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 whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     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 $66,850,000 as of July 4, 2010, based upon the closing price of our common stock 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 17, 2011, there were 20,453,718 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 12, 2011 have been incorporated by reference into Part III of this Annual Report on Form 10-K.

 

 

TABLE OF CONTENTS

 

 

 

Founded in 1992, we are one of the leading branded coffee companies in the United States, with a compelling multi-channel approach to our customers. Based on the number of coffeehouses, we are the second largest company-operated premium coffeehouse operator in the United States. As of January 2, 2011, we had 541 coffeehouses, including 131 franchised locations. Our coffeehouses are located in 20 states, the District of Columbia and nine international markets. Our coffeehouses aspire to be the community place loved by our guests as we strive to provide them with an extraordinary experience that makes their day better. We source the highest-quality coffees in the world and our skilled roast masters personally oversee the craft roasting of every single batch to bring out the best in every bean. We also provide the highest quality handcrafted beverages, foods and coffee lifestyle items. We deliver our guest experience with our unique blend of expertise, fun and authentic human connection in a comfortable and welcoming coffeehouse environment. We will continue our efforts to increase our comparable coffeehouse sales from building our brand awareness and loyalty through marketing efforts and introducing new products. We intend to continue strategically expanding our coffeehouse locations predominately in our existing markets. Our unique coffees are also available within our commercial segment via grocery stores, mass merchandisers, club stores, office coffee and foodservice providers, hotels, entertainment venues and e-commerce channels. In addition, we sell our blended coffees and license our brand to Keurig, Inc. for sale and use in its K-Cup single serve line of business. We seek to continue to grow our brand internationally through franchise agreements and we expect to selectively enter into franchising partnerships domestically. Through our multi-channel approach, we believed we offer a total coffee solution platform to our customers. Caribou Coffee is a proud recipient of the Rainforest Alliance Corporate Green Globe Award and is committed to operating practices that promote sustainability and environmental protection. For more information visit www. Cariboucoffee.com.

 

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 January 2, 2011, we operated 410 company-operated coffeehouses located in 16 states and the District of Columbia, including 211 coffeehouses in Minnesota and 53 coffeehouses in Illinois. We are committed to delivering the leading coffeehouse experience, by providing the highest quality coffee and food products in a warm and inviting coffeehouse environment served by people who care. Our goal is to provide our customers with an extraordinary experience that feeds the soul.

 

We have invested significant time, effort and capital to increase our average unit volume and drive operating leverage across our company-owned coffeehouses. We are focused on growing our average unit volume by driving higher levels of customer traffic and average customer check by increasing sales of beverages, food, beans and merchandise to our customers. To drive customer traffic, we have accelerated new product introductions and supported them with marketing initiatives. We continue to introduce new premium products, such as real chocolate-based beverages, distinctive teas and wholesome oatmeal. At the core of these product innovations are consistent themes of premium quality, natural ingredients and customizable offerings. We believe our guests want a superior food experience and these products and investments will drive loyalty and increase frequency of visit.

 

We believe that we have strong brand awareness and loyalty in markets where we have a significant coffeehouse presence. With a solid core of successful locations in the Midwest, as well as a strong footprint in other select regions, we are prepared to execute a targeted and measured expansion plan. Our focus is on increasing density in existing markets where we believe we have significant growth opportunities. As we increase the density of coffeehouses within these markets we will be able to drive higher customer awareness, loyalty and comparable coffeehouse sales. As our comparable coffeehouse sales increase, we expect our operating margins to improve as we leverage our operating structure. We also believe the growth of our coffeehouse base will increase awareness of the Caribou Coffee brand and drive sales across other channels.

Commercial.  We sell our high-quality premium whole bean and ground coffee to grocery stores, mass merchandisers, club stores, office coffee and foodservice providers, hotels, entertainment venues and on-line customers nationwide. In addition, we sell our blended coffees and license our brand to Keurig for sale and use in its K-Cup single serve line of business. As of January 2, 2011, Caribou Coffee can be found in over 40 states and in 7,500 stores through our Caribou-managed sales channel. Caribou Coffee K-Cups are found in, we believe, an additional 17,000 stores across all 50 states.

 

Our commercial segment comprised 15% of total sales in 2010. This segment has expanded quickly with 2010 segment sales growth of 52% versus the prior fiscal year. On a comparative 52-week basis, commercial sales increased 56% compared to the prior year, and experienced average annual growth of 51% over the past three years. Our growth strategy for the commercial segment is to continue to build our existing relationships and add new relationships with these points of distribution for our premium whole bean and ground coffee.

 

Franchise.  Since opening our first franchised coffeehouse in 2004, we have expanded the number of franchised coffeehouses and licensed kiosks to 131 worldwide as of January 2, 2011, with 75 of the franchised coffeehouses in nine international markets. Within the United States, we have a rigorous, disciplined approach to developing our franchising pipeline, which includes kiosks in nontraditional locations such as airports, offices, colleges and universities, grocery stores, hospitals and hotels. Internationally, we have a Master Franchise Agreement covering 12 countries and 250 Caribou Coffee coffeehouses. We have seen rapid and significant growth in the franchise segment, with sales growing from $2.0 million in 2006 to $9.9 million in 2010. We expect to continue to franchise Caribou Coffee branded coffeehouses and kiosks; we believe there are significant opportunities to grow our business with qualified development and franchising partners, both domestically and internationally.

 

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 of up to a year. As of January 2, 2011, we had commitments to purchase coffee beans at a total cost of $26.9 million through December 2011, which, combined with green coffee bean inventory on hand, represents approximately 55% of our anticipated coffee bean requirements for 2011. We have several processes for assuring the quality and price competitiveness of our raw materials, including commodity index monitoring, benchmarking, supplier business reviews, site visits and quality certification processes.

 

Our second largest raw material is dairy-related products. 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 such products for fixed prices based upon the commodity price plus a percentage.

 

Competition

 

In our retail coffeehouse business, our primary competitors are other premium coffee shops. In all markets in which we do business, there are numerous competitors in the premium coffee beverage business, and we expect this competition to continue. Starbucks is the premium coffeehouse segment leader with approximately 11,100 locations in the United States and approximately 5,700 locations internationally. Our other primary competitors are regional or local market coffeehouses. We also compete with numerous convenience stores, restaurants, coffee shops and street vendors, as well as with quick service restaurants, and recently, a number of quick service restaurants such as McDonalds’s have more aggressively pursued the coffee beverage market. As we continue to expand our food offerings, we will compete with additional regional and local competitors with food offerings. We also compete with numerous retailers and restaurants for the best retail real estate locations for our coffeehouses.

 

We believe that our customers choose among premium 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.

In our commercial business, we compete directly against all other coffee brands in the marketplace. In this segment, 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 premium coffee bean companies, some of which also operate premium coffeehouses. Competition in the premium coffee market is becoming increasingly intense as relatively low barriers to entry encourage new competitors to enter the market.

 

We also face intense competition with regards to the expansion of our franchise program as the number of franchising alternatives for potential franchisees increases. We expect to 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. In combination with our high-quality products, unique coffeehouse environment and 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.

 

Service Marks and Trademarks

 

We regard the Caribou Coffee brand and our 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 have applications pending with the U.S. Patent and Trademark Office for a number of additional marks, including Amy’s Blend and Mahogany. 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 seek to expand internationally. There can be no assurance that we can obtain registration for our 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 January 2, 2011, we employed a workforce of 5,753 people, approximately 1,642 of whom are considered full-time employees. None of our employees is 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 Americans 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 effect 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. Historically, we have experienced increased sales in our fourth fiscal quarter due to the 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 from 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 attribute undue certainty to 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. The risks we highlight below are not the only ones we face.

 

The United States economic crisis could adversely affect our business and financial results.

 

As a business selling premium products that is dependent upon consumer discretionary spending, our results of operations are sensitive to changes in macro-economic conditions. Many sectors of the economy have been adversely impacted from the global economic recession, and we face a challenging environment 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 revenue results in sales de-leveraging which creates downward pressure on margins and profitability. There is also a risk that if negative economic conditions persist for a long period of time, consumers may make long-lasting changes to their discretionary purchasing behavior, including less frequent discretionary purchases on a more permanent basis.

 

The availability and price of high quality Arabica coffee beans could impact our profitability and growth of our business.

 

Our principal raw material is green coffee beans. We source our green coffee beans from direct coffee farmer relationships utilizing brokers. Although most coffee beans are traded in the commodity market, the high-grade Arabica coffee beans we buy tend to trade on a negotiated basis at a substantial premium above commodity coffee prices, depending upon the supply and demand at the time of purchase. We typically enter into supply contracts with individual suppliers with a term of one year or less to purchase a pre-determined quantity of coffee beans at a fixed

price per pound. If we are unable to source sufficient quantities of green coffee beans to meet our demands for growth and expansion, then our business could be negatively impacted.

 

The prices we pay for coffee beans are subject to movements in the commodity market for coffee. The price can fluctuate depending on such things as weather patterns in coffee-producing countries, economic and political conditions affecting coffee-producing countries, foreign currency fluctuations, coffee-producing countries’ export quotas, commodity market investor activity and general economic conditions. In addition, coffee bean prices have been affected in the past, and may be affected in the future, by the actions of certain organizations and associations that have historically attempted to influence commodity prices of coffee beans through agreements establishing export quotas or restricting coffee supplies worldwide. If the price for coffee beans increases and we are not able to adjust our pricing and cost structure accordingly, our margins and profitability will decrease. Our ability to raise sales prices in response to rising coffee bean prices may be limited and depends largely on what our competitors do in response to price pressures, and our profitability could be adversely affected if coffee bean prices were to rise substantially. Moreover, passing price increases on to our customers could result in losses in sales volume or margins in the future. Similarly, rapid sharp decreases in the cost of coffee beans could also force us to lower sales prices before we have realized cost reductions in our coffee bean inventory.

 

A significant interruption in the operation of our roasting, warehousing and distribution facility could potentially disrupt our operations.

 

We have only one roasting, warehousing and distribution facility located at our headquarters in Minneapolis, Minnesota supporting our supply chain activities for all of our coffeehouses. A significant interruption impacting this supply chain facility, whether as a result of a natural disaster, technical or labor difficulties, fire or other causes, could cause a shortage of coffee at our coffeehouses and significantly impair our ability to operate our business. A disruption in service from our support center facility would negatively impact sales in all business segments.

 

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 pay significantly increased rent to stay in the location, 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 quality 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.

 

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

 

As of January 2, 2011, 211, or 51%, of our Company-operated coffeehouses were located in Minnesota. An additional 75, 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 January 2, 2011. Our Minnesota, North Dakota, South Dakota, Iowa, Illinois and Wisconsin company-operated coffeehouses accounted for approximately 72% of our coffeehouse net sales during the year ended January 2, 2011. 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 competitive changes, changes in consumer preferences, 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 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.

 

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 our 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:

 

 

 

Not applicable.

 

Locations and Facilities

 

Coffeehouse Locations

 

As of January 2, 2011, we had 541 retail coffeehouses, including 131 franchised locations. Caribou Coffee’s coffeehouses are located in 20 states, 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. This facility is organic certified by the U.S. Department of Agriculture.

From time to time we engage third party vendors to meet special processing needs, including roasting or specialized packaging for specific commercial accounts.

 

 

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

 

 

Executive Officers of the Registrant

 

The following table sets forth certain information concerning our executive officers as of March 24, 2011:

 

 

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.

 

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.

 

Henry J. Suerth has served as our Senior Vice President of Commercial Business since April 2009. Mr. Suerth was with Starbucks Coffee Company where he served as Senior Vice President of Business Alliances. Mr. Suerth has also held roles as President and CEO of Infinity Systems, a global audio company; CEO of Recoton Corporation’s multi brand home audio business, as well as general management roles at Ethan Allen, the Cahners Exposition Group and FMC Corporation. Mr. Suerth also managed his own Connecticut-based management consulting company, Decision Resources, for six years.

 

Daniel J. Hurdle has been with the Company since October 2008 and currently serves as our Senior Vice President of Retail Operations. 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 and has responsibility for our brand and product strategy and marketing activities. Previously, Mr. Martel was employed by KFC USA, Yum! Brands where he held a variety of marketing positions and was most recently the Director of Field and Multicultural Marketing from April 2004 until October 2008. Mr. Martel has experience in sales and marketing with various consumer packaged goods companies such as Clairol and The Andrew Jergens Co.

 

Dan E. Lee has served as our General Counsel, Vice President and Secretary since August 2005 and Senior Vice President since November 2009. 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 providing travel, hotel, restaurant, cruise and marketing services directly to consumers, corporations and government entities. 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.

 

 

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 17, 2011, there were approximately 7,373 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, that restrict our ability to pay dividends on our common stock.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

See “Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters” in Item 12 for information regarding securities authorized for issuance under our equity compensation plans.

Sales of Unregistered Securities

 

None.

 

Stock Performance Graph

 

Not applicable.

 

Repurchase of Equity Securities

 

The following table sets forth all purchases of our Common Stock during the fiscal year 2010:

 

 

 

The table below presents our selected consolidated financial data as of and for each of our fiscal years ended January 2, 2011, January 3, 2010, December 28, 2008, December 30, 2007 and December 31, 2006. The balance sheet data and consolidated statement of operations data as of and for our fiscal years ended January 2, 2011 and January 3, 2010 are derived from our audited consolidated financial statements included elsewhere in this report. The balance sheet data and consolidated statement of operations data as of and for the fiscal years ended December 28, 2008, December 30, 2007 and December 31, 2006 are derived from our audited consolidated financial statements previously filed and 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 is useful to investors in evaluating our operating performance because 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 207 company-operated coffeehouses, from the beginning of fiscal 2003 through 2010. 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. Additionally, depreciation and amortization is impacted by accelerated depreciation from asset impairments.

Consequently, we believe that adjusting for depreciation and amortization is useful for evaluating the operating performance of our coffeehouses.

 

Our management uses EBITDA:

 

 

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 as an alternative to net income, operating income, cash flows from operating activities or our other financial information as determined under GAAP.

 

The table below reconciles net income (loss) attributable to Caribou Coffee Company, Inc. to 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

 

Founded in 1992, we are one of the leading branded coffee companies in the United States, with a compelling multi-channel approach to our customers. Based on number of coffeehouses, we are the second largest company-operated premium coffeehouse operator in the United States. As of January 2, 2011, we had 541 retail locations, including 131 franchised locations. Our coffeehouses are located in 20 states, the District of Columbia and nine international markets. Our coffeehouses aspire to be the community place loved by our guests who are provided with an extraordinary experience that makes their day better. Our coffeehouses offer customers high-quality premium coffee and espresso-based beverages, foods and coffee lifestyle items. We believe we create a unique experience for customers through a combination of high-quality products, a comfortable and welcoming coffeehouse environment and customer service. Our success in the retail channel has elevated the Caribou Coffee brand

and created demand across other channels, including various commercial and foodservice categories. 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 nationwide. We seek to continue to grow our brand internationally through franchise agreements and we expect to selectively enter into franchising partnerships domestically. Through our multi-channel approach, we believe we offer a total coffee solution platform to our customers.

 

Our comparable coffeehouse sales have significantly improved driven by the expansion of our food product offerings such as hot oatmeal and breakfast sandwiches. We have reported positive comparable coffeehouse sales over the previous five quarters, including 3.5% for the quarter ending January 2, 2011. Our commercial segment has also experienced accelerated growth and in 2010 represented 15% of total net sales, up from less than 5% in 2007. Caribou Coffee whole bean and ground coffee products are found in grocery, mass merchant and club stores in over 40 states, allowing us to expand our brand recognition through this segment and reach customers across the United States. We also sell our blended coffees and license our brand to Keurig, Inc., an industry leader in single-cup brewing technology, for sale and use in its K-Cup single serve line of business. This enables Caribou Coffee products to be available in all 50 states. Our franchise segment franchises our brand to partners to operate Caribou Coffee branded coffeehouses in domestic and international markets. In addition, we sell Caribou Coffee branded products to our partners for resale in these franchised locations.

 

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.  Management uses judgment 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. 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 a 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. We had no coffeehouse impairments during fiscal 2010 or 2009.

 

Stock-based compensation.  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 value 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 recognize expense related to the fair value of our stock-based compensation awards. The estimated grant date fair value of each stock-based award is recognized as an expense 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. The fair value of each restricted stock award is calculated based on the trading value of the underlying stock on the grant date. Stock-based compensation expense for fiscal years 2010 and 2009 totaled approximately $1.3 million and $1.0 million, respectively.

 

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. 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. 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. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences, as determined pursuant to ASC 740, become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. In evaluating whether we would more likely than not recover these deferred tax assets, we have not assumed any future taxable income or tax planning strategies in the jurisdictions associated with these carryforwards where history does not support such an assumption. Our evaluation of the realizability of deferred tax assets must consider both positive and negative evidence, and the weight given to the potential effects of positive and negative evidence is based on the extent that it can be objectively verified. We have generated significant losses since our inception, and we have concluded that as of January 2, 2011 and January 3, 2010, a valuation allowance against substantially all of our deferred tax assets is required. As of January 2, 2011, our loss carryforward was $19.8 million and we had a valuation allowance aggregating $27.1 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 2023, if not utilized.

 

For the years ended January 2, 2011 and January 3, 2010, our operations generated taxable income. If the level of taxable income continues in future periods, we may determine that sufficient objective evidence exist to conclude that it is more likely than not that all or a portion of deferred tax assets will be realized. If such a determination is made in a future period, we would reduce the deferred tax asset valuation allowance and record an income tax benefit in our consolidated statements of operations. It is possible that such adjustments would be material to the results of our operations in the periods in which these determinations are made. However, there can be no assurance that we will continue to experience growth in revenues and operating income in future periods.

 

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. Our recognition of an uncertain tax position is dependent on whether or not that position is more likely than not of being sustained upon audit by the relevant taxing authority. If an uncertain tax position is more likely than not of being sustained, the position 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. Each fiscal year consists of four 13-week quarters in a 52-week year and three 13-week quarters and one 14-week fourth quarter in a 53-week year. Fiscal years 2010 and 2009 include 52 and 53 weeks, respectively.

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 2010 Compared to Fiscal Year 2009

 

 

Net Sales

 

Net sales increased $21.5 million, or 8.2%, to $284.0 million in fiscal 2010, from $262.5 million in fiscal 2009. When normalizing for the extra week in the 2009 fiscal year, net sales increased $26.6 million, or 10.3%. This increase was attributable to an increase in sales across all of our segments. Comparable coffeehouse sales for fiscal year 2010 were up 4.5% when compared with fiscal year 2009. For fiscal 2010, commercial and franchise sales increased $16.6 million, or 46.9%, as compared to fiscal 2009. When adjusting for the extra week in the 2009 fiscal year, Commercial and Franchise sales increased $17.4 million, or 50.5%, due to sales to existing and new commercial customers and to product sales, franchise fees and royalties from the previously existing franchised coffeehouses and ten net franchised coffeehouses opened during fiscal year 2010.

 

Costs and Expenses

 

Cost of sales and related occupancy costs.  Cost of sales and related occupancy costs increased $15.2 million, or 13.1%, to $131.1 million in fiscal year 2010, from $115.9 million in fiscal year 2009. This increase was primarily attributable to the increased cost of sales associated with the increased product sales in all of our segments. As a percentage of net sales, cost of sales and related occupancy costs increased to 46.2% in fiscal year 2010, from 44.1% in fiscal year 2009. The increase in cost of sales and related occupancy costs as a percentage of net sales was primarily due to the growth in commercial and franchise sales, which changed the overall mix of sales while

leveraging the fixed occupancy costs on the higher sales volume. As a result of product sales mix, commercial and franchise sales generally have a higher cost of sales rate than our company-operated coffeehouses.

 

Operating expenses.  Operating expenses increased $1.3 million, or 1.3%, to $101.2 million in fiscal year 2010, from $99.9 million in fiscal year 2009. On a dollar basis, this increase was driven by an increase in labor-related expenses, as well as other variable expenses in support of our sales volume increase. As a percentage of total net sales, operating expenses decreased to 35.6% in fiscal year 2010 from 38.0% in fiscal year 2009. The decrease in operating expenses as a percentage of net sales was primarily due to our ability to leverage our cost structure from the increased sales volume across all our segments.

 

Depreciation and amortization.  Depreciation and amortization decreased $1.8 million, or 12.9%, to $12.3 million in fiscal year 2010, from $14.1 million in fiscal year 2009. Fiscal year 2010 depreciation and amortization decreased due to a lower depreciable asset base as a result of reduced capital spending in fiscal years 2010 and 2009.

 

General and administrative expenses.  General and administrative expenses increased $2.2 million, or 8.1%, to $29.3 million in fiscal 2010 from $27.1 million in fiscal 2009. The increase was driven by building out key positions within our organization during 2010, primarily related to real estate development, human resources, marketing and product management. As a percentage of total net sales, general and administrative expenses remained flat at 10.3% of total net sales in fiscal year 2010 and 2009.

 

Interest expense.  Interest expense increased $0.1 million to $0.4 million in fiscal year 2010 from $0.3 million in fiscal year 2009. During 2010 and 2009, we did not draw on our revolving credit facility and the interest expense was primarily related to credit facility acquisition cost amortization and on-going commitment fees.

 

Secondary offering:  We incurred $0.5 million in costs related to the sale of a portion of our majority shareholder’s common stock, which culminated in a secondary stock offering in December 2010. The majority of these costs were reported in general and administrative expenses.

 

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 2010 and 2009.

 

Retail Coffeehouses

 

 

The retail segment operates company-operated coffeehouses. As of January 2, 2011, there were 410 company-operated coffeehouses in 16 states and the District of Columbia.

Coffeehouse sales

 

Coffeehouse sales increased $4.9 million, or 2.1%, to $232.1 million in fiscal year 2010 from $227.2 million in fiscal year 2009. When normalizing for the extra week in fiscal year 2009, coffeehouse sales increased $9.2 million, or 4.1%. This increase was attributable to the 4.5% increase in comparable coffeehouse sales driven by increased traffic in our coffeehouses and a higher average guest check, primarily due to higher food sales attributable to the launch of hot cereal, including wholesome oatmeal, in our coffeehouses at the beginning of 2010 and the phased rollout of breakfast sandwiches, which are now in 200 of our coffeehouses.

 

Costs and Expenses

 

Cost of sales and related occupancy costs.  Cost of sales and related occupancy costs increased $3.6 million, or 3.9%, to $96.6 million in fiscal year 2010, from $93.0 million in fiscal year 2009. The increase on a dollar basis was driven primarily by increased cost of goods related to our 4.5% growth in comparable coffeehouse sales. As a percentage of coffeehouse sales, cost of sales and related occupancy costs increased to 41.6% in fiscal year 2010, from 40.9% in fiscal year 2009 due to higher costs associated with a shift to higher-quality product platforms, particularly the shift from a powder-based chocolate ingredient to real, all natural chocolate in all of our chocolate based beverages. Also contributing to the increase were sales mix changes with food sales within our coffeehouses becoming a larger portion of the overall coffeehouse sales.

 

Operating expenses.  Operating expenses increased $0.4 million, or 0.4%, to $95.3 million in fiscal year 2010, from $94.9 million in fiscal year 2009. This increase was driven by an increase in labor related expenses in support of our higher sales volumes, partially offset by lower marketing spending in fiscal year 2010. As a percentage of coffeehouse sales, operating expenses decreased to 41.1% in fiscal year 2010 from 41.8% in fiscal year 2009 primarily due to leveraging labor expense on higher sales.

 

Depreciation and amortization.  Depreciation and amortization decreased $1.9 million, or 13.2%, to $12.2 million in fiscal year 2010, from $14.1 million in fiscal year 2009. As a percentage of coffeehouse sales, depreciation and amortization decreased to 5.3% in fiscal year 2010 from 6.2% in fiscal year 2009. Fiscal year 2010 depreciation and amortization decreased due to a lower depreciable asset base as a result of reduced capital spending in fiscal years 2010 and 2009.

 

General and administrative expenses.  General and administrative expenses increased $0.4 million, or 4.8%, to $8.4 million in fiscal year 2010 from $8.0 million in fiscal 2009. The increase was largely due to adding key positions in fiscal year 2010, primarily related to new store development and field management. As a percentage of coffeehouse sales, general and administrative expenses increased to 3.6% in fiscal year 2010 from 3.5% in fiscal year 2009.

 

Commercial

 

 

The commercial segment sells high-quality premium whole bean and ground coffee to grocery stores, mass merchandisers, club stores, office coffee and foodservice providers, hotels, entertainment venues and on-line customers. In addition, we sell our blended coffees and license our brand to Keurig for sale and use in its K-Cup single serve line of business. Keurig, an industry leader in single cup brewing technology, facilitates the sale and

distribution of Caribou K-Cups. As of January 2, 2011, Caribou Coffee can be found in over 40 states and in 7,500 stores through our Caribou-managed sales channel. Caribou Coffee K-Cups are found in, we believe, an additional 17,000 stores across all 50 states.

 

Sales

 

Sales increased $14.4 million, or 52.3%, to $42.0 million in fiscal 2010 from $27.6 million in fiscal 2009. When normalizing for the extra week in fiscal year 2009, commercial sales increased $15.1 million, or 56.1%. This increase was primarily attributable to the incremental sales to new and existing customers, primarily grocery stores, as well as Keurig. The increase in sales to Caribou-managed accounts was primarily driven by increased distribution gained in the second half of 2009. The increase in sales to Keurig has primarily been driven by an increased sales penetration of Keurig single-cup brewing machines and K-Cup replenishment purchases.

 

Costs and Expenses

 

Cost of sales and related occupancy costs.  Cost of sales and related occupancy costs increased $10.3 million, or 55.4%, to $28.8 million in fiscal year 2010, from $18.5 million in fiscal year 2009, driven by our increased sales volume. As a percentage of net sales, cost of sales and related occupancy costs increased to 68.5% in fiscal year 2010, from 67.1% in fiscal year 2009 due to sales mix changes.

 

Operating expenses.  Operating expenses increased $0.8 million, or 20.5%, to $4.6 million in fiscal year 2010, from $3.8 million in fiscal year 2009. This increase was attributable to labor and marketing investments as we build out our team and infrastructure to support our growing commercial segment. As a percentage of sales, operating expenses decreased to 11.0% in fiscal year 2010 from 13.8% in fiscal year 2009 due to leveraging fixed components of operating expenses over higher sales.

 

Franchise

 

 

The franchise segment franchises our brand to partners to operate Caribou Coffee branded kiosks and coffeehouses in domestic and international markets. In addition, we sell Caribou Coffee branded products to our partners for resale in these franchised locations. As of January 2, 2011, there were 131 franchised locations in the U.S and international markets.

 

Sales

 

Sales increased $2.1 million or 27.7% to $9.9 million in fiscal 2010 from $7.7 million in fiscal 2009. When adjusting for the extra week in fiscal year 2009, sales increased $2.3 million, or 30.5%. This increase was primarily attributable to franchise fees, royalties and product sales from the previously existing franchise locations and 10 net new franchise locations opened during the year.

 

Costs and Expenses

 

Cost of sales and related occupancy costs.  Cost of sales and related occupancy costs increased $1.3 million, or 31.0%, to $5.7 million in fiscal year 2010, from $4.3 million in fiscal year 2009. As a percentage of sales, cost of sales and related occupancy costs increased to 57.6% in fiscal year 2010, from 56.1% in fiscal year 2009. 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 franchise sales.

 

Operating expenses.  Operating expenses increased $0.1 million, or 7.9%, to $1.2 million in fiscal year 2010, from $1.1 million in fiscal year 2009. As a percentage of sales, operating expenses decreased to 12.4% in fiscal year 2010 from 14.7% in fiscal year 2009. The decrease in operating expenses as a percentage of sales was primarily due to leverage obtained on certain fixed segment expenses and a decrease in administrative support costs.

 

Unallocated Corporate

 

 

General and administrative expenses.  Unallocated general and administrative expenses increased $1.9 million, or 9.5%, to $21.0 million in fiscal year 2010 from $19.1 million in fiscal 2009. As a percentage of total net sales, unallocated general and administrative expenses increased to 7.4% of total net sales in fiscal year 2010, from 7.3% of total net sales in fiscal year 2009. The increase was driven by an increase in labor-related expenses as we build out key positions in fiscal year 2010 related to human resources, marketing and product management. In addition, the majority of costs incurred for our secondary stock offering in December 2010 were reported in unallocated general and administrative expenses.

 

Liquidity and Capital Resources

 

Cash and cash equivalents as of January 2, 2011 were $23.1 million, compared to cash and cash equivalents of $23.6 million as of January 3, 2010. Generally, our principal requirements for cash are 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 expanding production capacity to meet the growth demands of our business. Currently, our requirements for capital have been funded through cash flow from operations.

 

For fiscal years 2010 and 2009, we generated cash flow from operating activities of $7.5 million and $15.6 million, respectively. The decrease in the amount of cash provided by operating activities during fiscal year 2010 was the result of a working capital usage of $17.4 million, primarily driven by higher green coffee inventory as we grew our physical inventory to hedge against rising coffee commodity costs, partially offset by higher EBITDA during fiscal year 2010.

 

A portion of our cash flow generated from operating activities in each of the last two fiscal years has been invested in capital expenditures. Total capital expenditures for fiscal year 2010 were $8.0 million, compared to capital expenditures of $3.0 million for fiscal year 2009.

 

Net cash provided by financing activities was $0.2 million and $0.1 million for fiscal years 2010 and 2009, respectively. As of fiscal year end 2010, we had a revolving credit agreement for $25.0 million, of which $15.0 million is immediately available and an option to increase the amount available by an additional $10.0 million under terms to be mutually agreed. There were no funds drawn on the credit facility during the years 2010 and 2009 and we do not anticipate utilizing the credit facility for our current operating needs.

 

Our future capital requirements and the adequacy of available funds will depend on many factors, including the pace of our retail coffeehouse expansion, growth in our commercial segment and overall company operating performance. We expect capital expenditures for fiscal 2011 to be in the range of $13.0 to $15.0 million. We believe that our current liquidity and cash flow from operations will provide sufficient liquidity to fund our operations for at least 12 months.

New Accounting Standards

 

In January 2010, the FASB issued further guidance under ASC No. 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 requires disclosures about the transfers of investments between levels in the fair value hierarchy and disclosures relating to the reconciliation of fair value measurements using significant unobservable inputs (level 3 investments). ASC 820 is effective for the fiscal years and interim periods beginning after December 15, 2010. The Company will adopt the update on January 3, 2011 and expects that ASC 820 will not have a material impact on the Company’s consolidated financial statements.

 

In June 2009, the FASB issued guidance which amends certain ASC concepts related to consolidation of variable interest entities. Among other accounting and disclosure requirements, this guidance replaces the quantitative-based risks and rewards calculation for determining which enterprise has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity and the obligation to absorb losses of the entity or the right to receive benefits from the entity. We adopted this guidance beginning January 4, 2010. The adoption of this guidance did not have an impact on our financial statements.

 

Off-Balance Sheet Arrangements

 

We lease retail coffeehouses, roasting and distribution facilities and office space under operating leases expiring through March 2021. Most lease agreements contain renewal options and rent escalation clauses. Certain leases provide for contingent rentals based upon gross sales. The average remaining lease lives in our leased real estate portfolio is less than five years and the aggregate minimum future rental payments under these agreements as of January 2, 2011 are approximately $89 million.

 

At January 2, 2011 we had fixed price inventory purchase commitments, primarily for green coffee, aggregating approximately $26.9 million. These commitments are for less than one year.

 

Inflation

 

The primary inflationary factors affecting our business are costs associated with coffee beans, dairy, freight, 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 (the Company) as of January 2, 2011 and January 3, 2010, 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 audits 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 as of January 2, 2011 and January 3, 2010, 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.

 

ERNST & YOUNG LLP

 

Minneapolis, Minnesota

March 25, 2011

Caribou Coffee Company, Inc. and Affiliates

Consolidated Balance Sheets

 

 

See accompanying notes.

Caribou Coffee Company, Inc. and Affiliates

Consolidated Statements of Operations

 

 

See accompanying notes.

Caribou Coffee Company, Inc. and Affiliates

Consolidated Statements of Changes in Shareholders’ Equity

 

 

See accompanying notes.

Caribou Coffee Company, Inc. and Affiliates

Consolidated Statements of Cash Flows