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

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

Commission File Number: 000-51535

 

CARIBOU COFFEE COMPANY, INC.

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

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

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

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company þ
				(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

     On November 5, 2009, 19,813,027 shares of Registrant’s $0.01 par value common stock were outstanding.

 

 

CARIBOU COFFEE COMPANY, INC.

FORM 10-Q

For the Thirteen Week Period Ended September 27, 2009

Table of Contents

PART I. FINANCIAL INFORMATION
Item 1.		Financial Statements			3
		Condensed Consolidated Statements of Operations			3
		Condensed Consolidated Balance Sheets			4
		Condensed Consolidated Statement of Changes in Equity			5
		Condensed Consolidated Statements of Cash Flows			6
		Notes to Condensed Consolidated Financial Statements			7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			32
Item 4T.		Controls and Procedures			32
PART II. OTHER INFORMATION
Item 1.		Legal Proceedings			33
Item 1A.		Risk Factors			33
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			33
Item 3.		Defaults Upon Senior Securities			33
Item 4.		Submission of Matters to a Vote of Security Holders			33
Item 5.		Other Information			33
Item 6.		Exhibits			34
Signature					35
EX-31.1
EX-31.2
EX-32.1
EX-32.2

See accompanying notes.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

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

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

		Thirteen Weeks Ended								Thirty-Nine Weeks Ended
		September 27,				September 28,				September 27,				September 28,
		2009				2008				2009				2008
		(In thousands, except for per share amounts)
		(Unaudited)
Coffeehouse sales		$	54,479			$	54,731			$	162,637			$	168,618
Commercial and franchise sales			8,260				6,179				23,436				17,232
Total net sales			62,739				60,910				186,073				185,850
Cost of sales and related occupancy costs			27,849				26,992				81,438				80,209
Operating expenses			24,297				24,571				71,485				75,785
Opening expenses			6				62				20				198
Depreciation and amortization			3,465				10,208				10,776				20,771
General and administrative expenses			6,313				7,115				19,708				21,183
Closing expense and disposal of assets			123				646				179				4,524
Operating income (loss)			686				(8,684	)			2,467				(16,820	)
Other income (expense):
Interest income			10				2				17				23
Interest expense			(68	)			(81	)			(189	)			(714	)
Income (loss) before provision for income taxes			628				(8,763	)			2,295				(17,511	)
(Benefit from) provision for income taxes			(140	)			(36	)			(182	)			14
Net income (loss)			768				(8,727	)			2,477				(17,525	)
Less: Net income attributable to noncontrolling interest			114				39				309				79
Net Income (loss) attributable to Caribou Coffee Company, Inc.		$	654			$	(8,766	)		$	2,168			$	(17,604	)
Basic net income (loss) attributable to Caribou Coffee Company, Inc. common shareholders per share		$	0.03			$	(0.45	)		$	0.11			$	(0.91	)
Diluted net income (loss) attributable to Caribou Coffee Company, Inc. common shareholders per share		$	0.03			$	(0.45	)		$	0.11			$	(0.91	)
Basic weighted average number of shares outstanding			19,470				19,371				19,418				19,371
Diluted weighted average number of shares outstanding			20,169				19,371				19,830				19,371

See accompanying notes.

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

CONDENSED CONSOLIDATED BALANCE SHEETS

		September 27,				December 28,
		2009				2008
		In thousands, except per share amounts
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	19,086			$	11,060
Accounts receivable (net of allowance for doubtful accounts of $27 and $72 at September 27, 2009 and December 28, 2008, respectively)			5,381				5,311
Other receivables (net of allowance for doubtful accounts of $81 and $76 at September 27, 2009 and December 28, 2008, respectively)			1,297				916
Income tax receivable			78				60
Inventories			12,458				10,218
Prepaid expenses and other current assets			714				881
Total current assets			39,014				28,446
Property and equipment, net of accumulated depreciation and amortization			48,944				60,312
Restricted cash			327				327
Other assets			345				487
Total assets		$	88,630			$	89,572
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	9,774			$	8,229
Accrued compensation			6,057				6,241
Accrued expenses			7,344				8,317
Deferred revenue			5,763				9,473
Total current liabilities			28,938				32,260
Asset retirement liability			1,099				1,035
Deferred rent liability			8,653				9,245
Deferred revenue			2,330				2,538
Income tax liability			213				486
Total long term liabilities			12,295				13,304
Equity:
Caribou Coffee Company, Inc. Shareholders’ equity:
Preferred stock, par value $.01, 20,000 shares authorized; no shares issued and outstanding			—				—
Common stock, par value $.01, 200,000 shares authorized; 19,813 and 19,371 shares issued and outstanding at September 27, 2009 and December 28, 2008, respectively			198				194
Additional paid-in capital			126,381				125,222
Accumulated comprehensive loss			(36	)			—
Accumulated deficit			(79,311	)			(81,479	)
Total Caribou Coffee Company, Inc. shareholders’ equity			47,232				43,937
Noncontrolling interest			165				71
Total equity			47,397				44,008
Total liabilities and equity		$	88,630			$	89,572

See accompanying notes.

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

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(unaudited)
(in thousands)

		Common Stock								Additional								Accumulated
		Number of								Paid-In				Noncontrolling				Other				Accumulated
		Shares				Amount				Capital				Interest				Comprehensive Loss				Deficit				Equity
Balance, December 28, 2008		$	19,371				194			$	125,222			$	71			$	—			$	(81,479	)		$	44,008
Net income			—				—				—				309				—				2,168				2,477
Changes in fair value of derivative financial instruments			—				—				—				—				(36	)			—				(36	)
Comprehensive income																										$	2,441
Share based compensation			—				—				664				—				—				—				664
Options exercised			104				1				583				—				—				—				584
Restricted shares issued			338				3				(3	)			—				—				—				—
Distribution of noncontrolling interest			—				—				—				(195	)			—				—				(195	)
Purchase of noncontrolling interest			—				—				(85	)			(20	)			—				—				(105	)
Balance, September 27, 2009			19,813			$	198			$	126,381			$	165			$	(36	)		$	(79,311	)		$	47,397

See accompanying notes.

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

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

		Thirty-Nine Weeks Ended
		September 27,				September 28,
		2009				2008
		(In thousands)
		(Unaudited)
Operating activities
Net income (loss) attributable to Caribou Coffee Company, Inc.		$	2,168			$	(17,604	)
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:
Depreciation and amortization			12,360				22,387
Amortization of deferred financing fees			99				431
Noncontrolling interest			309				79
Provision for closing expense and asset disposals			9				553
Share-based compensation			664				420
Non cash accretion expense			64				28
Shareholder contribution			—				237
Changes in operating assets and liabilities:
Restricted cash			—				399
Accounts receivable and other receivables			(469	)			(240	)
Inventories			(2,240	)			(1,133	)
Prepaid expenses and other assets			241				908
Accounts payable			1,545				2,716
Accrued expenses and other liabilities			(2,250	)			(5,644	)
Deferred revenue			(3,918	)			(3,909	)
Net cash provided (used) by operating activities			8,582				(372	)
Investing activities
Payments for property and equipment			(845	)			(5,461	)
Proceeds from the disposal of property			36				—
Net cash used in investing activities			(809	)			(5,461	)
Financing activities
Borrowings under revolving credit facility			—				3,000
Payment of debt financing fees			(31	)			—
Issuance of common stock			584				—
Purchase of noncontrolling interest			(105	)			—
Distribution of noncontrolling interest			(195	)			(115	)
Net cash provided by financing activities			253				2,885
Increase (decrease) in cash and cash equivalents			8,026				(2,948	)
Cash and cash equivalents at beginning of period			11,060				9,886
Cash and cash equivalents at end of period		$	19,086			$	6,938

See accompanying notes.

CARIBOU COFFEE COMPANY, INC. AND AFFILIATES

(A Majority Owned Subsidiary of Caribou Holding Company Limited)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation

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

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

     Principles of Consolidation

     The Company’s consolidated financial statements include the accounts of Caribou Coffee Company, Inc., affiliates that it controls and a third party finance company (which exists for purposes of the Company’s revolving credit facility, as described in the Company’s Annual Report on Form 10-K) where the Company is the primary beneficiary in a variable interest entity. The affiliates are Caribou MSP Airport, a partnership in which the Company owns a 49% interest and that operates six coffeehouses, and Caribou Coffee Development Company, Inc., a licensor of Caribou Coffee branded coffeehouses. The Company controls the daily operations of Caribou Coffee Development Company, Inc. and accordingly consolidates their results of operations. The Company provided a loan to its partner in Caribou MSP Airport for all of the partner’s equity contribution to the venture. Consequently, the Company bears all the risk of loss but does not control all decisions that may have a significant effect on the success of the venture. Therefore, the Company consolidates the Caribou MSP Airport, as it is the primary beneficiary in this variable interest entity. Prior to December 31, 2008, the Company owned a 50% interest in Caribou Ventures, L.L.C (“Ventures”), a partnership that operated one coffeehouse. On December 31, 2008, the Company purchased the outstanding 50% interest in Ventures for $0.1 million. Prior to December 31, 2008, because the Company controlled the daily operations of Ventures, the results of operations were consolidated. All material intercompany balances and transactions between Caribou Coffee Company, Inc. and Caribou Ventures, L.L.C., Caribou MSP Airport, Caribou Coffee Development Company, Inc. and the third party finance company have been eliminated in consolidation.

     Use of Estimates

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

     Fiscal Year End

     The Company’s fiscal year ends on the Sunday falling nearest to December 31. Each fiscal year consists of four 13-week quarters in a 52-week year and three 13-week quarters and one 14-week fourth quarter in a 53-week year. Fiscal year 2009 will include 53 weeks. Each fiscal quarter reported herein consists of two four-week months and one five-week month.

     The Company’s sales are somewhat seasonal, with the fourth quarter accounting for the highest sales volumes. Operating results for the thirteen week and thirty-nine week periods ended September 27, 2009 are not necessarily indicative of future results that may be expected for the year ending January 3, 2010.

2. Summary of Significant Accounting Policies

     Revenue Recognition

     The Company recognizes retail coffeehouse revenue (coffeehouse sales) when payment is tendered at the point of sale. Sales tax collected from customers is presented net of amounts expected to be remitted to various tax jurisdictions. Accordingly, sales taxes have no effect on the Company’s reported net sales in the accompanying statements of operations. Additionally, revenues are recognized net of any discounts, returns, allowances and sales incentives, including coupon redemptions and rebates.

     Revenue from the sale of products to commercial, franchise or on-line customers (other sales) is recognized when ownership and price risk of the products are legally transferred to the customer, which is generally upon the shipment of goods. Revenues include any applicable shipping and handling costs invoiced to the customer, and the expense of such shipping and handling costs is included in cost of sales.

     The Company sells stored value cards of various denominations. Cash receipts related to stored value card sales are deferred when initially received and revenue is recognized when the card is redeemed and the related products are delivered to the customer. Such amounts are classified as a current liability on the Company’s consolidated balance sheets. The Company will honor all stored value cards presented for payment, however, the Company has determined that the likelihood of redemption is remote for certain card balances due to long periods of inactivity. In these circumstances, to the extent management determines there is no requirement for remitting balances to government agencies under unclaimed property laws, card and certificate balances may be recognized in the consolidated statements of operations. The Company uses the redemption recognition method and recognizes the estimated value of abandoned cards as a percentage of every stored value card redeemed and includes the amount in Coffeehouse sales. Such amounts represent the Company’s experience regarding unused balances related to stored value cards redeemed. The Company excludes stored value card balances sold in jurisdictions which require remittance of unused balances to government agencies under unclaimed property laws.

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

     Operating Leases and Rent Expense

     Certain of the Company’s lease agreements provide for scheduled rent increases during the lease term or for rental payments commencing at a date other than the date of initial occupancy. Rent expense is recorded on a straight-line basis over the initial lease term and renewal periods that are reasonably assured. The difference between rent expense and rent paid is recorded as deferred rent and is included in “accrued expenses” and “deferred rent liability” in the consolidated balance sheets. Contingent rents, including those based on a percentage of retail sales over stated levels, and rental payment increases based on a contingent future event are accrued over the respective contingency periods when the achievement of such targets or events are deemed to be probable by the Company.

3. Recent Accounting Pronouncements

     Effective July 1, 2009, the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) became the single official source of authoritative, nongovernmental generally accepted accounting principles (“GAAP”) in the United States. The historical GAAP hierarchy was eliminated and the ASC became the only level of authoritative GAAP, other than guidance issued by the Securities and Exchange Commission. Our accounting policies were not affected by the conversion to ASC. However, references to specific accounting standards in the footnotes to our consolidated financial statements have been changed to refer to the appropriate section of ASC.

     In September 2006, the FASB issued accounting guidance, which defines fair value, provides guidance for measuring fair value in GAAP and expands disclosures about fair value measurements. On December 31, 2007, the Company adopted these accounting rules for financial assets and liabilities. The Company adopted the the provisions related to non-financial assets and liabilities on December 29, 2008. The adoption of these accounting rules did not have a material impact on the Company’s consolidated statement of operations, cash flows or financial position.

     In December 2007, the FASB issued guidance establishing new standards that govern the accounting for and reporting of noncontrolling interests in partially owned subsidiaries. The Company adopted these accounting rules on December 29, 2008 and has accordingly retroactively applied the presentation and disclosure requirements for the existing noncontrolling interest for all periods presented.

     In March 2008, the FASB issued revised guidance requiring enhanced disclosures about an entity’s derivative instruments and hedging activities. The Company adopted these accounting rules on December 29, 2008. See Note 5 for the new disclosures.

     In May 2009, the FASB issued guidance intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Specifically, this standard sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This new accounting rule is effective for fiscal years and interim periods ended after June 15, 2009. The Company adopted this standard effective June 28, 2009 and has evaluated any subsequent events through November 5, 2009. There are no material subsequent events which would require recording or further disclosure.

     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. The Company will adopt this guidance in its first annual and interim reporting periods beginning after November 15, 2009. The Company has not determined the impact that this guidance may have on its financial statements.

4. Impairments, Coffeehouse Closings, Asset Disposals and Severance

     The Company reviews individual coffeehouses for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Recoverability is measured by a comparison of the carrying amount of the asset to future undiscounted net cash flows expected to be generated. There were no impairment charges recorded during the thirteen or thirty-nine week periods ended September 27, 2009. During the thirteen and thirty-nine week periods ended September 28, 2008, the Company recorded depreciation expense of $5.7 million and $7.5 million, respectively, for the impairment of coffeehouses in its retail segment. The Company recognizes lease exit costs and other expenses when a coffeehouse closes.

     Charges related to coffeehouse closures and disposal charges consist of the following (in thousands, except coffeehouse closures):

		Thirteen Weeks Ended								Thirty-Nine Weeks Ended
		September 27,				September 28,				September 27,				September 28,
		2009				2008				2009				2008
Coffeehouse closures			1				2				1				24
Amount charged to operations for closed coffeehouses:
Lease reserve non-cash		$	40			$	(857	)		$	(52	)		$	(272	)
Lease costs associated with lease termination-cash			73				1,286				220				3,971
Net book value of closed coffeehouse property and equipment			—				217				—				825
Amount charged to operations for other property and equipment write-offs			10				—				11				—
Coffeehouse closing expense and disposal of assets		$	123			$	646			$	179			$	4,524

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

		Balance at				Additions				Deductions
		Beginning of				Charged to				from				Balance at
Thirteen Weeks Ended:		Quarter				Expense				reserves				End of Quarter
September 27, 2009
Exit costs		$	212			$	83			$	73			$	222
Severance			234				—				141				93
Total		$	446			$	83			$	214			$	315

		Balance at				Additions				Deductions
		Beginning of				Charged to				from				Balance at
Thirteen Weeks Ended:		Quarter				Expense				reserves				End of Quarter
September 28, 2008
Exit costs		$	1,069			$	441			$	1,286			$	224
Severance			1,928				586				1,895				619
Total		$	2,997			$	1,027			$	3,181			$	843

		Balance at				Additions				Deductions
		Beginning of				Charged to				from				Balance at
Thirty-Nine Weeks Ended:		Year				Expense				reserves				End of Quarter
September 27, 2009
Exit costs		$	222			$	220			$	220			$	222
Severance			716				63				686				93
Total		$	938			$	283			$	906			$	315

		Balance at				Additions				Deductions
		Beginning of				Charged to				from				Balance at
Thirty-Nine Weeks Ended:		Year				Expense				reserves				End of Quarter
September 28, 2008
Exit costs		$	467			$	3,728			$	3,971			$	224
Severance			1,353				1,341				2,075				619
Total		$	1,820			$	5,069			$	6,046			$	843

     In the thirty-nine week period ended September 27, 2009, the Company recorded severance costs of $0.1 million related to severance provided to the Company’s Senior Vice President of Store Operations. During the thirty-nine weeks ended September 28, 2008, the Company accrued severance costs related to the Chief Financial Officer’s resignation and other eliminated positions in the amount of $1.3 million and included the amount in accrued compensation and general and administrative expense.

     The remaining amounts of severance accruals will be paid in the 4^th quarter of the 2009 fiscal year.

5. Derivative Financial Instruments

     The Company evaluates various strategies in managing its exposure to market-based risks, such as entering into hedging transactions to manage its exposure to fluctuating dairy commodity prices.

     The Company records all derivatives on the condensed consolidated balance sheets at fair value. For those cash flow hedges that have been designated and qualify as an effective accounting hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of other comprehensive income (“OCI”) and subsequently reclassified into net earnings when the hedged exposure affects net income. For those cash flow hedges that are not designated or do not qualify as an effective accounting hedge, the entire derivative gain or loss is recorded in earnings as incurred.

     As of September 27, 2009, the Company had accumulated net derivative losses of less than $0.1 million in other comprehensive income, all of which pertains to hedging instruments that will be realized within 12 months and will also continue to experience fair value changes before affecting earnings. Based on notional amounts, as of September 27, 2009 the Company had dairy commodity futures contracts representing approximately six hundred thousand gallons. The Company’s cash flow derivative instruments contain credit-risk-related contingent features. At September 27, 2009, the Company, in the normal course of business, has posted collateral of less than $0.1 million related to these contingent features.

     The following table presents the fair values of derivative instruments on the condensed consolidated balance sheets as of September 27, 2009 and December 28, 2008 (in thousands):

								Fair Value
				Fair Value				December 28,
Contract Type		Balance sheet Location		September 27, 2009				2008
Derivatives designated as hedging instruments
Cash flow commodity hedges		Accrued expenses		$	36			$	—
Derivatives not designated as hedging instruments
Cash flow commodity hedges		Accrued expenses			30				303
Total derivatives				$	66			$	303

     The following table presents the effect of derivative instruments on the condensed consolidated financial statements for the thirteen week and thirty-nine week periods ended September 27, 2009 and September 28, 2008 (in thousands):

		Gain/ (Loss) recognized in OCI
		Thirteen Weeks Ended						Thirty-Nine Weeks Ended
		September 27,				September 28,		September 27,				September 28,
Contract type		2009				2008		2009				2008
Cash flow commodity hedges(1)		$	56			$ —		$	(36	)		$ —

     During the thirteen and thirty-nine week periods ended September 27, 2009, the Company recognized less than $0.1 million in gains and $0.2 million in losses, respectively, related to commodity hedges not designated as hedging

instruments. During the thirteen and thirty-nine week periods ended September 27, 2009, the Company recognized less than $0.1 million in losses related to commodity hedges designated as hedging instruments. These losses are recorded in the condensed consolidated statements of operations as costs of goods sold and related occupancy expenses.

6. Fair Value Measurements

     Generally Accepted Accounting Principles define fair value, establish a framework for measuring fair value, and establish a fair value hierarchy that prioritizes the inputs used to measure fair value:

	•		Level 1: Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities traded in active markets.
	•		Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
	•		Level 3: Inputs that are generally unobservable. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

     The following table presents the financial assets and liabilities measured at fair value on a recurring basis as of September 27, 2009 (in thousands):

		Total
		September 27,
		2009				Level 1				Level 2				Level 3
Assets:
Cash and cash equivalents		$	19,086			$	19,086			$	—			$	—
Liabilities:
Derivatives		$	66			$	66			$	—			$	—

     Cash and cash equivalents include cash held at FDIC-insured financial institutions and highly liquid money market funds. The fair value of cash equivalents is determined using quoted market prices in active markets for identical assets, thus they are considered to be Level 1 instruments.

     Derivative assets consist of commodity futures contracts. Where applicable, the Company uses quoted prices in an active market for identical derivative assets and liabilities that are traded in exchanges. These derivative assets are included in Level 1.

7. Inventories

Inventories consist of the following (in thousands):

		September 27,				December 28,
		2009				2008
Coffee		$	5,914			$	4,652
Other merchandise held for sale			3,317				2,843
Supplies			3,227				2,723
		$	12,458			$	10,218

     At September 27, 2009 and December 28, 2008, the Company had committed to fixed price purchase contracts, primarily for green coffee, aggregating approximately $13.3 million and $16.3 million, respectively. These fixed price contracts are through December 2010.

8. Share-Based Compensation and Equity

     Stock-based Compensation

     The Company maintains stock 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 have been granted at prices equal to the fair market values as of the dates of grant. Options and restricted stock generally vest over four years and options generally expire ten years from the grant date. Stock-based compensation expense for the thirteen weeks ended September 27, 2009 and September 28, 2008 was approximately $0.2 million and $0.1 million, respectively, and for the thirty-nine weeks ended September 27, 2009 and September 28, 2008 totaled approximately $0.7 million and $0.4 million, respectively, and is included in general and administrative expenses in the condensed consolidated statements of operations.

Stock option activity during the period indicated is as follows (in thousands, except per share and life data):

										Weighted
						Weighted				Average
		Number of				Average				Contract
		Shares				Exercise Price				Life
Outstanding, December 28, 2008			2,452			$	5.16			7.89 Yrs
Granted			—			$	—
Exercised			—			$	—
Forfeited			(402	)		$	6.93
Outstanding, March 29, 2009			2,050			$	4.82			7.65 Yrs
Granted			10			$	2.22
Exercised			—			$	—
Forfeited			(213	)		$	8.51
Outstanding, June 28, 2009			1,847			$	4.37			7.32 Yrs
Granted			—			$	—
Exercised			(104	)		$	5.60
Forfeited			(13	)		$	6.75
Outstanding, September 27, 2009			1,730			$	4.28			7.80 Yrs
Options vested at September 27, 2009			724			$	6.18			6.53 Yrs

     Restricted Stock activity during the period indicated is as follows (in thousands, except per share and life data):

						Weighted				Weighted
						Average Grant				Average
		Number of				Date				Contract
		Shares				Fair Value				Life
Outstanding, December 28, 2008			—			$	—
Granted			338			$	5.50
Vested			(38	)		$	2.86
Forfeited			—			$	—
Outstanding, September 27, 2009			300			$	5.83			3.49 Yrs

     Comprehensive Income

     Comprehensive income was as follows (in thousands):

		Thirteen Weeks Ended								Thirty-Nine Weeks Ended
		September				September				September				September
		27, 2009				28, 2008				27, 2009				28, 2008
Net income (loss)		$	768			$	(8,727	)		$	2,477			$	(17,525	)
Unrealized holding gains (losses) on cash flow hedging instruments			56				—				(36	)			—
Total comprehensive income (loss)		$	824			$	(8,727	)		$	2,441			$	(17,525	)

9. Income Taxes

     During the thirteen and thirty-nine weeks ended September 27, 2009, the Company recognized a tax benefit of $0.1 million and $0.2 million, respectively. During the thirteen and thirty-nine weeks ended September 28, 2008, the Company recognized a tax benefit of $36 thousand and tax expense $14 thousand, respectively. After consideration of all evidence, both positive and negative, management has recorded a valuation allowance against its deferred income tax assets at September 27, 2009 due to the uncertainty of realizing such deferred income tax assets.

10. Net Income (Loss) Per Share

     Basic and diluted net income (loss) attributable to Caribou Coffee Company, Inc. common shareholders per share for the thirteen and thirty-nine week periods ended September 27, 2009 and September 28, 2008, were as follows (in thousands, except per share data):

		Thirteen Weeks Ended								Thirty-Nine Weeks Ended
		September 27,				September 28,				September 27,				September 28,
		2009				2008				2009				2008
Net income (loss) attributable to Caribou Coffee Company, Inc.		$	654			$	(8,766	)		$	2,168			$	(17,604	)
Weighted average common shares outstanding — basic			19,470				19,371				19,418				19,371
Dilutive impact of stock-based compensation			699				—				412				—
Weighted average common shares outstanding — dilutive			20,169				19,371				19,830				19,371
Basic net income (loss) per share		$	0.03			$	(0.45	)		$	0.11			$	(0.91	)
Diluted net income (loss) per share		$	0.03			$	(0.45	)		$	0.11			$	(0.91	)

     For the thirteen week periods ended September 27, 2009 and September 28, 2008, 0.4 million and 2.3 million stock options, respectively, and for the thirty-nine week periods ended September 27, 2009 and September 28, 2008, 0.6 million and 2.3 million stock options, respectively, were excluded from the calculation of shares applicable to diluted net income (loss) per share because their inclusion would have been anti-dilutive.

11. Master Franchise Agreement

     In November 2004, the Company entered into a Master Franchise Agreement with a franchisee. The agreement provides the franchisee the right to develop, subfranchise or operate 250 Caribou Coffee coffeehouses in 12 Middle Eastern countries. The Agreement expires in November 2012 and provides for certain renewal options.

     In connection with the agreement, the franchisee paid the Company a nonrefundable deposit aggregating $3.3 million. In addition to the deposit, the franchisee is obligated to pay the Company $20 thousand per franchised/subfranchised coffeehouse (initial franchise fee) opened for the first 100 Caribou Coffee Coffeehouses and $15 thousand for each additional franchised/subfranchised coffeehouse opened (after the first 100). The agreement provides for $5 thousand of the initial deposit received by the Company to be applied against the initial

franchise fee as discussed herein. Monthly royalty payments ranging from 3%-5% of gross sales are also due to the Company.

     The Company included $2.2 million of the deposit in long term liabilities as deferred revenue and $0.3 million in current liabilities as deferred revenue on its balance sheet as of September 27, 2009 and December 28, 2008. The initial deposit will be amortized into income on a pro rata basis along with the initial franchise fee payments received in connection with the execution of the franchise or subfranchise agreements at the time of the coffeehouse opening. The current portion of deferred revenue represents the franchise fees for the coffeehouses estimated to be opened during the subsequent twelve months per the development schedule in the Master Franchise Agreement. At September 27, 2009, there were 60 coffeehouses operating under this Agreement. The franchisee and certain owners of the franchisee also own indirect interests in Caribou Holding Company Limited.

12. Revolving Credit Facility

     On December 27, 2000, the Company entered into a sale leaseback arrangement with a third party finance company whereby from time to time the Company sells equipment to the finance company and immediately following the sale, it leases back all of the equipment it sold to such third party. The finance company funds its obligations under the lease financing arrangement through a revolving credit facility that it entered into with a commercial lender. The terms of the revolving credit facility are economically equivalent to the lease financing arrangement such that the amount of rent payments and unpaid acquisition costs under the lease financing arrangement are at all times equal to the interest and principal under the revolving credit facility. The Company consolidates the third party finance company, as the Company is the primary beneficiary in a variable interest entity due to the terms and provisions of the lease financing arrangement. Accordingly, the Company’s consolidated balance sheets include all assets and liabilities of the third party finance company under the captions property and equipment and revolving credit facility, respectively. The Company’s consolidated statements of operations include all the operations of the finance company including all interest expense related to the revolving credit facility. Notwithstanding this presentation, the Company’s obligations are limited to its obligations under the lease financing arrangement and the Company has no direct obligations under the revolving credit facility other than its obligations to the third party finance company. The third partying finance company was established solely for the purpose of facilitating the Company’s sale-leaseback arrangement. The finance company does not have any other assets or liabilities or income and expense other than those associated with the revolving credit facility. The lease financing arrangement has been structured to be consistent with Shari’ah principles.

     In February 2008, the Company amended the sale leaseback arrangement, reducing the maximum amount available to $20 million from $60 million and modified certain of the arrangement’s financial covenants. In connection with the amendment, the Company wrote-off $0.3 million, which is a portion of the costs associated with the acquisition of the sale leaseback arrangement, which is included in interest expense on the Company’s statement of operations. In November 2008, the Company amended the sale-leaseback arrangement to extend it to June 29, 2010, reduce the maximum available to $9 million and modify certain of the arrangement’s financial covenants. As of September 27, 2009 and December 28, 2008, the Company had no equipment leased under this arrangement.

13. Commitments and Contingencies

     On July 26, 2005, three of the Company’s former employees filed a lawsuit against us in the State of Minnesota District Court for Hennepin County seeking monetary and equitable relief from us under the Minnesota Fair Labor Standards Act, or the Minnesota FLSA, the federal FLSA and state common law. The suit primarily alleged that the Company misclassified its retail coffeehouse managers as exempt from the overtime provisions of the Minnesota FLSA and the federal FLSA and that these managers are therefore entitled to overtime compensation for each week in which they worked more than 40 hours from May 2002 to the present with respect to the claims under the federal FLSA and for weeks in which they worked more than 48 hours from May 2003 to the present with respect to the claims under the Minnesota FLSA. Plaintiffs sought payment of allegedly owed and unpaid overtime compensation, liquidated damages, interest and among other things, attorney’s fees and costs.

     On February 1, 2008, the Company entered into a Stipulation of Settlement (the “Stipulation”) to settle the lawsuit. The Stipulation provides for a gross settlement payment of $2.7 million, plus the employer’s share of payroll taxes. A partial settlement payment of $1.8 million was made in the first quarter of 2008 and the final settlement payment of $1.0 million was made in the first quarter of 2009.

     In addition, from time to time, the Company becomes involved in certain legal proceedings in the ordinary course of business. The Company does not believe that any such ordinary course legal proceedings to which it is currently a party will have a material adverse effect on its financial position or results of operations.

14. Segment Reporting

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

     Retail Coffeehouses

     The Company’s retail segment operated 413 company-owned coffeehouses located in 16 states and the District of Columbia, as of September 27, 2009. The coffeehouses offer customers high-quality gourmet coffee and espresso-based beverages, specialty teas, baked goods, whole bean coffee, branded merchandise and related products.

     Commercial

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

     Franchise

     The franchise segment sells franchises to operate Caribou Coffee brand coffeehouses to domestic and international franchisees. As of September 27, 2009, there were 112 franchised coffeehouses in U.S. and international markets.

     The tables below present information by operating segment for the thirteen and thirty-nine weeks ended September 27, 2009 and September 28, 2008 (in thousands):

Thirteen weeks ended September 27, 2009

		Retail												Unallocated
		Coffeehouses				Commercial				Franchise				Corporate				Total
Total net sales		$	54,479			$	6,557			$	1,703			$	—			$	62,739
Costs of sales and related occupancy costs			22,644				4,232				973				—				27,849
Operating expenses			23,004				1,010				283				—				24,297
Opening expenses			—				—				6				—				6
Depreciation and amortization			3,454				10				1				—				3,465
General and administrative expenses			1,742				—				—				4,571				6,313
Closing expense and disposal of assets			123				—				—				—				123
Operating income (loss)		$	3,512			$	1,305			$	440			$	(4,571	)		$	686
Identifiable assets		$	40,896			$	107			$	9			$	7,932			$	48,944

Thirteen weeks ended September 28, 2008

		Retail												Unallocated
		Coffeehouses				Commercial				Franchise				Corporate				Total
Total net sales		$	54,731			$	4,467			$	1,712			$	—			$	60,910
Costs of sales and related occupancy costs			23,080				2,858				1,054				—				26,992
Operating expenses			23,727				568				276				—				24,571
Opening expenses			56				—				6				—				62
Depreciation and amortization			10,199				9				—				—				10,208
General and administrative expenses			2,195				—				—				4,920				7,115
Closing expense and disposal of assets			646				—				—				—				646
Operating (loss) income		$	(5,172	)		$	1,032			$	376			$	(4,920	)		$	(8,684	)
Identifiable assets		$	55,097			$	141			$	13			$	9,551			$	64,802
Net impairment		$	5,743			$	—			$	—			$	—			$	5,743

Thirty-nine weeks ended September 27, 2009

		Retail												Unallocated
		Coffeehouses				Commercial				Franchise				Corporate				Total
Total net sales		$	162,637			$	17,996			$	5,440			$	—			$	186,073
Costs of sales and related occupancy costs			66,827				11,529				3,082				—				81,438
Operating expenses			68,023				2,582				880				—				71,485
Opening expenses			—				—				20				—				20
Depreciation and amortization			10,741				32				3				—				10,776
General and administrative expenses			5,591				—				—				14,117				19,708
Closing expense and disposal of assets			196				—				—				(17	)			179
Operating (loss) income		$	11,259			$	3,853			$	1,455			$	(14,100	)		$	2,467
Identifiable assets		$	40,896			$	107			$	9			$	7,932			$	48,944

Thirty-nine weeks ended September 28, 2008

		Retail												Unallocated
		Coffeehouses				Commercial				Franchise				Corporate				Total
Total net sales		$	168,618			$	12,502			$	4,730			$	—			$	185,850
Costs of sales and related occupancy costs			69,799				7,771				2,639				—				80,209
Operating expenses			73,149				1,548				1,088				—				75,785
Opening expenses			167				—				31				—				198
Depreciation and amortization			20,749				22				—				—				20,771
General and administrative expenses			6,976				—				—				14,207				21,183
Closing expense and disposal of assets			4,412				—				—				112				4,524
Operating (loss) income		$	(6,634	)		$	3,161			$	972			$	(14,319	)		$	(16,820	)
Identifiable assets		$	55,097			$	141			$	13			$	9,551			$	64,802
Net impairment		$	7,460			$	—			$	—			$	—			$	7,460

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

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations.

     The information in this Management’s Discussion and Analysis section should be read in conjunction with the unaudited condensed consolidated financial statements and the notes included in Item 1 of Part I of this Form 10-Q and the audited consolidated financial statements and notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended December 28, 2008 contained in the our Form 10-K (File No. [000-51535]).

FORWARD-LOOKING STATEMENTS

     Certain statements in this report and other written or oral statements made by or on behalf of Caribou Coffee are “forward-looking statements” within the meaning of the federal securities laws. Statements regarding future events and developments and our future performance, as well as management’s current expectations, beliefs, plans, estimates or projections relating to the future, are forward-looking statements within the meaning of these laws. These forward-looking statements are subject to a number of risks and uncertainties. Among the important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are: fluctuations in quarterly and annual results, incurrence of net losses, adverse effects of management focusing on implementation of a growth strategy, failure to develop and maintain the Caribou Coffee brand and other factors disclosed in the our filings with the Securities and Exchange Commission. We undertake no obligation to update any forward-looking statements in order to reflect events or circumstances that may arise after the date of this report.

Overview

     We are the second largest company-owned gourmet coffeehouse operator in the United States based on the number of coffeehouses. As of September 27, 2009, we had 525 retail locations, including 112 franchised. Our coffeehouses are located in 19 states, the District of Columbia and international markets. We focus on offering our customers high-quality gourmet coffee and espresso-based beverages, as well as specialty teas baked goods, whole bean coffee, branded merchandise and related products. Additionally, we sell our high-quality whole bean and ground coffee to grocery stores, mass merchandisers, office coffee providers, airlines, hotels, sports and entertainment venues, college campuses and on-line customers. We focus on creating a unique experience for customers through a combination of high-quality products, a comfortable and welcoming coffeehouse environment and customer service.

     We will continue our efforts to increase comparable coffeehouse sales, including increasing brand awareness through marketing efforts and introducing new products and promotions. As our comparable coffeehouse sales increase, we expect our operating margins at those coffeehouses to improve as we expect to have greater ability to leverage our fixed expense.

     During the thirteen and thirty-nine weeks ended September 27, 2009, our commercial segment experienced sales growth of 47% and 44% versus the thirteen and thirty-nine weeks ended September 28, 2008, respectively. Our growth strategy for the commercial segment is to continue to build our existing relationships with grocery stores and national office coffee providers and add new points of distribution for our gourmet whole bean and ground coffee.

     We intend to strategically expand our coffeehouse locations in our existing markets. During the three quarters of 2009, we opened 18 new coffeehouses. Our goal is to expand our concept into a nationally recognized brand in the United States by opening new company-operated coffeehouses and partnering with qualified developers to open franchised coffeehouses while adding select international locations through franchising.

Critical Accounting Policies

The preparation of our financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses during the periods presented. Our Annual Report on Form 10-K for the fiscal year ended December 28, 2008, (File No. [000-51535]) includes a summary of the critical accounting policies we believe are the most important to aid in understanding our financial condition and results of operations. We believe those critical accounting policies are significant or involve additional management judgment due to the sensitivity of the methods, assumptions, and estimates necessary in determining the related asset and liability amounts.

Fiscal Periods

     Our fiscal year ends on the Sunday falling nearest to December 31. Each fiscal year consists of four 13-week quarters in a 52-week year and three 13-week quarters and one 14-week fourth quarter in a 53-week year. Fiscal year 2009 will include 53 weeks. Each fiscal quarter reported herein consists of two four-week months and one five-week month.

     Our sales are somewhat seasonal, with the fourth quarter accounting for the highest sales volumes. Operating results for the thirteen week period ended September 27, 2009 are not necessarily indicative of future results that may be expected for the year ending January 3, 2010.

Thirteen Weeks Ended September 27, 2009 vs. Thirteen Weeks Ended September 28, 2008

Results of Operations

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

		Thirteen Weeks Ended												Thirteen Weeks Ended
		September 27,				September 28,				%				September 27,				September 28,
		2009				2008				Change				2009				2008
		(In thousands)												As a % of total net sales
Statement of Operations Data:
Net sales:
Coffeehouse		$	54,479			$	54,731				(0.5	)%			86.8	%			89.9	%
Commercial and franchise			8,260				6,179				33.7	%			13.2	%			10.1	%
Total net sales			62,739				60,910				3.0	%			100.0	%			100.0	%
Cost of sales and related occupancy costs			27,849				26,992				3.2	%			44.4	%			44.3	%
Operating expenses			24,297				24,571				(1.1	)%			38.7	%			40.3	%
Opening expenses			6				62				(90.3	)%			—	%			0.1	%
Depreciation and amortization			3,465				10,208				(66.1	)%			5.5	%			16.8	%
General and administrative expenses			6,313				7,115				(11.3	)%			10.1	%			11.7	%
Closing expense and disposal of assets			123				646				(81.0	)%			0.2	%			1.1	%
Operating income (loss)			686				(8,684	)			(107.9	)%			1.1	%			(14.3	)%
Other income (expense):
Interest income			10				2				400.0	%			—	%			—	%
Interest expense			(68	)			(81	)			(16.0	)%			(0.1	)%			(0.1	)%
Income (loss) before provision for income taxes and noncontrolling interest			628				(8,763	)			(107.2	)%			1.0	%			(14.4	)%
Benefit from income taxes			(140	)			(36	)			288.9	%			(0.2	)%			(0.1	)%
Net income (loss)			768				(8,727	)			(108.8	)%			1.2	%			(14.3	)%
Less: Net income attributable to noncontrolling interest			114				39				192.3	%			0.2	%			0.1	%
Net income (loss) attributable to Caribou Coffee Company, Inc.		$	654			$	(8,766	)			(107.5	)%			1.0	%			(14.4	)%

Net Sales

     Total net sales increased $1.8 million, or 3.0%, to $62.7 million in the third thirteen weeks of 2009 from $60.9 million in the third thirteen weeks of 2008. This increase was attributable to a sales increase in the commercial segment partially offset by a 0.5% decrease of comparable coffeehouse sales and a slight decrease in franchise segment sales. Coffeehouse net sales decreased $0.2 million, or 0.5%, to $54.5 million in the third thirteen weeks of 2009 from $54.7 million in the third thirteen weeks of 2008. Commercial and franchise sales increased by $2.1 million, or 33.7%, to $8.3 million for the third thirteen weeks of 2009 from $6.2 million for the third thirteen weeks

of 2008. This increase was largely due to sales to existing and new commercial customers offset slightly by fewer product sales, franchise fees and royalties from franchised coffeehouses during the preceding 12 months.

Costs and Expenses

     Cost of sales and related occupancy costs. Cost of sales and related occupancy costs increased $0.8 million, or 3.2%, to $27.8 million in the third thirteen weeks of 2009, from $27.0 million in the third thirteen weeks of 2008. This increase was largely due to higher commercial and franchise sales and was partially offset by lower coffeehouse net sales. As a percentage of total net sales, cost of sales and related occupancy costs increased to 44.4% in the third thirteen weeks of 2009 from 44.3% in the third thirteen weeks of 2008 as commercial and franchise sales typically have a higher cost of goods sold as a percentage of sales than coffeehouse sales.

     Operating expenses. Operating expenses decreased $0.3 million, or 1.1%, to $24.3 million in the third thirteen weeks of fiscal 2009, from $24.6 million in the third thirteen weeks of 2008. This decrease is attributable to operating performance improvements and 23 fewer operating coffeehouse weeks in the third thirteen weeks of 2009 as compared to the third thirteen weeks of 2008. As a result, operating expenses as a percentage of total net sales decreased to 38.7% in the third thirteen weeks of 2009 from 40.3% in the third thirteen weeks of 2008.

     Opening expenses. Opening expenses were minimal during the third thirteen weeks of 2009 and 2008 as there were no new company-owned coffeehouses opened in 2009 and two new company-owned coffeehouses opened in 2008. With respect to franchise coffeehouses, four and five new franchise coffeehouses were opened in the third thirteen weeks of 2009 and 2008, respectively.

     Depreciation and amortization. Depreciation and amortization decreased $6.7 million, or 66.1%, to $3.5 million in the third thirteen weeks of 2009, from $10.2 million in the third thirteen weeks of 2008. As a percentage of total net sales, depreciation and amortization was 5.5% in the third thirteen weeks of 2009, compared to 16.8% in the third thirteen weeks of 2008. This decrease is due to the impairment of company-owned coffeehouses during 2008. Depreciation and amortization in the third thirteen weeks of 2008 includes $5.7 million in accelerated depreciation associated with coffeehouse impairments.

     General and administrative expenses. General and administrative expenses decreased $0.8 million, or 11.3%, to $6.3 million in the third thirteen weeks of 2009, from $7.1 million in the third thirteen weeks of 2008. As a percentage of total net sales, general and administrative expenses decreased to 10.1% in the third thirteen weeks of 2009, from 11.7% in the third thirteen weeks of 2008. The decrease in general and administrative expenses was largely due to a reduction in personnel related costs at our support center.

     Closing expense and disposal of assets. Closing expense and disposal of assets were $0.1 million in the third thirteen weeks of 2009 compared to $0.6 million in the third thirteen weeks of 2008. One company-owned coffeehouse was closed in the third thirteen weeks of 2009 compared to two company-owned coffeehouse closures in third thirteen weeks of 2008. We will continue to actively manage our portfolio of coffeehouses.

     Interest income. Interest income increased slightly in the third thirteen weeks of 2009, as compared to the third thirteen weeks of 2008 due to more cash on hand in 2009.

     Interest expense. Interest expense remained relatively flat at $0.1 million for both the third thirteen weeks of 2009 and 2008. Outstanding borrowings as of September 27, 2009 and September 28, 2008 were $0.0 million and $3.0 million, respectively.

Operating Segments

     Segment information is prepared on the same basis that our management reviews financial information for decision making purposes. We have three reportable operating segments: retail, commercial and franchise. “Unallocated corporate” includes expenses pertaining to corporate administrative functions that support the operating segments but are not specifically attributable to or managed by any segment and are not included in the

reported financial results of the operating segments. The following tables summarize our results of operations by segment for the third thirteen weeks of fiscal 2009 and 2008.

Retail

		Thirteen Weeks Ended												Thirteen Weeks Ended
		September 27,				September 28,				%				September 27,				September 28,
		2009				2008				Change				2009				2008
		(In thousands)												As a % of coffeehouse sales
Coffeehouse sales		$	54,479			$	54,731				(0.5	)%			100.0	%			100.0	%
Costs of sales and related occupancy costs			22,644				23,080				(1.9	)%			41.6	%			42.2	%
Operating expenses			23,004				23,727				(3.0	)%			42.2	%			43.3	%
Opening expenses			—				56				(100.0	)%			—	%			0.1	%
Depreciation and amortization			3,454				10,199				(66.1	)%			6.3	%			18.6	%
General and administrative expenses			1,742				2,195				(20.6	)%			3.2	%			4.0	%
Closing expense and disposal of assets			123				646				(81.0	)%			0.2	%			1.2	%
Operating income (loss)		$	3,512			$	(5,172	)			(167.9	)%			6.4	%			(9.4	)%

     The retail segment operates company-owned coffeehouses. As of September 27, 2009, there were 413 company-owned coffeehouses in 16 states and the District of Columbia.

Coffeehouse sales

     Coffeehouse sales decreased $0.2 million, or 0.5%, to $54.5 million in the third thirteen weeks of 2009 from $54.7 million in the third thirteen weeks of 2008. This decrease is attributable to a 0.5% decrease in comparable coffeehouse net sales in the third thirteen weeks of 2009 as compared to the same period in 2008.

Costs and Expenses

     Cost of sales and related occupancy costs. Cost of sales and related occupancy costs decreased $0.4 million, or 1.9%, to $22.6 million in the third thirteen weeks of 2009, from $23.1 million for the third thirteen weeks of 2008. Cost of sales and related occupancy costs as a percentage of coffeehouse net sales decreased to 41.6% for the third thirteen weeks of 2009 from 42.2% for the third thirteen weeks of 2008. The decrease was primarily due to lower coffeehouse sales in 2009 and the closing of underperforming coffeehouses in 2008.

     Operating expenses. Operating expenses decreased $0.7 million, or 3.0%, to $23.0 million for the third thirteen weeks of 2009, from $23.7 million for the third thirteen weeks of 2008. As a percentage of coffeehouse net sales, operating expenses decreased to 42.2% in the third thirteen weeks of 2009 from 43.3% in the third thirteen weeks of 2008. This decrease is primarily attributable to operating performance improvements in 2009.

     Depreciation and amortization. Depreciation and amortization decreased $6.7 million, or 66.1%, to $3.5 million for the third thirteen weeks of 2009, from $10.2 million for the third thirteen weeks of 2008. This decrease is due to the impairment of company-owned coffeehouses during 2008. Depreciation and amortization includes $5.7 million in accelerated depreciation associated with coffeehouse impairments in the third thirteen weeks of 2008.

     General and administrative expenses. General and administrative expenses decreased $0.5 million, or 20.6%, to $1.7 million for the third thirteen weeks of 2009 from $2.2 million for the third thirteen weeks of 2008. The decrease was largely due to the realignment of our operating regions, in which we downsized the number of district managers.

     Closing expense and disposal of assets. Closing expense and disposal of assets decreased $0.5 million to $0.1 million for the third thirteen weeks of 2009 from $0.6 million for the third thirteen weeks of 2008. The decrease in closing expense and disposal of assets is primarily attributable to asset write-offs and lease termination costs associated with the closing of two underperforming company-owned coffeehouses in the third thirteen weeks of 2008. There was one company-owned coffeehouse closure in the third thirteen weeks of fiscal 2009. We will continue to actively manage our portfolio of company-owned coffeehouses. Expenses associated with the closings are variable from coffeehouse to coffeehouse and are dependent upon the amount of time left on the lease and the remaining book value of assets associated with each coffeehouse.

Commercial

		Thirteen Weeks Ended												Thirteen Weeks Ended
		September 27,				September 28,				%				September 27,				September 28,
		2009				2008				Change				2009				2008
		(In thousands)												As a % of commercial sales
Sales		$	6,557			$	4,467				46.8	%			100.0	%			100.0	%
Costs of sales and related occupancy costs			4,232				2,858				48.1	%			64.5	%			64.0	%
Operating expenses			1,010				568				77.8	%			15.4	%			12.7	%
Depreciation and amortization			10				9				11.1	%			0.2	%			0.2	%
Operating income		$	1,305			$	1,032				26.5	%			19.9	%			23.1	%