Results for prior periods have not been restated. We measure the estimated fair value of our granted stock options using a Black-Scholes pricing model and of our restricted stock based on the fair market value of a share of registered stock on the date of the grant.
 
During fiscal 2005, we recorded a charge of approximately $0.4 million related to repriced options. As a result of the adoption of SFAS 123R, we did not record any variable accounting charges or income during fiscals 2007 and 2006.
 
The following table illustrates the pro-forma effect on net loss attributable to common stockholders and net loss per common share if we had applied the fair value recognition provisions of SFAS 123R to stock-based compensation during fiscal 2005.
 
Pro Forma:
 
         
    Fiscal Year  
    2005  
    (In thousands,
 		 
    except per share data)  
 
Net loss as reported
  $ (13,126.0 )
Add: Stock-based compensation expense included in reported net loss
    3,158.5  
Deduct: Total stock-based compensation expense determined under the fair value based method for all awards
    (4,063.6 )
         
Pro forma net loss
  $ (14,031.1 )
         
Net loss per common share: basic and diluted
       
As reported
  $ (0.38 )
         
Pro forma
  $ (0.40 )
         
 
Fair Value of Financial Instruments
 
The carrying value of all financial instruments reflected in the accompanying balance sheets approximates fair value at December 31, 2007 and January 1, 2007.
 
Segment Information
 
Operating segments are defined as components of an enterprise about which separate financial information is available and is evaluated regularly by the chief operating decision maker in deciding how to allocate resources in assessing performance. Our chief operating decision maker reviews one aggregated set of financial statements to make decisions about resource allocations and to assess performance. Consequently, we have one reportable segment for all sales generated.


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COSI, INC.
 
Notes to Consolidated Financial Statements — (Continued)
 
Accounting Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the 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. Actual results may differ from those estimates.
 
Reclassifications
 
Certain amounts in the fiscal 2006 and 2005 consolidated financial statements have been reclassified to conform to the fiscal 2007 presentation.
 
2.   Accounts Receivable
 
Accounts receivable consist of the following:
 
                 
    Fiscal Year  
    2007     2006  
    (In thousands)  
 
Reimbursements due from landlords
  $ 200.0     $ 1,111.3  
Accounts receivable, trade
    187.3       172.1  
Receivables due from franchisees
    157.4       517.5  
Other
    115.8       153.5  
                 
Total receivables
    660.5       1,954.4  
Less allowance for doubtful accounts
    (2.7 )     (3.5 )
                 
Accounts receivable, net
  $ 657.8     $ 1,950.9  
                 
 
A summary of the reserve for doubtful accounts is as follows:
 
         
    (In thousands)  
 
Balance as of January 3, 2005
    152.4  
Benefit from accrual reversals
    (72.1 )
Deductions
    (72.3 )(a)
         
Balance as of January 2, 2006
    8.0  
Charged to costs and expenses
    13.0  
Deductions
    (17.5 )(a)
         
Balance as of January 1, 2007
  $ 3.5  
         
Charged to costs and expenses
    12.1  
Deductions
    (12.9 )(a)
         
Balance as of December 31, 2007
  $ 2.7  
         
 
 
(a) Write-off of uncollectible accounts.


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COSI, INC.
 
Notes to Consolidated Financial Statements — (Continued)
 
 
3.   Prepaid Expenses and Other Current Assets
 
Prepaid expenses and other current assets consist of the following:
 
                 
    Fiscal Year  
    2007     2006  
    (In thousands)  
 
Prepaid rent
  $ 1,708.9     $ 1,542.0  
Prepaid insurance
    1,704.8       1,915.9  
Other
    382.0       574.9  
                 
Prepaid expenses and other current assets
  $ 3,795.7     $ 4,032.8  
                 
 
4.   Discontinued Operations
 
Cosi has reached an agreement in principle with an area developer in the Seattle, Washington area to sell the assets of three company-owned locations currently operating in that state. Under the terms of the agreement Cosi will transfer rights to the assets and leasehold improvements. We expect to sell these assets and leasehold improvements and exit these locations by the end of the second quarter of 2008. The current liabilities associated with discontinued operations will be paid by Cosi.
 
Assets held for sale for the Seattle locations, representing salvage value, consist of the following:
 
         
    Fiscal Year  
    2007  
    (In thousands)  
 
Leasehold improvements
  $ 138.5  
Restaurant equipment
    140.8  
Furniture and fixtures
    48.5  
Computer and telephone equipment
    110.8  
         
Total furniture and fixtures, equipment and leasehold improvements
    438.6  
Less accumulated depreciation and amortization
    (316.7 )
         
Total assets held for sale, net
  $ 121.9  
         
 
During the third quarter of fiscal 2007, the Company reached an agreement with Macy’s Inc. (“Macy’s”) relating to the six Cosi restaurants operated within Macy’s stores. Under the terms of the agreement, Cosi ceased operations and closed those locations on August 19, 2007.
 
In accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Macy’s and Seattle locations qualify as discontinued operations, and accordingly we have reported the results of operations of this group in discontinued operations in the accompanying consolidated financial statements for all periods presented.


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COSI, INC.
 
Notes to Consolidated Financial Statements — (Continued)
 
The assets and liabilities associated with discontinued operations consisted of the following:
 
                 
    As of  
    December 31,
 		    January 1,
 		 
    2007     2007  
    (In thousands)  
 
Current assets:
               
Inventories
  $ 27.8     $ 71.9  
Other current assets
    8.0       326.8  
                 
Total current assets of discontinued operations
    35.8       398.7  
Furniture and fixtures, equipment and leasehold improvements, net
    —       4,127.7 (a)
                 
Total assets of discontinued operations
  $ 35.8     $ 4,526.4  
                 
Current liabilities:
               
Accrued expenses
  $ 161.9     $ 310.1  
Other current liabilities
    123.5       73.4  
                 
Total current liabilities of discontinued operations
  $ 285.4     $ 383.5  
                 
 
 
(a) Includes fixed assets of both the Macy’s and Seattle locations.
 
The following table shows the results of discontinued operations which includes the results of operations for both the Seattle and Macy’s locations.
 
                         
    Fiscal Year  
    2007     2006     2005  
    (In thousands)  
 
Revenues
                       
Restaurant net sales
  $ 3,203.3     $ 3,189.0     $ 3,043.7  
                         
Costs and expenses
                       
Cost of food and beverage
    949.1       986.5       1,101.7  
Restaurant labor and related expenses
    1,580.2       1,691.8       1,910.4  
Occupancy and other restaurant operating expenses
    1,167.6       962.6       868.2  
                         
      3,696.9       3,640.9       3,880.3  
Depreciation and amortization
    409.5       571.0       909.2  
Restaurant pre-opening expenses
    —       160.0       159.8  
                         
Total costs and expenses
    4,106.4       4,371.9       4,949.3  
                         
Operating loss from discontinued operations
  $ (903.1 )   $ (1,182.9 )   $ (1,905.6 )
                         


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COSI, INC.
 
Notes to Consolidated Financial Statements — (Continued)
 
5.   Furniture and Fixtures, Equipment and Leasehold Improvements
 
Furniture and fixtures, equipment and leasehold improvements consist of the following:
 
                 
    Fiscal Year  
    2007     2006  
    (In thousands)  
 
Leasehold improvements
  $ 48,747.3     $ 45,055.4  
Restaurant equipment
    19,585.2       18,520.6  
Furniture and fixtures
    14,039.9       10,999.7  
Computer and telephone equipment
    11,882.9       10,588.8  
Construction in progress
    174.2       378.5  
Vehicles
    29.7       29.7  
                 
Total furniture and fixtures, equipment and leasehold improvements
    94,459.2       85,572.7  
Less accumulated depreciation and amortization
    (51,982.6 )     (43,692.9 )
                 
Furniture and fixtures, equipment and leasehold improvements, net
  $ 42,476.6     $ 41,879.8  
                 
 
Depreciation and amortization expense for fiscals 2007, 2006 and 2005 was $8.8 million, $7.2 million and $6.5 million, respectively.
 
6.   Intangibles, Security Deposits and Other Assets
 
Intangibles, security deposits and other assets consist of the following:
 
                 
    Fiscal Year  
    2007     2006  
    (In thousands)  
 
Security deposits
  $ 983.1     $ 1,384.6  
Liquor licenses
    392.0       438.2  
Trademarks
    195.0       195.0  
Other
    399.9       534.5  
                 
Total other assets
  $ 1,970.0     $ 2,552.3  
                 
 
7.   Accrued Expenses
 
Accrued expenses consist of the following:
 
                 
    Fiscal Year  
    2007     2006  
    (In thousands)  
 
Payroll and related benefits and taxes
  $ 2,146.3     $ 2,225.6  
Insurance
    1,648.9       1,281.5  
Taxes other than income taxes
    884.0       897.1  
Unredeemed gift cards/certificates
    846.0       666.5  
Utilities
    938.9       588.8  
Deferred credits
    514.0       560.6  
Rent
    483.9       470.6  
Professional and legal
    379.9       394.8  
New restaurant construction
    70.5       716.5  
Other
    1,101.9       438.4  
                 
Total accrued expenses
  $ 9,014.3     $ 8,240.4  
                 


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COSI, INC.
 
Notes to Consolidated Financial Statements — (Continued)
 
8.   Income Taxes
 
Significant components of our deferred tax assets are as follows:
 
                 
    Fiscal Year  
    2007     2006  
    (In thousands)  
 
Deferred tax assets:
               
Net operating loss carryforward
  $ 62,434.5     $ 53,652.2  
Depreciation expense and impairment of long-lived assets
    14,290.5       13,506.4  
Contractual lease increases
    2,120.3       2,080.9  
Deferred franchise revenue
    1,153.8       891.1  
Stock-based compensation
    409.4       408.0  
Lease termination accrual
    228.8       163.7  
Accrued expenses
    129.8       123.9  
Allowance for doubtful accounts
    1.7       1.3  
                 
Total deferred tax assets
    80,768.8       70,827.5  
Valuation allowance
    (80,768.8 )     (70,827.5 )
                 
Net deferred taxes
  $ —     $ —  
                 
 
As of December 31, 2007, we have Federal net operating tax loss carry-forwards of approximately $164.0 million, which if not used, will expire from 2015 through 2022. The Company has recorded a valuation allowance to offset the benefit associated with the deferred tax assets described above due to the uncertainty of realizing the related benefits.
 
Below is a reconciliation of the statutory federal income tax rate to the effective tax rates as a percentage of income before income taxes:
 
                         
    Fiscal Year Ended  
    December 31,
 		    January 1,
 		    January 2,
 		 
    2007     2007     2006  
 
Statutory federal income tax rate
    35.0 %     35.0 %     35.0 %
State income taxes
    3.0       3.0       3.0  
                         
      38.0       38.0       38.0  
Less valuation allowance
    (38.0 )     (38.0 )     (38.0 )
                         
Effective Tax Rate
    0.0 %     0.0 %     0.0 %
                         
 
9.   Stockholders’ Equity
 
Common Stock Purchase Rights
 
On November 18, 2002, the Board of Directors resolved to adopt a Shareholders’ Rights Plan (“Rights Plan”). At that time the Board declared a dividend distribution of one right (“Right”) for each share of common stock to shareholders of record on November 25, 2002. Each Right entitles the registered holder to purchase from us one one-hundredth of a share of our preferred stock designated as Series D Preferred Stock at a price of $100 per one one-hundredth of a share. The Board of Directors also resolved to amend its certificate of incorporation, to designate 1,000,000 shares of Series D Preferred Stock for such issuance.
 
The exercise price and the number of Series D preferred shares issuable upon exercise are subject to adjustments from time to time to prevent dilution. The share purchase rights are not exercisable until the earlier to


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COSI, INC.
 
Notes to Consolidated Financial Statements — (Continued)
 
occur of (1) 10 days following a public announcement that a person or group of affiliated or associated persons, referred to as an acquiring person, have acquired beneficial ownership of 15% or more of our outstanding voting common stock or (2) 10 business days following the commencement of, or announcement of an intention to make, a tender offer or exchange offer which would result in an acquiring person beneficially owning 15% or more of our outstanding voting shares of common stock.
 
If we are acquired in a merger or other business combination, or if more than 50% of our consolidated assets or earning power is sold after a person or group has become an acquiring person, proper provision will be made so that each holder of a share purchase right — other than share purchase rights beneficially owned by the acquiring person, which will thereafter be void — will have the right to receive, upon exercise of the share purchase right at the then current exercise price, the number of shares of common stock of the acquiring company which at the time of the transaction have a market value of two times the exercise price. If any person or group becomes an acquiring person, proper provision shall be made so that each holder of a share purchase right — other than share purchase rights beneficially owned by the acquiring person, which will thereafter be void — will have the right to receive upon exercise of the share purchase right at the then current exercise price, the number of shares of Series D preferred stock with a market value at the time of the transaction equal to two times the exercise price.
 
Series D preferred shares issuable upon exercise of the share purchase rights will not be redeemable. Each Series D preferred share will be entitled to a minimum preferential dividend payment of $.10 per share and will be entitled to an aggregate dividend of 100 times the cash dividend declared per share of common stock. In the event we are liquidated, the holders of the Series D preferred shares will be entitled to receive a payment in an amount equal to the greater of $100 per one one-hundredth share or 100 times the payment made per share of common stock. Each Series D preferred share will have 100 votes, voting together with the shares of common stock. Finally, in the event of any merger, consolidation or other transaction in which shares of common stock are exchanged, each Series D preferred share will be entitled to receive 100 times the amount received per share of common stock. These rights are protected by customary antidilution provisions.
 
Before the date the Rights are exercisable, the Rights may not be detached or transferred separately from the common stock. The Rights will expire in 2012, or, if the Rights become exercisable before 2012, at the close of business on the 90th day following such date the Rights become exercisable, provided that the Company’s Board of Directors does not extend or otherwise modify the Right. At any time on or prior to 10 business days following the time an acquiring person acquires beneficial ownership of 15% or more of the Company’s outstanding voting common stock, the Company’s Board of Directors may redeem the Rights in whole, but not in part, at a price of $.01 per Right. Immediately upon any Rights redemption, the exercised Rights terminate, and the holders will only be entitled to receive the redemption price.
 
Stock Purchase Warrants
 
Warrants, issued in conjunction with previous equity and debt securities, to purchase 29,189 shares of our common stock were outstanding as of December 31, 2007. These warrants have an exercise price of $.01 per share and expire at varying dates through April 2008. All of the warrants provide for anti-dilution adjustments in the event of stock splits, stock dividends, or recapitalization, reorganization, reclassification, consolidation, merger, stock exchange, sale of all or substantially all of the Company’s assets or other similar transactions. These warrants also provide for anti-dilution adjustments in the event we sell our stock at, or issue options, warrants, rights or other convertible securities having an exercise price of, less than the exercise price of such warrants or less than the market price as of the date of such issue or sale. All of the holders of these warrants are entitled to participate in any dividends declared upon shares of our common stock (other than dividends payable solely in shares of common stock) as if these holders had fully exercised such warrants.


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COSI, INC.
 
Notes to Consolidated Financial Statements — (Continued)
 
10.   Stock-Based Employee Compensation
 
We have had several long-term incentive compensation plans, including the Amended and Restated Cosi, Inc. Long-Term Incentive Plan, that provided for the granting of incentive and nonqualified stock options to employees. On May 2, 2005 the Cosi, Inc. 2005 Omnibus Long-Term Incentive Plan (the “Omnibus Plan”) went into effect superseding all prior long-term incentive plans. The Omnibus Plan provides for the issuance of restricted stock, restricted stock units, incentive and nonqualified stock options, and any other stock awards that may be payable in shares, cash, other securities, and any other form of property as may be determined by the Compensation Committee of our Board of Directors. The purpose of this plan is to attract and retain qualified individuals and to align their interest with those of stockholders by providing certain employees of Cosi, Inc. and its affiliates with the opportunity to receive stock-based and other long-term incentive grants. The terms and conditions of stock-based awards under the plans are determined by the Compensation Committee of the Board of Directors. The grants are issued at fair market value and generally vest over a period of five years. We currently account for stock option grants in accordance with SFAS 123R, Share-Based Payments, which is a revision of SFAS 123, Accounting for Stock-Based Compensation.
 
When the Omnibus Plan went into effect, 3.7 million authorized but unissued common shares that were reserved under the Amended and Restated Cosi, Inc. Long Term Incentive Plan continued to be reserved for issuance under the Omnibus Plan. No additional awards will be granted under any of the prior long-term incentive plans including the Amended and Restated Cosi, Inc. Long-Term Incentive Plan.
 
As of December 31, 2007, approximately 3.7 million shares of common stock, in the aggregate, were reserved for issuance under the Omnibus Plan and for outstanding grants under the prior long-term incentive plans.
 
A summary of non-cash compensation is as follows:
 
                         
    For the Fiscal Year Ended  
    December 31,
 		    January 1,
 		    January 2,
 		 
    2007     2007     2006  
    (In thousands)  
 
Stock options variable accounting
  $ —     $ —     $ 844.7  
Stock option compensation expense
    363.3       1,073.5       —  
Restricted stock compensation expense
    1,496.8       3,822.1       2,188.7  
Awards of restricted stock to non-employee directors
    108.3       125.0       125.0  
                         
Total non-cash stock-based compensation expense
    1,968.4       5,020.6       3,158.4  
Non-cash compensation included in labor and related benefits
    14.5       42.9       214.2  
                         
Separately captioned stock compensation expense
  $ 1,953.9     $ 4,977.7     $ 2,944.2  
                         
 
As of December 31, 2007, there was approximately $0.4 million of total unrecognized compensation cost related to stock options granted under the Company’s various incentive plans which will be recognized over the remaining vesting period of the options through fiscal 2010. In addition, as of December 31, 2007, there was approximately $3.9 million of total unrecognized compensation cost related to restricted stock granted under the Omnibus Plan. The cost related to restricted stock grants will be recognized on a straight-line basis over a period of four years from the date of each grant through the fourth quarter of fiscal 2011.


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COSI, INC.
 
Notes to Consolidated Financial Statements — (Continued)
 
We measure the estimated fair value of our granted stock options using a Black-Scholes pricing model and of our restricted stock based on the fair market value of a share of registered stock on the date of the grant. Fiscal 2005 was the last year in which we issued stock option grants. The weighted average fair values of the options calculated in accordance with SFAS 123R were determined using a Black-Scholes option-pricing model with the following weighted average assumptions:
 
         
    2005  
 
Expected dividend yield
    0 %
Expected stock price volatility
    68 %
Average risk-free interest rate
    3.79 %
Average expected life of options
    5  
Weighted average grant date fair value
  $ 3.89  
 
SFAS 123R also requires the Company to estimate forfeitures in calculating the expense relating to share-based compensation as opposed to recognizing forfeitures as an expense reduction as they occur. Furthermore, in accordance with the provisions of SFAS 123R, we reclassified to additional paid-in-capital the balance that was in unearned compensation in our consolidated balance sheet as of January 3, 2006.
 
The expected volatility is based on an average of the historical volatility of the Company’s stock, the implied volatility of market options, peer company volatility, and other factors. The average expected life represents the period of time that option grants are expected to be outstanding and is derived from historical terms and other factors. The risk-free interest rate is based on the rate of U.S. Treasury zero-coupon issues with remaining term equal to the expected life of option grants. Pre-vesting forfeiture rates are estimated based on historical data.
 
A summary of option activity for fiscals 2007, 2006 and 2005 follows:
 
                                 
                Weighted
 		       
          Weighted
 		    Average
 		    Aggregate
 		 
    Number of
 		    Average Exercise
 		    Remaining
 		    Intrinsic
 		 
    Options     Price     Contractual Term     Value  
                      (In thousands)  
 
Outstanding as of January 3, 2005
    5,256,950     $ 5.26                  
Granted
    146,845     $ 6.54                  
Exercised
    (819,949 )   $ 2.99                  
Cancelled/Expired
    (386,771 )   $ 5.07                  
                                 
Outstanding as of January 2, 2006
    4,197,075     $ 6.09                  
Granted
    —                          
Exercised
    (341,640 )   $ 3.99                  
Cancelled/Expired
    (576,427 )   $ 2.31                  
                                 
Outstanding as of January 1, 2007
    3,279,008     $ 6.32       5.9     $ 4,338.5  
Granted
    —       —                  
Exercised
    (989,240 )   $ 2.06                  
Cancelled/Expired
    (505,350 )   $ 4.95                  
                                 
Outstanding as of December 31, 2007
    1,784,418     $ 7.76       3.9     $ 1.1  
                                 
Exercisable as of December 31, 2007
    1,638,067     $ 7.98       3.6     $ 0.9  
                                 
 
The total intrinsic value of options exercised during the years ended December 31, 2007, January 1, 2007, and January 2, 2006, was $2.9 million, $1.7 million, and $3.0 million, respectively. During fiscal 2007 we received


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COSI, INC.
 
Notes to Consolidated Financial Statements — (Continued)
 
approximately $2.0 million from the exercise of stock options. The total fair value of the options that vested during fiscal 2007 was $0.1 million.
 
                 
          Weighted
 		 
          Average
 		 
Total Exercisable at the End of the Year:
  Options     Exercise Price  
 
As of December 31, 2007
    1,638,067     $ 7.98  
                 
                 
As of January 1, 2007
    3,040,567     $ 6.58  
                 
                 
                 
As of January 2, 2006
    2,794,564     $ 6.87  
                 
 
The following table summarizes information about stock options outstanding at December 31, 2007:
 
                                         
    Options Outstanding              
          Weighted
 		          Options Exercisable  
          Average
 		    Weighted
 		          Weighted
 		 
    Number of
 		    Remaining
 		    Average
 		    Number of
 		    Average
 		 
    Options
 		    Contractual
 		    Exercise
 		    Options
 		    Exercise
 		 
Range of Exercise Prices
  Outstanding     Life in Years     Price     Exercisable     Price  
 
$1.36 - $2.04
    3,060       1.2     $ 1.90       2,895     $ 1.93  
$2.09 - $3.14
    422,851       5.5       2.75       421,541       2.75  
$4.33 - $6.50
    451,172       5.9       5.14       313,650       5.09  
$6.52 - $9.78
    162,364       0.7       8.76       155,010       8.85  
$9.84 - $12.25
    744,971       2.4       12.00       744,971       12.00  
                                         
      1,784,418       3.9     $ 7.76       1,638,067     $ 7.98  
                                         
 
Pursuant to the terms of his employment agreement dated September 15, 2007, and in accordance with the Omnibus Plan, we granted to James F. Hyatt on September 15, 2007 a sign-on restricted stock grant of 200,000 shares (the “Sign-on Grant”) and an initial restricted stock grant of 275,000 shares (the “Initial Grant”) of our authorized but unissued common stock, all under the Omnibus Plan. Mr. Hyatt’s rights in the shares granted pursuant to the Sign-on Grant will vest 50% at September 15, 2008 and the remaining 50% will vest at September 15, 2009 provided that at each such date, Mr. Hyatt remains in the continuous employ of Cosi from and after the grant date. Mr. Hyatt’s rights in the shares granted in the Initial Grant vested 20% on the grant date and an additional 20% will vest on each anniversary of the grant date provided that at each such date, Mr. Hyatt remains in the continuous employ of Cosi from and after the grant date and through each such anniversary date. The value of Mr. Hyatt’s shares, based on the closing price of our common stock on the date of the grants, was approximately $0.6 million and $0.9 million for the Sign-On Grant and Initial Grant, respectively. Approximately $0.3 million for these grants is included in stock-based compensation expense in the accompanying consolidated statements of operations for fiscal 2007.
 
In addition, during fiscal 2007, pursuant to the Omnibus Plan and in accordance with the terms and conditions prescribed by the Compensation Committee of our Board of Directors, we granted and issued 223,250 shares of our authorized but unissued common stock to certain key employees. The vesting of these restricted shares will occur as follows: (i) 20% of the shares vested on the grant date: and (ii) an additional 20% of the shares will vest on each anniversary of the grant date provided that at each such date the employee continues to be employed by the Company. The value of the shares for these certain key employees, based on the closing price of our common stock on the dates of the grants, was approximately $1.1 million. Approximately $0.2 million related to these grants is included in stock-based compensation expense in the accompanying consolidated statement of operations for fiscal 2007. During fiscal 2007, 574,450 previously issued shares of restricted common stock were forfeited. The value of the forfeited shares, based on the closing price of our common stock on the dates of the grants, was approximately $4.0 million.


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COSI, INC.
 
Notes to Consolidated Financial Statements — (Continued)
 
The following table summarizes the Company’s restricted stock activity:
 
                 
    Number of
 		    Weighted
 		 
    Shares of
 		    Average Grant-Date
 		 
    Restricted Stock     Fair Value  
 
Non-vested at January 3, 2005
    526,323     $ 1.62  
Granted
    860,000       5.99  
Vested
    698,323       2.70  
Forfeited
    —       —  
                 
Non-vested at January 2, 2006
    688,000       5.99  
Granted
    869,000       8.66  
Vested
    353,300       7.46  
Forfeited
    (54,000 )     7.74  
                 
Non-vested at January 1, 2007
    1,149,700       7.48  
Granted
    698,250       3.73  
Vested
    353,700       6.44  
Forfeited
    (574,450 )     7.04  
                 
Non-vested at December 31, 2007
    919,800     $ 5.31  
                 
 
On May 14, 2007, we issued 20,717 shares of restricted common stock to certain members of the Board of Directors pursuant to the Cosi Non-Employee Director Stock Incentive Plan. These shares had an aggregate value of approximately $0.1 million and vested upon issuance. In addition, on December 12, 2007, we issued 3,415 shares of restricted common stock to a new member of the Board of Directors pursuant to the Cosi Non-Employee Director Stock Incentive Plan with an aggregate value of approximately $0.01 million which vested upon issuance.
 
11.   Defined Contribution Plan
 
We have a 401(k) Plan (the “Plan”) for all qualified employees. The Plan provides for a matching employer contribution of 50% up to the first 4% of the employees’ deferred savings. The employer contributions made during the employee’s first year of employment vest upon the completion of one year of employment. Employer contributions made subsequent to the first year of employment vest immediately. The deferred amount cannot exceed 20% of an individual participant’s compensation in any calendar year. Our contributions to the Plan were approximately $0.1 million, $0.08 million and $0.05 million in fiscal years 2007, 2006 and 2005, respectively.
 
12.   Commitments and Contingencies
 
Commitments
 
As of December 31, 2007, we are committed under lease agreements expiring through 2018 for occupancy of our retail restaurants and for office space at the following minimum annual rentals:
 
         
Fiscal Year
  Amount  
    (In thousands)  
 
2008
  $ 15,382.8  
2009
    14,711.8  
2010
    13,415.1  
2011
    11,566.7  
2012
    9,792.9  
Thereafter
    20,546.2  
         
    $ 85,415.5  
         


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Table of Contents

 
COSI, INC.
 
Notes to Consolidated Financial Statements — (Continued)
 
Amounts shown are net of approximately $0.5 million of sublease rental income under non-cancelable subleases. Rental expense for fiscals 2007, 2006 and 2005 totaled $15.8 million, $13.7 million and $12.6 million, respectively. Certain lease agreements have renewal options ranging from 3 years to 15 years. In addition, certain leases obligate us to pay additional rent if restaurant sales reach certain minimum levels (percentage rent). Amounts incurred under these additional rent provisions and agreements were approximately $0.5 million, $0.5 million and $0.8 million, for fiscal years 2007, 2006 and 2005, respectively.
 
Certain of our lease agreements provide for scheduled rent increases during the lease term or for rental payments to commence at a date other than the date of initial occupancy. Rent expense is recognized on a straight-line basis over the term of the respective leases from the date we take possession. Our obligation with respect to these scheduled rent increases has been presented as a long-term liability in other liabilities in the accompanying consolidated balance sheets and totaled $5.4 million and $5.5 million as of the end of fiscal 2007 and 2006, respectively.
 
Certain of our leases also provide for landlord contributions to offset a portion of the cost of our leasehold improvements. These allowances are recorded as deferred liabilities and amortized on a straight-line basis against rent expense over the term of the related leases. Included in other long-term liabilities in the accompanying consolidated balance sheets for fiscals 2007 and 2006 were landlord allowances of $2.0 million and $2.1 million, respectively.
 
As of December 31, 2007, the Company had outstanding approximately $0.2 million in standby letters of credit, which were provided as security deposits for certain of the lease obligations. The letters of credit are fully secured by cash deposits or marketable securities held in accounts at the issuing banks and are not available for withdrawal by the Company. These amounts are included as a component of Intangibles, Security Deposits and Other Assets in the accompanying consolidated balance sheets.
 
During fiscal 2007 we recorded lease termination charges of approximately $0.3 million related to a location where, due to the enforcement of restrictions in a zoning overlay district, Cosi was denied the necessary permits to build a restaurant and we have exercised the exit provision under the lease and to an underperforming restaurant in Chicago where we have exercised the early exit provision of the lease. During both fiscal 2006 and fiscal 2005, we recorded lease termination income of approximately $0.2 million primarily due to the reversal of accruals deemed no longer required. During fiscal 2007, 2006 and 2005 we made cash payments of approximately $0.5 million, $0.08 million, and $0.02 million, respectively, related to restaurants in the lease termination accrual.
 
As of December 31, 2007, future minimum lease payments related to restaurants that have been closed is approximately $0.3 million, net of expected sublease payments, with remaining lease terms ranging from 1 to 5 years. For each of these locations, a lease termination reserve has been established based upon management’s estimate of the cost to exit the lease. Other liabilities in the accompanying consolidated balance sheet as of December 31, 2007 includes $0.3 million in accrued lease termination costs (including a current portion of $0.1 million), $5.4 million in accrued contractual lease increases and $2.0 million in landlord allowances (including a current portion of $0.3 million). Other liabilities in the accompanying consolidated balance sheet as of January 1, 2007 includes $0.4 million in accrued lease termination costs (including a current portion of $0.2 million), $5.5 million in accrued contractual lease increases and $2.1 million in landlord allowances (including a current portion of $0.3 million).
 
In fiscal 2001, we entered into a settlement agreement involving a trademark dispute. The settlement agreement requires us to make annual payments of $25,000 through 2011. The estimated present value of those future payments is included in other liabilities in the accompanying balance sheets.
 
Purchase Commitments
 
We have an agreement with Distribution Market Advantage, Inc. that provides us access to a national network of independent distributors. Under this agreement, which expires in November 2010, these independent distributors will supply us with approximately 77% of our food and paper products, primarily under pricing agreements that we negotiate directly with the suppliers.


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COSI, INC.
 
Notes to Consolidated Financial Statements — (Continued)
 
We have a long term beverage marketing agreement with Coca-Cola Company. We have received an allowance under this agreement, which is being recognized ratably as a credit to expense based on actual products purchased. Although we are eligible to receive additional amounts under the agreement if certain purchase levels are achieved, no additional amounts have been received or recorded as of December 31, 2007.
 
We purchase all contracted coffee products through a single supplier, Coffee Bean International, Inc. (“Coffee Bean International”), under an agreement that expires in June 2010. In the event of a business interruption, Coffee Bean International is required to utilize the services of a third-party roaster to fulfill its obligations. If the services of a third-party roaster are used, Coffee Bean International will guarantee that the product fulfillment standards stated in our contract will remain in effect throughout such business interruption period. Either party may terminate the agreement by written notice in accordance and subject to the terms of the agreement.
 
Self-Insurance
 
We have a self-insured group health insurance plan. We are responsible for all covered claims to a maximum liability of $100,000 per participant during a plan year. Benefits paid in excess of $100,000 are reimbursed to the plan under our stop-loss policy. In addition, we have an aggregate stop-loss policy whereby our liability for total claims submitted cannot exceed a pre-determined dollar factor based upon, among other things, past years’ claims experience, actual claims paid, the number of plan participants and monthly accumulated aggregate deductibles. Health insurance expense for fiscal years 2007, 2006, and 2005 was $2.2 million, $1.9 million and $1.3 million, respectively. The balance in the self-insurance reserve account was $0.3 million at both December 31, 2007 and January 1, 2007.
 
Litigation
 
In the normal course of business, we are routinely named as a defendant in or are a party to pending and threatened legal actions, 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.


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Table of Contents

SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
COSI, INC.
 
  By: 
/s/  WILLIAM KOZIEL
William Koziel
Chief Financial Officer, Secretary and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
 
Date: March 17, 2008
 
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
             
Signature
 
Title
 
Date
 
         
/s/  WILLIAM D. FORREST

William D. Forrest 		  Chairman of the Board   March 17, 2008
         
/s/  JAMES F. HYATT

James F. Hyatt 		  Chief Executive Officer, President and Director (Principal Executive Officer)   March 17, 2008
         
/s/  WILLIAM E. KOZIEL

William E. Koziel 		  Chief Financial Officer, Secretary and Treasurer (Principal Financial Officer and Principal Accounting Officer)   March 17, 2008
         
/s/  ELI COHEN

Eli Cohen 		  Director   March 17, 2008
         
/s/  CREED L. FORD III

Creed L. Ford III 		  Director   March 17, 2008
         
/s/  MARK DEMILIO

Mark Demilio 		  Director   March 17, 2008
         
/s/  ROBERT MERRITT

Robert Merritt 		  Director   March 17, 2008
         
/s/  MICHAEL O’DONNELL

Michael O’Donnell 		  Director   March 17, 2008
         
/s/  KARL S. OKAMOTO

Karl S. Okamoto 		  Director   March 17, 2008


71

Table of Contents

EXHIBIT INDEX
 
         
Exhibit
 		   
Number
 
Description of Exhibit
 
  2 .1   Merger Agreement by and among Xando, Incorporated, Xando Merger Corp. and Cosi Sandwich Bar, Inc. dated as of October 4, 1999 (Filed as Exhibit 2.1 to the Company’s Registration Statement on Form S-1, file #333-86390).
  3 .1   Amended and Restated Certificate of Incorporation of Cosi, Inc. (Filed as Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the period ended December 30, 2002).
  3 .2   Amended and Restated By-Laws of Cosi, Inc. (Filed as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 1, 2007).
  4 .1   Form of Certificate of Common Stock (Filed as Exhibit 4.1 to the Company’s Registration Statement on Form S-1, file #333-86390).
  4 .2   Rights Agreement between Cosi, Inc. and American Stock Transfer and Trust Company as Rights Agent dated November 21, 2002 (Filed as Exhibit 4.2 to the Company’s Annual Report on Form 10-K for the period ended December 30, 2002).
  4 .3   Amended and Restated Registration Agreement, dated as of March 30, 1999 (Filed as Exhibit 4.3 to the Company’s Registration Statement on Form S-1, file #333-86390).
  4 .4   Supplemental Registration Rights Agreement, dated as of August 5, 2003 by and among the Company and the parties thereto (Filed as Exhibit 4.4.2 to the Company’s Registration Statement on Form S-1, file #333-107689).
  4 .5   Amendment No. 1 to Rights Agreement dated as of November 21, 2002, between Cosi, Inc. and American Stock Transfer and Trust Company, as rights agent (Filed as Exhibit 4.3 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2003).
  4 .6   Investment Agreement, dated as of August 5, 2003, among the Company, Eric J. Gleacher, Charles G. Phillips, LJCB Nominees Pty Ltd, and ZAM Holdings, L.P. (Filed as Exhibit 4.9 to the Company’s Registration Statement on Form S-1/A, file #333-107689).
  4 .7   Letter Agreement, dated as of August 5, 2003, among the Company, Eric J. Gleacher, Charles G. Phillips, LJCB Nominees Pty Ltd, and ZAM Holdings, L.P. (Filed as Exhibit 4.10 to the Company’s Registration Statement on Form S-1/A, file #333-107689).
  10 .1   Cosi, Inc. 2005 Omnibus Long-Term Incentive Plan (Filed as Exhibit C to the Company’s Proxy Statement on Schedule 14A filed on March 31, 2005, file #000-50052.
  10 .2   Cosi Employee Stock Purchase Plan (Filed as Exhibit 10.2 to the Company’s Registration Statement on Form S-1, file #333-86390).
  10 .3   Cosi Non-Employee Director Stock Incentive Plan (Filed as Exhibit 10.3 to the Company’s Registration Statement on Form S-1, file #333-86390).
  10 .4   Cosi Sandwich Bar, Inc. Incentive Stock Option Plan (Filed as Exhibit 10.4 to the Company’s Registration Statement on Form S-1, file #333-86390).
  10 .5.3   Employment Agreement between Cosi, Inc. and Kevin Armstrong, dated May 9, 2005. (Filed as Exhibit 10.51.11 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended April 4, 2005).
  10 .5.4   Separation and Release Agreement between Cosi, Inc. and Cynthia Jamison, dated August 17, 2005 (Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated August 23, 2005).
  10 .5.5   Employment Agreement between Cosi, Inc. and William D. Forrest, dated December 12, 2005 (Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated December 16, 2005).
  10 .5.6   Terms of Employment between Cosi, Inc. and William E. Koziel, effective as of August 17, 2005 as described in the Company’s Current Report on Form 8-K (Filed on August 23, 2005).
  10 .5.7   Terms of Employment between Cosi, Inc. and Christopher Carroll, effective as of May 22, 2006 as described in the Company’s Current Report on Form 8-K (Filed on May 25, 2006).
  10 .5.8   Terms of Employment between Cosi, Inc. and Christopher Ames, effective as of November 13, 2006 as described in the Company’s Current Report on Form 8-K (Filed on November 17, 2006).


72

Table of Contents

         
Exhibit
 		   
Number
 
Description of Exhibit
 
  10 .5.9   Terms of Employment between Cosi, Inc. and Robert Merritt, effective as of March 12, 2007 as described in the Company’s Current Report on Form 8-K (Filed on March 12, 2007).
  10 .5.10   General separation and release agreement by and between the Company and Patrick Donnellan, dated August 8, 2007 (Filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 1, 2007).
  10 .5.11   Employment agreement, dated as of September 15, 2007 by and between the Company and James F. Hyatt (Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated September 18, 2007).
  10 .5.12   General separation and release agreement by and between the Company and Gilbert Melott, dated October 17, 2007 (Filed as Exhibit 10.2 to the company’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 1, 2007),
  10 .6.1   Foodservice Distribution Agreement between Cosi, Inc. and Distribution Market Advantage, Inc. dated as of November 1, 2005.(1)
  10 .7.1   Cosi, Inc. Form of Area Developer Franchise Agreement (Filed as Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 4, 2005).
  10 .7.2   Cosi, Inc. Form of Area Developer Franchise Agreement (Filed as Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 4, 2005).
  10 .8   Form of Senior Secured Note and Warrant Purchase Agreement (Filed as Exhibit 10.7 to the Company’s Registration on Form S-1, file #333-86390).
  10 .9   Securities Purchase Agreement dated as of April 27, 2004 (Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated April 28, 2004).
  10 .10   Form of Restricted Stock Award Agreement (Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated June 6, 2005).
  16     Letter from Ernst & Young LLP to the Securities and Exchange Commission, dated as of August 13, 2004, acknowledging its agreement with the statements made in Current Report on Form 8-K (Filed as Exhibit 16 to the Company’s Current Report on Form 8-K, dated August 13, 2004.
  21     Subsidiaries of Cosi, Inc. (Filed as Exhibit 21.1 to the Company’s Registration Statement on Form S-1, file #333-86390)
  23 .1   Filed herewith Consent of BDO Seidman, LLP, Independent Registered Public Accounting Firm
  31 .1   Filed herewith Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31 .2   Filed herewith Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32 .1   Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
(1) Portions of Exhibit 10.6.1 have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.


73

EX-23.1 2 c24897exv23w1.htm CONSENT exv23w1
 

EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Cosi, Inc.
Deerfield, Illinois
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-133113) and Form S-8 (No. 333- 132806) of Cosi, Inc. of our reports dated March 14, 2008, relating to the consolidated financial statements and the effectiveness of Cosi, Inc.’s internal control over financial reporting, which appear in this Form 10-K.
         
     
  /s/ BDO Seidman, LLP    
Chicago, Illinois     
March 14, 2008     

93

EX-31.1 3 c24897exv31w1.htm CERTIFICATION exv31w1
 

         
EXHIBIT 31.1
SECTION 302 CERTIFICATION
I, James F. Hyatt, certify that:
1.   I have reviewed this annual report on Form 10-K of Cosi, Inc;
 
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.   The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Rules 13a-15(f) and 15d-15(f), for the registrant and have:
  (a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  (b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  (c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  (d)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.   The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
  (a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  (b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
         
     
Date: March 17, 2008  /s/ JAMES F. HYATT    
  James F. Hyatt    
  Chief Executive Officer and
President and Director 		  

94

EX-31.2 4 c24897exv31w2.htm CERTIFICATION exv31w2
 

         
EXHIBIT 31.2
SECTION 302 CERTIFICATION
I, William Koziel, certify that:
1.   I have reviewed this annual report on Form 10-K of Cosi, Inc;
 
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.   The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Rules 13a-15(f) and 15d-15(f), for the registrant and have:
  (a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  (b)   Designed such internal control over financial reporting, or caused such internal control over reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  (c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  (d)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.   The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
  (a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  (b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
         
     
Date: March 17, 2008  /s/ WILLIAM KOZIEL    
  William Koziel   
  Chief Financial Officer, Secretary and Treasurer   

95

EX-32.1 5 c24897exv32w1.htm CERTIFICATION exv32w1
 

         
EXHIBIT 32-1
CERTIFICATION PURSUANT TO
18 U.S.C. ss.1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Cosi, Inc. (the “Company”) on Form 10-K for the fiscal year ended December 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James F. Hyatt, Chief Executive Officer and President and Director of the Company and I, William Koziel, Chief Financial Officer, Secretary and Treasurer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
  1.   The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Act of 1934; and
 
  2.   The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
         
     
Date: March 17, 2008   /s/ JAMES F. HYATT    
  James F. Hyatt   
  Chief Executive Officer and
President and Director 		  
 
     
Date: March 17, 2008  /s/ WILLIAM KOZIEL    
  William Koziel   
  Chief Financial Officer,
Secretary and Treasurer 		  
 
A signed original of this written statement required by Section 906 has been provided to Cosi, Inc. and will be retained by Cosi, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
The foregoing certification is being furnished to the Securities and Exchange Commission pursuant to 18 U.S.C. Section 1350. It is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

96

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