Caribou Coffee 10-Q 2009 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended September 28, 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 (State or other jurisdiction of incorporation or organization)	41-1731219 (I.R.S. Employer Identification No.)
3900 Lakebreeze Avenue North Brooklyn Center, Minnesota (Address of principal executive offices)	55429 (Zip Code)

(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. Yesþ Noo

     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). Yeso Noþ

     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 November 7, 2008
Common Stock, par value $0.01 per share	19,371,000

CARIBOU COFFEE COMPANY, INC.

FORM 10-Q

For the Thirteen Week Period Ended September 28, 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	25
Item 4T.	Controls and Procedures	25
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	26
Item 1A.	Risk Factors	26
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 3.	Defaults Upon Senior Securities	26
Item 4.	Submission of Matters to a Vote of Security Holders	26
Item 5.	Other Information	27
Item 6.	Exhibits	28
Signature		29
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

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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						Thirty-Nine Weeks Ended
	September 28,			September 30,			September 28,			September 30,
	2008			2007			2008			2007
	(In thousands, except for per share amounts)
	(Unaudited)
Coffeehouse sales	$	54,731		$	58,212		$	168,618		$	175,619
Commercial and franchise sales		6,179			3,769			17,232			11,062
Consolidated net sales		60,910			61,981			185,850			186,681
Cost of sales and related occupancy costs		26,992			26,756			80,209			78,790
Operating expenses		24,571			26,627			75,785			79,636
Opening expenses		62			109			198			285
Depreciation and amortization		10,208			7,143			20,771			19,146
General and administrative expenses		7,115			6,852			21,183			20,609
Closing expense and disposal of assets		646			2,872			4,524			3,733
Operating loss		(8,684	)		(8,378	)		(16,820	)		(15,518	)
Other income (expense):
Interest income		2			54			23			133
Interest expense		(81	)		(130	)		(714	)		(426	)
Loss before (benefit) provision for income taxes and minority interest		(8,763	)		(8,454	)		(17,511	)		(15,811	)
(Benefit) provision for income taxes		(36	)		(31	)		14			(328	)
Loss before minority interest		(8,727	)		(8,423	)		(17,525	)		(15,483	)
Minority interest		39			40			79			122
Net loss	$	(8,766	)	$	(8,463	)	$	(17,604	)	$	(15,605	)
Basic and diluted net loss per share	$	(0.45	)	$	(0.44	)	$	(0.91	)	$	(0.81	)
Basic and diluted weighted average number of shares outstanding		19,371			19,354			19,371			19,321

See accompanying notes.

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

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 28,			December 30,
	2008			2007
	(In thousands except per share amounts)
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	6,938		$	9,886
Accounts receivable (net of allowance for doubtful accounts of $35 and $8 at September 28, 2008 and December 30, 2007, respectively)		3,683			3,117
Other receivables (net of allowance for doubtful accounts of $31 and $9 at September 28, 2008 and December 30, 2007, respectively)		1,230			1,544
Income tax receivable		75			149
Inventories		11,362			10,229
Prepaid expenses and other current assets		921			1,691
Total current assets		24,209			26,616
Property and equipment, net of accumulated depreciation and amortization		64,802			83,798
Notes receivable		20			32
Restricted cash		12			411
Other assets		488			983
Total assets	$	89,531		$	111,840
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	12,366		$	9,650
Accrued compensation		4,529			7,864
Accrued expenses		7,202			9,318
Deferred revenue		6,217			9,988
Total current liabilities		30,314			36,820
Revolving credit facility		3,000			—
Asset retirement liability		1,017			989
Deferred rent liability		9,603			11,271
Deferred revenue		2,716			2,854
Income tax liability		431			473
Minority interests in affiliates		108			144
Total long term liabilities		16,875			15,731
Shareholders’ equity:
Preferred stock, par value $.01, 20,000 shares authorized; no shares issued and outstanding		—			—
Common stock, par value $.01, 200,000 shares authorized; 19,371 shares issued and outstanding at September 28, 2008 and December 30, 2007		194			194
Additional paid-in capital		124,889			124,232
Accumulated deficit		(82,741	)		(65,137	)
Total shareholders’ equity		42,342			59,289
Total liabilities and shareholders’ equity	$	89,531		$	111,840

See accompanying notes.

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

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Thirty-Nine Weeks Ended
	September 28,			September 30,
	2008			2007
	(In thousands)
	(Unaudited)
Operating activities
Net loss	$	(17,604	)	$	(15,605	)
Adjustments to reconcile net loss to net cash (used) provided by operating activities:
Depreciation and amortization		22,387			20,812
Amortization of deferred financing fees		431			258
Minority interests in affiliates		79			122
Provision for closing expense and asset disposals		553			2,549
Share-based compensation		420			429
Non cash accretion expense		28			68
Shareholder contribution		237			—
Changes in operating assets and liabilities:
Restricted cash		399			(127	)
Accounts receivable and other receivables		(240	)		(458	)
Income tax receivable		74			(58	)
Inventories		(1,133	)		(814	)
Prepaid expenses and other assets		834			651
Accounts payable		2,716			(2,067	)
Accrued compensation		(3,335	)		(1,016	)
Accrued expenses and income tax liability		(2,309	)		(340	)
Deferred revenue		(3,909	)		(2,540	)
Net cash (used) provided by operating activities		(372	)		1,864
Investing activities
Payments for property and equipment		(5,461	)		(11,443	)
Net cash used in investing activities		(5,461	)		(11,443	)
Financing activities
Borrowings under revolving credit facility		3,000			—
Distribution of minority interests’ earnings		(115	)		(140	)
Issuance of common stock		—			525
Net cash provided by financing activities		2,885			385
Decrease in cash and cash equivalents		(2,948	)		(9,194	)
Cash and cash equivalents at beginning of period		9,886			14,752
Cash and cash equivalents at end of period	$	6,938		$	5,558
Supplemental disclosure of cash flow information
Noncash financing and investing transactions:
Accrual for leasehold improvements, furniture, and equipment	$	—		$	168

See accompanying notes.

5

CARIBOU COFFEE COMPANY, INC. AND AFFILIATES

(A Majority Owned Subsidiary of Caribou Holding Company Limited)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollar amounts in thousands except where otherwise noted)

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 six 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 and thirty-nine week periods ended September 28, 2008 are not necessarily indicative of future results that may be expected for the year ending December 28, 2008.

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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 are presented net of sales tax collected and ultimately 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 and franchise customers 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 with long periods of inactivity. The Company estimates that cards that 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 that 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 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

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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

     The Company performs an operating cash flow analysis throughout the year to determine the future potential of individual coffeehouses and the net realizable value of associated assets. The Company records a charge to reduce the carrying value of the property and equipment to estimated realizable value when the coffeehouse assets are deemed to be impaired. During the thirteen-week periods ended September 28, 2008 and September 30, 2007, the Company recorded depreciation expense of $5,743 for the impairment of thirty-one coffeehouses and $1,529 for the impairment of six coffeehouses, respectively, in its retail segment. During the thirty-nine week periods ended September 28, 2008 and September 30, 2007, the Company recorded depreciation expense of $7,460 for the impairment of thirty-seven coffeehouses and $2,451 for the impairment of nine coffeehouses, respectively, in its retail segment. The Company recognizes lease exit costs and other expenses when a coffeehouse closes.

     Following the appointment of the Company’s new Chief Executive Officer in August 2008, the Company entered into a separation agreement with its interim Chief Executive Officer and agreed to provide severance benefits in the amount of $564. The Company recorded a liability for the amount of severance benefit in the third quarter of fiscal year 2008 and included the amount in accrued compensation and general and administrative expense. In an earlier quarter of fiscal 2008 the Company’s Chief Financial Officer resigned from his position. Additionally, the Company completed a reorganization of general and administrative departments and eliminated some positions. The Company previously accrued severance costs related to these actions in the amount of $755.

     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 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.

     Charges related to coffeehouse closures and disposal charges consist of the following:

	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
	September 28,			September 30,			September 28,			September 30,
	2008			2007			2008			2007
	(In thousands except coffeehouse closures)
Coffeehouse closures		2			11			24			19
Amount charged to operations for closed coffeehouses:
Lease reserve non-cash impact	$	(857	)	$	61		$	(272	)	$	144
Costs to consolidate facilities		—			(13	)		—			67
Lease costs associated with lease termination cash impact		1,286			693			3,971			1,184
Total lease exit costs		429			741			3,699			1,395
Net book value of closed coffeehouse property and equipment		217			2,127			825			2,292
Other property and equipment write-offs		—			4			—			46
Coffeehouse closing expense and disposal of assets	$	646		$	2,872		$	4,524		$	3,733

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     A summary of activity in the lease exit accrual and management severance accrual is as follows:

	Balance at		Additions		Deductions
	Beginning of		Charged to		from		Balance at
	Year		Expense		Accrual		End of Quarter
	(In thousands)
Thirty-Nine Weeks Ended:
September 28, 2008
Lease exit accrual	$	467	$	3,699	$	3,942	$	224
Management severance accrual		1,353		1,341		2,075		619
Total	$	1,820	$	5,040	$	6,017	$	843

	Balance at		Additions		Deductions
	Beginning of		Charged to		from		Balance at
	Year		Expense		Accrual		End of Quarter
	(In thousands)
Thirty-Nine Weeks Ended:
September 30, 2007
Lease exit accrual	$	512	$	1,395	$	1,373	$	534

5. Inventories

     Inventories consist of the following:

	September 28,		December 30,
	2008		2007
	(In thousands)
	(Unaudited)
Coffee	$	4,914	$	3,485
Other merchandise held for sale		3,390		4,346
Supplies		3,058		2,398
	$	11,362	$	10,229

     At September 28, 2008 and December 30, 2007, the Company had committed to fixed price purchase contracts, primarily for green coffee, aggregating approximately $2,555 and $6,922, 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 September 28, 2008 and September 30, 2007 totaled approximately $117 and $150, respectively, and for the thirty-nine weeks ended September 28, 2008 and September 30, 2007 totaled approximately $420 and $429, respectively.

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     Stock option activity during the period indicated is as follows:

				Weighted		Weighted
				Average		Average	Aggregate
	Number of			Exercise		Contract	Intrinsic
	Shares			Price		Life	Value
	(In thousands)
Outstanding, December 30, 2007		2,571		$	7.46	6.47 Yrs
Granted		55		$	2.78
Exercised		—		$	—
Forfeited		(15	)	$	8.11
Outstanding, March 30, 2008		2,611		$	7.35	6.28 Yrs	$	—
Granted		160		$	2.54
Exercised		—		$	—
Forfeited		(1,217	)	$	7.04
Outstanding, June 29, 2008		1,554		$	7.10	7.26 Yrs	$	—
Granted		836		$	2.34
Exercised		—		$	—
Forfeited		(71	)	$	4.27
Outstanding, September 28, 2008		2,319		$	5.47	7.99 Yrs	$	—
Options vested at September 28, 2008		822		$	7.63	5.76 Yrs	$	—

7. Income Taxes

     During the thirteen weeks ended September 28, 2008, the Company recognized a tax benefit of $36 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. After consideration of all evidence, both positive and negative, management has recorded a valuation allowance against its deferred income tax assets at September 28, 2008 due to the uncertainty of realizing such deferred income tax assets. During the thirteen and thirty-nine weeks ended September 30, 2007, the Company recognized a tax benefit of $31 and $328, 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 thirty-nine week periods ended September 28, 2008 and September 30, 2007, were as follows:

	Thirteen Weeks Ended						Thirty-nine Weeks Ended
	September 28,			September 30,			September 28,			September 30,
	2008			2007			2008			2007
	(In thousands, except for per share amounts)
Net loss	$	(8,766	)	$	(8,463	)	$	(17,604	)	$	(15,605	)
Weighted average common shares outstanding (for basic and diluted calculation)		19,371			19,354			19,371			19,321
Basic and diluted net loss per share	$	(0.45	)	$	(0.44	)	$	(0.91	)	$	(0.81	)

     For the thirteen and thirty-nine week periods ended September 28, 2008 and September 30, 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. In addition to the deposit, the franchisee is obligated to pay the Company $20 per franchised/subfranchised

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coffeehouse (initial franchise fee) opened for the first 100 Caribou Coffee coffeehouses and $15 for each additional franchised/subfranchised coffeehouse opened (after the first 100). The agreement provides for $5 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 $2,444 of the deposit in long term liabilities as deferred revenue and $330 in current liabilities as deferred revenue on its September 28, 2008 balance sheet. As of December 30, 2007, the Company included $2,535 of the deposit in long term liabilities as deferred revenue and $290 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 open during the subsequent twelve months per the development schedule in the Master Franchise Agreement. At September 28, 2008, there were forty-two 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 was included in prepaid expense at both September 28, 2008 and December 30, 2007, and $197 and $204 was included in other assets at September 28, 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. The finance company funds its obligations under the lease financing arrangement through a revolving credit facility that it entered into with a commercial lender. The terms of the revolving credit facility are economically equivalent to the lease financing arrangement such that the amount of rent payments and unpaid acquisition costs under the lease financing arrangement are at all times equal to the interest and principal under the revolving credit facility. The Company consolidates the third party finance company, as the Company is the primary beneficiary in a variable interest entity due to the terms and provisions of the lease financing arrangement. Accordingly, the Company’s consolidated balance sheets include all assets and liabilities of the third party finance company under the captions property and equipment and revolving credit facility, respectively. The Company’s consolidated statements of operations include all the operations of the finance company including all interest expense related to the revolving credit facility. Notwithstanding this presentation, the Company’s obligations are limited to its obligations under the lease financing arrangement and the Company has no direct obligations under the revolving credit facility other than its obligations to the third party finance company. The third party finance company was established solely for the purpose of facilitating the Company’s sale-leaseback arrangement. The finance company does not have any other assets or liabilities or income and expense other than those associated with the revolving credit facility. The lease financing arrangement has been structured to be consistent with Shari’ah principles.

     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. In connection with the amendment, the Company wrote-off $306, 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. The Company had $3 million of equipment leased under this arrangement at September 28, 2008, and the Company had no equipment leased under this arrangement at December 30, 2007. In November 2008, the Company amended the sale-leaseback arrangement to extend it to June 29, 2010, reduce the maximum available to $9 million and modify certain of the arrangement’s financial covenants.

11

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 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 provides 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; and a final settlement payment of $0.95 million will be made on December 29, 2008. Settlement payments made to all participating class members and all attorneys’ fees for plaintiffs’ counsel will be paid from the $2.7 million.

     The Company is party to various other legal proceedings arising in the ordinary course of its business. Management believes that none of these ordinary course legal proceedings would have a material adverse effect on the Company’s consolidated financial position or results of operations.

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 September 28, 2008. The coffeehouses offer customers high-quality hand crafted coffee and espresso-based beverages, specialty teas, baked goods, whole bean coffee, branded merchandise and related products.

     Commercial

     The commercial segment sells high-quality hand crafted 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 September 28, 2008, there were 80 franchised coffeehouses in U.S and international markets.

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     The tables below present information by operating segment for the thirteen and thirty-nine weeks ended September 28, 2008 and September 30, 2007:

Thirteen weeks ended September 28, 2008
								Unallocated
(In thousands)	Retail			Commercial		Franchise		Corporate			Total
Consolidated net sales	$	54,731		$	4,467	$	1,712	$	—		$	60,910
Costs of sales and related occupancy costs		23,080			2,858		1,054		—			26,992
Operating expenses		23,727			568		276		—			24,571
Opening expenses		56			—		6		—			62
Depreciation and amortization		10,199			9		—		—			10,208
General and administrative expenses		2,195			—		—		4,920			7,115
Closing expense and disposal of assets		646			—		—		—			646
Operating (loss) income	$	(5,172	)	$	1,032	$	376	$	(4,920	)	$	(8,684	)
Identifiable assets	$	55,097		$	141	$	13	$	9,551		$	64,802
Net impairment charges	$	5,743		$	—	$	—	$	—		$	5,743
Thirteen weeks ended September 30, 2007
								Unallocated
(In thousands)	Retail			Commercial		Franchise		Corporate			Total
Consolidated net sales	$	58,212		$	3,047	$	722	$	—		$	61,981
Costs of sales and related occupancy costs		24,378			1,955		423		—			26,756
Operating expenses		25,779			595		253		—			26,627
Opening expenses		109			—		—		—			109
Depreciation and amortization		7,133			8		2		—			7,143
General and administrative expenses		2,335			—		—		4,517			6,852
Closing expense and disposal of assets		2,872			—		—		—			2,872
Operating (loss) income	$	(4,394	)	$	489	$	44	$	(4,517	)	$	(8,378	)
Identifiable assets	$	81,096		$	71	$	19	$	10,353		$	91,539
Net impairment charges	$	1,529		$	—	$	—	$	—		$	1,529

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Thirty-nine weeks ended September 28, 2008
								Unallocated
(In thousands)	Retail			Commercial		Franchise		Corporate			Total
Consolidated net sales	$	168,618		$	12,502	$	4,730	$	—		$	185,850
Costs of sales and related occupancy costs		69,799			7,771		2,639		—			80,209
Operating expenses		73,149			1,548		1,088		—			75,785
Opening expenses		167			—		31		—			198
Depreciation and amortization		20,749			22		—		—			20,771
General and administrative expenses		6,976			—		—		14,207			21,183
Closing expense and disposal of assets		4,412			—		—		112			4,524
Operating (loss) income	$	(6,634	)	$	3,161	$	972	$	(14,319	)	$	(16,820	)
Identifiable assets	$	55,097		$	141	$	13	$	9,551		$	64,802
Net impairment charges	$	7,460		$	—	$	—	$	—		$	7,460
Thirty-nine weeks ended September 30, 2007
								Unallocated
(In thousands)	Retail			Commercial		Franchise		Corporate			Total
Consolidated net sales	$	175,619		$	8,229	$	2,833	$	—		$	186,681
Costs of sales and related occupancy costs		71,967			5,291		1,532		—			78,790
Operating expenses		77,177			1,587		872		—			79,636
Opening expenses		276			—		9		—			285
Depreciation and amortization		19,120			19		7		—			19,146
General and administrative expenses		7,246			—		—		13,363			20,609
Closing expense and disposal of assets		3,733			—		—		—			3,733
Operating (loss) income	$	(3,900	)	$	1,332	$	413	$	(13,363	)	$	(15,518	)
Identifiable assets	$	81,096		$	71	$	19	$	10,353		$	91,539
Net impairment charges	$	2,452		$	—	$	—	$	—		$	2,452

     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.

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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 September 28, 2008, we had 495 retail locations, including 80 franchised locations and 7 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 hand crafted 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 hand crafted 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 hand crafted products, a comfortable and welcoming coffeehouse environment and customer service.

     The Company participates in a rapidly growing market, specialty coffee. We believe there is significant market opportunity for a strong, clearly differentiated player focusing on a hand crafted coffee experience. The Company has potential for growth by leveraging some of its existing selling channels such as grocery, mass merchants, and franchising/licensing; along with strong brand recognition and a loyal customer base in the markets it serves. We offer our customers a best in class hand crafted coffee product, outstanding service, and a differentiated ambiance within its coffeehouses. There’s a great culture within our workforce and customers possess a deep passion for the Caribou Coffee brand. We also believe there is an opportunity to significantly improve performance leveraging these attributes across all business channels.

     In order to improve the business performance and grow the Company, we will concentrate our efforts in the following four strategic areas:

     Improving the profitability of our coffeehouses.Our coffeehouses are the core component of our current business model. We will focus our efforts on improving the unit level economics. Improving the health of our coffeehouse base will provide the foundation for the Company to resume growth.

     Aligning the real estate portfolio.As we strive to improve profitability of the coffeehouses, we will actively monitor our real estate portfolio. Real estate portfolio management will make sure we have the right number of coffeehouses and in the right locations.

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     Rationalizing the cost structure of the organization with our current revenue stream.We will continuously review areas in our business where we believe we can be more efficient and leverage infrastructure to become more profitable.

     Profitably growing our business channels — commercial and franchising.On the commercial side of our business, we are in the process of evaluating alternative investment options to drive incremental growth, as well as identifying key potential partnerships in distribution. We are outlining a new strategy and core targets for the next three years. We are currently in the process of reviewing all our franchise business opportunities. In the domestic and international markets, we are determining the type of arrangements necessary to drive growth in specific geographic locations. We are also in the process of identifying potential strategic partnerships with established brands in the U.S. market.

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 and thirty-nine week periods ended September 28, 2008 are not necessarily indicative of future results that may be expected for the year ending December 28, 2008.

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Thirteen Weeks Ended September 28, 2008 Compared to Thirteen Weeks Ended September 30, 2007

Results of Operations

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

	Thirteen Weeks Ended									Thirteen Weeks Ended
	September 28,			September 30,			%			September 28,			September 30,
	2008			2007			Change			2008			2007
	(In thousands)									As a % of consolidated net sales
Consolidated Statement of Operations Data:
Net sales:
Coffeehouse	$	54,731		$	58,212			(6.0	)%		89.9	%		93.9	%
Commercial & franchise		6,179			3,769			63.9	%		10.1	%		6.1	%
Consolidated net sales		60,910			61,981			(1.7)	%		100.0	%		100.0	%
Cost of sales and related occupancy costs		26,992			26,756			0.9	%		44.3	%		43.2	%
Operating expenses		24,571			26,627			(7.7	)%		40.3	%		43.0	%
Opening expenses		62			109			(43.1	)%		0.1	%		0.2	%
Depreciation and amortization		10,208			7,143			42.9	%		16.8	%		11.5	%
General and administrative expenses		7,115			6,852			3.8	%		11.7	%		11.0	%
Closing expense and disposal of assets		646			2,872			(77.5	)%		1.1	%		4.6	%
Operating loss		(8,684	)		(8,378	)		(3.7	)%		(14.3	)%		(13.5	)%
Other income (expense):
Interest income		2			54			(96.3	)%		—	%		0.1	%
Interest expense		(81	)		(130	)		(37.7	)%		(0.1	)%		(0.2	)%
Loss before benefit for income taxes and minority interest		(8,763	)		(8,454	)		(3.7	)%		(14.4	)%		(13.6	)%
Benefit for income taxes		(36	)		(31	)		16.1	%		(0.1	)%		—	%
Loss before minority interest		(8,727	)		(8,423	)		(3.6	)%		(14.3	)%		(13.6	)%
Minority interest		39			40			(2.5	)%		0.1	%		0.1	%
Net loss	$	(8,766	)	$	(8,463	)		(3.6	)%		(14.4	)%		(13.7	)%

Operating Segments

     Segment information is prepared on the same basis as financial information reviewed by our management for decision-making purposes. We have three reportable operating segments: retail, commercial and franchise. Our consolidated statement of operations includes general and administrative expenses, which include unallocated corporate 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 retail segment operates company-owned coffeehouses. As of September 28, 2008, there were 415 company-owned coffeehouses, including seven joint venture locations, in 16 states and the District of Columbia.

     The commercial segment sells high-quality hand crafted 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.

     The franchise segment sells franchises to operate Caribou Coffee brand coffeehouses to domestic and international franchisees. As of September 28, 2008, there were 80 franchised coffeehouses in the U.S and international markets.

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     The following tables summarize our results of operations by segment for the third thirteen weeks of fiscal 2008 and 2007.

	13 Weeks Ended									13 Weeks Ended
	September 28,			September 30,			%			September 28,			September 30,
	2008			2007			Change			2008			2007
	(In thousands)									As a % of applicable sales
Retail:
Coffeehouse sales	$	54,731		$	58,212			(6.0	)%		100.0	%		100.0	%
Costs of sales and related occupancy costs		23,080			24,378			(5.3	)%		42.2	%		41.9	%
Operating expenses		23,727			25,779			(8.0	)%		43.3	%		44.3	%
Opening expenses		56			109			(48.6	)%		0.1	%		0.2	%
Depreciation and amortization		10,199			7,133			43.0	%		18.6	%		12.2	%
General and administrative expenses		2,195			2,335			(6.0	)%		4.0	%		4.0	%
Closing expense and disposal of assets		646			2,872			(77.5	)%		1.2	%		4.9	%
Segment operating loss	$	(5,172	)	$	(4,394	)		(17.7	)%		(9.4	)%		(7.5	)%
Commercial:
Sales	$	4,467		$	3,047			46.6	%		100.0	%		100.0	%
Costs of sales and related occupancy costs		2,858			1,955			46.2	%		64.0	%		64.2	%
Operating expenses		568			595			(4.5	)%		12.7	%		19.5	%
Depreciation and amortization		9			8			12.5	%		0.2	%		0.3	%
Segment operating income	$	1,032		$	489			111.0	%		23.1	%		16.0	%
Franchise:
Sales	$	1,712		$	722			137.1	%		100.0	%		100.0	%
Costs of sales and related occupancy costs		1,054			423			149.2	%		61.6	%		58.6	%
Operating expenses		276			253			9.1	%		16.1	%		35.0	%
Opening expenses		6			—			100.0	%		0.3	%		0.0	%
Depreciation and amortization		—			2			(500.0	)%		—	%		0.3	%
Segment operating income	$	376		$	44			754.5	%		22.0	%		6.1	%

Net Sales

     Consolidated net sales decreased 1.7% largely due to our coffeehouse sales decreasing $3.5 million in our retail segment. Our coffeehouse sales decrease is attributable to 310 fewer operating coffeehouse weeks and lower traffic, which resulted in a 4.7% decrease in comparable coffeehouse net sales as compared to the same period in fiscal 2007. One operating coffeehouse week equals one coffeehouse opened and operating for one week. The decline in coffeehouse weeks is the result of the company closing 33 coffeehouses while opening 16 coffeehouses over the past twelve months. Commercial and franchise segments experienced sales growth from existing and new commercial customers and product sales, franchise fees and royalties from the development of 39 franchised coffeehouses during the preceding 12 months.

Costs and Expenses

     Cost of sales and related occupancy costs.Consolidated cost of sales and related occupancy costs increased slightly from the higher commercial and franchise segment level sales volume as well as higher overall supply prices for coffee and dairy, while being partially offset by lower coffeehouse sales and lower occupancy expense associated with the reduction in the number of company-owned coffeehouses since the end of the third quarter of 2007. The increase in cost of sales and related occupancy costs as a percent of total net sales was primarily due to these same factors.

     The increase in coffeehouse cost of sales and related occupancy costs as a percentage of coffeehouse sales in the retail segment is due to the deleveraging effect of lower comparable coffeehouse sales on fixed occupancy costs.

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The reduction in cost of sales and related occupancy costs as a percentage of commercial segment sales was driven by product mix and efficiencies gained in distribution costs. The increase in cost of sales and related occupancy costs as a percentage of franchise segment sales was primarily due to the growth in product sales related to the 39 new franchised coffeehouses opened during the past twelve months. This changes the sales mix and the associated product cost is at a higher percent of sales than a pure franchise fee or royalty stream. Franchise fees and royalties generally do not have any cost of sales associated with these revenue streams.

     Operating expenses.Consolidated operating expenses decrease is attributable to the 310 fewer operating coffeehouse weeks and tighter management of labor costs. The decrease in operating expenses as a percentage of consolidated net sales was primarily due to tighter management of labor costs and from closing underperforming company-owned coffeehouses. As a percentage of sales, operating expenses ratio decreases within the commercial and franchise segments is attributable to leveraging relatively fixed operating expenses on the higher sales volumes.

     Opening expenses.Opening expenses declined slightly as the Company opened 2 new company-owned coffeehouses during the third thirteen weeks ended September 28, 2008 and September 30, 2007.

     Depreciation and amortization.Depreciation and amortization includes $5.7 million in accelerated depreciation associated with 31 coffeehouse impairments during the third thirteen weeks of fiscal 2008 as compared to $1.5 million and 6 coffeehouse impairments during the third thirteen weeks of 2007. Excluding impairments depreciation and amortization decreased $1.1 million primarily due to the impairments taken during the past twelve months.

     General and administrative expenses.General and administrative expenses increased $0.2 million to 11.7% as a percentage of total net sales. The increase in general and administrative expenses was largely due to $0.6 million severance costs for the Company’s interim Chief Executive Officer. As a percentage of sales, general and administrative ratio increase was also attributable to the lower sales volume.

     Closing expenses and disposal of assets.The Company closed two company-owned coffeehouses during the third thirteen weeks of 2008 and incurred $0.6 million in costs as compared to closing eleven coffeehouses during the third thirteen weeks of 2007 and incurring costs of $2.9 million. 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.

     Interest expense.The Company reduced its revolving credit facility from $60 million to $20 million during the year and is incurring lower commitment fees. As of September 28, 2008, the Company had $3.0 million outstanding under its revolving credit facility. The Company did not have any amounts outstanding under the facility at September 30, 2007.

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Thirty-Nine Weeks Ended September 28, 2008 Compared to Thirty-Nine Weeks Ended September 30, 2007

Results of Operations

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

	Thirty-nine Weeks Ended									Thirty-nine Weeks Ended
	September 28,			September 30,			%			September 28,			September 30,
	2008			2007			Change			2008			2007
	(In thousands)									As a % of consolidated net sales
Statement of Operations Data:
Net sales:
Coffeehouse	$	168,618		$	175,619			(4.0	)%		90.7	%		94.1	%
Other		17,232			11,062			55.8	%		9.3	%		5.9	%
Consolidated net sales		185,850			186,681			(0.4	)%		100.0	%		100.0	%
Cost of sales and related occupancy costs		80,209			78,790			1.8	%		43.1	%		42.2	%
Operating expenses		75,785			79,636			(4.8	)%		40.8	%		42.7	%
Opening expenses		198			285			(30.5	)%		0.1	%		0.1	%
Depreciation and amortization		20,771			19,146			8.5	%		11.2	%		10.3	%
General and administrative expenses		21,183			20,609			2.8	%		11.4	%		11.0	%
Closing expense and disposal of assets		4,524			3,733			21.2	%		2.4	%		2.0	%
Operating loss		(16,820	)		(15,518	)		(8.4	)%		(9.0	)%		(8.3	)%
Other income (expense):
Interest income		23			133			(82.7	)%		—	%		—	%
Interest expense		(714	)		(426	)		67.6	%		(0.4	)%		(0.2	)%
Loss before provision (benefit) for income taxes and minority interest		(17,511	)		(15,811	)		10.8	%		(9.4	)%		(8.5	)%
Provision (benefit) for income taxes		14			(328	)		(104.3	)%		—	%		(0.2	)%
Loss before minority interest		(17,525	)		(15,483	)		13.2	%		(9.4	)%		(8.3	)%
Minority interest		79			122			(35.2	)%		—	%		0.1	%
Net loss	$	(17,604	)	$	(15,605	)		12.8	%		(9.4	)%		(8.4	)%

Operating Segments

     The following tables summarize our results of operations by segment for the first thirty-nine weeks of fiscal 2008 and 2007.

	39 Weeks Ended									39 Weeks Ended
	September 28,			September 30,			%			September 28,			September 30,
	2008			2007			Change			2008			2007
	(In thousands)									As a % of applicable sales
Retail:
Coffeehouse sales	$	168,618		$	175,619			(4.0	)%		100.0	%		100.0	%
Costs of sales and related occupancy costs		69,799			71,967			(3.0	)%		41.4	%		41.0	%
Operating expenses		73,149			77,177			(5.2	)%		43.4	%		43.9	%
Opening expenses		167			276			(39.5	)%		0.1	%		0.2	%
Depreciation and amortization		20,749			19,120			8.5	%		12.3	%		10.9	%
General and administrative expenses		6,976			7,246			(3.7	)%		4.1	%		4.1	%
Closing expense and disposal of assets		4,412			3,733			18.2	%		2.6	%		2.1	%
Segment operating loss	$	(6,634	)	$	(3,900	)		70.1	%		(3.9	)%		(2.2	)%

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	39 Weeks Ended							39 Weeks Ended
	September 28,		September 30,		%			September 28,			September 30,
	2008		2007		Change			2008			2007
	(In thousands)							As a % of applicable sales
Commercial:
Sales	$	12,502	$	8,229		51.9	%		100.0	%		100.0	%
Costs of sales and related occupancy costs		7,771		5,291		46.9	%		62.1	%		64.3	%
Operating expenses		1,548		1,587		(2.5	)%		12.4	%		19.3	%
Depreciation and amortization		22		19		15.8	%		0.2	%		0.2	%
Segment operating income	$	3,161	$	1,332		137.3	%		25.3	%		16.2	%
Franchise:
Sales	$	4,730	$	2,833		67.0	%		100.0	%		100.0	%
Costs of sales and related occupancy costs		2,639		1,532		72.3	%		55.8	%		54.1	%
Operating expenses		1,088		872		24.8	%		23.0	%		30.8	%
Opening expenses		31		9		244.4	%		0.7	%		0.3	%
Depreciation and amortization		—		7		—	%		—	%		0.2	%
Segment operating income	$	972	$	413		135.4	%		20.5	%		14.6	%

Net Sales

     Consolidated net sales decreased 0.4% largely due to our coffeehouse sales decreasing $7 million in our retail segment. Our coffeehouse sales decrease is attributable to 773 fewer operating coffeehouse weeks and lower traffic, which resulted in a 2.9% decrease in comparable coffeehouse net sales in the first thirty-nine weeks of fiscal 2008 as compared to the same period in fiscal 2007. Commercial and franchise segments experienced sales growth from existing and new commercial customers and product sales, franchise fees and royalties from the development of 39 franchised coffeehouses during the preceding 12 months.

Costs and Expenses

     Cost of sales and related occupancy costs.Consolidated cost of sales and related occupancy costs increased slightly from the higher commercial and franchise segment level sales volume as well as higher overall supply prices for coffee and dairy, while being partially offset by lower coffeehouse sales and lower occupancy expense associated with the reduction in the number of company-owned coffeehouses since the end of the third quarter of 2007. The increase in cost of sales and related occupancy costs as a percent of total net sales was primarily due to these same factors.

     The increase of cost of sales and related occupancy costs as a percent of coffeehouse sales in the retail segment is due to the deleveraging effect of lower comparable coffeehouse sales on fixed occupancy costs. The increase in commercial segment cost of sales and related occupancy costs is attributable to the growth in sales volume. The reduction in cost of sales and related occupancy costs as a percentage of commercial segment sales was driven by product mix and efficiencies gained in distribution costs. The increase in cost of sales and related occupancy costs is attributable to the growth in product sales volume to the 39 new franchised coffeehouses opened during the past twelve months. The increase in costs of sales and related occupancy costs as a percentage of franchise segment sales was primarily due to this same factor. This changes the sales mix and the associated product cost is at a higher percent of sales than a pure franchise fee or royalty stream

     Operating expenses.Operating expenses decrease is attributable to the 773 fewer operating coffeehouse weeks and tighter management of labor costs in the first thirty-nine weeks of fiscal 2008 as compared to the first thirty-nine weeks of fiscal 2007. As a percentage of total net sales, operating expenses decreased primarily due to tighter management of labor costs, closing underperforming company-owned coffeehouses and leveraging relatively fixed commercial and franchise segment operating costs over higher sales.

     Opening expenses.Opening expenses decreased due to opening seven new company-owned coffeehouses in the first thirty-nine weeks of fiscal 2008 versus eleven new company-owned coffeehouses during the first thirty-nine weeks of fiscal 2007.

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     Depreciation and amortization.Depreciation and amortization includes $7.5 million in accelerated depreciation associated with 37 coffeehouse impairments in the first thirty-nine weeks of fiscal 2008 as compared to $2.5 million in accelerated depreciation associated with nine coffeehouse impairments in the first thirty-nine weeks of 2007. Excluding impairments depreciation and amortization decreased $3.4 million primarily due to the impairments taken during the past twelve months.

     General and administrative expenses.General and administrative expenses increased $0.6 million to 11.4% as a percentage of consolidated net sales in the first thirty-nine weeks of fiscal 2008, largely due to $1.3 million in severance costs incurred during the first thirty-nine weeks of fiscal 2008. Excluding the severance costs general and administrative expenses decreased $0.7 million due to positions eliminated and lower legal costs.

     Closing expenses and disposal of assets.The Company closed twenty-four company-owned coffeehouses during the first thirty-nine weeks of 2008 and incurred $4.5 million in costs as compared to closing nineteen coffeehouses during the first thirty-nine weeks of fiscal 2007 and incurring costs of $3.7 million.

     Interest expense.The Company incurred costs associated with amending its revolving credit facility in February 2008 and incurred higher borrowing costs during the current year.

Liquidity and Capital Resources

     The following table summarizes our cash flow activity and should be read in conjunction with the Consolidated Statements of Cash Flows:

	Thirty-nine Weeks Ended
	September 28,			September 30,
	2008			2007
	(In thousands)
Net cash (used) provided by operating activities	$	(372	)	$	1,864
Net cash used in investing activities		(5,461	)		(11,443	)
Net cash provided by financing activities		2,885			385
Net change in cash and cash equivalents	$	(2,948	)	$	(9,194	)

     Cash and cash equivalents as of September 28, 2008 were $6.9 million. Generally, our current principal requirements for cash are capital expenditures and funding operations. Capital expenditures included 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. Currently our requirements for capital have been funded through cash flow from operations and our revolving credit facility.

     Net cash used by operating activities for the first thirty-nine weeks of fiscal 2008 was the result of a normal seasonal reduction in the deferred revenue liability and a decrease in accrued expenses. The normal seasonal reduction in the deferred revenue liability is attributable to customers’ use of stored value Caribou Cards sold, both new and increments added to existing cards, during the fourth quarter of 2007. The decrease in accrued expenses is primarily attributable to the $1.8 million payment made as part of the FLSA claim settlement.

     Net cash used in investing activities during the first thirty-nine weeks of fiscal 2008 was $5.5 million, compared to net cash used in investing activities of $11.4 million for the first thirty-nine weeks of fiscal 2007. Approximately half of the capital expenditures for each fiscal year were for the construction of new coffeehouses, which included the cost of leasehold improvements and capital equipment. We opened seven new company-owned coffeehouses in the first thirty-nine weeks of fiscal 2008 and eleven company-owned coffeehouses in the first thirty-nine weeks of fiscal 2007. The remainder of the capital expenditures for both the first thirty-nine weeks of 2008 and 2007 was for the remodel of existing coffeehouses in addition to roasting, packaging and computer equipment and systems.

     Net cash provided by financing activities during the first thirty-nine weeks of 2008 was $2.9 million. We borrowed $3.0 million under our revolving credit facility during the thirty-nine weeks ended September 28, 2008 which remained outstanding at September 28, 2008. In February 2008, we amended our revolving credit facility reducing the maximum amount available to $20 million. In November 2008, we amended our revolving credit

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facility to reduce the maximum amount available to $9 million, extended the expiration date of the facility to June 29, 2010 and modified certain of the facility’s financial covenants.

     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 are complicated, requiring application of qualitative and quantitative standards. The negotiation and documentation of financing that is compliant with these principles are generally complex and time consuming. As such, if we have immediate liquidity needs, we may not be able to obtain financing that is compliant with Shari’ah principles on a timely basis.

Off-Balance Sheet Arrangements

     We enter into fixed-price and price-to-be-fixed purchase commitments to secure our supply and fix our price for green coffee beans used in the normal course of our business. As of September 28, 2008, we were committed to fixed-price and price-to-be-fixed green coffee purchase contracts with deliveries expected through December 2009. We believe, based on relationships established with our suppliers in the past, the risk of non-delivery on such purchase commitments is remote.

Recent Accounting Pronouncements

     In September 2006, the FASB issued SFAS No. 157,Fair Value Measurement(“SFAS 157”). SFAS 157 defines fair value, provides guidance for measuring fair value in U.S. generally accepted accounting principles and expands disclosures about fair value measurements. On December 31, 2007, we 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 our 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. We are currently evaluating the potential impact of this statement.

Key Financial Metrics

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

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     The following table sets forth non-GAAP metrics and operating data that do not otherwise appear in our consolidated financial statements as of and for the thirteen and thirty-nine weeks ended September 28, 2008 and September 30, 2007:

	Thirteen Weeks Ended						Thirty-nine Weeks Ended
	September 28,			September 30,			September 28,			September 30,
	2008			2007			2008			2007
	(In thousands, except operating data)
Non-GAAP Metrics:
EBITDA (1)	$	2,037		$	(715	)	$	5,488		$	5,173
Operating Data:
Percentage change in comparable coffeehouse net sales (2)		(4.7	%)		1	%		(2.9	%)		0	%
Company-Owned:
Coffeehouses open at beginning of period		415			441			432			440
Coffeehouses opened during the period		2			2			7			11
Coffeehouses closed during the period		2			11			24			19
Coffeehouses open at end of period:
Total Company-Owned		415			432			415			432
Franchised:
Coffeehouses open at beginning of period		75			39			52			24
Coffeehouses opened during the period		5			2			28			17
Coffeehouses closed during the period		—			—			—			—
Coffeehouses open at end of period:
Total Franchised		80			41			80			41
Total coffeehouses open at end of period		495			473			495			473

(1)

See reconciliation and discussion of non-GAAP measures which follow at the end of this section.

(2)

Percentage change in comparable coffeehouse net sales compares the net sales of coffeehouses during a fiscal period to the net sales from the same coffeehouses for the equivalent period in the prior year. A coffeehouse is included in this calculation beginning in its thirteenth full fiscal month of operations. A closed coffeehouse is included in the calculation for each full month that the coffeehouse was open in both fiscal periods. Franchised coffeehouses are not included in the comparable coffeehouse net sales calculations.

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

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

• Our coffeehouse leases are generally short-term (5-10 years), and we must depreciate all of the cost associated with those leases on a straight-line basis over the initial lease term, excluding renewal options (unless such renewal periods are reasonably assured at the inception of the lease). We opened a net 164 company-owned coffeehouses from the beginning of fiscal 2004 through the end of the first thirty-nine weeks of fiscal 2008. As a result, we believe depreciation expense is disproportionately large when compared to the sales from a significant percentage of our coffeehouses that are in their initial years of operations. Also, many of the assets being depreciated have actual useful lives that exceed the initial lease term, excluding renewal options. Consequently, we believe that adjusting for depreciation and amortization is useful for evaluating the operating performance of our coffeehouses.

     Our management uses EBITDA:

• As a measurement of operating performance because it assists us in comparing our operating performance on a consistent basis, as it removes the impact of items not directly resulting from our coffeehouse operations;

• For planning purposes, including the preparation of our internal annual operating budget;

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• To establish targets for certain management compensation matters; and

• To evaluate our capacity to incur and service debt, fund capital expenditures and expand our business.

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

	Thirteen Weeks Ended						Thirty-nine Weeks Ended
	September 28,			September 30,			September 28,			September 30,
	2008			2007			2008			2007
	(In thousands)
Net loss	$	(8,766	)	$	(8,463	)	$	(17,604	)	$	(15,605	)
Interest expense		81			130			714			426
Interest income		(2	)		(54	)		(23	)		(133	)
Depreciation and amortization (1)		10,760			7,703			22,387			20,813
(Benefit) provision for income taxes		(36	)		(31	)		14			(328	)
EBITDA	$	2,037		$	(715	)	$	5,488		$	5,173

(1) Includes depreciation and amortization associated with our headquarters and roasting facility that are categorized as general and administrative expenses and cost of sales and related occupancy costs on our statement of operations.

Item 3.Quantitative and Qualitative Disclosures about Market Risks.

     Not applicable.

Item 4T.Controls and Procedures.

     We carried out an evaluation, under the supervision and with the participation of our management, including the chief executive officer and the chief financial officer, of the effectiveness of the design and the operations of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective, as of September 28, 2008, in ensuring that material information relating to us required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. There were no changes in our internal control over financial reporting during the quarter ended September 28, 2008, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1.Legal Proceedings.

     On May 25, 2005, we 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 us 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 we misclassified our 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.

     On February 1, 2008, after mediation of the matter, we entered into a Stipulation of Settlement (the “Stipulation”) to settle the FLSA Suit. The Stipulation provides 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 and a final settlement payment of $0.95 million will be made on December 29, 2008. Settlement payments made to all participating class members and all attorneys’ fees for plaintiffs’ counsel will be paid from the $2.7 million.

     We are party to various other legal proceedings arising in the ordinary course of our business. Management believes that none of these ordinary course legal proceedings would have a material adverse effect on our consolidated financial position or results of operations.

Item 1A.Risk Factors.

     There have been no material changes from the risk factors disclosed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 30, 2007.

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

     Unregistered Sales of Equity Securities

     Not applicable.

     Use of Proceeds

     Not applicable.

Item 3.Defaults Upon Senior Securities.

     Not applicable.

Item 4.Submission of Matters to a Vote of Security Holders.

     At the Company’s Annual Meeting held on August 6, 2008, the shareholders elected seven directors to serve until the 2009 Annual Meeting of Shareholders and ratified the selection of Ernst & Young LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 28, 2008.

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

	Votes in		Votes		Votes		Votes		Broker
Election of Directors:	Favor		Against		Withheld		Abstentions		Non-Votes
Kip R. Caffey		17,878,399		0		465,529		0		0
Michael J. Coles		17,788,553		0		555,375		0		0
Wallace B. Doolin		17,795,025		0		548,903		0		0
Gary A. Graves		17,798,486		0		545,442		0		0
Charles L. Griffith		17,879,321		0		464,607		0		0
Charles H. Ogburn		17,879,189		0		464,739		0		0
Sarah Palisi Chapin		17,820,422		0		523,506		0		0
Ratification of independent registered public accounting firm		18,136,367		143,048		0		64,513		0

Item 5.Other Information.

     Not applicable.

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Item 6.Exhibits.

3.1*	Form of Amended and Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement of Form S-1/A filed August 25, 2005).
3.2*	Form of Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement of Form S-1/A filed August 25, 2005).
4.1*	Form of Registrant’s Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement of Form S-1/A filed September 6, 2005).
10.1*	Employment agreement between Caribou Coffee Company, Inc. and Michael Tattersfield, dated August 1, 2008 (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on August 4, 2008).
10.2*	Stock Option Grant and Agreement between Caribou Coffee Company, Inc. and Michael Tattersfield, dated August 1, 2008 (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed on August 4, 2008).
10.3*	Letter Agreement setting forth Michael Tattersfield’s agreement to invest in shares of the Company between Caribou Coffee Company, Inc. and Michael Tattersfield, dated August 1, 2008 (incorporated by reference to Exhibit 10.3 of the Company’s Form 8-K filed on August 4, 2008).
10.4*	Separation Agreement between Caribou Coffee Company, Inc. and Rosalyn Mallet, dated August 29, 2008 (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on September 3, 2008).
10.5*	Employment Agreement between Caribou Coffee Company, Inc. and Timothy J. Hennessy, dated September 9, 2008 (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on September 9, 2008).
10.6*	Stock Option Grant and Agreement between Caribou Coffee Company, Inc. and Timothy J. Hennessy, dated September 9, 2008 (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed on September 9, 2008).
10.7*	Letter Agreement setting forth Timothy J. Hennessy’s agreement to invest in shares of the Company between Caribou Coffee Company, Inc. and Timothy J. Hennessy, dated September 9, 2008 (incorporated by reference to Exhibit 10.3 of the Company’s Form 8-K filed on September 9, 2008).
31.1	Certification Pursuant to Rule 13a — 14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification Pursuant to Rule 13a — 14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification Pursuant to 18 U.S. C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification Pursuant to 18 U.S. C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Asterisk (*) indicates exhibit previously filed with the Securities and Exchange Commission as indicated in parentheses.

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SIGNATURE

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

CARIBOU COFFEE COMPANY, INC.
By:	/s/ Timothy J. Hennessy
	Timothy J. Hennessy
	Chief Financial Officer

Date: November 12, 2008

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