CBOU Caribou Coffee Company, Inc. (MM)

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K

 

 

Commission File Number: 000-51535

CARIBOU COFFEE COMPANY, INC.

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code:

(763) 592-2200

 

Securities Registered Pursuant to Section 12(b) of the Act:

 

 

Securities Registered Pursuant to Section 12(g) of the Act:
None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  o      No  þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  o      No  þ

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation of S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o      No  þ

 

The aggregate market value of voting and non-voting common equity held by non-affiliates of the Registrant was approximately $36,029,297 as of June 29, 2008, based upon the closing price on the Nasdaq Global Market reported for such date. This calculation does not reflect a determination that certain persons are affiliates of the Registrant for any other purpose.

 

As of March 18, 2009, there were 19,370,590 shares of the registrant’s Common Stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the definitive Proxy Statement for the registrant’s Annual Meeting of Shareholders, to be held on May 21, 2009 have been incorporated by reference into Part III of this Annual Report on Form 10-K.

 

 

TABLE OF CONTENTS

 

 

 

Founded in 1992, we have developed into the second largest company-operated gourmet coffeehouse operator in the United States based on the number of coffeehouses operated. As of December 28, 2008, we had 511 coffeehouses, including 97 franchised locations. Our coffeehouses are located in 16 states, the District of Columbia and international markets. Our coffeehouses focus on creating a unique experience for our customers through the combination of our high-quality products, distinctive coffeehouse environment and customer service. Our products include high-quality gourmet coffee and espresso-based beverages, specialty teas, baked goods, whole bean coffee, branded merchandise and related products. To maintain product quality, we source the highest grades of Arabica beans, craft roast beans in small batches to achieve optimal flavor profiles and enforce strict packaging and brewing standards. We consider our roasting methods essential to the flavor and richness of our coffee.

 

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.

 

Segment Financial Information

 

We have three reportable operating segments: retail, commercial and franchise. Financial information about our segments is included in Note 16 to our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.

 

Retail Coffeehouses.   As of December 28, 2008, we operated 414 company-operated coffeehouses located in 16 states and the District of Columbia, including 211 coffeehouses in Minnesota and 53 coffeehouses in Illinois. We focus on offering our customers high-quality gourmet coffee and espresso-based beverages, and also offer specialty teas, baked goods, whole bean coffee, branded merchandise and related products. We believe we provide a unique experience for our customers through the combination of our high-quality products, distinctive coffeehouse environment and customer service. Our coffeehouse environment is driven by our distinctive coffeehouse design, which resembles a mountain lodge and provides an inviting and comfortable atmosphere for customers who wish to gather and relax while also providing convenience for take-out customers focused on quick service. Our coffeehouse staff provides consistent and personal service in a clean, smoke-free environment.

 

Our retail growth objective is to profitably build a leading gourmet coffeehouse brand. We will continue our efforts to increase our comparable coffeehouse sales, including increasing our brand awareness through marketing efforts and introducing new products and promotions. We believe that we have strong brand awareness in markets where we have a significant coffeehouse presence and that by building a similar coffeehouse base in other metropolitan areas, we will be able to drive customer awareness and comparable coffeehouse sales. As our comparable coffeehouse sales increase, we expect our operating margins to improve as we leverage our fixed expenses.

 

Commercial.   We sell our 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. This segment of our business continues to expand. During our fiscal year ending December 28, 2008, the commercial segment experienced sales growth of 44% versus the prior fiscal year. Our growth strategy for the commercial segment is to continue to build our existing relationships with grocery stores and national office coffee providers and add new points of distribution for our gourmet whole bean and ground coffee.

 

Franchise.   We opened our first franchised coffeehouse in 2004 and as of December 28, 2008, we have expanded the number of franchised coffeehouses to 97 with 59 of the franchised coffeehouses in international markets. We intend to franchise Caribou Coffee branded coffeehouses both domestically and internationally, where we believe there are significant opportunities to grow our business with qualified, multi-unit franchise development partners. In 2009, we are expecting to open 35-40 franchised coffeehouses in both domestic and international markets.

Purchasing

 

Our principal raw material is coffee beans. We typically enter into supply contracts to purchase a pre-determined quantity of coffee beans at a fixed price per pound. These contracts with individual suppliers usually cover periods up to a year. As of December 28, 2008, we had commitments to purchase coffee beans at a total cost of $16.3 million through December 2009, or roughly 80% of our anticipated coffee bean requirements for 2009. We will purchase the remainder of the coffee beans we need in the market at negotiated prices or under additional supply contracts we enter into during the fiscal year 2009.

 

Our second largest raw material is dairy. We obtain our dairy products from regional dairy suppliers. In our established markets, we generally have arrangements with a dairy supplier under which we purchase for fixed prices based upon the commodity price plus a percentage.

 

Competition

 

Our primary competitors for coffee beverage sales are other gourmet coffee shops and restaurants. In all markets in which we do business, there are numerous competitors in the gourmet coffee beverage business, and we expect this situation to continue. Starbucks is the gourmet coffeehouse segment leader with approximately 7,200 locations in the United States and approximately 2,000 locations internationally. Our primary competitors in addition to Starbucks are regional or local market coffeehouses. We also compete with numerous convenience stores, restaurants, coffee shops and street vendors as well as quick service restaurants. As we continue to expand geographically, we expect to encounter additional regional and local competitors.

 

We believe that our customers choose among gourmet coffeehouses based upon the quality and variety of the coffee and other products, atmosphere, convenience, customer service and, to a lesser extent, price. Although we believe consumers differentiate coffee brands based on freshness (as an element of coffee quality), to our knowledge, few significant competitors focus on craft roasting and product freshness in the same manner as Caribou Coffee. We spend significant resources to differentiate our customer experience, which is defined by our products, coffeehouse environment and customer service, from the offerings of our competitors. Despite these efforts, our competitors still may be successful in attracting our customers.

 

Competition in the gourmet coffee market is becoming increasingly intense as relatively low barriers to entry encourage new competitors to enter the market. The financial, marketing and operating resources of these new market entrants may be greater than our resources. In addition, some of our existing competitors have substantially greater financial, marketing and operating resources. Our failure to compete successfully against current or future competitors could have an adverse effect on our business, including loss of customers, declining net sales and loss of market share.

 

We also face intense competition in the expansion of our franchise program as the number of franchising alternatives for potential franchisees increases. We will continue to seek franchisees to operate coffeehouses under the Caribou Coffee brand in both domestic and international markets. We believe that our ability to recruit, retain and contract with qualified franchisees will be increasingly important to our operations as we expand. Along with our high-quality products, our unique coffeehouse environment and our exceptional customer service, we believe that our innovative development of the “store within a store” kiosk program will allow us to differentiate ourselves from other franchise offerings.

 

In our commercial business, we face competition from a number of large multi-national consumer product companies including Kraft Foods Inc., Nestle Inc. and Proctor & Gamble, as well as, regional gourmet coffee bean companies. As we seek to expand our opportunities with existing and potential commercial customers, we may not be successful.

 

We also compete with numerous other retailers and restaurants for retail real estate locations for our coffeehouses.

 

Service Marks and Trademarks

 

We regard the Caribou Coffee Brand and related intellectual property and other proprietary rights as important to our success. We rely on a combination of trademarks, copyrights, service marks, trade secrets and similar rights to

protect our intellectual property. We own several trademarks and service marks that have been registered with the U.S. Patent and Trademark Office, including Caribou Coffee, Reindeer Blend and other product-specific names. We also use our trademarks and other intellectual property on the Internet. We have applications pending with the U.S. Patent and Trademark Office for a number of additional marks, including Mahogany, Hoof Mints and Caribou Iced Coffee. We have registered or made application to register one or more of our marks in a number of foreign countries and expect to continue to do so in the future as we expand internationally. There can be no assurance that we can obtain the registration for the marks in every country where registration has been sought.

 

Our ability to differentiate the Caribou Coffee brand from those of our competitors depends, in part, on the strength and enforcement of our trademarks. We must constantly protect against any infringement by competitors. If a competitor infringes on our trademark rights, we may have to litigate to protect our rights, in which case, we may incur significant expenses and divert significant attention from our business operations.

 

Employees

 

As of December 28, 2008, we employed a workforce of 6,013 people, approximately 1,425 of whom are considered full-time employees. None of our employees are represented by a labor union. We consider our relationship with our employees to be good.

 

Government Regulation

 

Our coffee roasting operations and our coffeehouses are subject to various governmental laws, regulations and licenses relating to health and safety, building and land use, and environmental protection. These governmental authorities include federal, state and local health, environmental, labor relations, sanitation, building, zoning, fire, safety and other departments that have jurisdiction over the development and operation of these locations. Our roasting facility is subject to state and local air quality and emissions regulations. We believe that we are in compliance in all material respects with all such laws and regulations and that we have obtained all material licenses that are required for the operation of our business. We are not aware of any environmental regulations that have or that we believe will have a material adverse effect on our operations. Our activities are also subject to the American with Disabilities Act and related regulations, which prohibit discrimination on the basis of disability in public accommodations and employment. Changes in any of these laws or regulations could have a material adverse affect on our operations, sales, and profitability. Delays or failures in obtaining or maintaining required construction and operating licenses, permits or approvals could delay or prevent the opening of new coffeehouse locations, or could materially and adversely affect the operation of existing coffeehouses.

 

Seasonality

 

Our business is subject to seasonal fluctuations, including fluctuations resulting from weather conditions and holidays. A disproportionate percentage of our total annual net sales and profits are realized during the fourth quarter of our fiscal year, which includes the December holiday season. In addition, quarterly results are affected by the timing of the opening of new coffeehouses, and our growth may conceal the impact of other seasonal influences. Because of the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.

 

Available Information

 

Our website is located at www.cariboucoffee.com. Caribou Coffee Company’s Form 10-K reports, along with all other reports and amendments filed with or furnished to the Securities and Exchange Commission (“SEC”), are publicly available free of charge on Caribou Coffee Company’s website at www.cariboucoffee.com accessed the Home page through the Investors section or at www.sec.gov as soon as reasonably practicable after these materials are filed with or furnished to the SEC. The Company’s corporate governance policies, ethics code and Board of Directors’ committee charters are also posted within this section of our website. The information on the Company’s website is not part of this or any other report Caribou Coffee Company files with, or furnishes to, the SEC.

 

Certain statements we make in this filing, and other written or oral statements made by or on our behalf, may constitute “forward-looking statements” within the meaning of the federal securities laws. Words or phrases such as “should result,” “are expected to,” “we anticipate,” “we estimate,” “we project,” “we believe,” or similar expressions are intended to identify forward-looking statements. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. We believe that these forward-looking statements are reasonable; however, you should not place undue reliance on such statements. Such statements speak only as of the date they are made, and we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of future events, new information or otherwise. The following risk factors, as well as the risks detailed in the “Business” section and others that we may add from time to time, are some of the factors that could cause our actual results to differ materially from the expected results described in our forward-looking statements.

 

Risks Related to Our Business

 

The United States economic crisis could adversely affect our business and financial results and have a material adverse effect on our liquidity and capital resources

 

As the recent financial crisis has broadened and intensified, many sectors of the economy have been adversely impacted, and the United States is currently in an economic recession. As a retailer that is dependent upon consumer discretionary spending, we will face an extremely challenging fiscal 2009 because our customers may have less money for discretionary purchases as a result of job losses, foreclosures, bankruptcies, reduced access to credit and sharply falling home prices. Any resulting decreases in customer traffic or average value per transaction will negatively impact our financial performance as reduced revenues result in sales de-leveraging which creates downward pressure on margins. Additionally, many of the effects and consequences of the financial crisis and a broader economic downturn are currently unknown; any one or all of them could potentially have a material adverse effect on our liquidity and capital resources, including our ability to raise additional capital if needed, the ability of banks to honor draws on our credit facility, or otherwise negatively impact our business and financial results.

 

We have a history of net losses and may incur losses in the future.

 

We have incurred net losses in each of the last two fiscal years and in all but two years since our inception in 1992. Our net losses were $16.3 million and $30.7 million for the years ended December 28, 2008 and December 30, 2007, respectively. We may continue to incur net losses, and we cannot assure you that we will be profitable in future periods.

 

We will continue to incur significant operating expenses to grow our business and the number of our coffeehouses. Accordingly, we will need to increase our net sales at a rate greater than our expenses to achieve profitability. We cannot predict whether we will become profitable in future periods. Furthermore, we may not be able to return to profitability if we are unable to terminate, sublease or otherwise dispose of any underperforming locations. Even if we become profitable, we may not be able to sustain profitability.

 

We may need to raise additional capital in order to continue to grow our business, which subjects us to the risks that we may be unable to maintain or grow our business as planned or that our shareholders may be subject to substantial additional dilution. We are also subject to protective covenants that may restrict growth potential.

 

We may need to raise capital in order to continue to expand our business and open new coffeehouses. We do not know if we will be able to raise additional financing or financing on terms favorable to us. If adequate funds are not available or are not available on acceptable terms, our ability to fund our operations, develop and expand our business or otherwise respond to competitive pressures would be significantly impaired.

 

In addition, if we raise additional funds through the issuance of equity or convertible or exchangeable securities, the percentage ownership of our existing shareholders will be reduced. These newly issued securities may have rights, preferences and privileges senior to those of existing shareholders.

Our revolving credit facility contains restrictive covenants and requirements that we comply with certain financial ratios. These covenants limit our ability to take various actions without the consent of our lenders, including the incurrence of additional debt, the guaranteeing of certain indebtedness and engaging in various types of transactions, including mergers and sales of assets, paying dividends and making distributions or other restricted payments, including investments. These covenants could have an adverse effect on our business by limiting our ability to take advantage of business opportunities. Our inability in the future to comply with the covenant requirements under the revolving credit facility and to obtain a waiver of such violations could impair our liquidity and limit our ability to operate.

 

We may need to record additional impairment losses in the future if our stores’ operating performances do not improve.

 

We continually review our coffeehouses operating performances and evaluate the carrying value of their assets in relation to their expected future cash flows. In those cases where circumstances indicate that the carrying value of the applicable assets may not be recoverable, we record an impairment loss related to the long-lived assets. We recorded an impairment loss of $7.5 million related to 37 coffeehouses for fiscal year 2008. If our coffeehouse operating performance does not improve in the future, the carrying value of our coffeehouse assets may not be recoverable in light of future expected cash flows. This may result in our need to record additional impairment losses in certain markets where our coffeehouses operate that could have a materially adverse effect on our business, financial condition and results of operations.

 

We are actively managing our leased real estate portfolio and closing those underperforming coffeehouses where we have been able to negotiate an appropriate termination or sublease the locations to third parties. However, we may not be able to negotiate favorable lease termination terms or find third parties who desire to sublease these locations. As a result, we may continue to incur losses at some underperforming coffeehouses. Many factors impact our ability to close underperforming coffeehouses, including, local economic conditions, the amount of local real estate available for rent and the general real estate market deterioration.

 

We may not be able to renew leases or control rent increases at our retail locations or obtain leases for new coffeehouses.

 

Our coffeehouses are all leased. At the end of the term of the lease, we may be forced to find a new location to lease or close the coffeehouse. Any of these events could adversely affect our profitability. We compete with numerous other retailers and restaurants for coffeehouse sites in the highly competitive market for retail real estate. As a result, we may not be able to obtain new leases, or renew existing ones, on acceptable terms, which could adversely affect our net sales and brand-building initiatives.

 

The market price for our common stock may be volatile.

 

Our stock price has been, and is expected to continue to be, highly volatile. There could be an immediate adverse impact on our stock price as a result of any future sales of our common stock or other securities; a decline in any month or quarter of our net sales or earnings; a decline in any month or quarter of comparable sales; a deviation in our net sales, earning or comparable store sales from levels expected by securities analysts; changes in financial estimates by securities analysts; or changes in market valuation of other companies in the same or similar markets.

 

In addition, the Nasdaq Global Market sm has experienced extreme volatility that has often been unrelated to the performance of particular companies. Future market fluctuations may cause our stock price to fall regardless of our performance. Such volatility may limit our future ability to raise additional capital.

 

Recent changes in our senior management may cause uncertainty in, or be disruptive to, our business.

 

We have recently experienced significant changes in our senior management. On August 1, 2008, Michael Tattersfield was appointed Chief Executive Officer, replacing Rosalyn Mallet who had been our interim Chief Executive Officer since November 2007 and on September 9, 2008, Timothy Hennessy was appointed as Chief Financial Officer, replacing Kaye O’Leary, who had been our acting Chief Financial Officer, since January 11, 2008. These changes in our management may be disruptive to our business, and, during the transition period, there

may be uncertainty among investors, vendors, employees and others concerning our future direction and performance. Moreover, our future success will depend to a significant extent on our ability to identify, hire and retain key management personnel going forward. If we are unable to identify and retain effective permanent replacements for our key executives, our results of operations and financial condition may be adversely affected.

 

We are susceptible to adverse trends and economic conditions in Minnesota and the Upper Midwest.

 

As of December 28, 2008, 211, or 51%, of our coffeehouses were located in Minnesota. An additional 76, or 18%, were located in the states of North Dakota, South Dakota, Iowa, Illinois and Wisconsin. Our Minnesota coffeehouses accounted for approximately half of our company-operated coffeehouse net sales during the year ended December 28, 2008. Our Minnesota, North Dakota, South Dakota, Iowa, Illinois and Wisconsin company-operated coffeehouses accounted for approximately 60% of our coffeehouse net sales during the year ended December 28, 2008. As a result, any adverse trends and economic conditions in these states have a disproportionate adverse impact on our overall results. In addition, given our geographic concentration in these states, negative publicity in the region regarding any of our coffeehouses could have a material effect on our business and operations throughout the region, as could other regional occurrences such as local strikes, new or revised laws or regulations, adverse weather conditions, natural disasters or disruptions in the supply of food products

 

Complaints or claims by current, former or prospective employees could adversely affect us.

 

We are subject to the a variety of regulations which govern such matters as minimum wages, overtime and other working conditions, various family leave mandates and a variety of other laws enacted, or rules and regulations promulgated, by federal, state and local governmental authorities that govern these and other employment matters. A material increase in the minimum wage and other statutory benefits could adversely affect our operating results. We have been, and in the future may be, the subject of complaints or litigation from current, former or prospective employees from time to time. These complaints or litigation involving current, former or prospective employees 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.

 

If we fail to maintain an effective system of internal controls over financial reporting and disclosure, we may not be able to accurately report our financial results or prevent fraud. As a result, current and potential shareholders could lose confidence in our financial and other public reporting, which would harm our business and the trading price of shares of our common stock.

 

Our financial reporting and disclosure controls and procedures are designed to reasonably assure that information required to be reported and disclosed by us in reports we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to management, recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (“SEC”). We believe that any financial reporting and disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Effective internal controls over financial reporting and disclosure are necessary for us to provide reliable financial reports and are designed to prevent fraud. If we cannot provide reliable financial reports and disclosures or prevent fraud, our brand and operating results could be harmed. We may in the future discover areas of our internal controls that need improvement. We cannot be certain that any remedial measures we take will ensure that we implement and maintain adequate controls over our financial processes and reporting in the future. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting and disclosure obligations. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of shares of our common stock.

We have a significant number of options outstanding to acquire shares of our common stock that, when exercised, will dilute existing shareholders and could decrease the market price of our common stock.

 

We have a significant number of outstanding options to acquire shares of our common stock at various price ranges. In addition to the dilution our shareholders will experience once these options are exercised, our shareholders could experience a decline in the market price of our common stock from the sale of these shares in the public market.

 

Risks Related to Our Structure

 

Arcapita has substantial control over us, and could limit other shareholders’ ability to influence the outcome of matters requiring shareholder approval and may support corporate actions that conflict with other shareholders’ interests.

 

Our largest shareholder is an affiliate of Arcapita Bank B.S.C. (c), a global investment group founded in 1997 with offices in Atlanta, London and Bahrain. We refer to Arcapita Bank B.S.C. (c) and its affiliates collectively as either Arcapita or our majority shareholder in the Form 10-K.

 

Arcapita beneficially owns 11,672,245 shares, or approximately 60.3%, of the outstanding shares of our common stock as of December 28, 2008. Arcapita’s ownership of shares of our common stock could have the effect of delaying or preventing a change of control of us, could discourage a potential acquirer from obtaining control of us, even if the acquisition or merger would be in the best interest of our shareholders, or could otherwise affect our business because of our compliance with Shari’ah principles as described below. This could have an adverse effect on the market price for shares of our common stock. Arcapita is also able to control the election of directors to our board. Two of the eight members of our board of directors are representatives of Arcapita.

 

Our compliance with Shariah principles may make it difficult for us to obtain financing and may limit the products we sell.

 

Arcapita operates its business and makes its investments in a manner consistent with the body of Islamic principles known as Shari’ah. Consequently, we operate our business in a manner that is consistent with Shari’ah principles and will continue to do so for so long as Arcapita is a controlling shareholder. Shari’ah principles regarding the lending and borrowing of money require application of qualitative and quantitative standards. A Shari’ah-compliant company is prohibited from engaging in derivative hedging transactions such as interest rate swaps or futures, forward options or other instruments designed to hedge against changes in interest rates or the price of commodities we purchase. Also, a Shari’ah compliant company is prohibited from dealing in the areas of alcohol, gambling, pornography, pork and pork-related products.

 

Provisions in our articles of incorporation and bylaws and of Minnesota law have anti-takeover effects that could prevent a change in control that could be beneficial to our shareholders, which could depress the market price of shares of our common stock.

 

Our articles of incorporation and bylaws and Minnesota corporate law contain provisions that could delay, defer or prevent a change in control of us or our management that could be beneficial to our shareholders. These provisions could also discourage proxy contests and make it more difficult for you and other shareholders to elect directors and take other corporate actions. As a result, these provisions could limit the price that investors are willing to pay in the future for shares of our common stock. These provisions might also discourage a potential acquisition proposal or tender offer, even if the acquisition proposal or tender offer is at a price above the then current market price for shares of our common stock. These provisions:

 

 

 

Because we do not intend to pay dividends, shareholders will benefit from an investment in shares of our common stock only if it appreciates in value.

 

We have never declared or paid any cash dividends on shares of our common stock. We currently intend to retain our future earnings, if any, to finance the operation and growth of our business and do not expect to pay any cash dividends in the foreseeable future. As a result, the success of an investment in shares of our common stock will depend upon any future appreciation in its value. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which shareholders have purchased their shares.

 

 

Not applicable.

 

 

Locations and Facilities

 

Coffeehouse Locations

 

As of December 28, 2008, we had 511 retail coffeehouses, including 97 franchised locations. Caribou Coffee’s coffeehouses are located in sixteen states and the District of Columbia and international markets.

 

 

 

 

We lease all of our retail facilities. Most of our existing leases are for five to 10 years and typically have multiple five-year renewal options. We regularly evaluate the economic performance of our coffeehouses and, when feasible, close ones that do not meet our expectations.

 

Headquarters and Roasting Facility

 

We currently conduct our roasting and packaging, and warehouse and distribution activities in a 130,000 square foot leased facility in suburban Minneapolis, which also houses our corporate headquarters. We lease this facility under a lease that has an initial term that expires in 2019 and is subject to extensions through 2029. We have an option to purchase the facility at the end of the initial lease term. This facility has approximately 46,000 square feet for warehousing of finished goods and distribution, approximately 42,000 square feet for storage of raw materials, roasting and packaging and approximately 42,000 square feet of office space. At present, we are operating at less than our full capacity, and we believe that our existing infrastructure is scalable so that we can add additional capacity with limited incremental capital expenditures in the near future. In addition, when we need to add additional roasting, packaging and fulfillment infrastructure, we believe that we can do so at a relatively inexpensive cost.

 

This facility is organic certified by the U.S. Department of Agriculture, allowing us to offer our Rainforest Blend and our Acacia Blend as organic certified. From time to time we engage third party vendors to meet special processing needs, including roasting or specialized packaging for specific commercial accounts.

 

 

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 alleged 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 allegedly owed and unpaid overtime compensation, liquidated damages, interest, and among other things, attorney’s fees and costs.

 

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 provided for a gross settlement payment of $2.7 million, plus the employer’s share of payroll taxes. A partial settlement payment of $1.75 million was made on March 15, 2008; a final settlement payment of $0.95 million was made on December 29, 2008. Settlement payments made to all participating class members and all attorneys’ fees for plaintiffs’ counsel were paid from the $2.7 million.

 

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.

 

 

No matters were submitted to a vote of security holders during the fiscal fourth quarter of 2008.

 

The following table sets forth certain information concerning the individuals who will be our executive officers, with ages as of March 30, 2009:

 

 

Michael Tattersfield has served as our President and Chief Executive Officer since August 2008. Previously, Mr. Tattersfield was with lululemon athletica, inc. (“lulu”), a yoga-inspired athletic apparel company, where he served as Chief Operating Officer and Executive Vice President from 2006 to 2008. Prior to joining lulu, Mr. Tattersfield served as Vice President Store Operations for Limited Brands, Inc. (“Limited Brands”), an operator of specialty stores that sell apparel, personal care, beauty and lingerie products, from 2005 to 2006. Prior to joining Limited Brands, Mr. Tattersfield was with Yum! Brands, Inc., the world’s largest restaurant company in terms of system restaurants, serving as President of A&W All American Food Restaurants from 2003 to 2005, Managing Director and Chief Executive Officer of Puerto Rico and the Caribbean from 1998 to 2002, Chief Financial Officer and Development Director of Mexico from 1996 to 1998 and Director of Operations of Pizza Hut and KFC for Mexico from 1992 to 1996.

 

Timothy J. Hennessy has served as our Chief Financial Officer since September 2008. Previously, Mr. Hennessy was with Carlson Wagonlit Travel (“Carlson Wagonlit”), a European-based leading travel management company, where he served as Chief Financial Officer and Executive Vice President from 2001 to 2007, Chief Financial Officer of America and Vice President from 1999 to 2000 and Group Controller from 1997 to 1999. Prior to joining Carlson Wagonlit, Mr. Hennessy served as Director of Acquisitions and Strategic Planning for Carlson Companies (“Carlson”), a large private company providing travel, hotel, restaurant, cruise and marketing services directly to consumers, corporations and government entities, from 1994 to 1996. Prior to joining Carlson, Mr. Hennessy was with Deloitte & Touche LLP, an audit, consulting, financial advisory, risk management and tax services firm, from 1983 to 1992.

 

Daniel J. Hurdle has served as our Senior Vice President Supply Chain, Product Management and Real Estate since October 2008. Previously, Mr. Hurdle was the Senior Vice President of North American Field Operations for Weight Watchers. From 2006 to 2008 Mr. Hurdle was Senior Vice President of Strategy & Business Development for Washington Mutual. Mr. Hurdle also held various leadership roles with Starbucks Coffee Company where he was Vice President, Existing Stores Portfolio from 2005 to 2006; Vice President, Retail Food Business from 2002 to 2005; and Vice President, Strategy and Chief of Staff to the President North America from 2001 to 2002.

 

Alfredo V. Martel has served as our Senior Vice President of Marketing since October 2008. Previously, Mr. Martel was employed by KFC USA, Yum! Brands where he held a variety of marketing position and was most recently the Director of Marketing.

 

Dan E. Lee has served as our General Counsel, Vice President and Secretary since August 2005. Prior to joining the Company, Mr. Lee served as an attorney for MoneyGram International, Inc., a global payment services company, from April 2005 to July 2005. From 1988 to 2004, Mr. Lee worked with Carlson Companies, Inc., a large private company in the hospitality, marketing and travel industries. From 2003 to 2004, he was Executive Vice President, Program Manager and Associate General Counsel for CW Government Travel, a part of the travel

operations of Carlson Companies responsible for soliciting and managing travel for U.S. government departments. From 1988 to 2003, he was Associate General Counsel and Assistant Secretary for Carlson Companies.

 

Karen E. McBride-Raffel has served as our Vice President of Human Resources since June 2003 and as our Senior Director of Field Human Resources from March 2000 through May 2003. Prior to that time she held various other positions with us since joining us in 1995, including Human Resource Manager and Director of Human Resources.

 

Christopher B. Rich has served as our Vice President of Global Franchising since August 2005. Prior to joining us, Mr. Rich served as Director of Franchising for Glory Days Grill, a sports-themed casual dining concept, from January 2005 to August 2005. From April 1995 to December 2004, Mr. Rich was the Owner and General Manager of Fowlers Mill Group, a restaurant and catering complex.

 

Henry A. Stein has served as our Vice President of Business Development and Commercial Sales since March 2005 and served as our Senior Director, Commercial Sales from October 2003 through February 2005. Prior to joining us, Mr. Stein served in various management positions at The Coca-Cola Company, including Director, Corporate Customer Development and Regional Sales Manager, Midwest Region, from 1997 to 2003.

 

R. Paul Turek has served as our Vice President of Support Operations since June 2003 and served as our Senior Director and General Manager of Support Operations from July 1999 to June 2003.

PART II

 

 

Market for the Registrant’s Stock

 

The Company’s common stock is listed on the Nasdaq Global Market under the symbol “CBOU.” The following table sets forth, for the periods indicated, the high and low prices for our common stock as reported on the Nasdaq Global Market.

 

 

As of March 6, 2009, there were approximately 6,020 registered holders of record of the Company’s common stock.

 

Dividend Policy

 

We have not declared or paid any dividends on our capital stock. We expect to retain any future earnings to fund the development and expansion of our business. Therefore, we do not anticipate paying cash dividends on our common stock in the foreseeable future. Our revolving credit facility contains provisions, which restrict our ability to pay dividends on our common stock.

 

Sales of Unregistered Securities

 

Not applicable.

 

The table below presents our selected consolidated financial data as of and for each of our fiscal years ended December 28, 2008, December 30, 2007, December 31, 2006, January 1, 2006, and January 2, 2005. The balance sheet data, consolidated statement of operations data and additional operating data as of and for our fiscal years ended December 28, 2008 and December 30, 2007 are derived from our audited consolidated financial statements included elsewhere in this report. The balance sheet data, consolidated statement of operations data and additional operating data as of and for the fiscal years ended December 31, 2006, January 1, 2006 and January 2, 2005, are derived from our audited consolidated financial statements not included in this report.

 

The following selected consolidated financial data and operating information should be read in conjunction with our “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the Company’s consolidated financial statements and the related notes included elsewhere in this report. The historical results presented below are not necessarily indicative of future results.

 

 

 

 

 

We believe EBITDA and Adjusted EBITDA are useful to investors in evaluating our operating performance for the following reasons:

 

 

Our management uses EBITDA and Adjusted EBITDA:

 

 

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

 

We prepare Adjusted EBITDA by adjusting EBITDA to eliminate the impact of a number of items that we do not consider indicative of our core operating performance. You are encouraged to evaluate each adjustment and the reasons we consider them appropriate for supplemental analysis. As an analytical tool, Adjusted EBITDA is subject to all of the limitations applicable to EBITDA. In addition, in evaluating Adjusted EBITDA, you should be aware that in the future we might incur expenses similar to the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed as an implication that our future results will be unaffected by unusual or non-recurring items.

 

The table below reconciles net loss to EBITDA and Adjusted EBITDA for the periods presented.

 

 

 

 

 

The following discussion should be read in conjunction with the consolidated financial statements and related notes that appear elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this report, particularly under the heading “Risk Factors.”

 

Overview

 

We are the second largest company-operated gourmet coffeehouse operator in the United States based on the number of coffeehouses. As of December 30, 2008, we had 511 retail locations, including 97 franchised. Our coffeehouses are located in 19 states and the District of Columbia and two 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. 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 will continue our efforts to increase our comparable coffeehouse sales, including increasing our brand awareness through marketing efforts and introducing new products and promotions. As our comparable coffeehouse sales increase, we expect our operating margins at those coffeehouses to improve as we expect to have a greater ability to leverage our fixed expense.

 

During our fiscal year ending December 28, 2008, the commercial segment experienced sales growth of 44% versus the prior fiscal year. Our growth strategy for the commercial segment is to continue to build our existing relationships with grocery stores and national office coffee providers and add new points of distribution for our gourmet whole bean and ground coffee.

 

We intend to continue to strategically expand our coffeehouse locations in our existing markets. During fiscal year 2008, we opened 52 new coffeehouses, including 7 new company-operated coffeehouses. Our goal is to expand our concept into a nationally recognized brand in the United States by opening new company-operated coffeehouses and partnering with qualified developers to open franchised coffeehouses while adding select international locations through franchising.

 

Critical Accounting Policies

 

Our consolidated financial statements and the related notes contain information that is pertinent to management’s discussion and analysis. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities. Our actual results might, under different assumptions and conditions, differ from our estimates. We believe the following 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.

 

Long-lived assets.   SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” , requires management judgments regarding the future operating and disposition plans for marginally performing assets and estimates of expected realizable values for assets to be sold. Actual results may differ from those estimates. The application of SFAS No. 144 has affected the amount and timing of charges to our operating results that have been significant in recent years. We periodically evaluate possible impairment at the individual coffeehouse level, and record an impairment loss whenever we determine impairment factors are present. We also periodically evaluate the criteria we use as an indication of a coffeehouse impairment. We consider a history of coffeehouse operating losses to be the primary indicator of potential impairment for individual coffeehouse locations. A lack of improvement at the coffeehouses we are monitoring, or deteriorating results at other coffeehouses, could result in additional impairment charges. During fiscal years 2008 and 2007 the assets related

to thirty-seven and thirty-six coffeehouses were impaired, of which we recorded charges of approximately $7.5 million and $10.4 million, respectively.

 

Stock-based compensations.   We maintain stock-based compensation plans, which provide for the granting of non-qualified stock options and restricted stock to officers and key employees and certain non-employees. Stock options are granted with strike prices equal to the fair market values of our common stock as of the dates of grant. Options vest generally over four years and expire ten years from the grant date. We account for the issuance of stock options under the fair value recognition provisions of SFAS No. 123R (revised 2004), Share Based Payment , (“SFAS 123R”) which revised SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”) and supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”) requiring us to recognize expense related to the fair value of our stock-based compensation awards. In accordance with SFAS 123R, the estimated grant date fair value of each stock-based award is recognized in income on a straight line basis over the requisite service period (generally the vesting period). The estimated fair value of each option is calculated using the Black-Scholes option-pricing model. Stock-based compensation expense for fiscal year 2008 and 2007, totaled approximately $0.8 million in each year.

 

Lease accounting.   We enter into operating leases for all of our coffeehouse locations. Certain of our leases provide for scheduled rent increases during the lease terms or for rental payments commencing on a date that is other than the date we take possession. In accordance with the FASB’s Technical Bulletin No. 85-3, “Accounting for Operating Leases with Scheduled Rent Increases,” we recognize rent expense on leases for coffeehouse and office buildings on a straight line basis over the initial lease term and commencing on the date we take possession. We use the date of initial possession (regardless of when rent payments commence) to begin recognition of rent expense, which is generally the date we begin to add leasehold improvements to ready the site for its intended use. In accordance with the FASB’s Technical Bulletin No. 88-1, “Issues Relating to Accounting for Leases,” we record landlord allowances as deferred rent in other long-term liabilities and accrued expenses on our consolidated balance sheets and amortize such amounts as a component of cost of sales and related occupancy costs on a straight-line basis over the term of the related leases.

 

Income taxes.   We provide for income taxes based on our estimate of federal and state tax liabilities. These estimates include, among other items, effective rates for state and local income taxes, estimates related to depreciation and amortization expense allowable for tax purposes, and the tax deductibility of certain other items. Our estimates are based on the information available to us at the time we prepare the income tax provision. We generally file our annual income tax returns several months after our fiscal year-end. Income tax returns are subject to audit by federal, state and local governments, generally years after the returns are filed. These returns could be subject to material adjustments or differing interpretations of the tax laws.

 

Deferred income tax assets and liabilities are recognized for the expected future income tax benefits or consequences of loss carryforwards and temporary differences between the book and tax basis of assets and liabilities. We must assess the likelihood that we will be able to recover our deferred tax assets. If recovery is not likely, we establish valuation allowances to offset any deferred tax asset recorded. The valuation allowance is based upon historical taxable income. Given that we have had net operating losses, we have recognized a valuation allowance equal to 100% of our net deferred tax assets. As we update our estimates, we may need to establish an additional valuation allowance, which could have a material negative impact on our results of operations or financial position. As of December 28, 2008, our loss carryforward was $39.1 million and we had a valuation allowance aggregating $31.9 million recorded such that net deferred income tax assets were fully reserved at such date. The net operating loss carryforwards will begin to expire in 2011, if not utilized.

 

Effective January 1, 2007, we adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109 (“FIN 48”), which prescribes a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. Though the validity of any tax position is a matter of tax law, the body of statutory, regulatory and interpretive guidance on the application of the law is complex and often ambiguous. Because of this, whether a tax position will ultimately be sustained may be uncertain. Under FIN 48, the impact of an uncertain tax position that is more likely than not of being sustained upon audit by the relevant taxing

authority must be recognized at the largest amount that is more likely than not to be sustained. No portion of an uncertain tax position will be recognized if the position has less than a 50% likelihood of being sustained.

 

Fiscal Periods

 

Our fiscal year ends on the Sunday falling nearest to December 31. Fiscal years 2008 and 2007 include 52 weeks.

 

Consolidated Results of Operations

 

The following discussion on results of operations should be read in conjunction with “Item 6. Selected Consolidated Financial Data,” the consolidated financial statements and accompanying notes and the other financial data included elsewhere in this report.

 

Fiscal Year 2008 Compared to Fiscal Year 2007

 

 

Net Sales

 

Net sales decreased $2.9 million, or 1.1%, to $253.9 million in fiscal 2008, from $256.8 million in fiscal 2007. This decrease is primarily attributable to the net decrease of 1,004 coffeehouse operating weeks in fiscal 2008 compared to fiscal 2007 primarily due to retail coffeehouse closings. Comparable coffeehouse sales for fiscal year 2008 were down 3.5% when compared with fiscal year 2007. Franchised sales are not included in the comparable coffeehouse sales calculations. For fiscal 2008, Commercial and Franchise sales increased $8.2 million, or 49.7%, as compared to fiscal 2007. This increase was largely due to sales to existing and new commercial customers and to product sales, franchise fees and royalties from the development of 45 franchised coffeehouses during the preceding twelve months.

Costs and Expenses

 

Cost of sales and related occupancy costs.   Cost of sales and related occupancy costs increased $1.3 million, or 1.2%, to $109.6 million in fiscal year 2008, from $108.4 million in fiscal year 2007. This increase is primarily attributable to the increased cost of sales associated with the increased product sales in our commercial and franchise segments. Commercial and Franchise sales generally have a higher cost of sales and related occupancy costs rate than company-operated coffeehouses. Costs of sales and occupancy costs in our retail segment decreased due to fewer coffeehouse operating weeks in fiscal 2008 when compared to fiscal 2007. As a percentage of net sales, cost of sales and related occupancy costs increased to 43.2% in fiscal year 2008, from 42.2% in fiscal year 2007. The increase in cost of sales and related occupancy costs as a percentage of net sales was primarily due to the high growth in Commercial and Franchise sales which changed the overall mix of sales.

 

Operating expenses.   Operating expenses decreased $6.8 million, or 6.3%, to $100.3 million in fiscal year 2008, from $107.1 million in fiscal year 2007. This decrease is primarily attributable to the net decrease in the number of company-operated coffeehouses operating during fiscal 2008 compared to fiscal 2007 and lower labor expense. As a percentage of total net sales, operating expenses decreased to 39.5% in fiscal year 2008 from 41.7% in fiscal year 2007. The decrease in operating expenses as a percentage of net sales was primarily due to lower labor expense as a percent of net sales at company-operated coffeehouses. We also were able to leverage the increase in sales in our franchise and commercial segments with relatively flat operating expenses in those segments compared to 2007.

 

Opening expenses.   Opening expenses decreased $0.3 million, or 54.2%, to $0.2 million in fiscal year 2008, from $0.5 million in fiscal year 2007. The decrease in coffeehouse opening expense was primarily attributable to the opening of fewer new company-operated coffeehouses in fiscal 2008 versus fiscal 2007. In fiscal 2008, 7 new company-operated coffeehouses were opened as compared to 20 new company-operated coffeehouses in fiscal 2007.

 

Depreciation and amortization.   Depreciation and amortization decreased $7.2 million, or 22.5%, to $24.9 million in fiscal year 2008, from $32.1 million in fiscal year 2007. This decrease was largely due to the accelerated depreciation in 2007 associated with coffeehouse asset impairments in fiscal 2007. Coffeehouse depreciation and amortization includes $7.5 million in accelerated depreciation associated with coffeehouse asset impairments in fiscal 2008 as compared to $10.4 million in fiscal year 2007. As a percentage of total net sales, coffeehouse depreciation and amortization decreased to 9.8% in fiscal year 2008 from 12.5% in fiscal year 2007. The decrease in depreciation and amortization as a percentage of net sales is primarily due to a lower depreciable asset base as a result of accelerated depreciation as well as lower accelerated depreciation associated with coffeehouse asset impairments in fiscal 2008 compared to fiscal 2007.

 

General and administrative expenses.   General and administrative expenses decreased $3.2 million, or 9.8%, to $29.1 million in fiscal 2008 from $32.3 million in fiscal 2007. The decrease was due to 2007 expenses related to severance costs associated with the Company’s former CEO, litigation settlement costs and management consulting services as well as an overall reduction in general and administration expenses. As a percentage of total net sales, general and administrative expenses decreased to 11.5% of total net sales in fiscal year 2008, from 12.6% of total net sales in fiscal year 2007. While we incurred some general and administrative costs in 2008 related to management changes, the decrease was primarily due to the scale of the 2007 expenses mentioned above as well as an overall reduction in general and administration expenses.

 

Closing expenses and disposal of assets.   Closing expenses and disposal of assets decreased $1.7 million to $5.1 million in fiscal year 2008 from $6.8 million in fiscal year 2007. The decrease in closing expenses and disposal of assets is primarily attributable to asset write-off and lease termination costs associated with the closing of 28 underperforming company-operated coffeehouses in fiscal year 2007 compared to 25 closed company-operated coffeehouses in fiscal year 2008. Expenses associated with the closings are variable from coffeehouse to coffeehouse and are dependent upon the amount of time left on the lease and the remaining book value of assets associated with each coffeehouse.

Interest income.   Interest income was not significant in fiscal year 2008 compared $0.2 million in fiscal year 2007 primarily due to lower cash and cash equivalents in 2008 compared to 2007 on a weighted average basis and lower interest rates.

 

Interest expense.   Interest expense increased $0.2 million to $0.8 million in fiscal year 2008 from $0.6 million in fiscal year 2007. During 2008, the Company periodically had borrowings outstanding under its revolving credit facility. During fiscal year 2007, the Company had no borrowings under its revolving credit facility. Interest expense for 2007 is primarily related to credit facility acquisition cost amortization and on-going commitment fees.

 

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 fiscal 2008 and 2007.

 

Retail Coffeehouses

 

 

The retail segment operates company-operated coffeehouses. As of December 28, 2008, there were 414 company-operated coffeehouses in 16 states and the District of Columbia.

 

Retail Coffeehouse sales

 

Coffeehouse sales decreased $11.2 million, or 4.7%, to $229.1 million in fiscal 2008 from $240.3 million in fiscal 2007. This decrease is primarily attributable to the net decrease of 1,004 coffeehouse operating weeks in fiscal 2008 compared to fiscal 2007 due to fewer company owned coffeehouses. Comparable coffeehouse sales for fiscal year 2008 were down 3.5% when compared with fiscal year 2007.

 

Costs and Expenses

 

Cost of sales and related occupancy costs.   Cost of sales and related occupancy costs decreased $3.8 million, or 3.9%, to $94.6 million in fiscal year 2008, from $98.4 million in fiscal year 2007. This decrease is primarily attributable to the net decrease of 1,004 coffeehouse operating weeks in fiscal 2008 compared to fiscal 2007 due to fewer company owned coffeehouses. As a percentage of total net sales, cost of sales and related occupancy costs increased to 41.3% in fiscal year 2008, from 40.9% in fiscal year 2007. The increase in cost of sales and related occupancy costs as a percentage of coffeehouse sales was primarily due to fixed occupancy costs at coffeehouses being leveraged against lower sales.

Operating expenses.   Operating expenses decreased $7.0 million, or 6.7%, to $96.5 million in fiscal year 2008, from $103.5 million in fiscal year 2007. This decrease is primarily attributable to the net decrease of 1,004 coffeehouse operating weeks in fiscal 2008 vs. fiscal 2007 due to fewer company owned coffeehouses. As a percentage of total net sales, operating expenses decreased to 42.1% in fiscal year 2008 from 43.1% in fiscal year 2007. The decrease in operating expenses as a percentage of coffeehouse sales was primarily due to lower labor expense as a percent of net sales at company-operated coffeehouses.

 

Opening expenses.   Opening expenses decreased $0.3 million, or 63.3%, to $0.2 million in fiscal year 2008, from $0.5 million in fiscal year 2007. The decrease in coffeehouse opening expense was primarily attributable to the opening of fewer new company-operated coffeehouses in fiscal 2008 versus fiscal 2007. In fiscal 2008, 7 new company-operated coffeehouses were opened as compared to 20 new company-operated coffeehouses in fiscal 2007.

 

Depreciation and amortization.   Depreciation and amortization decreased $7.2 million, or 22.5%, to $24.9 million in fiscal year 2008, from $32.1 million in fiscal year 2007. This decrease was due to accelerated depreciation associated with coffeehouse asset impairments in fiscal 2007. Coffeehouse depreciation and amortization includes $7.5 million in accelerated depreciation associated with coffeehouse asset impairments in fiscal 2008 as compared to $10.4 million in fiscal year 2007. As a percentage of coffeehouse sales, coffeehouse depreciation and amortization decreased to 10.9% in fiscal year 2008 from 13.4% in fiscal year 2007. The decrease in depreciation and amortization as a percentage of coffeehouse sales is primarily due to a lower depreciable asset base as a result of accelerated depreciation as well as lower accelerated depreciation associated with coffeehouse asset impairments in fiscal 2008 compared to fiscal 2007.

 

General and administrative expenses.   General and administrative expenses decreased $0.5 million, or 4.9%, to $9.6 million in fiscal 2008 from $10.1 million in fiscal 2007. The decrease was largely due to an overall reduction in management costs in fiscal 2008. The Company capitalizes direct costs associated with the site selection and construction of new coffeehouses, including direct internal payroll and payroll related costs. The Company capitalized approximately $0.2 million and $0.5 million of such costs during the fiscal years 2008 and 2007, respectively. These costs are amortized over the lease terms of the underlying leases. As a percentage of total net sales, general and administrative expenses remained flat at 4.2% of coffeehouse sales in fiscal year 2008 and fiscal year 2007.

 

Closing expense and disposal of assets.   Closing expense and disposal of assets decreased $2.0 million to $5.0 million in fiscal year 2008 from $7.0 million in fiscal year 2007. The decrease in closing expense and disposal of assets is primarily attributable to asset write-offs and lease termination costs associated with the closing of 28 underperforming company-operated coffeehouses in fiscal year 2007 compared to 25 closed company-operated coffeehouses in fiscal year 2008. Expenses associated with the closings are variable from coffeehouse to coffeehouse and are dependent upon the amount of time left on the lease and the remaining book value of assets associated with each coffeehouse.

 

Commercial

 

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 $5.5 million, or 44.3%, to $17.9 million in fiscal 2008 from $12.4 million in fiscal 2007. This increase is primarily attributable to the incremental sales to existing grocery store and other customers and sales to new customers primarily grocery stores.

 

Costs and Expenses

 

Cost of sales and related occupancy costs.   Cost of sales and related occupancy costs increased $3.5 million, or 44.5%, to $11.3 million in fiscal year 2008, from $7.8 million in fiscal year 2007. The increase was primarily due to incremental sales to existing grocery store and other customers and sales to new customers. As a percentage of sales, cost of sales and related occupancy costs remained relatively flat at 63.0% in fiscal 2008 compared to 62.9% in fiscal year 2007.

 

Operating expenses.   Operating expenses decreased $0.1 million, or 2.8%, to $2.3 million in fiscal year 2008, from $2.3 million in fiscal year 2007. This decrease was primarily attributable to a decrease in marketing expense. As a percentage of sales, operating expenses decreased to 12.6% in fiscal year 2008 from 18.7% in fiscal year 2007. The decrease in operating expenses as a percentage of sales was also due to the leveraging of higher sales and a decrease in marketing expenses.

 

Franchise

 

 

The franchise segment sells franchises to operate Caribou Coffee brand coffeehouses to domestic and international franchisees. As of December 28, 2008, there were 97 franchised coffeehouses in the U.S and international markets.

 

Sales

 

Sales increased $2.7 million or 66.2% to $6.9 million in fiscal 2008 from $4.1 in fiscal 2007. This increase is primarily attributable to franchise fees, royalties and product sales from the 45 new franchise coffeehouses opened during the year.

 

Costs and Expenses

 

Cost of sales and related occupancy costs.   Cost of sales and related occupancy costs increased $1.6 million, or 74.3%, to $3.8 million in fiscal year 2008, from $2.2 million in fiscal year 2007. The increase was primarily due to the additional product sales for the new franchised coffeehouses opened during the year. As a percentage of sales, cost of sales and related occupancy costs increased slightly to 54.8% in fiscal year 2008, from 52.2% in fiscal year

2007. The increase in cost of sales and related occupancy costs as a percentage of sales was primarily due to the revenue mix, as product sales to our franchise partners became a larger percentage of total franchise sales.

 

Operating expenses.   Operating expenses increased $0.3 million, or 24.6%, to $1.5 million in fiscal year 2008, from $1.2 million in fiscal year 2007. This increase is primarily attributable to increase administrative costs associated with supporting the franchise business. As a percentage of sales, operating expenses decreased to 22.0% in fiscal year 2008 from 29.4% in fiscal year 2007. The decrease in operating expenses as a percentage of sales was primarily due to leverage obtained on certain fixed segment expenses.

 

Unallocated Corporate

 

 

General and administrative expenses.   Unallocated general and administrative expenses decreased $2.7 million, or 12.1%, to $19.6 million in fiscal 2008 from $22.3 million in fiscal 2007. The decrease was due to fiscal 2007 expenses related to severance costs associated with the Company’s former CEO, litigation settlement costs and management consulting services as well as an overall reduction in general and administration expenses in fiscal 2008. As a percentage of total net sales, unallocated general and administrative expenses decreased to 7.7% of total net sales in fiscal year 2008, from 8.7% of total net sales in fiscal year 2007 due to an overall reduction in general and administration expenses in fiscal 2008.

 

Closing expenses and disposal of assets.   Unallocated closing expenses and disposal of assets increased $0.3 million to $0.1 million in fiscal year 2008 from a credit of $0.2 million in fiscal year 2007. The Company has been maintaining a reserve related to a lease for an office/warehouse building the Company discontinued using in connection with a consolidation of its corporate headquarters, warehouse and roasting facilities, in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This consolidation was completed in June 2004. During fiscal year 2007, the Company obtained subleases for a substantial portion of the building and reversed the remaining reserve. Fiscal 2008 costs relate to write offs of corporate assets.

 

Liquidity and Capital Resources

 

Cash and cash equivalents as of December 28, 2008 were $11.1 million, compared to cash and cash equivalents of $9.9 million as of December 30, 2007. Our principal requirements for cash are capital expenditures, coffeehouse closing costs and funding operations. Capital expenditures include the development costs related to the opening of new coffeehouses, maintenance and remodeling of existing coffeehouses, general and administrative expenditures for items like, management information systems and costs for new production equipment. Coffeehouse closing costs include the cost of exiting a coffeehouse location including costs to remove equipment and signage and lease termination costs. Currently, our requirements for capital have been funded through cash flow from operations and our revolving credit facility.

 

For fiscal years 2008 and 2007, we generated cash flow from operating activities of $7.0 million and $12.0 million, respectively. The decrease in the amount of cash provided by operating activities during fiscal year 2008 was the result of the timing of cash payments of accounts payable, accrued compensation, and accrued expenses as well as payments made during fiscal 2008 related to the former CEO’s severance and the FLSA litigation settlement.

 

A significant portion of our cash flow generated from operating activities in each of the last two fiscal years has been invested in capital expenditures, the majority of which was for the construction of new company-operated coffeehouses, which include the cost of leasehold improvements and capital equipment. Total capital expenditures

for fiscal 2008, were $5.9 million, compared to capital expenditures of $17.2 million for fiscal 2007. We opened 7 new company-operated coffeehouses in fiscal year 2008 and 20 new company-operated coffeehouses in fiscal year 2007.

 

Net cash used by financing activities was $0.3 million for fiscal 2008 compared to $0.3 million provided by financing activities for fiscal 2007. As of fiscal year end 2008, we had $9.0 million available under our revolving credit facility and no amount outstanding. Interest payable under the revolving credit facility is equal to the amount outstanding under the facility multiplied by the applicable Federal Funds effective rate plus a specified margin or the lenders prime rate plus a specified margin. The revolving credit facility is subject to financial and non-financial covenants and has an expiration date of June 30, 2010.

 

Our capital requirements include capital expenditures and funding operations. Capital expenditures include the development costs related to the opening of new coffeehouses, maintenance and remodeling of existing coffeehouses, general and administrative expenditures for items like management information systems and costs for new production equipment. Our future capital requirements and the adequacy of available funds will depend on many factors, including the pace of our expansion, real estate markets, the availability of suitable site locations and the nature of the arrangements negotiated with landlords for new coffeehouses. We expect capital expenditures for fiscal 2009 to be in the range of $7.0 to $9.0 million. We believe that our current liquidity, cash flow from operations and amounts available under our revolving credit facility, will provide sufficient liquidity to fund our operations for at least 12 months. In the future, we may amend or replace our revolving credit facility or enter into another financing arrangement to provide us with additional liquidity. We expect that any such financing arrangement would be structured in a manner that would be compliant with Shari’ah principles. Shari’ah principles regarding the lending and borrowing of money require application of qualitative and quantitative standards. Given the current financial crisis in the capital markets, and the credit markets in particular, the availability and terms of a new financing arrangement is uncertain.

 

New Accounting Standards

 

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 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.

 

Off-Balance Sheet Arrangements

 

Other than our coffeehouse leases, we do not have any off-balance sheet arrangements.

 

Inflation

 

The primary inflationary factors affecting our business are costs associated with coffee beans, dairy, freight, labor, paper products, real estate and labor costs. Many of our leases require us to pay taxes, maintenance, repairs, insurance and utilities, all of which are generally subject to inflationary increases. We believe that inflation has not had a material impact on our results of operations in recent years.

 

 

The Board of Directors and Shareholders of Caribou Coffee Company, Inc. and Affiliates

 

We have audited the accompanying consolidated balance sheets of Caribou Coffee Company, Inc. and Affiliates (A Majority Owned Subsidiary of Caribou Holding Company Limited) (the Company) as of December 28, 2008 and December 30, 2007, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the years then ended. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Caribou Coffee Company, Inc. and Affiliates (A Majority Owned Subsidiary of Caribou Holding Company Limited) as of December 28, 2008 and December 30, 2007, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

 

As discussed in Note 1, Summary of Significant Accounting Policies, to the consolidated financial statements, effective January 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109.”

 

 

Minneapolis, Minnesota

March 19, 2009

Caribou Coffee Company, Inc. and Affiliates
(A Majority Owned Subsidiary of Caribou Holding Company Limited)

Consolidated Balance Sheets

 

 

See accompanying notes.

Caribou Coffee Company, Inc. and Affiliates
(A Majority Owned Subsidiary of Caribou Holding Company Limited)

Consolidated Statements of Operations

 

 

See accompanying notes.

Caribou Coffee Company, Inc. and Affiliates
(A Majority Owned Subsidiary of Caribou Holding Company Limited)

Consolidated Statements of Changes in Shareholders’ Equity

 

 

See accompanying notes.

Caribou Coffee Company, Inc. and Affiliates
(A Majority Owned Subsidiary of Caribou Holding Company Limited)

Consolidated Statements of Cash Flows