CBOU Caribou Coffee Company, Inc. (MM)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 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 Number: 000-51535

CARIBOU COFFEE COMPANY, INC.

FORM 10-Q

For the Thirteen Week Period Ended September 30, 2007

Table of Contents

		PART I. FINANCIAL INFORMATION
Item 1.		Financial Statements			3
		Condensed Consolidated Statements of Operations			3
		Condensed Consolidated Balance Sheets			4
		Condensed Consolidated Statements of Cash Flows			5
		Notes to Condensed Consolidated Financial Statements			6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			11
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			20
Item 4T.		Controls and Procedures			20
		PART II. OTHER INFORMATION
Item 1.		Legal Proceedings			20
Item 1A.		Risk Factors			21
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			21
Item 3.		Defaults Upon Senior Securities			21
Item 4.		Submission of Matters to a Vote of Security Holders			21
Item 5.		Other Information			22
Item 6.		Exhibits			22
Signature					23
Certification
Certification
Certification
Certification

PART I — FINANCIAL INFORMATION

See accompanying notes.

See accompanying notes.

CARIBOU COFFEE COMPANY, INC. AND AFFILIATES
(A Majority Owned Subsidiary of Caribou Holding Company Limited)

2. Summary of Significant Accounting Policies

      Revenue Recognition

     The Company recognizes coffeehouse sales when payment is tendered at the point of sale. Revenue from the sale of products to commercial, mail order or license customers (other sales) is recognized when ownership and price risk of the products are legally transferred to the customer, which is generally upon the shipment of goods. Revenues include any applicable shipping and handling costs invoiced to the customer and the expense of such shipping and handling costs is included in cost of sales.

     Sales to commercial customers where a right of return exists are deferred until the product is sold to the ultimate customer or a predictable return history is available.

     The Company sells stored value cards of various denominations. Cash receipts related to stored value card sales are deferred when initially received and revenue is recognized when the card is redeemed and the related products are delivered to the customer. Such amounts are classified as a current liability on the Company’s consolidated balance sheets. On January 1, 2007, the Company discontinued its policy of charging a $2.00 per month maintenance fee on all of its stored value cards which have had no activity for 12 consecutive months. In 2006, this maintenance fee was recorded as other income on the Company’s financial statements.

     The Company will honor all stored value cards presented for payment, however, the Company has determined that the likelihood of redemption is remote for certain card balances due to long periods of inactivity. Beginning January 1, 2007, the Company estimates that cards which have had no activity for 16 months are unlikely to be used in the future. The Company uses the redemption recognition method and recognizes the estimated value of abandoned cards as a percentage of every stored value card redeemed and includes the amount in Coffeehouse sales. Such amounts represent the Company’s experience regarding unused balances related to stored value cards redeemed. The Company excludes stored value card balances sold in jurisdictions which require remittance of unused balances to government agencies under unclaimed property laws. For the thirteen and thirty-nine weeks ended September 30, 2007, the Company recognized coffeehouse sales of approximately $209,000 and $787,000, respectively, related to estimated abandoned stored value card balances.

      Operating Leases and Rent Expense

     The Company accounts for its operating leases in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 13, Accounting for Leases, and FASB Technical Bulletin No. 85-3, Accounting for Operating Leases With Scheduled Rent Increases. Certain of the Company’s lease agreements provide for scheduled rent increases during the lease term or for rental payments commencing at a date other than the date of initial occupancy. Rent expense is recorded on a straight-line basis over the initial lease term and renewal periods that are reasonably assured. The difference between rent expense and rent paid is recorded as deferred rent and is included in “accrued expenses” and “deferred rent liability” in the consolidated balance sheets.

3. Recent Accounting Pronouncements

     In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements . This statement clarifies the definition of fair value, establishes a framework for measuring fair value and expands the disclosures on fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently assessing the impact of the adoption of this statement.

     In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115, which is effective for fiscal years beginning after November 15, 2007. This statement permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair value has been elected will be reported in earnings. The Company is currently evaluating the potential impact of this statement.

4. Coffeehouse Closing and Asset Disposals

     Based on an operating cash flow analysis performed throughout the year, the Company commits to a plan to close unprofitable coffeehouses. If the coffeehouse assets are deemed to be impaired, the Company records a charge to reduce the carrying value of the property and equipment to estimated realizable value in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Upon closing of the coffeehouses, the Company will accrue for estimated lease commitments and other expenses associated with the closings.

     Charges related to coffeehouse closures and the impairment of assets still in service during the thirteen and thirty-nine week periods ended September 30, 2007 and October 1, 2006 consisted of the following:

     As required by SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities, the Company records estimated costs for store closures when they are incurred rather than at the date of a commitment to an exit or disposal plan. These costs primarily consist of the estimated cost to terminate real estate leases.

5. Inventories

     Inventories consist of the following:

     Inventories are net of related reserves totaling $116,578 and $374,289 at September 30, 2007 and December 31, 2006, respectively.

     At September 30, 2007 and December 31, 2006, the Company had committed to fixed price purchase contracts, primarily for green coffee, aggregating approximately $2,202,000 and $5,433,000, respectively. These fixed price contracts are for less than one year. The Company is also committed to price-to-be-fixed green coffee purchase contracts with deliveries through December 2008. The Company only contracts for green coffee expected to be used in the normal course of business. The Company believes, based on relationships established with its suppliers in the past, the risk of non-delivery on such purchase commitments is remote.

6. Equity and Share-Based Compensation

     The Company maintains stock option plans which provide for the granting of non-qualified stock options to officers and key employees and certain non-employees. Stock options have been granted at prices equal to the fair market values as of the dates of grant. Options vest generally in four years and expire in ten years from the grant date. Effective January 2, 2006, the Company adopted the fair value recognition provisions of SFAS 123R using the modified-prospective-transition method. Under SFAS 123R, share-based compensation expense for the thirteen weeks ended September 30, 2007 and October 1, 2006 totaled approximately $150,000 and $154,000, respectively, and for the thirty-nine weeks ending September 30, 2007 and October 1, 2006, totaled approximately $429,000 and $329,000, respectively.

     Stock option activity during the period indicated is as follows:

7. Income Taxes

     On January 1, 2007, we adopted the provisions of Financial Standards Accounting Board Interpretations No. 48 Accounting for Uncertainty in Income Taxes (“FIN 48”), an interpretation of FASB Statement No. 109 (“SFAS 109”). As a result of the implementation of FIN 48, we recognized a $530,100 increase to long term income tax liabilities for unrecognized tax benefits (including interest and penalties of $70,000), which was accounted for on the Company’s balance sheet as a reduction to the beginning balance of retained earnings. At the adoption date of January 1, 2007, we had $4,759,000 of total unrecognized tax benefits, of which 802,208, if recognized could have a favorable impact on the effective tax rate in future periods. At September 30, 2007, we had $3,755,000 of unrecognized tax benefits.

     During the thirteen weeks ended September 30, 2007 and October 1, 2006, the Company recognized a tax benefit of $31,468 and $25,428, respectively. For the thirteen weeks ended September 30, 2007, our tax benefit consisted of $29,341 of state income tax expense and $60,809 of tax benefit related to the decrease of its long term income tax liabilities for unrecognized tax benefits due to the expiration of the statute of limitations. For the thirty-nine weeks ended September 30, 2007, and October 1, 2006, the Company recognized a tax benefit of $327,565 and tax expense of $256,928, respectively. For the thirty-nine weeks ended September 30, 2007, our tax benefit consisted of $71,579 of state income tax expense and $399,144 of tax benefit related to the decrease of its long term income tax liabilities for unrecognized tax benefits due to the expiration of the statute of limitations.

     We recognize interest and penalties related to uncertain tax positions in income tax expense.

8. Net Loss Per Share

     Basic and diluted net loss per share for the thirteen and thirty-nine week periods ended September 30, 2007 and October 1, 2006 were as follows:

     For the thirteen and thirty-nine week periods ended September 30, 2007 and October 1, 2006, stock options were excluded from the calculation of shares applicable to diluted net loss per share because their inclusion would have been anti-dilutive.

9.  Master Franchise Agreement

     In November 2004, the Company entered into a Master Franchise Agreement with a franchisee. The agreement provides the franchisee the right to develop, subfranchise or operate 250 Caribou Coffee coffeehouses in 12 Middle Eastern countries. The Agreement expires in November 2012 and provides for certain renewal options.

     In connection with the agreement, the franchisee paid the Company a nonrefundable deposit aggregating $3,250,000. In addition to the deposit, the franchisee is obligated to pay the Company $20,000 per franchised/subfranchised coffeehouse (initial franchise fee) opened for the first 100 Caribou Coffee Coffeehouses and $15,000 for each additional franchised/subfranchised coffeehouse opened (after the first 100). The agreement provides for $5,000 of the initial deposit received by the Company to be applied against the initial franchise fee as discussed herein. Monthly royalty payments ranging from 3%-5% of gross sales are also due to the Company.

The Company included $2,626,000 of the deposit in long term liabilities as deferred revenue and $350,000 in current liabilities as deferred revenue on its September 30, 2007 balance sheet. As of December 31, 2006, the Company included $2,769,000 of the deposit in long term liabilities as deferred revenue and $325,000 in current liabilities as deferred revenue. The initial deposit will be amortized into income on a pro rata basis along with the initial franchise fee payments received in connection with the execution of the franchise or subfranchise agreements at the time of the coffeehouse opening. The $350,000 and $325,000 as of September 30, 2007 and December 31, 2006, respectively, consist of franchise fees for the coffeehouses estimated to be opened during the subsequent 12 months per the development schedule in the Master Franchise Agreement. At September 30, 2007, there were twenty-eight coffeehouses operating under this Agreement. The franchisee and certain owners of the franchisee also own indirect interests in Caribou Holding Company Limited.

     The Company also deferred certain costs in connection with the Master Franchise Agreement which were $232,485 and $244,005 at September 30, 2007 and December 31, 2006 respectively. These costs include the direct costs for training franchisees, establishing a logistics and distribution network to supply product to franchisees, related travel and legal costs. These costs are direct one-time charges incurred by the Company associated with the start up of the Master Franchise Agreement. These costs will be deferred until the related revenue is recognized when the coffeehouse is opened.

10. Commitments and Contingencies

     On July 26, 2005, three of our former employees filed a lawsuit against us, which we removed to the federal court in Minnesota, under the federal Fair Labor Standards Act (“FLSA”), the Minnesota FLSA, and state common law. The suit now primarily alleges that we misclassified our retail coffeehouse managers as exempt from the overtime provisions of the FLSA and the Minnesota FLSA and that these managers are therefore entitled to overtime compensation for each week in which they worked more than 40 hours from May 2002 to the present with respect to the claims under the federal FLSA and for weeks in which they worked more than 48 hours from May 2003 to the present with respect to the claims under the Minnesota FLSA. The plaintiffs are seeking to represent themselves and all of our allegedly similarly situated current and former (within the foregoing periods of time) coffeehouse managers. The plaintiffs are seeking payment of an unspecified amount of allegedly owed and unpaid overtime compensation, liquidated damages, prejudgment interest, civil penalties under the Minnesota FLSA, a full accounting of the amount allegedly owed to the putative class, temporary and injunctive relief, attorney’s fees and costs. On October 31, 2005,

the court granted the plaintiffs’ motion to conditionally certify an alleged nationwide class of our current and former coffeehouse managers since May 25, 2002 for purposes of pursuing the plaintiffs’ claim that the coffeehouse managers were and are misclassified as exempt under the FLSA. The period for potential class members to opt in and discovery is now closed. On September 22, 2006 we filed a Motion for Decertification seeking to decertify the conditionally certified class. On October 10, 2006, the plaintiffs moved to certify an alleged opt out class under the Minnesota FLSA. On February 16, 2007 we filed a Motion for Summary Judgment on the claims of the original three named plaintiffs and the plaintiffs filed a motion to reopen the opt in period on the FLSA claims. On April 6, 2007, the Magistrate Judge recommended that our Motion for Decertification be denied, that the plaintiffs’ motion to certify an opt out class under the Minnesota FLSA be granted, and that their motion to reopen the opt in period on the FLSA claims be denied. On April 25, 2007, we and the plaintiffs filed Objections with the District Judge to these recommendations that respectively went against each side. On May 17, 2007, the District Judge denied all Objections and adopted the Magistrate Judge’s recommendations in their entirety. On June 1, 2007, we filed a Petition with the Eighth Circuit Court of Appeals seeking permission to immediately appeal the District Court’s class certification rulings. On July 10, 2007, a three judge panel of the Eighth Circuit denied this Petition by a vote of 2-1. In the meantime, however, on April 19, 2007, the Court granted our Motion for Summary Judgment as to the claims of one of the original three named plaintiffs and to limit the FLSA claims of all other plaintiffs to the period of time beginning on May 25, 2003 (rather than going back to May 25, 2002 as alleged by the plaintiffs). We continue to believe that we have defenses to all of the remaining claims in this case, and we are vigorously defending the lawsuit. These claims could divert our management’s time and attention from our business operations and might potentially result in substantial costs of defense, settlement or other disposition, which could have a material adverse effect on our results of operations in one or more fiscal periods.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The information in this Management’s Discussion and Analysis section should be read in conjunction with the unaudited condensed consolidated financial statements and the notes included in Item 1 of Part I of this Form 10-Q and the audited consolidated financial statements and notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended December 31, 2006 contained in the Company’s Form 10-K (File No. 000-51535).

FORWARD-LOOKING STATEMENTS

Certain statements in this report, and other written or oral statements made by or on behalf of Caribou Coffee are “forward-looking statements” within the meaning of the federal securities laws. Statements regarding future events and developments and our future performance, as well as management’s current expectations, beliefs, plans, estimates or projections relating to the future, are forward-looking statements within the meaning of these laws. These forward-looking statements are subject to a number of risks and uncertainties. Among the important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are: fluctuations in quarterly and annual results, incurrence of net losses, adverse effects of management focusing on implementation of a growth strategy, failure to develop and maintain the Caribou Coffee brand and other factors disclosed in the Company’s filings with the Securities and Exchange Commission. The Company undertakes no obligation to update any forward-looking statements in order to reflect events or circumstances that may arise after the date of this report.

Overview

     We are the second largest company-owned gourmet coffeehouse operator in the United States based on the number of coffeehouses. As of September 30, 2007, we had 473 retail locations, including 41 licensed locations and 6 joint venture locations. We focus on offering our customers high-quality gourmet coffee and espresso-based beverages, as well as specialty teas, baked goods, whole bean coffee, branded merchandise and related products. In addition, we sell our products to grocery stores and mass merchandisers, office coffee providers, airlines, hotels, sports and entertainment venues, college campuses and other commercial customers. We focus on creating a unique experience for customers through a combination of high-quality products, a comfortable and welcoming coffeehouse environment and customer service.

     We intend to franchise the Caribou Coffee brand where we believe there are significant opportunities to grow our business, both domestically and internationally. In late 2006, we completed and filed our Uniform Franchise Offering Circular (UFOC) and have begun discussions with a number of qualified multi-unit developers for key U.S. markets. As of June 29, 2007, a domestic development agreement has been signed with a local developer for the development of 20 locations in the Northern New Jersey market. In late 2006, we announced our first entry into the Asian market and our second major international franchise agreement which calls for the development of a minimum of 25 coffeehouses in South Korea over the next five years. As of September 30, 2007, 4 locations have opened in South Korea. In 2005, we entered into a master franchise agreement with a local franchisee to develop 250 coffeehouses in the Middle East through 2012 and have opened 28 coffeehouses under this agreement. We are currently exploring franchise arrangements in other international markets.

     A key part of our continued business expansion is the aggressive development of a national brand presence through brand licensing agreements. To date, we have entered into brand licensing agreements with Kemps, Inc. (a St. Paul based dairy), General Mills, Coca-Cola North America (CCNA) and most recently, Keurig Incorporated, an industry leader in single-cup coffee brewing technology. The Kemps licensing agreement allows Kemps to use Caribou Coffee marks and coffee in producing various gourmet coffee flavored ice cream products. The products are sold at retail grocery stores. Under the General Mills licensing agreement, General Mills will use the Caribou Coffee marks and coffee in the production of various gourmet coffee flavored snack bars. Four gourmet coffee flavored snack bars have been produced, distributed and marketed throughout the U.S. In November 2006, we announced our brand licensing arrangement with CCNA to launch a new line of premium ready-to-drink iced coffees in the U.S. The new Caribou Iced Coffee product was launched in select markets this August with convenience and limited grocery store distribution. Our most recent business licensing agreement is with Keurig Incorporated. Under this licensing agreement, Caribou branded coffee is packaged in Keurig K-Cups offering single cup coffee lovers eight Caribou Coffee varieties to choose from for both at home and in the office consumption. The Caribou Coffee K-cups and Keurig brewers are available in our coffeehouses and on our website.

Critical Accounting Policies

     The preparation of our financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses during the periods presented. Our Annual Report on Form 10-K for the fiscal year ended December 31, 2006, (File No. 000-51535) includes a summary of the critical accounting policies we believe are the most important to aid in understanding our financial condition and results of operations. We believe those critical accounting policies and the following additional critical accounting policy are significant or involve additional management judgment due to the sensitivity of the methods, assumptions, and estimates necessary in determining the related asset and liability amounts.

      Income taxes - We account for uncertain tax positions in accordance with FASB Interpretation No. 48 Accounting for Uncertainty in Income Taxes (“FIN 48”) an interpretation of FASB Statement No. 109 (“SFAS 109”). The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. As such, we are required to make many subjective assumptions and judgments regarding our income tax exposures. Interpretations of and guidance surrounding income tax laws and regulations change over time, and as such, changes in our subjective assumptions and judgments can materially affect amounts recognized in the consolidated balance sheets and statements of income. See note 7 to the condensed consolidated financial statements, “Income Taxes”, for additional detail on our uncertain tax positions.

Fiscal Periods

     Our fiscal year ends on the Sunday falling nearest to December 31. Each fiscal year reported herein consists of four 13-week quarters in a 52-week year. Each fiscal quarter reported herein consists of two four-week months and one five-week month.

     The Company’s sales are somewhat seasonal, with the fourth quarter accounting for the highest sales volumes. Operating results for the thirteen week period ended September 30, 2007, are not necessarily indicative of future results that may be expected for the year ending December 30, 2007.

Net Sales

     Total net sales increased $5.0 million, or 8.8%, to $62.0 million in the third thirteen weeks of fiscal 2007, from $57.0 million in the third thirteen weeks of fiscal 2006. This increase was primarily attributable to the opening of net 16 new company-owned coffeehouses during the past twelve months. Other net sales increased by $1.3 million, or 48.5% to $3.8 million for the third thirteen weeks of fiscal 2007 from $2.5 million for the third thirteen weeks of fiscal 2006. This increase was primarily driven by sales to grocery stores, club stores and other commercial accounts. Also contributing to the increase were product sales and royalties from the 25 net new franchised coffeehouses opened during the past twelve months and franchise development fees from the two new franchised coffeehouse opened in the third thirteen weeks of 2007.

Costs and Expenses

      Cost of sales and related occupancy costs. Cost of sales and related occupancy costs increased $3.1 million, or 12.8%, to $26.8 million in the third thirteen weeks of fiscal 2007, from $23.7 million in the third thirteen weeks of fiscal 2006. This increase was primarily due to an increase in our total net sales. As a percentage of total net sales, cost of sales and related occupancy costs increased to 43.2% in the third thirteen weeks of fiscal 2007 from 41.6% in the third thirteen weeks of fiscal 2006. The increase in cost of sales and related occupancy costs as a percent of total net sales was primarily due to higher dairy and product mix.

      Operating expenses. Operating expenses increased $2.7 million, or 11.2%, to $26.6 million in the third thirteen weeks of fiscal 2007, from $23.9 million in the third thirteen weeks of fiscal 2006. As a percentage of total net sales, operating expenses increased to 43.0% in the third thirteen weeks of fiscal 2007 from 42.0% in the third thirteen weeks of fiscal 2006. The increase in operating expenses as a percentage of total net sales was primarily due to increases in coffeehouse labor costs, including employee benefits, at both new and existing units.

      Opening expenses. Opening expenses decreased $0.4 million, or 76.5%, to $0.1 million in the third thirteen weeks of fiscal 2007, from $0.5 million in the third thirteen weeks of fiscal 2006. The decrease in coffeehouse opening expense was primarily attributable to the opening of two new company-owned coffeehouses in the third thirteen weeks of fiscal 2007 versus opening twelve new company-owned coffeehouses during the third thirteen weeks of fiscal 2006.

      Depreciation and amortization. Depreciation and amortization increased $1.8 million, or 33.9%, to $7.1 million in the third thirteen weeks of fiscal 2007, from $5.3 million in the third thirteen weeks of fiscal 2006. This increase was primarily due to additional depreciation associated with six impaired coffeehouses compared to one impaired coffeehouse last year. As a percentage of total net sales, depreciation and amortization was 11.5% in the third thirteen weeks of fiscal 2007, compared to 9.4% in the third thirteen weeks of fiscal 2006. This increase as a percentage of total net sales was due to the 16 net new coffeehouses opened during the last twelve months and a $1.3 million increase in impairment expense to $1.5 million in the third thirteen weeks of fiscal year 2007, from $0.2 million in the third thirteen weeks of fiscal year 2006.

      General and administrative expenses. General and administrative expenses increased $0.1 million, or 1.2%, to $6.9 million in the third thirteen weeks of fiscal 2007 from $6.8 million in the third thirteen weeks of fiscal 2006. As a percentage of total net sales, general and administrative expenses decreased to 11.0% in the third thirteen weeks of fiscal 2007, from 11.9% in the third thirteen weeks of fiscal 2006. The decrease in general and administrative expenses was due to the Company’s ability to leverage its general and administrative costs.

      Closing expenses and disposal of assets. Closing expense and disposal of assets increased $2.8 million to $2.9 million in the third thirteen weeks of fiscal 2007 from $0.1 million in the third thirteen weeks of fiscal 2006. This increase is due to eleven coffeehouse closures in the third thirteen weeks of fiscal 2007, compared to one in the third thirteen weeks of fiscal 2006. The Company will continue to actively manage its portfolio of coffeehouses. Expenses associated with the closings are variable from coffeehouse to coffeehouse and are dependant upon the amount of time left on the leases and the remaining book value associated with each coffeehouse.

      Other Income. Other income decreased $0.2 million in the third thirteen weeks of fiscal 2007 from $0.2 million in the third thirteen weeks of fiscal 2006 due to the elimination of the monthly $2.00 maintenance fee which was deducted from a Caribou branded stored value card’s balance after 12 consecutive months of inactivity. The Company determined that stored value cards which have been inactive for 16 months are unlikely to be used in the future. As of January 1, 2007, the Company began recognizing breakage revenue for these inactive cards using the redemption recognition method and has classified such revenue as a component of coffeehouse sales.

      Interest income. Interest income decreased by $0.1 million to $0.1 million in the third thirteen weeks of fiscal 2007, from $0.2 million in the third thirteen weeks of fiscal 2006 due to the decrease in our cash and cash equivalents balance from $13.3 million as of October 1, 2006, to $5.6 million as of September 30, 2007.

      Interest expense. Interest expense remained flat at $0.1 million in the third thirteen weeks of fiscal 2007 and 2006. Interest expense was comprised of commitment fees, agency fees and debt acquisition cost amortization associated with the Company’s revolving credit facility. There were no outstanding borrowings at the end of either the third thirteen weeks of fiscal 2007 or fiscal 2006.

Net Sales

     Total net sales increased $17.2 million, or 10.1%, to $186.7 million in the first thirty-nine weeks of fiscal 2007, from $169.5 million in the first thirty-nine weeks of fiscal 2006. This increase was primarily attributable to the opening of net 16 new company-owned coffeehouses in the last twelve months. Other net sales increased by $3.5 million, or 45.7% to $11.1 million for the first thirty-nine weeks of fiscal 2007 from $7.6 million for the first thirty-nine weeks of fiscal 2006. This increase was primarily driven by sales to grocery stores, club stores and other commercial accounts. Also contributing to the increase were product sales and royalties from the 25 net new franchised coffeehouses opened during the past twelve months.

Costs and Expenses

      Cost of sales and related occupancy costs. Cost of sales and related occupancy costs increased $8.0 million, or 11.4%, to $78.8 million in the first thirty-nine weeks of fiscal 2007, from $70.8 million in the first thirty-nine weeks of fiscal 2006. This increase was primarily due to an increase in our total net sales. As a percentage of total net sales, cost of sales and related occupancy costs increased to 42.2% in the first thirty-nine weeks of fiscal 2007 from 41.7% in the first thirty-nine weeks of fiscal 2006. The increase in cost of sales and related occupancy costs as a percent of total net sales was primarily due to higher percentage occupancy costs at new coffeehouses and mix of product sales.

      Operating expenses. Operating expenses increased $9.5 million, or 13.5%, to $79.6 million in the first thirty-nine weeks of fiscal 2007, from $70.1 million in the first thirty-nine weeks of fiscal 2006. This increase was primarily due to the increased number of coffeehouses in operation. As a percentage of total net sales, operating expenses increased to 42.7% in the first thirty-nine weeks of fiscal 2007 from 41.4% in the first thirty-nine weeks of fiscal 2006. This increase as a percentage of total net sales was primarily due to an increase in coffeehouse labor costs, including employee benefits.

      Opening expenses. Opening expenses decreased $0.9 million, or 77.1%, to $0.3 million in the first thirty-nine weeks of fiscal 2007, from $1.2 million in the first thirty-nine weeks of fiscal 2006. The decrease in coffeehouse opening expense was primarily attributable to the opening of eleven new company-owned coffeehouses in the first thirty-nine weeks of fiscal 2007 versus thirty-five new company-owned coffeehouses during the first thirty-nine weeks of fiscal 2006.

      Depreciation and amortization. Depreciation and amortization increased $3.7 million, or 24.3%, to $19.1 million in the first thirty-nine weeks of fiscal 2007, from $15.4 million in the first thirty-nine weeks of fiscal 2006. This increase was primarily due to additional depreciation associated with nine impaired coffeehouses in addition to depreciation associated with new coffeehouses opened during the last twelve months. As a percentage of total net sales, depreciation and amortization was 10.3% in the first thirty-nine weeks of fiscal 2007, compared to 9.1% in the first thirty-nine weeks of fiscal 2006. This increase as a percentage of total net sales was due to the 16 net new coffeehouses opened during the last twelve months and a $1.8 million increase in impairment expense to $2.4 million in the first thirty-nine weeks of fiscal year 2007, from $0.6 million in the first thirty-nine weeks of fiscal year 2006.

      General and administrative expenses. General and administrative expenses increased $1.5 million, or 7.8%, to $20.6 million in the first thirty-nine weeks of fiscal 2007 from $19.1 million in the first thirty-nine weeks of fiscal 2006. As a percentage of total net sales, general and administrative expenses decreased to 11.0% in the first thirty-nine weeks of fiscal 2007, from 11.3% in the first thirty-nine weeks of fiscal 2006. The decrease in general and administrative expenses as a percentage of total net sales was due to the Company’s ability to leverage its general and administrative costs.

      Closing expenses and disposal of assets. In the first thirty-nine weeks of fiscal 2007 closing expenses and disposal of assets increased $3.3 million to $3.7 million in the first thirty-nine weeks of fiscal 2007 from $0.4 million in the first thirty-nine weeks of fiscal 2006. This increase is primarily due to the closing of nineteen company-owned coffeehouses in the first thirty-nine weeks of fiscal 2007, compared to five in the first thirty-nine weeks of fiscal 2006. The Company will continue to actively manage its portfolio of coffeehouses. Expenses associated with the closings are variable from coffeehouse to coffeehouse and are dependant upon the amount of time left on the leases and the remaining book value associated with each coffeehouse.

      Other Income. Other income decreased $0.8 million in the first thirty-nine weeks of fiscal 2007 from $0.8 million in the first thirty-nine weeks of fiscal 2006 due to the elimination of the monthly $2.00 maintenance fee which was deducted from a Caribou branded stored value card’s balance after 12 consecutive months of inactivity. The Company determined that stored value cards which have been inactive for 16 months are unlikely to be used in the future. As of January 1, 2007, the Company began recognizing breakage revenue for these inactive cards using the redemption recognition method and has classified such revenue as a component of coffeehouse sales.

      Interest income. Interest income decreased by $0.4 million to $0.1 million in the first thirty-nine weeks of fiscal 2007, from $0.5 million in the first thirty-nine weeks of fiscal 2006 due to the decrease in our cash and cash equivalents balance from $13.3 million as of October 1, 2006 to $5.6 million as of September 30, 2007.

      Interest expense. Interest expense decreased by $0.1 million to $0.4 million in the first thirty-nine weeks of fiscal 2007, from $0.5 million in the first thirty-nine weeks of fiscal 2006. Interest expense was comprised of commitment fees, agency fees and debt acquisition cost amortization associated with the Company’s revolving credit facility. There were no outstanding borrowings at the end of either the first thirty-nine weeks of fiscal 2007 or fiscal 2006.

      Income tax provision. Income tax provision decreased by $0.6 million to a $0.3 million benefit in the first thirty-nine weeks of fiscal 2007, from a $0.3 million expense in the first thirty-nine weeks of fiscal 2006 due to the reversal of income tax reserves. The income tax reserve was reduced as a result of the expiration of the associated statue of limitations.

     Cash and cash equivalents as of September 30, 2007, were $5.6 million, compared to cash and cash equivalents of $14.8 million as of December 31, 2006. Generally, our principal requirements for cash are capital expenditures for the development of new coffeehouses, maintaining or remodeling existing coffeehouses and funding operations. Our requirements for capital have been funded through cash flow from operations and proceeds from our initial public offering. Other than normal operating expenses, cash requirements for fiscal 2007 are expected to consist primarily of capital expenditures for new company-owned coffeehouses, the remodeling of existing company-owned coffeehouses and other infrastructure capital needs. Management expects capital expenditures to be in the range of $18.0 million to $21.0 million in fiscal 2007.

     Net cash provided by operating activities for the first thirty-nine weeks of fiscal 2007 was $1.9 million compared to net cash provided of $2.6 million for the first thirty-nine weeks of 2006. The $0.7 million decrease of cash provided by operating activities was the result of an increase in our net loss, partially offset by additional depreciation, non-cash closing costs and lower working capital requirements.

     Net cash used in investing activities during the first thirty-nine weeks of fiscal 2007 was $11.4 million compared to net cash used in investing activities of $23.1 million for the first thirty-nine weeks of fiscal 2006. A significant amount of these capital expenditures for each fiscal year, were for the construction of new coffeehouses, which include the cost of leasehold improvements and capital equipment. The company opened eleven new company-owned coffeehouses in the first thirty-nine weeks of fiscal 2007 and thirty-five company-owned coffeehouses in the first thirty-nine weeks of fiscal 2006. The remainder of the capital expenditures for each fiscal year was for the remodel of existing coffeehouses in addition to roasting, packaging and computer equipment and systems.

     Net cash provided by financing activities was $0.4 million for the first thirty-nine weeks of fiscal 2007 compared to $0.1 million used by financing activities for the first thirty-nine weeks of fiscal 2006. The increase in net cash provided by financing activities is attributable to sales of stock to option holders under the Company’s 2005 Equity Incentive Plan. We did not have any borrowings under our revolving credit facility during fiscal 2006 or in the first thirty-nine weeks of fiscal 2007. As of September 30, 2007, we had $60 million available under our revolving credit facility, all of which remains undrawn and available for borrowing. Interest payable under the revolving credit facility is equal to the amount outstanding under the facility multiplied by the applicable LIBOR rate plus a specified margin. The revolving credit facility is subject to financial and non-financial covenants. Our revolving credit facility expires in June of 2009.

     We believe that our anticipated future cash flows from operations and amount available under our revolving credit facility will be sufficient to fund our working capital and capital expenditure requirements for the next twelve months.

Off-Balance Sheet Arrangements

     Other than our coffeehouse leases, we do not have any off-balance sheet arrangements. As of September 30, 2007, we were committed to fixed and price-to-be-fixed green coffee purchase contracts with deliveries expected through December 2008. The Company only contracts for green coffee expected to be used in the normal course of business. The Company believers, based on relationships established with its suppliers in the past, the risk of non-delivery on such purchase commitments is remote.

Recent Accounting Pronouncements

     In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements . This statement clarifies the definition of fair value, establishes a framework for measuring fair value and expands the disclosures on fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the potential impact of this statement.

     In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115, which is effective for fiscal years beginning after November 15, 2007. This statement permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair value has been elected will be reported in earnings. We are currently evaluating the potential impact of this statement.

Key Financial Metrics

     We review our operations based on both financial and non-financial metrics. Among the key financial metrics upon which management focuses in reviewing our performance are comparable coffeehouse net sales, EBITDA (a non-GAAP measure), cash flow from operations before general and administrative expenses, general and administrative expenses and capital expenditures. Among the key non-financial metrics upon which management focuses in reviewing performance are the number of new coffeehouse openings, average check and transaction count.

     The following table sets forth non-GAAP metrics and operating data that do not otherwise appear in our consolidated financial statements for the thirteen and thirty-nine weeks ended September 30, 2007 and October 1, 2006:

EBITDA is equal to net income (loss) excluding: (a) interest expense; (b) interest income; (c) depreciation and amortization; and (d) income taxes.

          We believe EBITDA is a useful to investors in evaluating our operating performance for the following reason:

•

Our coffeehouse leases are generally short-term (5-10 years) and we must depreciate all of the cost associated with those leases on a straight-line basis over the initial lease term excluding renewal options (unless such renewal periods are reasonably assured at the inception of the lease). We opened 285 coffeehouses from the beginning of fiscal 2002 through the end of the first thirty-nine weeks of fiscal 2007. As a result, we believe depreciation expense is disproportionately large when compared to the sales from a significant percentage of our coffeehouses that are in their initial years of operations. Also, many of the assets being depreciated have actual useful lives that exceed the initial lease term excluding renewal options. Consequently, we believe that adjusting for depreciation and amortization is useful for evaluating the operating performance of our coffeehouses.

          Our management uses EBITDA:

	•		As a measurement of operating performance because it assists us in comparing our operating performance on a consistent basis as it removes the impact of items not directly resulting from our coffeehouse operations;
	•		For planning purposes, including the preparation of our internal annual operating budget;
	•		To establish targets for certain management compensation matters; and
	•		To evaluate our capacity to incur and service debt, fund capital expenditures and expand our business.

          EBITDA as calculated by us is not necessarily comparable to similarly titled measures used by other companies. In addition, EBITDA: (a) does not represent net income or cash flows from operating activities as defined by GAAP; (b) is not necessarily indicative of cash available to fund our cash flow needs; and (c) should not be considered an alternative to net income, operating income, cash flows from operating activities or our other financial information as determined under GAAP.

the court granted the plaintiffs’ motion to conditionally certify an alleged nationwide class of our current and former coffeehouse managers since May 25, 2002 for purposes of pursuing the plaintiffs’ claim that the coffeehouse managers were and are misclassified as exempt under the FLSA. The period for potential class members to opt in and discovery is now closed. On September 22, 2006 we filed a Motion for Decertification seeking to decertify the conditionally certified class. On October 10, 2006, the plaintiffs moved to certify an alleged opt out class under the Minnesota FLSA. On February 16, 2007 we filed a Motion for Summary Judgment on the claims of the original three named plaintiffs and the plaintiffs filed a motion to reopen the opt in period on the FLSA claims. On April 6, 2007, the Magistrate Judge recommended that our Motion for Decertification be denied, that the plaintiffs’ motion to certify an opt out class under the Minnesota FLSA be granted, and that their motion to reopen the opt in period on the FLSA claims be denied. On April 25, 2007, we and the plaintiffs filed Objections with the District Judge to these recommendations that respectively went against each side. On May 17, 2007, the District Judge denied all Objections and adopted the Magistrate Judge’s recommendations in their entirety. On June 1, 2007, we filed a Petition with the Eighth Circuit Court of Appeals seeking permission to immediately appeal the District Court’s class certification rulings. On July 10, 2007, a three judge panel of the Eighth Circuit denied this Petition by a vote of 2-1. In the meantime, however, on April 19, 2007, the Court granted our Motion for Summary Judgment as to the claims of one of the original three named plaintiffs and to limit the FLSA claims of all other plaintiffs to the period of time beginning on May 25, 2003 (rather than going back to May 25, 2002 as alleged by the plaintiffs). We continue to believe that we have defenses to all of the remaining claims in this case, and we are vigorously defending the lawsuit. These claims could divert our management’s time and attention from our business operations and might potentially result in substantial costs of defense, settlement or other disposition, which could have a material adverse effect on our results of operations in one or more fiscal periods.

     In addition, from time to time, we become involved in certain legal proceedings in the ordinary course of business. We do not believe that any such ordinary course legal proceedings to which we are currently a party will have a material adverse effect on our financial position or results of operations.

Item 1A. Risk Factors.

     There have been no material changes from the risk factors disclosed in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

      Unregistered Sales of Equity Securities

     Not applicable

      Use of Proceeds

     Not applicable

     The table below shows the results of the shareholders’ votes:

SIGNATURE

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: November 9, 2007

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