##### Table of Contents



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 July 2, 2006.
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from               to                 .
 Commission File Number: 000-51535
 
 CARIBOU COFFEE COMPANY, INC.
 (Exact Name of Registrant as Specified in Its Charter)
 Minnesota
    
    41-1731219(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)3900 Lakebreeze Avenue North
    
    55429Brooklyn Center, Minnesota
    
    (Zip Code)(Address of principal executive offices)
 (763) 592-2200
 Not Applicable
 þ o
  o o þ
 o þ
  Title
    
    Shares Outstanding as of August 9, 2006Common Stock, par value $0.01 per share
    
    19,286,425




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##### 



CARIBOU COFFEE COMPANY, INC.
 FORM 10-Q
 For the Thirteen and Twenty-Six Week Periods Ended July 2, 2006
 Table of Contents
 PART I. FINANCIAL INFORMATIONItem 1.
    
    Financial Statements
    
    
    3Condensed Consolidated Statements of Operations
    
    
    3Condensed Consolidated Balance Sheets
    
    
    4Condensed Consolidated Statements of Cash Flows
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    19Item 4.
    
    Controls and Procedures
    
    
    20PART II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    21Item 1A.
    
    Risk Factors
    
    
    21Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    21Item 3.
    
    Defaults Upon Senior Securities
    
    
    22Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    22Item 5.
    
    Other Information
    
    
    22Item 6.
    
    Exhibits
    
    
    22Signature
    
    
    
    
    23Certification Pursuant to Section 302Certification Pursuant to Section 302Certification Pursuant to Section 906Certification Pursuant to Section 906
  2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 CARIBOU COFFEE COMPANY, INC. AND AFFILIATES
(A Majority Owned Subsidiary of Caribou Holding Company Limited)
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Thirteen Weeks Ended
    
    
    Twenty-Six Weeks EndedJuly 3,
    
    
    July 2,
    
    
    July 3,
    
    
    July 2,2005
    
    
    2006
    
    
    2005
    
    
    2006(Unaudited)Coffeehouse sales
    
    $
    46,833,925
    
    
    $
    54,210,429
    
    
    $
    90,831,786
    
    
    $
    107,494,251Other sales
    
    
    1,080,014
    
    
    
    2,373,564
    
    
    
    2,121,832
    
    
    
    5,055,954Total net sales
    
    
    47,913,939
    
    
    
    56,583,993
    
    
    
    92,953,618
    
    
    
    112,550,205Cost of sales and related occupancy costs
    
    
    19,371,860
    
    
    
    23,764,186
    
    
    
    37,416,701
    
    
    
    47,030,254Operating expenses
    
    
    19,404,425
    
    
    
    23,107,034
    
    
    
    37,776,602
    
    
    
    46,207,890Opening expenses
    
    
    469,502
    
    
    
    367,303
    
    
    
    777,821
    
    
    
    782,554Depreciation and amortization
    
    
    3,659,774
    
    
    
    5,265,173
    
    
    
    7,346,712
    
    
    
    10,070,406General and administrative expenses
    
    
    7,014,999
    
    
    
    6,239,910
    
    
    
    11,615,951
    
    
    
    12,341,088Closing expense and disposal of assets
    
    
    119,771
    
    
    
    263,391
    
    
    
    120,668
    
    
    
    271,389Operating loss
    
    
    (2,126,392
    )
    
    
    (2,423,004
    )
    
    
    (2,100,837
    )
    
    
    (4,153,376
    )Other income (expense):Other income
    
    
    173,406
    
    
    
    241,615
    
    
    
    366,849
    
    
    
    564,565Interest income
    
    
    25,613
    
    
    
    133,389
    
    
    
    26,978
    
    
    
    320,392Interest expense
    
    
    (488,104
    )
    
    
    (186,096
    )
    
    
    (912,337
    )
    
    
    (333,838
    )Loss before provision for income taxes
and minority interest
    
    
    (2,415,477
    )
    
    
    (2,234,096
    )
    
    
    (2,619,347
    )
    
    
    (3,602,257
    )Provision for income taxes
    
    
    150,000
    
    
    
    135,317
    
    
    
    301,323
    
    
    
    282,356Loss before minority interest
    
    
    (2,565,477
    )
    
    
    (2,369,413
    )
    
    
    (2,920,670
    )
    
    
    (3,884,613
    )Minority interest
    
    
    103,044
    
    
    
    15,740
    
    
    
    185,066
    
    
    
    72,605Net loss
    
    $
    (2,668,521
    )
    
    $
    (2,385,153
    )
    
    $
    (3,105,736
    )
    
    $
    (3,957,218
    )Basic and diluted net loss per share
    
    $
    (0.19
    )
    
    $
    (0.12
    )
    
    $
    (0.23
    )
    
    $
    (0.21
    )Basic and diluted weighted average
number of shares outstanding
    
    
    13,806,753
    
    
    
    19,280,806
    
    
    
    13,804,387
    
    
    
    19,277,454
  3




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##### Table of Contents



CARIBOU COFFEE COMPANY, INC. AND AFFILIATES
(A Majority Owned Subsidiary of Caribou Holding Company Limited)
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 January 1,
    
    
    July 2,2006
    
    
    2006(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    33,846,111
    
    
    $
    18,498,527Accounts receivable (net of allowance for doubtful accounts of
approximately $237,595 and $13,943 at January 1, 2006 and July 2, 2006)
    
    
    1,137,120
    
    
    
    1,266,520Other receivables
    
    
    2,260,254
    
    
    
    1,030,593Income tax receivable
    
    
    135,750
    
    
    
    Inventories
    
    
    11,182,512
    
    
    
    10,196,390Prepaid expenses and other current assets
    
    
    1,251,555
    
    
    
    1,613,617Total current assets
    
    
    49,813,302
    
    
    
    32,605,647Property and equipment, net of accumulated depreciation and amortization
    
    
    96,022,720
    
    
    
    98,148,226Notes receivable
    
    
    64,531
    
    
    
    56,472Restricted cash
    
    
    321,030
    
    
    
    315,352Other assets
    
    
    1,738,717
    
    
    
    1,544,345Total assets
    
    $
    147,960,300
    
    
    $
    132,670,042LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    14,553,743
    
    
    $
    7,683,888Accrued compensation
    
    
    5,462,657
    
    
    
    4,826,808Accrued expenses
    
    
    8,504,552
    
    
    
    6,481,300Deferred revenue
    
    
    8,165,260
    
    
    
    5,416,556Total current liabilities
    
    
    36,686,212
    
    
    
    24,408,552Asset retirement liability
    
    
    760,997
    
    
    
    811,921Deferred rent liability
    
    
    10,485,177
    
    
    
    11,254,000Deferred revenue
    
    
    2,964,000
    
    
    
    2,912,000Minority interests in affiliates
    
    
    138,159
    
    
    
    126,191Total long term liabilities
    
    
    14,348,333
    
    
    
    15,104,112Commitments and contingenciesShareholders equity:Preferred stock, par value $.01, 20,000,000 shares authorized; no
shares issued and outstanding
    
    
    
    
    
    
    Common stock, par value $.01, 200,000,000 shares authorized; 19,269,133
and 19,283,759 shares issued and outstanding at January 1, 2006 and
July 2, 2006, respectively
    
    
    192,699
    
    
    
    192,838Treasury stock
    
    
    (9,011
    )
    
    
    Additional paid-in capital
    
    
    121,626,855
    
    
    
    121,806,546Accumulated deficit
    
    
    (24,884,788
    )
    
    
    (28,842,006
    )Total shareholders equity
    
    
    96,925,755
    
    
    
    93,157,378Total liabilities and shareholders equity
    
    $
    147,960,300
    
    
    $
    132,670,042
  4




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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
 Twenty-Six Weeks EndedJuly 3,
    
    
    July 2,2005
    
    
    2006(Unaudited)Operating activitiesNet loss
    
    $
    (3,105,736
    )
    
    $
    (3,957,218
    )Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:Depreciation and amortization
    
    
    8,196,177
    
    
    
    11,047,983Amortization of deferred financing fees
    
    
    164,197
    
    
    
    172,196Minority interests in affiliates
    
    
    185,066
    
    
    
    72,605Provision for closing expense and asset disposals
    
    
    12,668
    
    
    
    271,389Share-based compensation
    
    
    
    
    
    
    175,000Non cash compensation
    
    
    987,750
    
    
    
    Non cash accretion expense
    
    
    
    
    
    
    50,924Changes in operating assets and liabilities:Accounts receivable and other receivables
    
    
    (365,591
    )
    
    
    1,108,321Income tax receivable
    
    
    197,753
    
    
    
    135,750Inventories
    
    
    (1,839,568
    )
    
    
    986,122Prepaid expenses and other assets
    
    
    (555,628
    )
    
    
    (334,208
    )Accounts payable
    
    
    2,147,034
    
    
    
    (6,869,855
    )Accrued compensation
    
    
    (141,011
    )
    
    
    (635,849
    )Accrued expenses
    
    
    (46,417
    )
    
    
    571,201Deferred revenue
    
    
    (1,047,039
    )
    
    
    (2,800,704
    )Net cash provided (used) by operating activities
    
    
    4,789,655
    
    
    
    (6,343
    )Investing activitiesPayments for property and equipment
    
    
    (13,025,995
    )
    
    
    (15,270,509
    )Net cash used in investing activities
    
    
    (13,025,995
    )
    
    
    (15,270,509
    )Financing activitiesBorrowings under revolving credit facility
    
    
    4,000,000
    
    
    
    Distribution of minority interests earnings
    
    
    (171,942
    )
    
    
    (84,573
    )IPO Expenses
    
    
    
    
    
    
    (69,292
    )Issuance of common stock
    
    
    8,000
    
    
    
    74,122Repurchase of common stock
    
    
    
    
    
    
    (11,651
    )Sale of treasury stock
    
    
    
    
    
    
    20,662Deferred financing fees paid
    
    
    (70,461
    )
    
    
    Net cash provided (used) by financing activities
    
    
    3,765,597
    
    
    
    (70,732
    )Decrease in cash and cash equivalents
    
    
    (4,470,743
    )
    
    
    (15,347,584
    )Cash and cash equivalents at beginning of period
    
    
    7,618,470
    
    
    
    33,846,111Cash and cash equivalents at end of period
    
    $
    3,147,727
    
    
    $
    18,498,527Supplemental disclosure of cash flow informationNoncash financing and investing transactions:Accrual for leasehold improvements, furniture, and equipment
    
    $
    792,914
    
    
    $
    1,507,696
  5




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##### Table of Contents



CARIBOU COFFEE COMPANY, INC. AND AFFILIATES
(A Majority Owned Subsidiary of Caribou Holding Company Limited)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 1. Basis of Presentation
   Principles of Consolidation
  Use of Estimates
  Fiscal Year End
   6




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2. Summary of Significant Accounting Policies
 Revenue Recognition
    Operating Leases and Rent Expense
 Accounting for Leases, Accounting for Operating Leases With Scheduled Rent Increases.
 Stock Compensation
  Share-Based Payment Accounting for Stock Issued to Employees
 Accounting for Stock-Based Compensation
 3. Recent Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes Accounting for Income Taxes
 7




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4. Coffeehouse Closing and Asset Disposals
 Accounting for the Impairment or Disposal of
Long-Lived Assets.
  Thirteen Weeks Ended
    
    

Twenty-Six
Weeks EndedJuly 3,
    
    
    July 2,
    
    
    July 3,
    
    
    July 2,2005
    
    
    2006
    
    
    2005
    
    
    2006(Unaudited)Coffeehouse closures
    
    
    2
    
    
    
    2
    
    
    
    2
    
    
    
    4Amount charged to
operations for closed
coffeehouses:Cash closure costs
    
    $
    108,000
    
    
    $
    
    
    
    $
    108,000
    
    
    $
    Net book value of
closed coffeehouse
property and equipment
    
    
    
    
    
    
    173,956
    
    
    
    
    
    
    
    173,956Amount charged to
operations for other
property and equipment
write-offs
    
    
    11,771
    
    
    
    49,435
    
    
    
    12,668
    
    
    
    57,433Amount charged to
operations for costs to
consolidate facilities
    
    
    
    
    
    
    40,000
    
    
    
    
    
    
    
    40,000Coffeehouse closing
expense and disposal of
assets
    
    $
    119,771
    
    
    $
    263,391
    
    
    $
    120,668
    
    
    $
    271,389Results of operations
for unprofitable
coffeehouses
(coffeehouses with
operating losses)
    
    $
    1,355,299
    
    
    $
    3,141,042
    
    
    $
    2,865,335
    
    
    $
    5,435,124Depreciation expense
related to charges for
impaired assets
    
    $
    
    
    
    $
    346,000
    
    
    $
    134,000
    
    
    $
    428,000
 5. Inventories
  January 1,
    
    
    July 2,2006
    
    
    2006(Unaudited)Coffee
    
    $
    5,048,815
    
    
    $
    3,847,140Other merchandise held for sale
    
    
    3,311,014
    
    
    
    3,187,913Supplies
    
    
    2,822,683
    
    
    
    3,161,337$
    11,182,512
    
    
    $
    10,196,390
  8




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6. Equity and Share-Based Compensation
     Thirteen weeks
    
    
    Twenty-sixended
    
    
    weeks endedJuly 3,
    
    
    July 3,2005
    
    
    2005(Unaudited)
    
    
    (Unaudited)Net loss, as reported
    
    $
    (2,668,521
    )
    
    $
    (3,105,736
    )Deduct: Share-based employee
compensation expense determined under
fair value based method for all
awards, net of related tax effects
    
    
    (58,013
    )
    
    
    (108,668
    )Pro forma net loss
    
    $
    (2,726,534
    )
    
    $
    (3,214,404
    )Basic and diluted net loss per shareAs reported
    
    $
    (0.19
    )
    
    $
    (0.23
    )Pro forma
    
    $
    (0.20
    )
    
    $
    (0.23
    )
  Thirteen weeks Ended
    
    Twenty-Six weeks EndedJuly 3,
    
    July 2,
    
    July 3,
    
    July 2,2005
    
    2006
    
    2005
    
    2006Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expected volatility
    
    
    0
    %
    
    
    49
    %
    
    
    0
    %
    
    
    50
    %Risk free interest rate
    
    
    3.84
    %
    
    
    4.97
    %
    
    
    3.84
    %
    
    
    4.76
    %Expected life
    
    
    5
    
    
    
    5
    
    
    
    5
    
    
    
    5
 9




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Number of
    
    Weighted Average
    
    Weighted AverageShares
    
    Exercise Price
    
    Contract LifeBalance at January 1, 2006
    
    
    2,204,199
    
    
    $
    7.21Granted
    
    
    194,256
    
    
    $
    9.73Exercised
    
    
    (10,997
    )
    
    $
    5.85Forfeited
    
    
    (11,628
    )
    
    $
    8.05Outstanding at April 2, 2006
    
    
    2,375,830
    
    
    $
    7.41Granted
    
    
    38,500
    
    
    $
    9.00Exercised
    
    
    (4,931
    )
    
    $
    6.17Forfeited
    
    
    (27,560
    )
    
    $
    8.11Balance at July 2, 2006
    
    
    2,381,839
    
    
    $
    7.43
    
    
    7.39 YrsExercisable at July 2, 2006
    
    
    1,183,425
    
    
    $
    6.34
    
    
    6.21 Yrs
   Weighted AverageGrant Date FairNumber of Shares
    
    ValueUnvested at January 1, 2006
    
    
    1,106,398
    
    
    $
    8.15Granted
    
    
    194,256
    
    
    $
    9.73Vested
    
    
    (30,504
    )
    
    $
    6.54Forfeited
    
    
    (10,962
    )
    
    $
    8.19Unvested at April 2, 2006
    
    
    1,259,188
    
    
    $
    8.43Granted
    
    
    38,500
    
    
    $
    9.00Vested
    
    
    (77,977
    )
    
    $
    7.38Forfeited
    
    
    (21,297
    )
    
    $
    8.42Unvested at July 2, 2006
    
    
    1,198,414
    
    
    $
    8.52
 7. Income Taxes
  10




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8. Net Loss Per Share
  Thirteen Weeks Ended
    
    
    Twenty-Six Weeks EndedJuly 3,
    
    
    July 2,
    
    
    July 3,
    
    
    July 2,2005
    
    
    2006
    
    
    2005
    
    
    2006Net loss
    
    $
    (2,668,521
    )
    
    $
    (2,385,153
    )
    
    $
    (3,105,736
    )
    
    $
    (3,957,218
    )Weighted average common shares
outstanding(for basic and diluted
calculation)
    
    
    13,806,753
    
    
    
    19,280,806
    
    
    
    13,804,387
    
    
    
    19,277,454Basic and diluted net loss per share
    
    $
    (0.19
    )
    
    $
    (0.12
    )
    
    $
    (0.23
    )
    
    $
    (0.21
    )
  9. Commitments and Contingencies
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
  FORWARD-LOOKING STATEMENTS
  11




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Overview
     Critical Accounting Policies
  Stock options. Accounting for Stock Issued to
 12




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, Share-Based Payment Accounting for Stock-Based Compensation
 Fiscal Periods
  Thirteen Weeks Ended July 2, 2006 vs. Thirteen Weeks Ended July 3, 2005
 Results of Operations
 :
 Thirteen Weeks Ended
    
    
    
    
    
    
    Thirteen Weeks EndedJuly 3,
    
    
    July 2,
    
    
    %
    
    
    July 3,
    
    
    July 2,2005
    
    
    2006
    
    
    Change
    
    
    2005
    
    
    2006Statement of Operations Data:
    
    (In thousands)
    
    
    
    
    
    
    As a % of total net salesNet sales:Coffeehouse
    
    $
    46,834
    
    
    $
    54,210
    
    
    
    15.8
    %
    
    
    97.7
    %
    
    
    95.8
    %Other
    
    
    1,080
    
    
    
    2,374
    
    
    
    119.8
    %
    
    
    2.3
    %
    
    
    4.2
    %Total net sales
    
    
    47,914
    
    
    
    56,584
    
    
    
    18.1
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales and related occupancy costs
    
    
    19,372
    
    
    
    23,764
    
    
    
    22.7
    %
    
    
    40.4
    %
    
    
    42.0
    %Operating expenses
    
    
    19,404
    
    
    
    23,107
    
    
    
    19.1
    %
    
    
    40.5
    %
    
    
    40.8
    %Opening expenses
    
    
    469
    
    
    
    368
    
    
    
    (21.8
    )%
    
    
    1.0
    %
    
    
    0.7
    %Depreciation and amortization
    
    
    3,660
    
    
    
    5,265
    
    
    
    43.9
    %
    
    
    7.6
    %
    
    
    9.3
    %General and administrative expenses
    
    
    7,015
    
    
    
    6,240
    
    
    
    (11.0
    )%
    
    
    14.7
    %
    
    
    11.0
    %Closing expense and disposal of assets
    
    
    120
    
    
    
    263
    
    
    
    119.9
    %
    
    
    0.3
    %
    
    
    0.5
    %Operating income (loss)
    
    
    (2,126
    )
    
    
    (2,423
    )
    
    
    (13.9
    )%
    
    
    (4.5
    )%
    
    
    (4.3
    )%Other income (expense):Other income
    
    
    173
    
    
    
    242
    
    
    
    39.3
    %
    
    
    0.4
    %
    
    
    0.4
    %Interest income
    
    
    26
    
    
    
    133
    
    
    
    420.8
    %
    
    
    0.0
    %
    
    
    0.2
    %Interest expense
    
    
    (489
    )
    
    
    (186
    )
    
    
    (61.9
    )%
    
    
    (1.0
    )%
    
    
    (0.3
    )%Loss before provision for income taxes
and minority interest
    
    
    (2,416
    )
    
    
    (2,234
    )
    
    
    7.5
    %
    
    
    (5.1
    )%
    
    
    (4.0
    )%Provision for income taxes
    
    
    150
    
    
    
    135
    
    
    
    (9.8
    )%
    
    
    0.3
    %
    
    
    0.2
    %Loss before minority interest
    
    
    (2,566
    )
    
    
    (2,369
    )
    
    
    7.6
    %
    
    
    (5.4
    )%
    
    
    (4.2
    )%Minority interest
    
    
    103
    
    
    
    16
    
    
    
    (84.7
    )%
    
    
    0.2
    %
    
    
    0.0
    %Net loss
    
    $
    (2,669
    )
    
    $
    (2,385
    )
    
    
    10.6
    %
    
    
    (5.6
    )%
    
    
    (4.2
    )%
 Net Sales
  13




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Costs and Expenses
 Cost of sales and related occupancy costs.
 Operating expenses.
 Depreciation and amortization.
 General and administrative expenses.
 Closing
expenses and disposal of assets.
 Other Income.
 Interest income.
 Interest expense.
 14




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##### Table of Contents



Twenty-Six Weeks Ended July 2, 2006 vs. Twenty-Six Weeks Ended July 3, 2005
 Results of Operations
 (amounts in thousands):
 Twenty-Six Weeks Ended
    
    
    
    
    
    
    Twenty-Six Weeks EndedJuly 3,
    
    
    July 2,
    
    
    %
    
    
    July 3,
    
    
    July 2,2005
    
    
    2006
    
    
    Change
    
    
    2005
    
    
    2006Statement of Operations Data:
    
    (In thousands)
    
    
    
    
    
    
    As a % of total net salesNet sales:Coffeehouse
    
    $
    90,832
    
    
    $
    107,494
    
    
    
    18.3
    %
    
    
    97.7
    %
    
    
    95.5
    %Other
    
    
    2,122
    
    
    
    5,056
    
    
    
    138.3
    %
    
    
    2.3
    %
    
    
    4.5
    %Total net sales
    
    
    92,954
    
    
    
    112,550
    
    
    
    21.1
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales and related occupancy costs
    
    
    37,417
    
    
    
    47,030
    
    
    
    25.7
    %
    
    
    40.3
    %
    
    
    41.8
    %Operating expenses
    
    
    37,777
    
    
    
    46,208
    
    
    
    22.3
    %
    
    
    40.6
    %
    
    
    41.1
    %Opening expenses
    
    
    778
    
    
    
    783
    
    
    
    0.6
    %
    
    
    0.8
    %
    
    
    0.7
    %Depreciation and amortization
    
    
    7,347
    
    
    
    10,070
    
    
    
    37.1
    %
    
    
    7.9
    %
    
    
    8.9
    %General and administrative expenses
    
    
    11,616
    
    
    
    12,341
    
    
    
    6.2
    %
    
    
    12.5
    %
    
    
    11.0
    %Closing expense and disposal of assets
    
    
    121
    
    
    
    271
    
    
    
    124.9
    %
    
    
    0.1
    %
    
    
    0.2
    %Operating income (loss)
    
    
    (2,102
    )
    
    
    (4,153
    )
    
    
    (97.7
    )%
    
    
    (2.2
    )%
    
    
    (3.7
    )%Other income (expense):Other income
    
    
    367
    
    
    
    565
    
    
    
    53.9
    %
    
    
    0.4
    %
    
    
    0.5
    %Interest income
    
    
    27
    
    
    
    320
    
    
    
    1087.6
    %
    
    
    0.0
    %
    
    
    0.3
    %Interest expense
    
    
    (912
    )
    
    
    (334
    )
    
    
    (63.4
    )%
    
    
    (1.0
    )%
    
    
    (0.3
    )%Loss before provision for income taxes
and minority interest
    
    
    (2,620
    )
    
    
    (3,602
    )
    
    
    (37.5
    )%
    
    
    (2.8
    )%
    
    
    (3.2
    )%Provision for income taxes
    
    
    301
    
    
    
    282
    
    
    
    6.3
    %
    
    
    0.3
    %
    
    
    0.3
    %Loss before minority interest
    
    
    (2,921
    )
    
    
    (3,884
    )
    
    
    (33.0
    )%
    
    
    (3.1
    )%
    
    
    (3.5
    )%Minority interest
    
    
    185
    
    
    
    73
    
    
    
    (60.8
    )%
    
    
    0.2
    %
    
    
    0.0
    %Net loss
    
    $
    (3,106
    )
    
    $
    (3,957
    )
    
    
    (27.4
    )%
    
    
    (3.3
    )%
    
    
    (3.5
    )%
 Net Sales
  Costs and Expenses
 Cost of sales and related occupancy costs.
 Operating expenses.
 15




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Depreciation and amortization.
 General and administrative expenses.
 Closing expenses and disposal of assets.
 Other Income.
 Interest income.
 Interest expense.
 Liquidity and Capital Resources
   16




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Off-Balance Sheet Arrangements
  Key Financial Metrics
  17




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##### Table of Contents



Thirteen Weeks Ended
    
    Twenty-Six Weeks EndedJuly 3, 2005
    
    July 2, 2006
    
    July 3, 2005
    
    July 2, 2006(In thousands, except operating data)Non-GAAP Metrics:EBITDA(1)
    
    $
    2,034
    
    
    $
    3,569
    
    
    $
    6,276
    
    
    $
    7,387Adjusted EBITDA(1)
    
    $
    3,772
    
    
    $
    3,569
    
    
    $
    8,014
    
    
    $
    7,387Operating Data:Percentage change in comparable coffeehouse net
sales(2)
    
    
    8
    %
    
    
    (4
    )%
    
    
    9
    %
    
    
    (2
    )%Coffeehouses open at beginning of period
    
    
    314
    
    
    
    394
    
    
    
    304
    
    
    
    386Coffeehouses opened during the period
    
    
    13
    
    
    
    13
    
    
    
    23
    
    
    
    23Coffeehouses closed during the period
    
    
    (2
    )
    
    
    (2
    )
    
    
    (2
    )
    
    
    (4
    )Coffeehouses open at end of period
    
    
    325
    
    
    
    405
    
    
    
    325
    
    
    
    405Licensed coffeehouses open at end of period
    
    
    3
    
    
    
    11
    
    
    
    3
    
    
    
    11Total coffeehouses open at end of period
    
    
    328
    
    
    
    416
    
    
    
    328
    
    
    
    416
 
 (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.   
    
    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 278 coffeehouses from the beginning of fiscal 2001
through the end of the first twenty-six weeks of fiscal 2006. 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.
    
    In June 2005, we recorded a one-time compensation charge of $1.7 million in connection
with amending the terms of the employment agreement with our Chief Executive Officer. We
believe that it is useful to exclude this expense from Adjusted EBITDA because it was
non-recurring and was unrelated to our operations.Our management uses EBITDA and Adjusted EBITDA:
    
    As measurements of operating performance because they assist us in comparing our
operating performance on a consistent basis as they remove the impact of items not directly
resulting from our coffeehouse operations;
    
    For planning purposes, including the preparation of our internal annual operating budget;
 18




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##### Table of Contents




    
    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.
  Thirteen Weeks Ended
    
    
    Twenty-Six Weeks EndedJuly 3, 2005
    
    
    July 2, 2006
    
    
    July 3, 2005
    
    
    July 2, 2006(Thousands)Net loss
    
    $
    (2,669
    )
    
    $
    (2,385
    )
    
    $
    (3,106
    )
    
    $
    (3,957
    )Interest expense
    
    
    488
    
    
    
    186
    
    
    
    912
    
    
    
    334Interest income
    
    
    (26
    )
    
    
    (133
    )
    
    
    (27
    )
    
    
    (320
    )Depreciation and
amortization(1)
    
    
    4,091
    
    
    
    5,766
    
    
    
    8,196
    
    
    
    11,048Provision for income taxes
    
    
    150
    
    
    
    135
    
    
    
    301
    
    
    
    282EBITDA
    
    
    2,034
    
    
    
    3,569
    
    
    
    6,276
    
    
    
    7,387Amendment of employment
agreement
    
    
    1,738
    
    
    
    
    
    
    
    1,738
    
    
    
    Adjusted EBITDA
    
    $
    3,772
    
    
    $
    3,569
    
    
    $
    8,014
    
    
    $
    7,387
 
 (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 Risk.
 Primary Market Risk Exposures
  Financial Instruments and Derivative Commodity Instruments
  19




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Item 4. Controls and Procedures.
  20




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PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
   
 Item 1A. Risk Factors.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 Unregistered Sales of Equity Securities
  Use of Proceeds
  21




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##### Table of Contents



Item 3. Defaults Upon Senior Securities.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
   Votes in
    
    Votes
    
    Votes
    
    Votes
    
    BrokerElection of Directors:
    
    Favor
    
    Against
    
    Withheld
    
    Abstentions
    
    Non-VotesKip R. Caffey
    
    
    18,135,909
    
    
    
    0
    
    
    
    118,833
    
    
    
    0
    
    
    
    0Michael J. Coles
    
    
    17,945,632
    
    
    
    0
    
    
    
    309,110
    
    
    
    0
    
    
    
    0Wallace B. Doolin
    
    
    18,142,736
    
    
    
    0
    
    
    
    112,006
    
    
    
    0
    
    
    
    0Charles L. Griffith
    
    
    17,948,480
    
    
    
    0
    
    
    
    306,262
    
    
    
    0
    
    
    
    0Jeffrey C. Neal
    
    
    18,138,249
    
    
    
    0
    
    
    
    116,493
    
    
    
    0
    
    
    
    0Charles H. Ogburn
    
    
    17,949,816
    
    
    
    0
    
    
    
    304,926
    
    
    
    0
    
    
    
    0Ratification of
independent
registered public
accounting firm
    
    
    18,202,523
    
    
    
    47,068
    
    
    
    0
    
    
    
    5,151
    
    
    
    0
 
 Item 5. Other Information.
  
 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
    
    Description of Annual Support and Field Management Bonus Plan
(incorporated by reference to Exhibit 10.1 to the Companys Current
Report on Form 8-K filed May 26, 2006).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.
 22




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SIGNATURE
  CARIBOU COFFEE COMPANY, INC.By:
    /s/ George E. MileusnicGeorge E. MileusnicChief Financial Officer  23