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 June 29, 2008.

or

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

For the transition period from             to            .

Commission File Number: 000-51535

CARIBOU COFFEE COMPANY, INC.

(Exact Name of Registrant as Specified in Its Charter)

Minnesota		41-1731219
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

3900 Lakebreeze Avenue North		55429
Brooklyn Center, Minnesota		(Zip Code)
(Address of principal executive offices)

(763) 592-2200
(Registrant’s Telephone Number, Including Area Code)

Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the registrant is 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 o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller Reporting Company þ

     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

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Title		Shares Outstanding as of July 24, 2008
Common Stock, par value $0.01 per share		19,370,590

 

 

CARIBOU COFFEE COMPANY, INC.

FORM 10-Q

For the Thirteen Week Period Ended June 29, 2008

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			15
Item 3. Quantitative and Qualitative Disclosures About Market Risk			29
Item 4T. Controls and Procedures			29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			30
Item 1A. Risk Factors			31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			31
Item 3. Defaults Upon Senior Securities			31
Item 4. Submission of Matters to a Vote of Security Holders			31
Item 5. Other Information			31
Item 6. Exhibits			32
Signature			33
Certification
Certification
Section 1350 Certification
Section 1350 Certification

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

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

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

		Thirteen Weeks Ended								Twenty-Six Weeks Ended
		June 29,				July 1,				June 29,				July 1,
		2008				2007				2008				2007
		(Unaudited)
Coffeehouse sales		$	57,267,099			$	59,331,262			$	113,887,162			$	117,407,226
Other sales			5,916,290				3,516,123				11,052,948				7,292,789
Total net sales			63,183,389				62,847,385				124,940,110				124,700,015
Cost of sales and related occupancy costs			27,004,012				26,519,499				53,216,720				52,033,765
Operating expenses			25,815,112				27,021,720				51,209,974				53,009,181
Opening expenses			50,425				66,018				135,452				175,809
Depreciation and amortization			4,645,264				5,985,216				10,566,323				12,002,800
General and administrative expenses			6,617,706				7,153,341				14,067,245				13,757,563
Closing expense and disposal of assets			1,332,414				133,886				3,878,743				860,864
Operating loss			(2,281,544	)			(4,032,295	)			(8,134,347	)			(7,139,967	)
Other income (expense):
Interest income			2,752				45,899				20,291				79,136
Interest expense			(121,863	)			(165,579	)			(633,459	)			(295,298	)
Loss before provision (benefit) for income taxes and minority interest			(2,400,655	)			(4,151,975	)			(8,747,515	)			(7,356,129	)
Provision (benefit) for income taxes			43,861				(315,932	)			49,846				(296,097	)
Loss before minority interest			(2,444,516	)			(3,836,043	)			(8,797,361	)			(7,060,032	)
Minority interest			(12,956	)			54,473				40,182				81,534
Net loss		$	(2,431,560	)		$	(3,890,516	)		$	(8,837,543	)		$	(7,141,566	)
Basic and diluted net loss per share		$	(0.13	)		$	(0.20	)		$	(0.46	)		$	(0.37	)
Basic and diluted weighted average number of shares outstanding			19,370,590				19,320,055				19,370,590				19,304,035

See accompanying notes.

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

CONDENSED CONSOLIDATED BALANCE SHEETS

		June 29,				December 30,
		2008				2007
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	6,749,930			$	9,886,427
Accounts receivable (net of allowance for doubtful accounts of $50,669 and $7,989 at June 29, 2008 and December 30, 2007, respectively)			3,090,036				3,116,864
Other receivables (net of allowance for doubtful accounts of $60,828 and $9,399 at June 29, 2008 and December 30, 2007, respectively)			1,280,274				1,544,281
Income tax receivable			92,645				149,304
Inventories			10,260,257				10,228,527
Prepaid expenses and other current assets			841,412				1,690,668
Total current assets			22,314,554				26,616,071
Property and equipment, net of accumulated depreciation and amortization			74,403,518				83,798,120
Notes receivable			24,237				32,296
Restricted cash			12,229				410,831
Other assets			532,300				982,334
Total assets		$	97,286,838			$	111,839,652
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	7,764,996			$	9,650,326
Accrued compensation			7,464,583				7,863,445
Accrued expenses			7,032,004				9,318,442
Deferred revenue			6,530,320				9,987,724
Total current liabilities			28,791,903				36,819,937
Revolving credit facility			3,000,000				—
Asset retirement liability			1,009,709				989,490
Deferred rent liability			10,307,717				11,271,186
Deferred revenue			2,742,000				2,853,500
Income tax liability			477,710				473,064
Minority interests in affiliates			73,575				144,176
Total long term liabilities			17,610,711				15,731,416
Shareholders’ equity:
Preferred stock, par value $.01, 20,000,000 shares authorized; no shares issued and outstanding			—				—
Common stock, par value $.01, 200,000,000 shares authorized; 19,370,590 shares issued and outstanding at June 29, 2008 and December 30, 2007			193,706				193,706
Additional paid-in capital			124,665,330				124,231,862
Accumulated deficit			(73,974,812	)			(65,137,269	)
Total shareholders’ equity			50,884,224				59,288,299
Total liabilities and shareholders’ equity		$	97,286,838			$	111,839,652

See accompanying notes.

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

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

		Twenty-Six Weeks Ended
		June 29,				July 1,
		2008				2007
		(Unaudited)
Operating activities
Net loss		$	(8,837,543	)		$	(7,141,566	)
Adjustments to reconcile net loss to net cash (used) provided by operating activities:
Depreciation and amortization			11,627,437				13,109,014
Amortization of deferred financing fees			401,905				172,196
Minority interests in affiliates			40,182				81,534
Provision for closing expense and asset disposals			1,142,699				369,255
Share-based compensation			302,794				278,666
Non cash accretion expense			20,219				54,404
Shareholder contribution			130,674				—
Changes in operating assets and liabilities:
Restricted cash			398,602				—
Accounts receivable and other receivables			298,894				(387,370	)
Income tax receivable			56,659				(151,569	)
Inventories			(31,730	)			1,000,647
Prepaid expenses and other assets			897,385				293,082
Accounts payable			(1,885,330	)			(3,183,108	)
Accrued compensation			(398,862	)			580,457
Accrued expenses and income tax liability			(2,585,353	)			(848,598	)
Deferred revenue			(3,568,904	)			(2,435,680	)
Net cash (used) provided by operating activities			(1,990,272	)			1,791,364
Investing activities
Payments for property and equipment			(4,035,442	)			(8,309,760	)
Net cash used in investing activities			(4,035,442	)			(8,309,760	)
Financing activities
Borrowings under revolving credit facility			3,000,000				—
Distribution of minority interests’ earnings			(110,783	)			(91,942	)
Issuance of common stock			—				223,837
Net cash provided by financing activities			2,889,217				131,895
Decrease in cash and cash equivalents			(3,136,497	)			(6,386,501	)
Cash and cash equivalents at beginning of period			9,886,427				14,752,269
Cash and cash equivalents at end of period		$	6,749,930			$	8,365,768
Supplemental disclosure of cash flow information
Noncash financing and investing transactions:
Accrual for leasehold improvements, furniture, and equipment		$	—			$	446,606

See accompanying notes.

CARIBOU COFFEE COMPANY, INC. AND AFFILIATES

(A Majority Owned Subsidiary of Caribou Holding Company Limited)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

     The “Company” and “Caribou” refer to Caribou Coffee Company, Inc. and its affiliates, collectively.

     The unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, these statements include all adjustments considered necessary for the fair presentation of all interim periods reported herein. All adjustments are of a normal recurring nature unless otherwise disclosed. Management believes that the disclosures made are adequate for a fair presentation of the Company’s results of operations, financial position and cash flows. These consolidated financial statements should be read in conjunction with the year-end consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K (File No. 000-51535).

      Principles of Consolidation

     The Company’s consolidated financial statements include the accounts of Caribou Coffee Company, Inc., affiliates that it controls and a third party finance company (which exists for purposes of the Company’s revolving credit facility, as described in the Company’s Annual Report on Form 10-K) where the Company is the primary beneficiary in a variable interest entity. The affiliates are Caribou Ventures, L.L.C., a partnership in which the Company owns a 50% interest and that operates one coffeehouse, Caribou MSP Airport, a partnership in which the Company owns a 49% interest and that operates five coffeehouses, and Caribou Coffee Development Company, Inc., a licensor of Caribou Coffee branded coffeehouses. The Company controls the daily operations of Caribou Ventures, L.L.C. and Caribou Coffee Development Company, Inc. and accordingly consolidates their results of operations. The Company provided a loan to its partner in Caribou MSP Airport for all of the partner’s equity contribution to the venture. Consequently, the Company bears all the risk of loss but does not control all decisions that may have a significant effect on the success of the venture. Therefore, the Company consolidates the Caribou MSP Airport, as it is the primary beneficiary in this variable interest entity. All material intercompany balances and transactions between Caribou Coffee Company, Inc. and Caribou Ventures, L.L.C., Caribou MSP Airport, Caribou Coffee Development Company, Inc. and the third party finance company have been eliminated in consolidation.

      Use of Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the accompanying consolidated financial statements. Actual results may differ from those estimates, and such differences may be material to the consolidated financial statements.

      Fiscal Year End

     The Company’s fiscal year ends on the Sunday falling nearest to December 31. Each fiscal year 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 June 29, 2008 are not necessarily indicative of future results that may be expected for the year ending December 28, 2008.

2. Summary of Significant Accounting Policies

      Revenue Recognition

     The Company recognizes retail coffeehouse revenue (coffeehouse sales) when payment is tendered at the point of sale. Sales tax collected from customers is presented net of amounts expected to be remitted to various tax jurisdictions. Accordingly, sales taxes have no effect on the Company’s reported net sales in the accompanying statements of operations.

     Revenue from the sale of products to commercial, franchise or on-line 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.

     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. 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. 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.

     Territory development fees and initial franchise fees are recognized upon substantial performance of services for a new territory or coffeehouse, which is generally upon the opening of a new coffeehouse. Royalties based upon a percentage of reported sales are recognized on a monthly basis when earned. Cash payments received in advance for territory development fees or initial franchise fees are recorded as deferred revenue until earned.

      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 the Financial Accounting Standards Board (“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. Contingent rents, including those based on a percentage of retail sales over stated levels, and rental payment increases based on a contingent future event are accrued over the respective contingency periods when the achievement of such targets or events are deemed to be probable by the Company.

3. Recent Accounting Pronouncements

     In September 2006, the FASB issued SFAS No. 157, Fair Value Measurement (“SFAS 157”). SFAS 157 defines fair value, provides guidance for measuring fair value in GAAP and expands disclosures about fair value measurements. On December 31, 2007, the Company adopted SFAS 157 for financial assets and liabilities and will adopt SFAS 157 at the beginning of fiscal 2009 for nonfinancial assets and liabilities. The adoption of this statement did not have a material impact on the Company’s consolidated statement of operations, cash flows or financial position.

     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 (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. On December 31, 2007, the Company did not elect to adopt SFAS 159.

     In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statements (“SFAS 160”). SFAS 160 establishes new standards that will govern the accounting for and reporting of noncontrolling interests in partially owned subsidiaries. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008, and requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements shall be applied prospectively. The Company is currently evaluating the potential impact of this statement.

4. Impairments, Coffeehouse Closings, Asset Disposals and Severance

     Based on an operating cash flow analysis performed throughout the year combined with operational judgment on the future potential of individual coffeehouses, 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. During the thirteen week periods ended June 29, 2008 and July 1, 2007, the Company recorded depreciation expense of $238,404 for the impairment of one coffeehouse and $510,417 for the impairment of two coffeehouses, respectively, in its retail segment. During the twenty-six week periods ended June 29, 2008 and July 1, 2007, the Company recorded depreciation expense of $1,717,443 for the impairment of six coffeehouses and $922,878 for the impairment of three coffeehouses, respectively, in its retail segment.

     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 disposal charges consist of the following:

		Thirteen Weeks Ended								Twenty-Six Weeks Ended
		June 29,				July 1,				June 29,				July 1,
		2008				2007				2008				2007
Coffeehouse closures			6				6				22				8
Amount charged to operations for closed coffeehouses:
Amount charged to operations for closed coffeehouses lease reserve non-cash		$	99,929			$	99,735			$	585,275			$	83,195
Amount charged to operations for costs to consolidate facilities			—				40,037				—				80,073
Amount charged to operations for lease costs associated with lease termination-cash			1,070,259				(43,225	)			2,736,044				491,609
Total exit costs			1,170,188				96,547				3,321,319				654,877
Net book value of closed coffeehouse property and equipment			162,226				956				557,424				164,569
Amount charged to operations for other property and equipment write-offs			—				36,383				—				41,418
Coffeehouse closing expense and disposal of assets		$	1,332,414			$	133,886			$	3,878,743			$	860,864

     A reconciliation of the beginning and ending exit activity accrual is as follows:

		Balance at				Additions				Deductions
		Beginning of				Charged to				from				Balance at
Twenty-Six Weeks Ended:		Year				Expense				reserves				End of Quarter
June 29, 2008
Exit costs		$	466,768			$	3,352,193			$	2,749,552			$	1,069,409
Severance			1,353,000				754,895				180,387				1,927,508
Total		$	1,819,768			$	4,107,088			$	2,929,939			$	2,996,917

Balance at

Additions

Deductions

Beginning of

Charged to

from

Balance at

Twenty-Six Weeks Ended:

Year

Expense

reserves

End of Quarter

July 1, 2007

Exit costs

$

511,641

$

654,877

$

634,957

$

531,561

     During the twenty-six weeks ended June 29, 2008, the Company’s CFO resigned from his position. Additionally, the Company completed a reorganization of general and administrative departments and eliminated some positions. The Company accrued severance costs related to the Chief Financial Officer’s resignation and the eliminated positions in the amount of $754,895.

     In November 2007, the Company’s Chief Executive Officer resigned his position. In connection with his resignation, the Company entered into an agreement with the former Chief Executive Officer to (1) continue to pay him a base salary for 60 days; (2) immediately vest all of his unvested stock options; and (3) pay him a lump sum severance benefit of $1,353,000 in July 2008. The Company recorded a liability for the amount of the severance benefit in the fourth quarter of fiscal year 2007 and included the amount in accrued compensation and general and administrative expense.

5. Inventories

     Inventories consist of the following:

		June 29,				December 30,
		2008				2007
		(Unaudited)
Coffee		$	4,025,051			$	3,485,133
Other merchandise held for sale			3,099,165				4,345,584
Supplies			3,136,041				2,397,810
		$	10,260,257			$	10,228,527

     At June 29, 2008 and December 30, 2007, the Company had committed to fixed price purchase contracts, primarily for green coffee, aggregating approximately $6,286,000 and $6,922,000, 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 2009. 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 over four years and expire ten years from the grant date. Under SFAS 123R, share-based compensation expense for the thirteen weeks ended June 29, 2008 and July 1, 2007 totaled approximately $151,000 and $137,000, respectively, and for the twenty-six weeks ended June 29, 2008 and July 1, 2007 totaled approximately $303,000 and $279,000, respectively.

     Stock option activity during the period indicated is as follows:

						Weighted				Weighted
						Average				Average				Aggregate
		Number of				Exercise				Contract				Intrinsic
		Shares				Price				Life				Value
Outstanding, December 30, 2007			2,570,746			$	7.46			6.47 Yrs
Granted			55,000			$	2.78
Exercised			—			$	—
Forfeited			(14,331	)		$	8.11
Outstanding, March 30, 2008			2,611,415			$	7.35			6.28 Yrs				$	—

						Weighted				Weighted
						Average				Average				Aggregate
		Number of				Exercise				Contract				Intrinsic
		Shares				Price				Life				Value
Granted			160,271			$	2.54
Exercised			—			$	—
Forfeited			(1,217,651	)		$	7.04
Outstanding, June 29, 2008			1,554,035			$	7.10			7.26 Yrs				$	—
Options vested at June 29, 2008			761,089			$	7.53			5.86 Yrs				$	—

7. Income Taxes

     During the thirteen and twenty-six weeks ended June 29, 2008, the Company recognized a tax provision of $43,861 and $49,846, respectively. After consideration of all evidence, both positive and negative, management has recorded a valuation allowance against its deferred income tax assets at June 29, 2008 due to the uncertainty of realizing such deferred income tax assets. During the thirteen and twenty-six weeks ended July 1, 2007, the Company recognized a tax benefit of $315,932 and $295,295, respectively, principally as a result of reducing its long term income tax liability for unrecognized tax benefits due to the expiration of the statue of limitations.

8. Net Loss Per Share

     Basic and diluted net loss per share for the thirteen and twenty-six week periods ended June 29, 2008 and July 1, 2007, were as follows:

		Thirteen Weeks Ended								Twenty-Six Weeks Ended
		June 29,				July 1,				June 29				July 1,
		2008				2007				2008				2007
Net loss		$	(2,431,560	)		$	(3,890,516	)		$	(8,837,543	)		$	(7,141,566	)
Weighted average common shares outstanding (for basic and diluted calculation)			19,370,590				19,320,055				19,370,590				19,304,035
Basic and diluted net loss per share		$	(0.13	)		$	(0.20	)		$	(0.46	)		$	(0.37	)

     For the thirteen and twenty-six week periods ended June 29, 2008 and July 1, 2007, 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 $2,470,000 of the deposit in long term liabilities as deferred revenue and $290,000 in current liabilities as deferred revenue on its June 29, 2008 balance sheet. As of December 30, 2007, the Company included $2,535,000 of the deposit in long term liabilities as deferred revenue and $290,000 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 current portion of deferred revenue represents the franchise fees for the coffeehouses estimated to be opened during the subsequent twelve months per the development schedule in the Master Franchise Agreement. At June 29, 2008, there were forty 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 of which $21,000 was included in prepaid expense at both June 29, 2008 and December 30, 2007, and $198,974 and $204,410 was

included in other assets at June 29, 2008 and December 30, 2007, 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. Note Payable and Revolving Credit Facility

     On December 27, 2000, the Company entered into a sale leaseback arrangement with a third party finance company whereby from time to time the Company sells equipment to the finance company and immediately following the sale, it leases back all of the equipment it sold to such third party. In February 2008, the Company amended the sale leaseback arrangement, reducing the maximum amount available to $20 million from $60 million and modified certain of the arrangement’s financial covenants. The sale leaseback arrangement’s expiration date of June 29, 2009 was not changed. The Company had $3,000,000 of equipment leased under this arrangement at June 29, 2008, and the Company had no equipment leased under this arrangement at December 30, 2007. In connection with the amendment, the Company wrote-off $306,000, which is a portion of the costs associated with the acquisition of the sale leaseback arrangement, which is included in interest expense on the Company’s statement of operations.

11. Commitments and Contingencies

     On May 25, 2005, the Company received a complaint by three of its former employees for a lawsuit in the State of Minnesota District Court for Hennepin County seeking monetary and equitable relief from the Company under the Minnesota Fair Labor Standards Act (“Minnesota FLSA”), the Federal Fair Labor Standards Act (“FLSA”), and state common law (hereafter the “FLSA Suit”). The FLSA Suit primarily alleges that the Company misclassified its retail store managers and managers in training as exempt from the overtime provisions of the Minnesota FLSA and the FLSA and that these managers and mangers in training 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 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. Plaintiffs sought payment of an unspecified amount of allegedly owed and unpaid overtime compensation, liquidated damages, prejudgment interest, civil penalties under the Minnesota FLSA, an accounting of the amount allegedly owed to the putative class, temporary and injunctive relief, attorney’s fees and costs.

     Since commencement, the Company has removed the matter to Federal Court for the District of Minnesota. The Plaintiffs have also brought a motion to have the FLSA Suit conditionally certified as a class action on behalf of the relevant class. This motion for conditional certification though opposed by the Company was granted to the Plaintiffs. As a result of the grant of this conditional certification of the relevant class, notices were sent to potential class members giving them the option to opt in to the litigation. At this date the opt-in period has expired and 295 of the over 900 potential class members opted in to the litigation.

     The Company and Plaintiffs after mediation of the matter on February 1, 2008, entered into a Stipulation of Settlement (the “Stipulation”) to settle the FLSA Suit. The Stipulation, which was contingent upon court approval, provides for a gross settlement payment of $2.7 million, plus the employer’s share of payroll taxes. The settlement payments will be made as follows: 1) $1.75 million on the later of the date of District Court final approval of the settlement or March 15, 2008; and 2) $950,000 on the later of December 29, 2008 or thirty (30) days after the date of final District Court approval of the settlement, along with interest on this installment from the date of the initial installment payment at 6% simple interest. Settlement payments will be made to all participating class members and all attorneys’ fees for plaintiffs’ counsel will be paid from the $2.7 million.

     On April 1, 2008, the Company received a complaint by DMP Limited Partnership for a lawsuit in the United States District Court for the Western District of Pennsylvania seeking monetary relief from the Company related to the termination of a Lease Agreement (the “Lease Suit”) for a proposed Company coffeehouse in Pittsburgh, Pennsylvania. The Lease Suit alleges that the Company is in default of the Lease Agreement and seeks monetary

damages of in excess of $526,000. It is the position of the Company that it is not in default of the Lease Agreement and that DMP Limited Partnership is obligated to reimburse the Company in excess of $162,179 that the Company has already paid to DMP Limited Partnership as rent. The Company seeks reimbursement of this amount as a result from the failure of DMP Limited Partnership to meet all of its obligations under the Lease Agreement. Discovery has commenced and the Company intends to vigorously defend itself in the matter.

     On May 6, 2008, the Company received a compliant for a lawsuit in the District Court, Ninth Judicial District, County of Beltrami, State of Minnesota, from Lindsey Savage, individually and on behalf of others similarly situated known and unknown, seeking monetary and equitable relief from the Company under the Minnesota Fair Labor Standards Act (“Minnesota FLSA”) and in related allegations that the Company was unjustly enriched and converted the funds of certain of its employees. The essence of the claim is that the Company should have somehow prohibited shift supervisors and/or store managers from participating in any money left in change and/or tip jars at Company stores. The Company intends to vigorously defend the matter. Discovery has commenced and is ongoing.

     On July 3, 2008 the Company received a complaint in the United States District Court Northern District of Illinois, from Arimathea LLC alleging that the hinged lid containers used by the Company in the sale of Caribou Coffee Glacier Blast Gum infringes certain alleged patents held by Arimathea LLC. The suit seeks monetary and equitable relief from the Company. The Company intends to vigorously defend the matter.

12. Segment Reporting

     Segment information is prepared on the same basis that the Company’s management reviews financial information for decision making purposes. The Company has three reportable operating segments: retail, commercial and franchise. “Unallocated corporate” includes expenses pertaining to corporate administrative functions that support the operating segments but are not specifically attributable to or managed by any segment and are not included in the reported financial results of the operating segments. All of the segment sales are from external customers.

      Retail

     The retail segment operated 415 company-owned coffeehouses located in 16 states and the District of Columbia, as of June 29, 2008. The coffeehouses offer customers high-quality gourmet coffee and espresso-based beverages, specialty teas, baked goods, whole bean coffee, branded merchandise and related products.

      Commercial

     The commercial segment sells high-quality gourmet whole and ground coffee to grocery stores, mass merchandisers, office coffee providers, airlines, hotels, sports and entertainment venues, college campuses and on-line customers.

      Franchise

     The franchise segment sells franchises to operate Caribou Coffee brand coffeehouses to domestic and international franchisees. As of June 29, 2008, there were 75 franchised coffeehouses in U.S and international markets.

     The tables below present information by operating segment for the thirteen and twenty-six weeks ended June 29, 2008 and July 1, 2007:

Thirteen weeks ended June 29, 2008														Unallocated
(in thousands)		Retail				Commercial				Franchise				Corporate				Total
Total net sales		$	57,267			$	4,484			$	1,432			$	—			$	63,183
Costs of sales and related occupancy costs			23,419				2,882				703				—				27,004
Operating expenses			24,935				480				400				—				25,815
Opening expenses			25				—				26				—				51
Depreciation and amortization			4,637				7				1				—				4,645
General and administrative expenses			2,272				—				—				4,346				6,618
Closing expense and disposal of assets			1,229				—				—				103				1,332
Operating income (loss)		$	750			$	1,115			$	302			$	(4,449	)		$	(2,282	)
Identifiable assets		$	64,669			$	75			$	15			$	9,645			$	74,404
Net impairment		$	238			$	—			$	—			$	—			$	238

Twenty-six weeks ended June 29, 2008														Unallocated
(in thousands)		Retail				Commercial				Franchise				Corporate				Total
Total net sales		$	113,887			$	8,034			$	3,019			$	—			$	124,940
Costs of sales and related occupancy costs			46,719				4,913				1,585				—				53,217
Operating expenses			49,423				979				808				—				51,210
Opening expenses			110				—				25				—				135
Depreciation and amortization			10,550				13				3				—				10,566
General and administrative expenses			4,780				—				—				9,287				14,067
Closing expense and disposal of assets			3,767				—				—				112				3,879
Operating (loss) income		$	(1,462	)		$	2,129			$	598			$	(9,399	)		$	(8,134	)
Identifiable assets		$	64,669			$	75			$	15			$	9,645			$	74,404
Net impairment		$	1,717			$	—			$	—			$	—			$	1,717

Twenty-six weeks ended July 1, 2007														Unallocated
(in thousands)		Retail				Commercial				Franchise				Corporate				Total
Total net sales		$	117,407			$	5,182			$	2,111			$	—			$	124,700
Costs of sales and related occupancy costs			47,588				3,337				1,109				—				52,034
Operating expenses			51,398				992				619				—				53,009
Opening expenses			166				—				10				—				176
Depreciation and amortization			11,986				12				5				—				12,003
General and administrative expenses			4,912				—				—				8,845				13,757
Closing expense and disposal of assets			861				—				—				—				861
Operating income (loss)		$	496			$	841			$	368			$	(8,845	)		$	(7,140	)
Identifiable assets		$	88,019			$	76			$	22			$	10,403			$	98,520
Net impairment		$	923			$	—			$	—			$	—			$	923

     All of the Company’s assets are located in the United States, and approximately 1% of the Company’s consolidated sales come from outside the United States. No customer accounts for 10% or more of the Company’s sales.

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 30, 2007 contained in the our 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 our filings with the Securities and Exchange Commission. We undertake 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 June 29, 2008, we had 490 retail locations, including 75 franchised locations and 6 joint venture locations. Our coffeehouses are located in 16 states, the District of Columbia and international markets. 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. Additionally, we sell our high-quality whole bean and ground coffee to grocery stores, mass merchandisers, office coffee providers, airlines, hotels, sports and entertainment venues, college campuses and on-line 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 will continue our efforts to increase comparable coffeehouse sales, including increasing brand awareness through marketing efforts and introducing new products and promotions. If our comparable coffeehouse sales increase, we expect our operating margins at those coffeehouses to improve as we expect to have greater ability to leverage our fixed expense.

     We intend to continue to grow through multiple points of distribution, including opening new company-owned coffeehouses, partnering with qualified developers to open domestic and international coffeehouses and partnerships with other commercial partners to expand our brand presence.

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 30, 2007, (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 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.

Fiscal Periods

     Our fiscal year ends on the Sunday falling nearest to December 31. Each fiscal year 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.

     Our sales are somewhat seasonal, with the fourth quarter accounting for the highest sales volumes. Operating results for the thirteen week period ended June 29, 2008 are not necessarily indicative of future results that may be expected for the year ending December 28, 2008.

Thirteen Weeks Ended June 29, 2008 vs. Thirteen Weeks Ended July 1, 2007

Results of Operations

     The following table presents the consolidated statements of operations as well as the percentage relationship to total net sales of items included in our consolidated statement of operations :

		Thirteen Weeks Ended												Thirteen Weeks Ended
		June 29,				July 1,				%				June 29,				July 1,
		2008				2007				Change				2008				2007
		(In thousands)												As a % of total net sales
Statement of Operations Data:
Net sales:
Coffeehouse		$	57,267			$	59,331				(3.5	)%			90.6	%			94.4	%
Other			5,916				3,516				68.3	%			9.4	%			5.6	%
Total net sales			63,183				62,847				0.5	%			100.0	%			100.0	%
Cost of sales and related occupancy costs			27,004				26,519				1.8	%			42.7	%			42.2	%
Operating expenses			25,815				27,022				(4.5	)%			40.8	%			43.0	%
Opening expenses			51				66				(22.7	)%			0.1	%			0.1	%
Depreciation and amortization			4,645				5,985				(22.4	)%			7.4	%			9.5	%
General and administrative expenses			6,618				7,153				(7.5	)%			10.5	%			11.4	%
Closing expense and disposal of assets			1,332				134				894.0	%			2.1	%			0.2	%
Operating loss			(2,282	)			(4,032	)			43.4	%			(3.6	)%			(6.4	)%
Other income (expense):
Interest income			3				46				(93.5	)%			—	%			0.1	%
Interest expense			(122	)			(166	)			(26.5	)%			(0.2	)%			(0.3	)%
Loss before provision for income taxes and minority interest			(2,401	)			(4,152	)			42.2	%			(3.8	)%			(6.6	)%
Provision (benefit) for income taxes			44				(316	)			(113.9	)%			0.0	%			(0.5	)%
Loss before minority interest			(2,445	)			(3,836	)			36.3	%			(3.8	)%			(6.1	)%
Minority interest			(13	)			54				124.1	%			0.0	%			0.1	%
Net loss		$	(2,432	)		$	(3,890	)			37.5	%			(3.8	)%			(6.2	)%

Net Sales

     Total net sales increased $0.4 million, or 0.5%, to $63.2 million in the second thirteen weeks of fiscal 2008 from $62.8 million in the second thirteen weeks of fiscal 2007. This increase is largely due to increased sales in our commercial and franchise segments in the second thirteen weeks of fiscal 2008 as compared to the same period in fiscal 2007. Other net sales increased by $2.4 million, or 68.3%, to $5.9 million for the second thirteen weeks of fiscal 2008 from $3.5 million for the second thirteen weeks of fiscal 2007. This increase was largely due to sales to existing and new commercial customers and product sales, franchise fees and royalties from the development of 36 franchised coffeehouses during the preceding 12 months. Coffeehouse net sales decreased $2.0 million, or 3.5%, to $57.3 million in the second thirteen weeks of fiscal 2008 from $59.3 million in the second thirteen weeks of fiscal 2007. This decrease is attributable to 318 fewer operating coffeehouse weeks and a 1.7% decrease in comparable coffeehouse net sales in the second thirteen weeks of fiscal 2008 as compared to the same period in fiscal 2007.

Costs and Expenses

      Cost of sales and related occupancy costs. Cost of sales and related occupancy costs increased $0.5 million, or 1.8%, to $27.0 million in the second thirteen weeks of fiscal 2008, from $26.5 million in the second thirteen weeks of fiscal 2007. This increase was largely due to higher other sales and was partially offset by lower coffeehouse net sales. As a percentage of total net sales, cost of sales and related occupancy costs increased to 42.7% in the second thirteen weeks of fiscal 2008 from 42.2% in the second thirteen weeks of fiscal 2007. The increase in cost of sales and related occupancy costs as a percent of total net sales was primarily due to higher other sales which typically have a higher cost of goods sold as a percentage of sales than coffeehouse sales.

      Operating expenses. Operating expenses decreased $1.2 million, or 4.5%, to $25.8 million in the second thirteen weeks of fiscal 2008, from $27.0 million in the second thirteen weeks of fiscal 2007. This decrease is attributable to the 318 fewer operating coffeehouse weeks and tighter management of labor costs in the second thirteen weeks of fiscal 2008 as compared to the second thirteen weeks of fiscal 2007. As a percentage of total net sales, operating expenses decreased to 40.8% in the second thirteen weeks of fiscal 2008 from 43.0% in the second thirteen weeks of fiscal 2007. The decrease in operating expenses as a percentage of total net sales was primarily due to tighter management of labor costs and from closing underperforming company-owned coffeehouses.

      Opening expenses.   Opening expenses remained flat at $0.1 million in the second thirteen weeks of fiscal 2008. We opened no new company-owned coffeehouses in the second thirteen weeks of fiscal 2008 versus five new company-owned coffeehouses during the second thirteen weeks of fiscal 2007.

      Depreciation and amortization. Depreciation and amortization decreased $1.4 million, or 22.4%, to $4.6 million in the second thirteen weeks of fiscal 2008, from $6.0 million in the second thirteen weeks of fiscal 2007. This decrease is due to the impairment of 38 company-owned coffeehouses during the preceding twelve months and the fewer number of company-owned coffeehouses in operation at the end of the second thirteen weeks ended June 29, 2008 as compared to the prior year. Depreciation and amortization includes $0.2 million in accelerated depreciation associated with coffeehouse impairments in the second thirteen weeks of fiscal 2008 as compared to $0.5 million in the second thirteen weeks of 2007. As a percentage of total net sales, depreciation and amortization was 7.4% in the second thirteen weeks of fiscal 2008, compared to 9.5% in the second thirteen weeks of fiscal 2007. This decrease as a percentage of total net sales was due to the lower number of company-owned coffeehouses opened during the second thirteen weeks of fiscal 2008 and due to the impairment of 38 company-owned coffeehouses during the previous twelve months.

      General and administrative expenses. General and administrative expenses decreased $0.6 million, or 7.5%, to $6.6 million in the second thirteen weeks of fiscal 2008, from $7.2 million in the second thirteen weeks of fiscal 2007. As a percentage of total net sales, general and administrative expenses decreased to 10.5% in the second thirteen weeks of fiscal 2008, from 11.4% in the second thirteen weeks of fiscal 2007. The decrease in general and administrative expenses was largely due to lower labor costs during the second thirteen weeks of fiscal 2008.

      Closing expenses and disposal of assets. Closing expense and disposal of assets increased $1.2 million to $1.3 million in the second thirteen weeks of fiscal 2008 from $0.1 million in the second thirteen weeks of fiscal 2007. We closed six company-owned coffeehouses in both the second thirteen weeks of 2008 and 2007. The increase in closing expense and disposal of assets is attributable to the wide variations in the costs associated with coffeehouse closings. The closing costs on an individual store basis vary due to such factors as the real estate market conditions, the amount of time left on the lease, the remaining net book value of the coffeehouse assets and a variety of store specific factors. We will continue to actively manage our portfolio of coffeehouses.

      Interest income. Interest income remained flat in the second thirteen weeks of fiscal 2008, as compared to the second thirteen weeks of fiscal 2007.

      Interest expense. Interest expense decreased $0.1 million to $0.1 million in the second thirteen weeks of fiscal 2008 from $0.2 million in the second thirteen weeks of 2007. Interest expense decreased due to lower costs associated with reducing our revolving credit facility from $60.0 million to $20.0 million. Outstanding borrowings as of June 29, 2008 and July 1, 2007 were $3.0 million and $0.0 million, respectively.

Operating Segments

     Segment information is prepared on the same basis that our management reviews financial information for decision making purposes. We have three reportable operating segments: retail, commercial and franchise. “Unallocated corporate” includes expenses pertaining to corporate administrative functions that support the operating segments but are not specifically attributable to or managed by any segment and are not included in the reported financial results of the operating segments. The following tables summarize our results of operations by segment for the second thirteen weeks of fiscal 2008 and 2007.

Retail

		13 Weeks Ended												13 Weeks Ended
		June 29,				July 1,				%				June 29,				July 1,
		2008				2007				Change				2008				2007
		(In thousands)												As a % of coffeehouse sales
Coffeehouse sales		$	57,267			$	59,330				(3.5	)%			100.0	%			100.0	%
Costs of sales and related occupancy costs			23,419				24,268				(3.5	)%			40.9	%			40.9	%
Operating expenses			24,935				26,251				(5.0	)%			43.5	%			44.2	%
Opening expenses			25				74				(66.2	)%			0.1	%			0.1	%
Depreciation and amortization			4,637				5,977				(22.4	)%			8.1	%			10.1	%
General and administrative expenses			2,272				2,537				(10.4	)%			4.0	%			4.3	%
Closing expense and disposal of assets			1,229				134				817.2	%			2.1	%			0.2	%
Operating income		$	750			$	89				742.7	%			1.3	%			0.2	%

     The retail segment operates company-owned coffeehouses. As of June 29, 2008, there were 415 company-owned coffeehouses in 16 states and the District of Columbia.

Coffeehouse sales

     Coffeehouse sales decreased $2.0 million, or 3.5%, to $57.3 million in the second thirteen weeks of fiscal 2008 from $59.3 million in the second thirteen weeks of fiscal 2007. This decrease is attributable to 318 fewer operating coffeehouse weeks due to store closings and a 1.7% decrease in comparable coffeehouse net sales in the second thirteen weeks of fiscal 2008 as compared to the same period in fiscal 2007.

Costs and Expenses

      Cost of sales and related occupancy costs.  Cost of sales and related occupancy decreased $0.9 million, or 3.5%, to $23.4 million in the second thirteen weeks of 2008, from $24.3 million for the second thirteen weeks of 2007. The decrease in cost of sales and related occupancy costs was primarily due lower coffeehouse sales. Cost of sales and related occupancy costs as a percentage of coffeehouse net sales remained flat at 40.9%.

      Operating expenses.   Operating expenses decreased $1.4 million, or 5.0%, to $24.9 million for the second thirteen weeks of 2008, from $26.3 million for the second thirteen weeks of 2007. This decrease is primarily attributable to the 318 fewer coffeehouse operating weeks for the second thirteen weeks of fiscal 2008 as compared to the same period in fiscal 2007 and the tighter management of labor costs. As a percentage of coffeehouse net sales, operating expenses decreased to 43.5% in the second thirteen weeks of 2008 from 44.2% in the second thirteen weeks of 2007. The decrease in operating expenses as a percentage of coffeehouse net sales was primarily due to tighter management of labor cost and closing underperforming company-owned coffeehouses.

      Depreciation and amortization.   Depreciation and amortization decreased $1.4 million, or 22.4%, to $4.6 million for the second thirteen weeks of 2008, from $6.0 million for the second thirteen weeks of 2007. This decrease is due to the impairment of 38 company-owned coffeehouses during the preceding twelve months and the fewer number of company-owned coffeehouses in operation at the end of the second thirteen weeks ended June 29, 2008 as compared to the prior year. Depreciation and amortization includes $0.2 million in accelerated depreciation associated with

coffeehouse impairments in the second thirteen weeks of fiscal 2008 as compared to $0.5 million in the second thirteen weeks of 2007.

      General and administrative expenses.   General and administrative expenses decreased $0.2 million, or 10.4%, to $2.3 million for the second thirteen weeks of fiscal 2008 from $2.5 million for the second thirteen weeks of fiscal 2007. The decrease was largely due to lower labor costs.

      Closing expense and disposal of assets.   Closing expense and disposal of assets increased $1.1 million to $1.2 million for the second thirteen weeks of 2008 from $0.1 million for the second thirteen weeks of 2007. We closed six company-owned coffeehouses in both the second thirteen weeks of 2008 and 2007. The increase in closing expense and disposal of assets is attributable to the wide variations in the costs associated with coffeehouse closings. The closing costs on an individual store basis vary due to such factors as the real estate market conditions, the amount of time left on the lease, the remaining net book value of the coffeehouse assets and a variety of store specific factors.

     We will continue to actively manage our portfolio of company-owned coffeehouses.

Commercial

		13 Weeks Ended												13 Weeks Ended
		June 29,				July 1,				%				June 29,				July 1,
		2008				2007				Change				2008				2007
		(In thousands)												As a % of commercial sales
Sales		$	4,484			$	2,681				67.3	%			100.0	%			100.0	%
Costs of sales and related occupancy costs			2,882				1,843				56.4	%			64.3	%			68.7	%
Operating expenses			480				486				(1.2	)%			10.7	%			18.2	%
Depreciation and amortization			7				6				16.7	%			0.1	%			0.2	%
Operating income		$	1,115			$	346				222.3	%			24.9	%			12.9	%

     The commercial segment sells high-quality gourmet whole bean and ground coffee to grocery stores, mass merchandisers, office coffee providers, airlines, hotels, sports and entertainment venues, college campuses and on-line customers.

Sales

     Sales increased $1.8 million, or 67.3%, to $4.5 million in the second thirteen weeks of fiscal 2008, from $2.7 million in the second thirteen weeks of fiscal 2007. This increase is primarily attributable to the incremental sales to existing grocery stores and Keurig Incorporated, an industry leader in single cup brewing technology, as well as, sales to new grocery stores and food brokers who distribute our products.

Costs and Expenses

      Cost of sales and related occupancy costs.  Cost of sales and related occupancy costs increased $1.1 million, or 56.4%, to $2.9 million for the second thirteen weeks of 2008, from $1.8 million for the second thirteen weeks of 2007. The increase was largely driven by increased sales. As a percentage of sales, cost of sales and related occupancy costs decreased to 64.3% for the second thirteen weeks of 2008, from 68.7% for the second thirteen weeks of 2007. The reduction in cost of sales and related occupancy costs as a percentage of sales was primarily due to lower grocery store slotting charges on new grocery accounts.

      Operating expenses. Operating expenses remained flat at $0.5 million. As a percentage of sales, operating expenses decreased to 10.7% in the second thirteen weeks of 2008 from 18.2% in the second thirteen weeks of 2007. The decrease is attributable to leveraging relatively fixed operating expenses.

Franchise

		13 Weeks Ended												13 Weeks Ended
		June 29,				July 1,				%				June 29,				July 1,
		2008				2007				Change				2008				2007
		(In thousands)												As a % of franchise sales
Sales		$	1,432			$	836				71.3	%			100.0	%			100.0	%
Costs of sales and related occupancy costs			703				408				72.3	%			49.1	%			48.8	%
Operating expenses			400				285				40.4	%			27.9	%			34.1	%
Opening expenses			26				(8	)			(425.0	)%			1.8	%			(1.0	)%
Depreciation and amortization			1				2				(50.0	)%			0.1	%			0.3	%
Operating income		$	302			$	149				102.7	%			21.1	%			17.8	%

     The franchise segment sells franchises to operate Caribou Coffee brand coffeehouses to domestic and international franchisees. As of June 29, 2008, there were 75 franchised coffeehouses in the U.S and international markets.

Sales

     Sales increased $0.6 million, or 71.3%, to $1.4 million for the second thirteen weeks of 2008 from $0.8 million for the second thirteen weeks of 2007. This increase is primarily attributable to royalties and product sales from the 36 new franchise coffeehouses opened during the preceding 12 months.

Costs and Expenses

      Cost of sales and related occupancy costs.  Cost of sales and related occupancy costs increased $0.3 million, or 72.3%, to $0.7 million for the second thirteen weeks of 2008, from $0.4 million for the second thirteen weeks of 2007. The increase was primarily due to the additional product sales from the new franchised coffeehouses opened during the past twelve months. As a percentage of sales, cost of sales and related occupancy costs increased slightly to 49.1% for the second thirteen weeks of 2008, from 48.8% for the second thirteen weeks of 2007. The increase in cost of sales and related occupancy costs as a percentage of sales was primarily due to a change in product mix sold to franchisees.

      Operating expenses.   Operating expenses increased $0.1 million, or 40.4%, to $0.4 million for the second thirteen weeks of 2008, from $0.3 million for the second thirteen weeks of 2007. This increase is primarily attributable to increased administrative costs associated with supporting the growth of our franchise business. As a percentage of sales, operating expenses decreased to 27.9% for the second thirteen weeks of 2008 from 34.1% for the second thirteen weeks of 2007. The decrease in operating expenses as a percentage of sales was primarily due to leverage obtained on certain fixed segment expenses.

      Opening expenses.   Opening expenses remained flat at $0.1 million in the second thirteen weeks of fiscal 2008. In the second thirteen weeks of 2007 we received reimbursement for preopening expenses from a franchisor, offsetting prior period expenses.

Unallocated Corporate

		13 Weeks Ended												13 Weeks Ended
		June 29,				July 1,				%				June 29,				July 1,
		2008				2007				Change				2008				2007
		(In thousands)												As a % of total net sales
General and administrative expenses		$	4,346			$	4,616				(5.8	)%			6.9	%			7.3	%
Closing expense and disposal of assets			103				—				n/a				0.1	%			—	%
Operating (loss)		$	(4,449	)		$	(4,616	)			3.6	%			(7.0	)%			(7.3	)%

      General and administrative expenses. General and administrative expenses decreased $0.3 million, or 5.8%, to $4.3 million in the second thirteen weeks of fiscal 2008, from $4.6 million in the second thirteen weeks of fiscal 2007. As a percentage of total net sales, general and administrative expenses decreased to 6.9% in the second thirteen weeks of fiscal 2008, from 7.3% in the second thirteen weeks of fiscal 2007. The decrease in general and administrative expenses as a percentage of net sales was due to decreased labor costs during the second thirteen weeks of fiscal 2008.

Twenty-Six Weeks Ended June 29, 2008 vs. Twenty-Six Weeks Ended July 1, 2007

Results of Operations

     The following table presents the consolidated statements of operations as well as the percentage relationship to total net sales of items included in our consolidated statement of operations :

		Twenty-Six Weeks Ended												Twenty-Six Weeks Ended
		June 29,				July 1,				%				June 29,				July 1,
		2008				2007				Change				2008				2007
		(In thousands)												As a % of total net sales
Statement of Operations Data:
Net sales:
Coffeehouse		$	113,887			$	117,407				(3.0	)%			91.2	%			94.2	%
Other			11,053				7,293				51.6	%			8.8	%			5.8	%
Total net sales			124,940				124,700				0.2	%			100.0	%			100.0	%
Cost of sales and related occupancy costs			53,217				52,034				2.3	%			42.6	%			41.7	%
Operating expenses			51,210				53,009				(3.4	)%			41.0	%			42.5	%
Opening expenses			135				176				(23.3	)%			0.1	%			0.1	%
Depreciation and amortization			10,566				12,003				(12.0	)%			8.4	%			9.7	%
General and administrative expenses			14,067				13,757				2.3	%			11.3	%			11.0	%
Closing expense and disposal of assets			3,879				861				350.5	%			3.1	%			0.7	%
Operating loss			(8,134	)			(7,140	)			13.9	%			(6.5	)%			(5.7	)%
Other income (expense):
Interest income			20				79				(74.7	)%			—	%			0.0	%
Interest expense			(634	)			(295	)			114.9	%			(0.5	)%			(0.2	)%
Loss before provision for income taxes and minority interest			(8,748	)			(7,356	)			18.9	%			(7.0	)%			(5.9	)%
Provision (benefit) for income taxes			50				(296	)			(116.9	)%			0.0	%			(0.2	)%
Loss before minority interest			(8,798	)			(7,060	)			24.6	%			(7.0	)%			(5.7	)%
Minority interest			40				82				(51.2	)%			0.0	%			0.0	%
Net loss		$	(8,838	)		$	(7,142	)			23.7	%			(7.0	)%			(5.7	)%

Net Sales

     Total net sales increased $0.2 million, or 0.2%, to $124.9 million in the first twenty-six weeks of fiscal 2008 from $124.7 million in the first twenty-six weeks of fiscal 2007. This increase is largely due to increased sales in our commercial and franchise segments in the first twenty-six weeks of fiscal 2008 as compared to the same period in fiscal 2007. Other net sales increased by $3.8 million, or 51.6%, to $11.1 million for the first twenty-six weeks of

fiscal 2008 from $7.3 million for the first twenty-six weeks of fiscal 2007. This increase was largely due to sales to existing and new commercial customers and product sales, franchise fees and royalties from the development of 36 franchised coffeehouses during the preceding 12 months. Coffeehouse net sales decreased $3.5 million, or 3.0%, to $113.9 million in the first twenty-six weeks of fiscal 2008 from $117.4 million in the first twenty-six weeks of fiscal 2007. This decrease is attributable to 464 fewer operating coffeehouse weeks and a 2.0% decrease in comparable coffeehouse net sales in the first twenty-six weeks of fiscal 2008 as compared to the same period in fiscal 2007.

Costs and Expenses

      Cost of sales and related occupancy costs. Cost of sales and related occupancy costs increased $1.2 million, or 2.3%, to $53.2 million in the first twenty-six weeks of fiscal 2008, from $52.0 million in the first twenty-six weeks of fiscal 2007. This increase was largely due to higher other sales. As a percentage of total net sales, cost of sales and related occupancy costs increased to 42.6% in the first twenty-six weeks of fiscal 2008 from 41.7% in the first twenty-six weeks of fiscal 2007. The increase in cost of sales and related occupancy costs as a percent of total net sales was primarily due to higher other sales which typically have a higher cost of goods as percentage of sales than coffeehouse sales.

      Operating expenses. Operating expenses decreased $1.8 million, or 3.4%, to $51.2 million in the first twenty-six weeks of fiscal 2008, from $53.0 million in the first twenty-six weeks of fiscal 2007. This decrease is attributable to 464 fewer operating coffeehouse weeks, tighter management of labor costs and the timing of coffeehouse maintenance and marketing expense in the first twenty-six weeks of fiscal 2008 as compared to the first twenty-six weeks of fiscal 2007. As a percentage of total net sales, operating expenses decreased to 41.0% in the first twenty-six weeks of fiscal 2008 from 42.5% in the first twenty-six weeks of fiscal 2007. The decrease in operating expenses as a percentage of total net sales was primarily due to tighter management of labor costs, the timing of coffeehouse maintenance and marketing expenses and from closing underperforming company-owned coffeehouses.

      Opening expenses.   Opening expenses decreased $0.1 million, or 23.3%, to $0.1 million in the first twenty-six weeks of fiscal 2008, from $0.2 million in the first twenty-six weeks of fiscal 2007. We opened five new company-owned coffeehouses in the first twenty-six weeks of fiscal 2008 versus nine new company-owned coffeehouses during the first twenty-six weeks of fiscal 2007.

      Depreciation and amortization. Depreciation and amortization decreased $1.4 million, or 12.0%, to $10.6 million in the first twenty-six weeks of fiscal 2008, from $12.0 million in the first twenty-six weeks of fiscal 2007. This decrease is due to the impairment of 38 company-owned coffeehouses during the preceding twelve months and the fewer number of company-owned coffeehouses in operation at the end of the first twenty-six weeks ended June 29, 2008 as compared to the prior year. Depreciation and amortization includes $1.7 million in accelerated depreciation associated with coffeehouse impairments in the first twenty-six weeks of fiscal 2008 as compared to $0.9 million in the first twenty-six weeks of 2007. As a percentage of total net sales, depreciation and amortization was 8.4 % in the first twenty-six weeks of fiscal 2008, compared to 9.7% in the first twenty-six weeks of fiscal 2007. This decrease as a percentage of total net sales was due to the lower number of company-owned coffeehouses opened during the first twenty-six weeks of fiscal 2008 and due to the impairment of 38 company-owned coffeehouses during the previous twelve months.

      General and administrative expenses. General and administrative expenses increased $0.3 million, or 2.3%, to $14.1 million in the first twenty-six weeks of fiscal 2008, from $13.8 million in the first twenty-six weeks of fiscal 2007. As a percentage of total net sales, general and administrative expenses increased to 11.3% in the first twenty-six weeks of fiscal 2008, from 11.0% in the first twenty-six weeks of fiscal 2007. The increase in general and administrative expenses was largely due to severance costs incurred during the first twenty-six weeks of fiscal 2008.

      Closing expenses and disposal of assets. Closing expense and disposal of assets increased $3.0 million to $3.9 million in the first twenty-six weeks of fiscal 2008 from $0.9 million in the first twenty-six weeks of fiscal 2007. This increase is due to costs associated with twenty-four coffeehouse closures in the first twenty-six weeks of fiscal 2008, compared to eight in the first twenty-six weeks of fiscal 2007, and due to the wide variations in the costs associated with coffeehouse closings. The closing costs on an individual store basis vary due to such factors as the real estate market conditions, the amount of time left on the lease, the remaining net book value of the coffeehouse assets and a variety of store specific factors. We will continue to actively manage our portfolio of coffeehouses.

      Interest income. Interest income remained flat in the first twenty-six weeks of fiscal 2008, as compared to the first twenty-six weeks of fiscal 2007.

      Interest expense. Interest expense increased $0.3 million to $0.6 million in the first twenty-six weeks of fiscal 2008 from $0.3 million in the first twenty-six weeks of 2007. Interest expense increased due to the write-off of a portion of the costs associated with acquiring the our revolving credit facility because the we reduced the amount available under our revolving credit facility from $60.0 million to $20.0 during the first thirteen weeks of fiscal 2008. The outstanding borrowings as of June 29, 2008 and July 1, 2007 were $3.0 million and $0.0 million, respectively.

Operating Segments

     Segment information is prepared on the same basis that our management reviews financial information for decision making purposes. We have three reportable operating segments: retail, commercial and franchise. “Unallocated corporate” includes expenses pertaining to corporate administrative functions that support the operating segments but are not specifically attributable to or managed by any segment and are not included in the reported financial results of the operating segments. The following tables summarize our results of operations by segment for the first twenty-six weeks of fiscal 2008 and 2007.

Retail

		26 Weeks Ended												26 Weeks Ended
		June 29,				July 1,				%				June 29,				July 1,
		2008				2007				Change				2008				2007
		(In thousands)												As a % of coffeehouse sales
Coffeehouse sales		$	113,887			$	117,407				(3.0	)%			100.0	%			100.0	%
Costs of sales and related occupancy costs			46,719				47,588				(1.8	)%			41.0	%			40.5	%
Operating expenses			49,423				51,398				(3.8	)%			43.4	%			43.8	%
Opening expenses			110				166				(33.7	)%			0.1	%			0.2	%
Depreciation and amortization			10,550				11,986				(12.0	)%			9.3	%			10.2	%
General and administrative expenses			4,780				4,912				(2.7	)%			4.2	%			4.2	%
Closing expense and disposal of assets			3,767				861				337.4	%			3.3	%			0.7	%
Operating (loss) income		$	(1,462	)		$	496				(394.8	)%			(1.3	)%			0.4	%