10-K 1 d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

 

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

  For the fiscal year ended December 30, 2008

OR

 

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

  For the transition period from              to             

 

 

Jamba, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   001-32552   20-2122262
(State or other jurisdiction of incorporation)   (Commission File No.)   (I.R.S. Employer Identification No.)

6475 Christie Avenue, Suite 150, Emeryville, California 94608

(Address of principal executive offices)

Registrant’s telephone number, including area code: (510) 596-0100

Securities registered pursuant to Section 12(b) of the Act:

 

Units, consisting of one share of Common Stock, par value

$0.001 per share, and one Common Stock Purchase Warrant

   The NASDAQ Stock Market LLC

Common Stock, par value $.001 per share

   The NASDAQ Stock Market LLC

Common Stock Purchase Warrants

   The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act:

NONE

 

 

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

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

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 the filing requirements for the past 90 days.    Yes  x    No  ¨

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

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  ¨      Accelerated filer  x  

Non-accelerated filer  ¨

(Do not check if a smaller reporting company)

  Smaller reporting company  ¨

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

The aggregate market value of the registrant’s common stock, $0.001 par value per share, held by non-affiliates as of the last day of the registrant’s second fiscal quarter ended July 15, 2008 was $53,554,731 (based upon the closing sales price of registrant’s common stock on such date). For purposes of this disclosure, shares of common stock held by persons who held more than 5% of the outstanding shares of common stock and shares held by officers and directors of the registrant have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of shares of common stock of Jamba, Inc. issued and outstanding as of March 6, 2009 was 54,690,728.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2009 Annual Meeting of Stockholders (the “Proxy Statement”), to be filed within 120 days of the end of the fiscal year ended December 30, 2008, are incorporated by reference in Part III hereof. Except with respect to information specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed to be filed as part hereof.

 

 

 


Table of Contents

JAMBA, INC.

ANNUAL REPORT ON FORM 10-K

FISCAL YEAR ENDED DECEMBER 30, 2008

 

Form 10-K

Item No.

  

Name of Item

   Page
   PART I   

Item 1.

  

BUSINESS

   4

Item 1A.

  

RISK FACTORS

   17

Item 1B.

  

UNRESOLVED STAFF COMMENTS

   30

Item 2.

  

PROPERTIES

   30

Item 3.

  

LEGAL PROCEEDINGS

   31

Item 4.

  

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

   31
   PART II   

Item 5.

  

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

   32

Item 6.

  

SELECTED FINANCIAL DATA

   34

Item 7.

  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

   37

Item 7A.

  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   67

Item 8.

  

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

   68

Item 9.

  

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

   126

Item 9A.

  

CONTROLS AND PROCEDURES

   126

Item 9B.

  

OTHER INFORMATION

   126
   PART III   

Item 10.

  

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

   128

Item 11.

  

EXECUTIVE COMPENSATION

   128

Item 12.

  

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

   128

Item 13.

  

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

   128

Item 14.

  

PRINCIPAL ACCOUNTING FEES AND SERVICES

   128
   PART IV   

Item 15.

  

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

   129
  

SIGNATURES

   130

 

2


Table of Contents

Special Note Regarding Forward-Looking Statements

We believe that some of the information in this document constitutes forward-looking statements. You can identify these statements by forward-looking words such as “may,” “expect,” “anticipate,” “contemplate,” “believe,” “estimate,” “intends,” and “continue” or similar words. You should read statements that contain these words carefully because they:

 

   

discuss future expectations;

 

   

contain projections of future results of operations or financial condition; or

 

   

state other “forward-looking” information.

We believe it is important to communicate our expectations to our stockholders. However, there may be events in the future that we are not able to accurately predict or over which we have no control. The risk factors and cautionary language discussed in this document outline examples of risks, uncertainties and events that may cause actual results to differ materially from the expectations described in the forward-looking statements, including among other things:

 

   

the amount of cash on hand available to us;

 

   

our business strategy;

 

   

changing interpretations of generally accepted accounting principles;

 

   

outcomes of government reviews, inquiries, investigations and related litigation;

 

   

continued compliance with government regulations;

 

   

legislation or regulatory environments, requirements or changes adversely affecting the businesses in which we are engaged;

 

   

statements about industry trends;

 

   

fluctuations in customer demands;

 

   

general economic conditions; and

 

   

geopolitical events and regulatory changes.

You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this document.

All forward-looking statements included herein are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Except to the extent required by applicable laws and regulations, we undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this document or to reflect the occurrence of unanticipated events.

You should be aware that the occurrence of the events described in the “Risk Factors” portion of this annual report, the documents incorporated herein and our other SEC filings could have a material adverse effect on our business, prospects, financial condition or operating results.

 

3


Table of Contents

PART I

 

ITEM 1. BUSINESS

Background of Jamba, Inc.

Jamba, Inc. was incorporated in Delaware on January 6, 2005 as a blank check company formed to serve as a vehicle for the acquisition of a then unidentified operating business. On July 6, 2005, the Company consummated its initial public offering. On March 10, 2006, the Company entered into an Agreement and Plan of Merger with Jamba Juice Company, the category-defining retailer of premium healthy blended beverages that was originally founded in 1990. The merger between the Company and Jamba Juice Company (the “Merger”) was completed on November 29, 2006. To complete the Merger, the Company raised additional proceeds in a private placement financing. Upon completion of the Merger, Jamba Juice Company became a wholly owned subsidiary of Jamba, Inc.

Unless the context otherwise requires, Jamba, Inc., the registrant, together with Jamba Juice Company, are referred to in this Form 10-K annual report (“Form 10-K”) as the “Company”, “Jamba”, “we”, “us” and “our.” Information regarding the Company’s fiscal periods is included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Revitalization Objectives and Strategy

The Company is in the midst of an effort to revitalize itself for future growth and long-term stockholder value. In fiscal 2008, we experienced significant changes in our executive management team, including the departure of our chief executive officer, chief financial officer, chief marketing and brand officer, senior vice president of operations, and senior vice president of development.

We have a new chief executive officer and have internally promoted other members of the executive team and increased their responsibilities. The Company has set out in a new direction to develop and evolve the Jamba brand and implement new business strategies that we believe will have a positive financial impact. The strategic priorities for fiscal 2009 include:

 

   

building a customer first “operationally focused” service culture;

 

   

building a retail food capability across all four day parts (breakfast, lunch, afternoon, and dinner);

 

   

accelerating the development of franchise and non-traditional stores;

 

   

building a consumer products growth platform; and

 

   

continuing to implement a disciplined expense reduction plan.

These strategic priorities support the Company’s mission to continue to grow and develop Jamba as a premier healthy living brand offering consumers compelling and differentiated products and experiences at Jamba Juice stores and other retail distribution channels. Key to our success is the Jamba culture, a unique set of core values and actions that manifest themselves in employees executing at the highest levels while expressing their passion for the brand.

Building a Customer First “Operationally Focused” Service Culture

A major aspect of our revitalization plan is to improve the level and consistency of customer service at our stores. Over the last few years, the administrative tasks required by the General Managers at our stores had increased so that the General Manager was not sufficiently promoting the interaction between our team members and the customers that lead to a positive experience and reinforcement of our brand promise by encouraging a healthy, active lifestyle. We have recently reduced the number of these administrative tasks with the goal of

 

4


Table of Contents

having the General Manager spend more time building, and working with other team members to build, a powerful relationship with customers based on quality, trust and integrity.

We have also introduced new initiatives to help attract, hire, and retain quality customer-service-oriented people who exhibit our culture and values. We are also upgrading our training of team members so that they can more effectively deliver a high-quality customer experience. We also provide team members with financial incentives and opportunities for advancement when they fulfill service expectations.

Customer satisfaction is critically important to us. To that end, we recently instituted a mystery shopper program to measure the customer experience. We believe delivering high-quality customer service will differentiate us in the marketplace and drive long-term customer loyalty. We seek for team members to enthusiastically greet customers upon entering the store and efficiently deliver their order in a timely manner. With a highly customized product, operational efficiency is vital to achieving high levels of throughput. Our team members are trained to not only deliver the customers’ orders quickly, but also to transfer the fun and energy they gain from working at Jamba Juice to the customers.

A related aspect of customer service is reinforcement of the vibrant and fun store environment, which we believe offers the Company a competitive advantage. We plan to embark on a “refresh” program with select older Company stores, primarily through new paint schemes and interior finishes. As part of the “refresh” program we also intend to incorporate aspects of our new store prototype, which supports our brand environment goals and provides a more customer-friendly experience. We also plan on testing self-service kiosks to provide customers with easier access to nutritional information and for ordering so as to improve speed of service and optimize labor. We plan to explore other technologies to enhance the ordering process as well.

Building a Retail Food Capability Across All Four Day Parts (breakfast, lunch, afternoon and dinner)

Menu Overview

We currently provide a range of freshly blended beverages, baked goods and snacks in our stores. Our menu items are designed to strengthen the relationship with our customers by offering products that are relevant to individuals striving for a healthy lifestyle. Product innovation is a high priority and our research and development team, composed of food scientists, nutritionists and culinary experts, is continually developing and testing new and improved menu items that support the integrity of the Jamba brand and our commitment to offering great tasting products made from simple high quality ingredients.

In fiscal 2008, to help establish our food capability program, we rolled out several new products on a system-wide basis, including a new breakfast menu comprised of nutritionally balanced yogurt blends, smoothies, food and juices. In January 2009, we completed the system-wide rollout of steel cut hot oatmeal with fruit as another step in establishing our food capability program. In fiscal 2008, we also tested other food products, including wraps, sandwiches and salads in selected stores. These new products are designed to feature healthy, on-the-go food items to attract new customers, increase the frequency of current customer visits, create a point of differentiation, and provide a more complete meal solution for our customers across all day parts.

We plan to grow our food capability program in fiscal 2009. The purpose of growing our food capability program is to broaden the appeal of our offering to current customers who often purchase a smoothie and then go elsewhere for a food item in addition to bringing in new customers looking for a more complete meal solution. In addition, we believe there is consumer demand for healthy on-the-go food items that is not being fulfilled by other quick service restaurants, especially those serving burgers and fries. Our goal is for Jamba to be the leader in the healthy quick service restaurant segment.

Beverages: Our blended beverages are available in three sizes, Sixteen, Original and Power.

 

5


Table of Contents

Fresh Squeezed Juices and Juicies: We offer a line-up of fresh squeezed juices, including orange juice, carrot juice, and juice combinations such as orange carrot banana and orange mango passion.

All Fruit Smoothies: Made with real fruit and fruit juices, these natural, freshly blended-to-order fruit smoothies provide 5 servings of fruit in the Original size, have no sugar added, and are dairy-free. All Fruit smoothies are an excellent source of vitamin C and offer essential vitamins, minerals and antioxidants.

Jamba Light: With one-third fewer calories and sugars than our average Jamba Classic, Jamba Light smoothies offer great taste and good nutrition that won’t weigh you down. The Sixteen oz. size has less than 180 calories.

Blended with a Purpose: Our line-up of pre-boosted smoothies offer a refreshing palette of products that deliver key nutrients and offer unique health properties associated with super foods such as açai berries, cholesterol-blocking plant sterols, soy and whey protein, and matcha green tea.

Jamba Classics: These smoothies include our top eight customer favorites.

Creamy Treats: We offer four types of delicious smoothies with indulgent qualities.

Shots: We offer single and double shots of matcha green tea, with orange juice or soy milk, and a fresh-squeezed wheatgrass juice shot. Our matcha green tea shots are made with high grade, imported Japanese green tea and are high in antioxidants and vitamin K. Our wheatgrass shots are an excellent source of vitamin K and a good source of iron.

Jamba Boosts:

To supplement the natural nutrients in our smoothies, Jamba Boosts are a selection of high-quality, blended vitamin, mineral and herbal dietary supplements designed to give the mind and body a nutritious boost.

Jamba offers 11 new-and-improved boosts that deliver better efficacy and minimal taste impact. Of the new boosts, five are Super Boosts and are available in any of our smoothies for a small charge. Each reformulated boost contains unique blends of concentrated vitamins, minerals and other nutrients specialized for specific health and lifestyle needs.

Breakfast All Day:

Yogurt and Fruit Blends: These refreshing blends of fruit, nonfat yogurt and soymilk offer healthy great taste to start the day right.

Yogurt and Fruit Blends with Granola: Eat it with a spoon! A nutritionally balanced breakfast of blended fruit, low-fat yogurt and soymilk topped with crunchy, organic granola. Flavors include Berry Topper, Mango Peach Topper and Chunky Strawberry.

Hot Oatmeal with Fruit: Launched nationally in January 2009, 100% organic steel-cut oats made with soymilk and topped with fruit compote or fresh fruit and brown sugar crumble. Flavors include Fresh Banana, Blueberry & Blackberry and Apple Cinnamon.

Jamba Baked Goods and Packaged Snacks:

Most of our locations offer a combination of baked goods and packaged snacks. Our current line up of baked goods includes Reduced Fat Blueberry Lemon Loaf, Reduced Fat Cranberry Orange Loaf, Zucchini Walnut Loaf and Oatcakes. Each of these items is made only with natural ingredients and offers customers a complement to Jamba smoothies and juices.

Jamba Merchandise:

Most of our stores carry a limited supply of related merchandise, including books and smallwares. This is not a core component of revenue but contributes to the overall store experience.

 

6


Table of Contents

Our research and development team continually seeks to enhance the product offerings available to customers, and where possible, reduce product and labor costs. Our research and development process includes both the development of new products and the optimization of the menu to ensure only the most appealing products are offered to customers. As new products are introduced to the menu, usage occasions increase and positive word-of-mouth is spread. We are passionate about creating fresh new products that meet an even greater variety of customer needs. We pride ourselves on listening carefully to customer feedback. We continue to devote significant resources to our research and development team in an effort to build upon recent new product successes and take our product innovation abilities to the next level. This combination of optimizing existing products and expanding our menu with offerings that are relevant to our customers’ needs provides increased opportunities for both increased frequency and increased average check. While there is no certainty that product development efforts will lead to the introduction and success of new product offerings as well as a potential increase in operating margins, we will continue to use these resources to try to develop fresh concepts that appeal to customers at any time of day and in any weather or season.

Accelerating the Development of Franchise and Non-Traditional Stores

Jamba Juice Stores

A primary goal of the Company is to build accessibility, meaning making it easier for customers to experience Jamba. One way to increase accessibility is to expand the number of Jamba Juice stores. The goal of building accessibility is increasing frequency and, as a result, comparable store sales and average unit volumes. At the same time, we understand that the foundation for growth lies in strong store-level economics. Accordingly, part of our growth strategy is to ensure that we, and our franchisees, achieve target metrics in terms of average unit volume, store level cash flow, store level cash flow margin, net cost per unit and cash-on-cash returns.

We believe we have significant market expansion opportunities both nationally and internationally. Our research and planning have shown that there is potential for at least 2,000 additional Jamba Juice stores in the United States which we believe could be profitable and would meet our new store opening criteria.

We have grown our concept and brand through company owned and operated stores (“Company Stores”) and franchise store locations (“Franchise Stores”). As of December 30, 2008, there were 729 Jamba Juice locations consisting of 511 Company Stores and 218 Franchise Stores operating in 21 states and the Bahamas. Except for the single Bahamas franchise location we have no other international locations. Of the 729 locations, 388 stores are located in California, of which 338 are Company Stores. We lease the real estate for all of our Company Stores.

We generally characterize our stores as either “traditional” or “non-traditional” locations. Traditional locations are characterized as a business premise that exists primarily as a Jamba Juice store. Traditional stores currently average approximately 1,400 square feet in size and are designed to be fun, friendly, energetic and colorful to represent the active, healthy lifestyle that we promote. These stores are located either in major urban centers or in suburban strip mall centers. As of December 30, 2008, there were 610 traditional Jamba Juice store locations.

Non-traditional locations are characterized as a Jamba Juice store located within another primary business in conjunction with other businesses or at institutional settings such as colleges and universities, schools, shopping malls, supermarkets and airports. A “captive” audience is a common characteristic of non-traditional locations. We believe one benefit of the development of non-traditional stores is to generate awareness to complement the traditional stores in the area. As of December 30, 2008, there were 119 non-traditional Jamba Juice store locations.

All Jamba Juice stores are designed to provide a highly interactive Jamba experience to build our customer relationship, including the enticing aroma of fresh fruit, vegetables and wheatgrass, the high-energy sounds of

 

7


Table of Contents

whirring blenders and team members calling out greetings. The construction and color scheme employed at the Jamba Juice stores provide a bright and cheerful “marketplace” theme with colors that embody our commitment to fresh and healthy juices, smoothies and other energizing products. Additionally, stores focus on the “theater” aspect of smoothie making by providing an environment in which all food preparation is conducted behind glass and in the open for customers to watch as the juices and smoothies are made. The layout offers a casual bar-type atmosphere using interior stools and exterior tables and chairs. Glass cases display baked goods, and shelving in front of cash registers allow for the sale of baked goods and prepackaged healthy snack items. We have lowered the typical costs to construct a traditional Jamba Juice Store from an average of $425,000 in 2008 to approximately $325,000 today, depending upon location. This cost reduction was accomplished through reducing our real estate footprint from an average of 1400 sq. ft. to 1200 sq. ft., aggressive competitive biding with our general contractor pool to reduce leasehold improvement costs, aggressive competitive biding for our furniture and fixtures package, value engineering, and innovative equipment and physical layouts to help reduce operational costs.

We believe reducing a traditional store’s “build out” costs will help attract franchisees by providing a higher return on investment as franchisees are obligated to finance their own “build-out” costs according to our specifications.

We have also developed plans for different Jamba Juice store configurations and “smoothie-only” product offerings for non-traditional locations in order to help reduce construction and operating costs and improve our flexibility in locating Jamba Juice stores in sites with alternative configurations.

Growth Strategy

Until the third quarter of fiscal 2008, our growth strategy had been focused on Company Stores. For fiscal 2008, we opened 35 new Company Stores, closed 38 Company Stores and acquired 13 Franchise Stores located in Florida by means of acquiring the remaining 65% joint venture interest (we previously owned a 35% interest) in a franchisee (“JJC Florida LLC”). Franchisees opened 37 Franchise Stores, closed 12 Franchise Stores and, through the sale of the 65% joint venture interest noted above, sold 13 Franchise Stores to the Company. We believe that our aggressive Company Store development in an adverse economy in fiscal 2008 and in the prior year in fiscal 2007, which included opening 99 new Company Stores, exacerbated our negative financial results.

Our current growth strategy is to transition from a Company Store model to a model more evenly weighted between Company Stores and Franchise Stores. We anticipate minimal Company Store development in fiscal 2009. We anticipate that growth in fiscal 2009 will be accomplished through the development of Franchise Stores, with a particular emphasis on non-traditional locations. We believe this franchise strategy will better position us for growth in market share, reduce capital outlays, provide better overall margins, allow us to open more stores faster, increase our brand presence, and increase customer frequency.

As part of this growth strategy, we are selectively re-franchising Company Stores primarily in “mixed markets” where we have both Company Stores and Franchise Stores. We also will refranchise in geographic areas where there are all Company Stores in order to achieve operational efficiencies.

We also continue to explore possible future international development opportunities, which will primarily be through area development or joint venture agreements with third-parties.

In recognition of our expanding franchise program, in fiscal 2009 we established a Franchise Advisory Counsel (“FAC”). The FAC formalizes a channel of communications through a representative group of franchisees to provide advice, counsel and input to us on important issues impacting the business.

Franchise Stores

Our franchising program is currently conducted via (i) traditional store venues such as single store franchises to a franchisee, (ii) franchises granted for non-traditional store venues and (iii) exclusive multi-unit

 

8


Table of Contents

license agreements in which the franchisee develops and operates a specified number of stores within a specified period of time within a specified geographic area, which we call area development agreements.

Our current traditional store franchise agreement provides for a 10-year term. The agreement is renewable for additional consecutive 10-year terms, subject to various conditions and state law. The royalty rate in the current franchise agreement is 7% of revenue for traditional store locations, with franchisees required to contribute up to an additional 4% of revenue to a company-administered marketing fund. At the present time, in general, we are charging 1.75% to 2.0% of revenue as the marketing contribution for our traditional store franchisees. There is typically up to a two-mile geographic radius restriction for traditional stores in non-downtown areas. The royalty rates and marketing contributions for non-traditional stores vary depending upon type (airport, college or university or supermarket).

Franchisees typically pay an initial fee ranging from $15,000 for non-traditional store locations to $25,000 for traditional store locations. Except in connection with the re-franchising of Company Stores, we do not currently provide financing to our franchisees. However, given current market conditions, we may consider financing, joint venture or other arrangements in the future.

Area Development Agreements

As of December 30, 2008, we had two multi-unit area developers who have the right to develop additional franchise stores pursuant to multi-unit license agreements. The exclusive territories covered by these two multi-unit area license agreements are (i) the Hawaiian Islands and (ii) parts of Texas, Kansas and Missouri. Generally, a franchise agreement is entered into with each area developer with regard to each store opened under a multi-unit license agreement. These franchise agreements are generally the same as those entered into with franchisees who are not area developers. Even after a multi-unit license agreement expires or is terminated, the area developer continues to operate the opened stores under each store’s respective franchise agreement, including in most cases, its contractually provided exclusive geographic radius restriction, which is typically one-mile. As of December 30, 2008, there were 77 stores operating under the two current multi-unit license agreements.

As of December 30, 2008, one of the two multi-unit area developers had contractual commitments to open new franchise stores in their respective territories. Specifically, as of December 30, 2008, the area developer in parts of Texas, Kansas and Missouri must open 4 more new stores by May 6, 2010, the expiration date of this multi-unit license agreement. Multi-unit area development agreements can be deemed to be null and void if the terms of the agreement are not fulfilled. Although the multi-unit developer for the Hawaiian Islands has satisfied its contractual commitment to open new franchise stores, it still has the exclusive right to open additional new stores through the expiration of its multi-unit license agreement on June 25, 2018.

Under typical multi-unit license agreements, the area developer generally pays one-half of the $25,000 initial fee, or $12,500, for each store required to be developed upon execution of the multi-unit development agreement as a development fee. Area developers are obligated to finance their own build-out of each store location according to our specifications.

Notwithstanding the exclusive territorial rights of the two multi-unit area developers, we retain the right to franchise non-traditional stores. As of December 30, 2008, we have an agreement with Safeway, Inc. for the opening of up to 44 franchise stores within its grocery stores, of which all 44 were open.

We also continue to strengthen our relationships with food and beverage concessionaires operating at non-traditional venues such as schools, airports, and other retail and entertainment venues to help maximize our non-traditional franchise development.

 

9


Table of Contents

Market Planning and Site Selection Process

Our market planning and site selection process is integral to the successful execution of our growth strategy. We have processes for identifying, analyzing, and assigning undeveloped markets for either Company Store or Franchise Store development. Once a market is selected, we carefully screen trade areas for demand based on demographic, psychographic and Jamba Juice specific variables to assess the risk of developing a store. We select trade areas that meet our guidelines for new store development and begin the site selection process. Once a trade area is selected, we carefully screen prospective locations for visibility, traffic patterns, ease-of-use and co-tenancy for potential Company Store and Franchise Store locations. Our expansion strategy involves using this market planning and site selection process to leverage areas of demand within each market. We use this approach to cluster stores in specific geographic areas of demand, which will drive brand awareness, improve operating and marketing efficiencies while leveraging the costs associated with regional supervision. Distribution efficiencies are also captured through this strategy. In addition, we believe our ability to hire qualified team members is enhanced in markets where we are well known.

Building a Consumer Products Growth Platform

We believe there is untapped potential to extend the Jamba brand into the retail market. In December 2007, we announced that Nestlé USA had entered into a worldwide license agreement for the manufacturing, marketing and distribution of Jamba ready-to-drink beverages. In May 2008, Nestlé launched a Jamba ready-to-drink product line including six SKUs: three Jamba Smoothies, named Strawberries Wild w/Energy Boost, Orange Dream Machine w/Immunity, Banana Berry w/Heart Healthy Boost; and, three Jamba Juicies named Orange Strawberry Banana w/Protein Boost, Mango Orange Peach w/Fiber Boost and Very Berry w/Calcium Boost. The Jamba Smoothies and Jamba Juicies were available in major grocery retailers and convenience stores in eight Western states: California, Oregon, Utah, Nevada, Arizona, Idaho, Washington and Colorado. In December 2008, Nestlé voluntarily suspended production and shipments of the Jamba ready-to-drink beverages due to production issues. We believe Nestlé is fully committed to re-launching a Jamba ready-to-drink beverage proposition.

We continue to have discussions with potential partners regarding fruit teas, fruit yogurt and parfaits, frozen smoothie bars and sorbets, breakfast and energy bars and packaged boosts. Our goal is to extend our product offerings outside of our Jamba Juice stores to not only generate revenue, but also to expand the brand accessibility and product usage occasions available to consumers. To support and optimize this extension, we intend to structure these partnership relationships in various ways, such as, for example, licensing agreements, joint venture agreements, co-packing agreements, and sales and distribution agreements.

Continuing to Implement a Disciplined Expense Reduction Plan

This strategic priority involves all aspects of the organization to improve store-level profitability and returns. The plan is focused on a number of initiatives, including reductions in costs of goods sold, labor savings from operational simplification, improved wage and benefit management, the implementation of a labor planning system, rent and occupancy savings, improved management of controllable costs related to better cost controls and processes and the negotiation of service contracts and more effective and efficient brand communication. We expect our general and administrative expenses to continue to decrease as we implement the strategic initiatives described above and continue to improve our processes and systems.

Company Store Operations

Store Management

Our Operations team is the foundation for our performance and vital to long-term growth. We recruit and retain leaders with broad experience in management and our industry.

 

10


Table of Contents

We support our store operations with a combination of Regional Directors of Operations, Area District Managers (instituted in fiscal 2009) and District Managers.

Our typical store operations team consists of a combination of an Area General Manager (instituted in fiscal 2009) or General Manager at each store, two to four Shift Managers and approximately twenty front line team members.

Maintaining our corporate culture is essential as we continue to expand, and we believe that it is critical to developing our brand and ensuring our continued success. We believe team members are the key to our success and that our culture fosters personal interaction, mutual respect, trust, empowerment, enthusiasm and commitment.

Training

We conduct various training programs for team members, support center staff and our leadership team. We are dedicated to providing a meaningful experience for all team members, with ample opportunity to develop leadership skills as they move up through the organization. Our training programs include formal programs such as the Manager-in-Training programs for new managers and the more informal one-on-one discussions held between General Managers, District Managers and Regional Directors of Operations. In fiscal 2009, we are also instituting a more robust online training program. The goal of all the programs is to shorten the learning curve while creating greater confidence in order to achieve success through strong performance and results.

Recruiting and Retention

We carefully screen potential team members to ensure that they hold many of our core values and fit into our culture. By placing an emphasis on our mission statement and values, and encouraging responsibility and accountability at every level, we believe that it has created a sense of team member loyalty and an open and interactive work environment, resulting in a highly passionate workforce. Team members are paid competitive wages and are offered opportunities for advancement. In addition to competitive wages, store managers are eligible for performance-based bonuses and retention bonuses.

Advertising and Marketing

Our marketing strategy focuses on communicating the benefits of the products and the brand’s values through many creative and non-traditional avenues. Marketing efforts are concentrated on store locations to build memorable experiences that will generate positive word-of-mouth. As we enter new markets we must communicate the Jamba Juice story, the benefits of our products and our usage occasions. Emotional connections are developed as the messages are delivered consistently and with a freshness that appeals to consumers.

In fiscal 2009, we also refocused our marketing strategy on a local basis on what we term “owning the two-mile radius” around our stores. One part of this effort is capitalizing on off-premises sales as an opportunity to reach new customers. Off-premises sales (called “Go-Go’s”) involve bringing Jamba products to sell at an event such as school, community or sporting events. These opportunities also reinforce our strong commitment to our communities. A second part of this effort is the additional empowerment and compensation incentives we have instituted at the store-level to incentivize sales generation activities. A third part of this effort is the addition of fundraising opportunities for non-profit organizations. We believe our healthy menu offering combined with an attractive fundraising component is a very attractive choice for non-profit organizations during this challenging economic environment.

We also believe we benefit from national media attention, providing us a significant competitive advantage. Historically, we have not engaged in any mass media marketing programs, relying instead on word-of-mouth, trade-area marketing and in-store promotions to increase customer awareness. Nevertheless, we have been

 

11


Table of Contents

featured in stories appearing in The Wall Street Journal and a host of local newspapers and magazines. We have also been featured in television shows and feature films. Our fundraising events also capture a significant amount of coverage from local television stations.

In addition to the Company’s marketing efforts, franchisees also contribute to the development and deployment of system-wide marketing programs. Franchisees also spend to market the Company’s brand in their local market area.

Furthermore, in fiscal 2009, we plan to enhance our online, community and social networking initiatives to drive new customer trials and foster better ongoing communication with our customers.

Product Supply

We are committed to providing only the finest smoothies, juices and other food products. Smoothie and juice products depend heavily upon supplies of fresh and individually quick frozen (“IQF”) fruit. The quality of each smoothie depends to a large degree on the quality of the basic fruit ingredients from which it is made. It is therefore essential that the supply of fruit is of the highest quality and is consistent throughout the year. To achieve these dual goals we purchase our projected requirements for the coming year of a given type of fruit from suppliers at the height of the season for that particular fruit. The supply and price of fresh and IQF fruit are dependent upon the supply and demand at the time of purchase and are subject to significant volatility. Supply and price can be affected by multiple factors in the producing regions, including weather, natural disasters and regional political and economic conditions. In addition, as we continue to grow, we will likely become more dependent upon global fruit supplies than we have in the past, which may result in natural disasters and global political and economic conditions having a greater effect on the supply and price of our fruit ingredients and our profitability.

We use the highest quality fruit in our products. We conduct quality assurance testing at the time of packing to ensure that the fruit meets our high standards, which meets or exceeds USDA Grade-A standards. The fruit is then flash-frozen and stored by the supplier(s) for shipment to distributors throughout the year. We contract with independent distribution companies to distribute products to the stores. The length of these contracts varies in duration. Given the density of stores in California, the costs of goods sold in California is lower than other regions of the country. We believe that by clustering future store development we can begin to lower distribution costs, and therefore reduce cost of goods sold, in non-California markets.

Southwest Traders, Inc. is a distributor of proprietary products to our Company Stores and Franchise Stores. Southwest Traders distributed ingredients that made up approximately 81% of cost of sales for Jamba Juice Company’s fiscal 2008. Southwest Traders does not manufacture or negotiate pricing agreements for products sold in our stores. They serve solely in a warehousing and distribution capacity and receive a fixed mark up per case on the independently negotiated cost of our ingredients. Our contract does provide that during the term we will use Southwest Traders as our exclusive distributor within certain territorial boundaries provided they meet required service levels. The contract is firm through December 31, 2012 and is not subject to cancellation unless either party defaults within the contract due to non-performance.

All of our nutritional supplements (i.e., Boosts), pretzels and baked goods are produced to very defined specifications. All products are shipped directly to stores using outside distributors. We do not maintain central warehousing facilities.

Competition

The beverage industry is highly competitive and fragmented. Restaurants compete based on a number of factors, including quality, price-value relationships, customer service, name recognition, employee hiring and retention and location. We compete with a variety of purveyors of quick, convenient food and beverage products,

 

12


Table of Contents

including quick service restaurants, coffee shops, donut shops and grocery stores. While competition in the beverage market is fragmented, competition is increasing, and a major competitor with substantially greater resources than the Company could enter the market at any time and compete directly against Jamba Juice stores.

We compete most directly with regional smoothie stores, most of which are franchises of other smoothie brands. Additionally, the rising popularity of convenient and healthy food items may result in increased competition from traditionally non-smoothie retailers as they increase their offerings of smoothies and other juice-related products.

In addition, we also face intense competition from both restaurants and other specialty retailers for suitable sites for new stores and qualified personnel to operate both new and existing stores. There can be no assurance that the Company or franchisees will be able to continue to secure adequate sites at acceptable rent levels or that the Company or franchisees will be able to attract a sufficient number of qualified personnel.

Government Regulation and Environmental Matters

Government Regulation. We are subject to extensive and varied federal, state and local government regulation, including regulations relating to public health and safety and zoning codes. We operate each of our stores in accordance with standards and procedures designed to comply with applicable codes and regulations. However, if we could not obtain or retain food or other licenses, it would adversely affect our operations. Although we have not experienced, and do not anticipate, any significant difficulties, delays or failures in obtaining required licenses, permits or approvals, any such problem could delay or prevent the opening of, or adversely impact the viability of, a particular store or group of stores.

California and other states and local jurisdictions have enacted laws, rules, regulations and ordinances which may apply to the operation of a Company Store, including those which (a) establish general standards, specifications and requirements for the construction, design and maintenance of the store premises; (b) regulate matters affecting the health, safety and welfare of our customers, such as general health and sanitation requirements for restaurants; employee practices concerning the storage, handling, cooking and preparation of food; special health, food service and licensing requirements; restrictions on smoking; exposure to tobacco smoke or other carcinogens or reproductive toxicants and saccharin; availability of and requirements for public accommodations, including restrooms; (c) set standards pertaining to employee health and safety; (d) set standards and requirements for fire safety and general emergency preparedness; (e) regulate the proper use, storage and disposal of waste, insecticides and other hazardous materials; (f) establish general requirements or restrictions on advertising containing false or misleading claims, or health and nutrient claims on menus or otherwise, such as “low calorie” or “fat free”; and (g) establish requirements concerning withholdings and employee reporting of taxes on tips.

In order to develop and construct more stores, we or our franchisees need to comply with applicable zoning, land use and environmental regulations. Federal and state environmental regulations have not had a material effect on our operations to date, but more stringent and varied requirements of local governmental bodies with respect to zoning, land use and environmental factors could delay or even prevent construction and increase development costs for new stores. We and our franchisees are also required to comply with the accessibility standards mandated by the U.S. Americans with Disabilities Act, which generally prohibits discrimination in accommodation or employment based on disability. We may, in the future, have to modify stores, for example, by adding access ramps or redesigning certain architectural fixtures, to provide service to or make reasonable accommodations for disabled persons. While these expenses could be material, our current expectation is that any such action will not require us to expend substantial funds.

We are subject to the U.S. Fair Labor Standards Act, the U.S. Immigration Reform and Control Act of 1986 and various federal and state laws governing various matters including minimum wages, overtime and other working conditions. We pay a significant number of our hourly staff at rates consistent with but higher than the

 

13


Table of Contents

applicable federal or state minimum wage. Accordingly, increases in the minimum wage would increase our labor cost. We are also subject to various laws and regulations relating to our current and any future franchise operations. See “Risk Factors—Governmental regulation may adversely affect our ability to open new stores or otherwise adversely affect our existing and future operations and results.”

We are also subject to various federal and state laws that regulate the offer and sale of franchises and aspects of the licensor-licensee relationships. Many state franchise laws impose restrictions on the franchise agreement, including the duration and scope of non-competition provisions, the ability of a franchisor to terminate or refuse to renew and the ability of a franchisor to designate sources of supply. The Federal Trade Commission, or the FTC, and some state laws also require that the franchisor furnish to prospective franchisees a franchise disclosure document that contains prescribed information and, in some instances, require the franchisor to register the franchise offering.

Environmental Matters. We are subject to federal, state and local environmental laws and regulations concerning the discharge, storage, handling, release and disposal of hazardous or toxic substances. These environmental laws provide for significant fines, penalties and liabilities, sometimes without regard to whether the owner or operator of the property knew of, or was responsible for, the release or presence of the hazardous or toxic substances. Third parties may also make claims against owners or operators of properties for personal injuries and property damage associated with releases of, or actual or alleged exposure to, such substances. We cannot predict what environmental laws will be enacted in the future, how existing or future environmental laws will be administered or interpreted or the amount of future expenditures that we may need to make to comply with, or to satisfy claims relating to, environmental laws. While, during the period of their ownership, lease or operation, our stores have not been the subject to any material environmental matters, we have not conducted a comprehensive environmental review of our properties or operations. We have not conducted investigations of our properties to identify contamination caused by third-party operations; in such instances, the contamination must be addressed by the third party. If the relevant third party does not or has not addressed the identified contamination properly or completely, then under certain environmental laws, we could be held liable as an owner and operator to address any remaining contamination. Any such liability could be material. Further, we may not have identified all of the potential environmental liabilities at our properties, and any such liabilities could have a material adverse effect on our operations or results of operations.

Trademarks and Domain Names

The Company owns and/or has applied to register numerous trademarks and service marks in the United States and 50 additional countries throughout the world. Rights to the trademarks and service marks in the United States are generally held by a wholly-owned affiliate of the Company and are used by the Company under license. Some of the Company’s trademarks, including Jamba Juice® and the Jamba logo are of material importance to the Company. The duration of trademark registrations varies from country to country. However, trademarks are generally valid and may be renewed indefinitely as long as they are in use and/or their registrations are properly maintained. In addition, the Company has registered and maintains numerous Internet domain names, including “jamba.com” and “jambajuice.com.”

Management Information Systems

Each Company Store has computerized point-of-sale registers which collect transaction data used to generate pertinent information, including sales transactions and product mix. Additionally, the point-of-sale system is used to authorize, batch and transmit credit card data. All product prices are programmed into the point-of-sale register from the Company’s corporate office. Franchise Stores generally use the same point-of-sale registers as Company Stores, but may elect to use alternative systems provided certain information is provided to the Company. Franchisees set their own menu prices.

Company Stores use the Company’s licensed labor scheduling and food cost management software to record employee time clock information, schedule labor, improve inventory management and provide management reports.

 

14


Table of Contents

While we believe the current point-of-sale register system is adequate to support our expansion needs, we do intend to institute certain upgrades to the platform in fiscal 2009.

Seasonality

Our business is subject to day to day volatility based on weather and varies by season. A significant portion of the Company’s revenue is realized during the second and third quarters of the fiscal year, which include the summer months. The fourth quarter of the fiscal year, which encompasses the winter months and the holiday season, has traditionally been our lowest revenue volume quarter. Because of the seasonality of the business, results for an individual quarter are not necessarily indicative of the results which may be achieved for the full fiscal year.

Executive Officers

Company executive officers, their respective ages and positions as of December 30, 2008 and a description of their business experience are set forth below. There are no family relationships among any of the executive officers named below.

James D. White, age 48

Mr. White has been the Company’s President and Chief Executive Officer since December 2008. Previously, Mr. White was Senior Vice President of Consumer Brands for Safeway, Inc. with responsibility for brand strategy, innovation, manufacturing and commercial sales from 2005 to 2008. Prior to Safeway, Mr. White was Senior Vice President of Business Development, North America at the Gillette Company, where his responsibilities included Centralized Marketing, Sales, Retail Execution, Marketing Planning and Canadian Operations from 2002 to 2005. Mr. White also held executive and management roles with Nestlé Purina from 1987 to 2005, including Vice President, Customer Interface Group from 1999 to 2002 and Vice President, Customer Development East from 1997 to 1999.

Karen L. Luey, age 47

Ms. Luey has been the Company’s Senior Vice President and Chief Financial Officer since August 2008. Ms. Luey had previously been the Jamba Juice Company’s Vice President, Controller and Principal Accounting Officer since April 2007. Previously, Ms. Luey was Vice President, Corporate Controller, and Principal Accounting Officer of LeapFrog Enterprises, located in Emeryville, California from 2005 to 2006. Prior to LeapFrog, Ms. Luey was with Sharper Image Corporation in San Francisco, California as Vice President, Finance and Controller from 2000 to 2005.

Steve Adkins, age 43

Mr. Adkins has been Jamba Juice Company’s Senior Vice President, Company Operations since July 2008. Mr. Adkins previously served as Jamba Juice Company’s Zone Vice President, East Zone beginning in 2005, and joined Jamba Juice Company in 2002 as a Regional Director of Operations for the Midwest. Previously, Mr. Adkins was with Fresh Choice from 1991 to 2002, departing as Senior Vice President of Operations.

Thibault de Chatellus, age 49

Mr. de Chatellus has been Jamba Juice Company’s Senior Vice President, Global Franchise, Development and Operations Services since August 2008, and had been Senior Vice President, International since May 2007. Mr. de Chatellus joined Jamba Juice Company after having served as an independent consultant in Dallas, Texas, focusing on business development strategies in international markets from 2005 through 2007. Prior to consulting, he held several senior executive positions with Blockbuster, Inc. in Ft. Lauderdale, Florida and

 

15


Table of Contents

Dallas, Texas, including Senior Vice President and Category General Manager, Games from February 2003 through June 2005, Senior Vice President, Strategic Concepts from June 2001 through February 2003, Senior Vice President, Content and New Business Channels from April 2000 through June 2001, Senior Vice President, Latin America from September 1996 through April 2000.

Michael W. Fox, age 49

Mr. Fox has been the Company’s Senior Vice President and General Counsel since August 2008, and has been Corporate Secretary since July 2005. Mr. Fox joined Jamba Juice Company in February 2005 as Vice President, Legal Affairs. From August 1999 until joining Jamba Juice Company, Mr. Fox was General Counsel and a co-founder of ProMost, Inc., an e-procurement company. From 1993 to July 1999, Mr. Fox was Senior Vice President, Business Affairs and General Counsel of Sony Signatures, Inc., the entertainment merchandising and merchandise licensing company of Sony Corporation of America.

Gregory A. Schwartz, age 44

Mr. Schwartz has been Jamba Juice Company’s Senior Vice President, Supply Chain, since September 2008, and joined Jamba Juice Company in August, 2007 as Vice President, Supply Chain. Previously, Mr. Schwartz was with WalMart Stores, Inc., in Bentonville, Arkansas, where he served as Vice President, Global Procurement from 2007 until joining Jamba Juice Company. Prior to WalMart, Mr. Schwartz was with Safeway, Inc. in Pleasanton, California from 1999 to 2006 in increasingly responsible positions, including Vice President, Strategic Global Sourcing and Business Development (Blackhawk Network) from 2005 to 2006, Vice President, Strategic Sourcing and Materials Management and Senior Vice President, Omnibrand Sales from 2003 to 2005, and Director, Smart Sourcing Procurement & Senior Vice President Omnibrand Sales from 1999 to 2003.

Employees

As of December 30, 2008, we employed approximately 9,000 persons, approximately 200 of whom were at our corporate offices or part of our field support and operations. The remainder of the employees were store management and hourly store personnel. The Company also hires a significant number of seasonal employees during its peak selling season during the Spring and Summer. Our employees are not covered by a collective bargaining agreement. We consider our employee relations to be good. We place a priority on staffing our stores and support center positions with skilled team members who embrace our culture and invest in training programs to ensure the quality of our store operations.

Available Information

Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available on our website at http://ir.jambajuice.com/index.cfm, as soon as reasonably practicable after we electronically file such reports with, or furnish those reports to, the Securities and Exchange Commission (the “SEC”). Our Corporate Governance Principles and Practices, Board of Directors committee charters (including the charters of the Audit Committee, Compensation and Executive Development Committee and Nominating and Governance Committee) and code of ethics entitled “Code of Business Conduct and Ethics” also are available at that same location on our website. Information on our website is not incorporated into this annual report. Stockholders may request free copies of these documents from:

Jamba, Inc.

c/o ICR, Inc.

450 Post Road East

Westport, CT 06880

(203) 682-8200

investors@jambajuice.com

 

16


Table of Contents

We included the certifications of the Chief Executive Officer and the Chief Financial Officer of Jamba, Inc. relating to the quality of our public disclosure, as required by Section 302 of the Sarbanes-Oxley Act of 2002 and related rules, in this Annual Report on Form 10-K as Exhibits 31.1 and 31.2.

 

ITEM 1A. RISK FACTORS

Set forth below and elsewhere in this report and in other documents we file with the SEC are descriptions of the risks and uncertainties that could cause our actual results to differ materially from the results contemplated by the forward-looking statements contained in this report.

RISKS RELATED TO OUR BUSINESS

We may not be successful in implementing our strategic priorities, which may have a material adverse impact on our business and financial results.

In 2008, we defined strategic priorities we believe necessary to revitalize the Company for future growth and long-term stockholder value, including:

 

   

building a customer first “operationally focused” service culture;

 

   

building a retail food capability across all four day parts (breakfast, lunch, afternoon, and dinner);

 

   

accelerating the development of franchise and non-traditional store;

 

   

building a consumer products growth platform; and

 

   

continuing to implement a disciplined expense reduction plan.

There can be no assurance that we will be able to successfully implement these strategic priorities or whether these strategic priorities will be successful, either of which will impede our growth and operating results.

The failure to control our cost and expense structure could have a material adverse impact on our profitability and earnings.

As part of our revitalization efforts, we have been able to reduce both our store level expenses and our general and administrative expense. However, we will need to continue to control our costs and expenses as we focus on our strategic priorities. Any unplanned increases in store costs, marketing expenditures, or general and administrative expenses could delay us from achieving sustained profitability or otherwise have a material adverse impact on our operating results and profitability. See Financing and Liquidity Risks below.

A worsening of economic conditions, a decrease in consumer spending, or a change in the competitive conditions in this market may substantially decrease our revenues and may adversely impact our ability to implement our business strategy.

Our success depends to a significant extent on discretionary consumer spending, which is influenced by general economic conditions and the availability of discretionary income. In 2008, we saw many consumers facing steep mortgage payments, tightening credit and rising energy and food prices, which adversely affected consumer spending. Accordingly, we may experience continuing declines in revenue during economic turmoil or during periods of uncertainty. Any material decline in the amount of discretionary spending, leading cost- conscious consumers to be more selective in restaurants visited, could have a material adverse effect on our revenue, results of operations, business and financial condition.

 

17


Table of Contents

We must successfully gauge dietary and consumer preferences to succeed.

Our success depends, in part, upon the popularity of our products and our ability to develop new menu items that appeal to consumers across all four day parts. Shifts in consumer preferences away from our products, our inability to develop new menu items that appeal to consumers across all day parts, or changes in our menu that eliminate items popular with some consumers could harm our business. In 2008, we rolled out several new products on a system-wide basis to anchor our new breakfast platform, including hot oatmeal, and tested wraps, sandwiches and salads. These new products are designed to feature healthy, on-the-go items to attract new customers, increase the frequency of current customer visits, create a point of differentiation, and provide a more complete meal solution for our customers across all day parts. To the extent we misjudge the market for our products, our sales will be adversely affected, which will negatively impact our operating results.

In addition, with new menu items, we must anticipate and effectively respond to changing product mix ramifications. These new products have new and different ingredients, vendors, lead times, packaging, and operational requirements than our existing products. Accordingly, our business may be harmed by unanticipated consequences such as an adverse effect on speed of service and higher cost of goods of these new products that could lead to suboptimal selection and timing of product purchases or subpar operational execution.

Some of the new menu items we plan to introduce may involve utilizing a different distribution system than we are currently using for our products. Accordingly, our business may be harmed to the extent we are unable to economically and efficiently implement a different distribution system for new menu items.

We may not persuade customers of the benefits of paying premium prices for higher-quality food.

Our success depends in large part on our ability to persuade customers to pay premium prices for our freshly blended beverages. We may not successfully educate customers about the quality and benefits of our product offerings, and customers may not care. Failure to maintain premium pricing could require us to change our pricing, products, and strategies, which would adversely affect our brand identity.

Our inability to compete with the many food services businesses may result in reductions in our revenue and operating margins.

We compete with many well-established companies, food service and otherwise, on the basis of taste, quality and price of product offered, customer service, atmosphere, location and overall guest experience. We compete with other smoothie and juice bar retailers, specialty coffee retailers, yogurt and ice cream shops, bagel shops, fast-food restaurants, delicatessens, cafés, take-out food service companies, supermarkets and convenience stores. Our competitors change with each of the four day parts, ranging from coffee bars and bakery cafés to casual dining chains. Aggressive pricing by our competitors or the entrance of new competitors into our markets could reduce our revenue and operating margins. We also compete with other employers in our markets for hourly workers and may become subject to higher labor costs as a result of such competition.

Our revenue is subject to volatility based on weather and varies by season.

Seasonal factors also cause our revenue to fluctuate from quarter to quarter. Our revenue is typically lower during the winter months and the holiday season and during periods of inclement weather (because fewer people choose cold beverages) and higher during the Spring, Summer and Fall months (for the opposite reason).

New stores, once opened, may not be profitable, and the increases in average store revenue and comparable store revenue that we have experienced in the past may not be indicative of future results.

Historically, our new stores have opened with an initial ramp-up period typically lasting approximately 24 months or more, during which they generated revenue and profit below the levels at which we expect them to normalize. This is in part due to the time it takes to build a customer base in a new market, higher fixed costs

 

18


Table of Contents

relating to increased construction and occupancy costs and other start-up inefficiencies that are typical of new stores. New stores may neither be profitable nor have results comparable to our existing stores. In addition, our average store revenue and comparable store revenue may not continue to increase at the rates achieved over the past several years. The ability to operate new stores profitably and increase average store revenue and comparable store revenue will depend on many factors, some of which are beyond our control or the control of our franchisees, including many of the risks described herein. If new stores don’t perform as planned, our business and future prospects could be harmed. In addition, changes in our average store revenue or comparable store revenue could cause our operating results to vary adversely from expectations.

Fluctuations in various food and supply costs, particularly fruit and dairy, could adversely affect our operating results.

Supplies and prices of the various products that we use to prepare our offerings can be affected by a variety of factors, such as weather, seasonal fluctuations, demand, politics and economics in the producing countries. These factors subject us to shortages or interruptions in product supplies, which could adversely affect our revenue and profits. In addition, the prices of fruit and dairy, which are the main products in our offerings, can be highly volatile. The fruit of the quality we seek tends to trade on a negotiated basis, depending on supply and demand at the time of the purchase. An increase in pricing of any fruit that we use in our products could have a significant adverse effect on our profitability. If we are unable to pass along increased fruit and dairy costs, our margin will decrease and our profitability will suffer accordingly. In addition, higher diesel and gasoline prices may affect our supply costs and may affect our revenue going forward. For example, in some cases higher diesel prices have resulted in the imposition of surcharges on the delivery of commodities to its distributors, which they have generally passed on to us to the extent permitted under our arrangements with them. To help mitigate the risks of volatile commodity prices and to allow greater predictability in pricing, we typically enter into fixed price or to-be-fixed priced purchase commitments for a portion of our fruit and dairy requirements. We cannot assure you that these activities will be successful or that they will not result in our paying substantially more for our fruit supply than would have been required absent such activities. We do have some multi-year pricing agreements with certain vendors. Declines in sales may also adversely affect our business to the extent we have purchase commitments in excess of our needs. The Company actively works with its vendors under such contracts to mitigate any such “long” positions by authorizing the vendors to sell such products to other customers or by more actively promoting sales of offerings that contain such products, but there is no guarantee that the Company will be successful in its mitigation efforts.

We are primarily dependent upon one supplier for a significant amount of our food distribution.

We maintain food distribution contracts primarily with one supplier. This supplier, Southwest Traders, Inc., provided approximately 81% of cost of sales for each of our fiscal years 2008 and 2007, approximately 82% of cost of sales in fiscal 2006, and approximately 85% of cost of sales in Jamba Juice Company’s fiscal 2006, which potentially subjects us to a concentration of business risk. If this supplier had operational problems, our operations could be adversely affected.

We may face difficulties entering into new or modified arrangements with existing or new suppliers or new service providers.

If we expand our operations into new geographic areas through new Company Stores or franchises, we may have to seek new suppliers and service providers or enter into new arrangements with existing ones. We may also encounter difficulties or be unable to negotiate pricing or other terms as favorable as those we currently enjoy, which could harm our business and operating results. If we cannot replace or engage new arrangements, suppliers and/or service providers in a cost effective basis, we may need to change our purchasing practices, remove items from the menu, or make menu price adjustments. These activities could negatively impact our revenues and results of operations.

 

19


Table of Contents

Our business could be adversely affected by increased labor costs or labor shortages.

Labor is a primary component in the cost of operating our business. We devote significant resources to recruiting and training our team members. A considerable number of the team members employed by us and our franchisees are paid at rates related to the federal minimum wage. In 2008, the federal minimum wage increased from $5.85 to $6.55 and it will increase again in 2009 to $7.25. Additionally, many of our team members work in stores located in states where the minimum wage is greater than the federal minimum and receive compensation equal to the state’s minimum wage. During 2008, we had state minimum wage increases in California, Oregon, New York, Arizona, Washington, Colorado, Illinois and Florida all above the federal minimum wage. In addition, the city of San Francisco itself has a minimum wage requirement greater than the State of California. Any further increases in the federal minimum wage or the enactment of additional state or local minimum wage increases will increase labor costs. If we are unable or unwilling to increase our menu prices or take other actions to offset increased operating costs, our operating results will suffer. Additionally, competition and labor shortages in various markets could result in higher required wage rates.

We are subject to all of the risks associated with leasing space subject to long-term non-cancelable leases.

We and our franchisees compete for real estate and our or their inability to secure appropriate real estate or lease terms could impact the ability to grow. Our leases generally have initial terms of between five and 15 years, and generally can be extended only in five-year increments if at all. All of our leases require a fixed annual rent, although some require the payment of additional rent if store revenue exceeds a specified amount. Generally, our leases are “net” leases, which require us to pay all of the cost of insurance, taxes, maintenance and utilities. We generally cannot cancel these leases. If an existing or future store is not profitable, and we decide to close it, we may nonetheless be committed to perform our obligations under the applicable lease including, among other things, paying the base rent for the balance of the lease term. Current locations of our stores and franchised locations may become unattractive as demographic patterns change. In addition, as each of our leases expire, we may fail to negotiate renewals, either on commercially acceptable terms or at all, which could cause us to close stores in desirable locations.

We may not achieve sales growth plans and other assumptions that support the carrying value of our assets and we may record lease termination costs.

The carrying value of our assets is subject to impairment reviews as of the last day of each fiscal quarter or more frequently if deemed necessary due to events or changes in circumstances. We have recorded asset impairment charges, principally related to underperforming Company Stores and, in fiscal 2008, recorded lease termination costs related to store closures. We may experience further asset impairments and lease termination costs in the future. Estimated future cash flows used in these impairment reviews could be negatively impacted if we do not achieve our sales plans, planned cost savings, and other assumptions that support the carrying value of our assets, which could result in potential impairment of further assets or a decision to close additional Company Stores.

Our business and results may be subject to disruption from work stoppages, terrorism or natural disasters.

Our operations may be subject to disruption for a variety of reasons, including work stoppages, acts of war, terrorism, pandemics, fire, earthquake, flooding or other natural disasters. In particular, our corporate offices and support center is located in Northern California, near known earthquake fault lines. If a major earthquake or other natural disaster were to occur in Northern California, our corporate offices and support center may be damaged or destroyed. Such a disruption could result in the temporary or permanent loss of critical data, suspension of operations, delays in shipments of product, and disruption of business in both the affected region and nationwide, which would adversely affect our revenue as a result.

 

20


Table of Contents

The unexpected loss of one or more members of our executive management team could adversely affect our business.

We have experienced significant changes in our executive management team in 2008, including the departure of our chief executive officer, chief financial officer, chief marketing officer, head of operations, and head of development. We have a new chief executive officer and have internally promoted other members of the executive team and increased their responsibilities. We believe that these individuals understand our operational strategies and new strategic priorities to revitalize our long-term growth and stockholder value. We have entered into employment agreements with each of these individuals, but we cannot make any assurances that we can retain these individuals for the period necessary for us to return to sustained profitability. Competition for personnel in our industry is strong and the ability to retain key employees during a revitalization effort can be difficult. The unexpected future loss of services of one or members of our executive management team could have an adverse effect on our business. If we are unable to retain key executive officers, then it may be difficult for us to maintain a competitive position within our industry or implement our strategic priorities.

Our growth strategy depends on increasing franchise ownership.

There were 511 Company Stores and 218 Franchise Stores open as of December 30, 2008. Our recent growth strategy is to transition from a Company Store model to a model more evenly weighted between Company Stores and Franchise Stores. This strategy is subject to risks and uncertainties. We may not be able to identify franchisee candidates with appropriate experience and financial resources or to negotiate mutually acceptable agreements with them. Our franchisee candidates may not be able to obtain financing at acceptable rates and terms. We may not be able to increase the percentage of franchised stores at the annual rate we desire or achieve the ownership mix of franchise stores to Company Stores that we desire.

Risks Related to Franchise Operations

The opening and success of franchised stores depend on various factors, including the following:

 

   

the demand for our franchises;

 

   

the selection of appropriate franchisee candidates;

 

   

financing capital expenditures;

 

   

locating and securing an adequate supply of new store sites;

 

   

competition for sites and for business;

 

   

negotiating leases with acceptable terms;

 

   

hiring and training qualified operating personnel in local markets;

 

   

managing construction and development costs of new stores at affordable levels, particularly in competitive markets;

 

   

the availability of construction materials and labor;

 

   

the availability of, and their ability to obtain, adequate supplies of ingredients that meet our quality standards;

 

   

the impact of inclement weather, natural disasters and other calamities; and

 

   

securing required governmental approvals (including construction, parking and other permits) in a timely manner.

As the number of franchisees increase, our revenues derived from royalties at franchise stores will increase, as will the risk that revenues could be negatively impacted by defaults in the payment of royalties.

 

21


Table of Contents

Expansion into new geographic markets may present increased risks.

Franchise growth is planned in new geographic areas in the United States. Our future results, and the results of new franchise stores, depend on various factors, including successful selection and expansion into these new geographic markets and market acceptance of the Jamba Juice experience. Those markets may have different competitive conditions, consumer tastes and discretionary spending patterns than our existing markets. As a result, those new stores may be less successful than stores in our existing markets. Consumers in a new market may not be familiar with the Jamba Juice brand, and we may need to build brand awareness in that market through greater investments in advertising and promotional activity than we originally planned. Franchisees may find it more difficult in new markets to hire, motivate and keep qualified employees who can project our vision, passion and culture. Stores opened in new markets may also have lower average store revenue than stores opened in existing markets, and may have higher construction, occupancy or operating costs than stores in existing markets. Furthermore, we may have difficulty in finding reliable suppliers or distributors or ones that can provide us, either initially or over time, with adequate supplies of ingredients meeting our quality standards. Revenue at stores opened in new markets may take longer to ramp up and reach expected revenue levels, and may never do so, thereby affecting overall royalty income. As with the experience of other retail food concepts who have tried to expand nationally, we may find that the Jamba Juice concept has limited or no appeal to customers in new markets or we may experience a decline in the popularity of the Jamba Juice experience. Newly opened franchise stores may not succeed, future markets and stores may not be successful and, even if we are successful, our average store revenue, and the royalty income generated therefrom, may not increase at historical rates.

Termination or non-renewal of franchise agreements may disrupt store performance.

Each franchise agreement is subject to termination by us in the event of default by the franchisee after the applicable cure periods. Upon the expiration of the initial term of a franchise agreement, the franchisee generally has an option to renew for an additional term. There is no assurance that franchisees will meet the criteria for renewal or will desire or be able to renew their franchise agreements. If not renewed, a franchise agreement and payments required thereunder will terminate. We may be unable to find a new franchisee to replace such lost revenue. Furthermore, while we will be entitled to terminate franchise agreements following a default that is not cured within the applicable cure period, if any, the disruption to the performance of the stores could materially and adversely affect our business.

Our franchising strategy means we will become more dependent on franchisees for their success.

Several of our franchisees have been experiencing financial pressures, which, in certain instances, became more exacerbated during 2008. Our franchisees closed 12 stores in fiscal 2008 and may close additional stores in the future. Royalty revenues are directly correlated to sales by franchise stores and, accordingly, franchise store closures have an adverse effect on our revenues, results of operations and cash flows. Furthermore, an insolvency or bankruptcy proceeding involving a franchisee could prevent us from collecting payments or exercising any of our other rights under the related franchise agreement.

Our re-franchising strategy may not be successful.

We are implementing a strategy to refranchise in certain geographic markets. Given the current risks and financing challenges associated with becoming a franchisee of a restaurant retailer in the current economy, we cannot predict the likelihood of re-franchising any such markets or the amount of any proceeds that might be received therefrom, including the amounts that might be realized from the sale of store assets and from any related franchise agreements. Re-franchising could result in the recognition of impairment losses on the related assets. Additionally, in certain instances, there may be change in control provisions in the lease which require us to get landlord consent for a re-franchising transaction. Failure of a landlord to consent to the assumption of a lease from us by a franchisee could cause us to remain liable for such lease obligations either as a guarantor or a sublessor.

 

22


Table of Contents

Our franchisees could take actions that harm our reputation and reduce our royalty revenue.

Franchisees are independent contractors and are not our employees. Further, we do not exercise control over the day-to-day operations of our franchise stores. Any operational or development shortcomings of our franchise stores are likely to be attributed to our system-wide operations and could adversely affect our reputation and have a direct negative impact on the royalty revenue we receive from those stores.

We could face liability from our franchisee and from government agencies.

A franchisee or government agency may bring legal action against us based on the franchisor/franchisee relationship. Various state and federal laws govern our relationship with our franchisees and our potential sale of a franchise. If we fail to comply with these laws, we could be liable for damages to franchisees, fines or other penalties. Expensive litigation with our franchisees or government agencies may adversely affect both our profits and our important relations with our franchisees.

We periodically acquire existing Jamba Juice stores from our franchisees, which could adversely affect our results of operations.

Historically, we have acquired Jamba Juice stores from our franchisees either by negotiated agreement or exercise of our rights of first refusal or purchase option under the franchise or area development agreement. Any acquisition that we undertake involves risks, including, our ability to successfully and profitably transition acquired franchise stores into Company Stores. Failure to do so effectively could strain our financial and management resources as well as negatively impact our results of operations.

If we expand into foreign markets we will be exposed to new uncertainties and risks, which could negatively impact our results of operations.

We are exploring expanding our operations into new foreign markets, which will expose us to new risks and uncertainties, including product supply, consumer preferences, occupancy costs, operating expenses and labor and infrastructure challenges. In addition, consumers in a foreign market may not be familiar with the Jamba Juice brand, and we may need to build brand awareness in that market through greater investments in advertising and promotional activity. Finally, international operations have inherent risks such as foreign currency exchange rate fluctuations, the application and effect of local laws and regulations and enforceability of intellectual property and contract rights.

Our failure to manage our growth effectively could harm our business and operating results.

Our existing management, financial, and other resources may be inadequate to support our franchise growth strategy. Managing our growth effectively will require us to continue to enhance our financial and management controls and informational and operations systems. We may not respond quickly enough to the changing demands that our growth will impose on our management, employees and existing infrastructure. Our failure to manage our growth effectively could harm our business and operating results.

Governmental regulation may adversely affect our ability to open new stores or otherwise adversely affect our existing and future operations and results.

We and our franchisees are subject to various federal, state and local regulations. Each of our stores is subject to state and local licensing and regulation by health, sanitation, food and workplace safety and other agencies. We and our franchisees may experience material difficulties or failures in obtaining the necessary licenses or approvals for new stores, which could delay planned store openings. In addition, stringent and varied requirements of local regulators with respect to zoning, land use and environmental factors could delay or prevent development of new stores in particular locations.

 

23


Table of Contents

We and our franchisees are subject to the U.S. Americans with Disabilities Act and similar state laws that give civil rights protections to individuals with disabilities in the context of employment, public accommodations and other areas. We and our franchisees may in the future have to modify stores, for example by adding access ramps or redesigning certain architectural fixtures, to provide service to or make reasonable accommodations for disabled persons. The expenses associated with these modifications could be material.

Our operations are also subject to the U.S. Fair Labor Standards Act, which governs such matters as minimum wages, overtime and other working conditions, along with the U.S. Americans with Disabilities Act, family leave mandates and a variety of similar laws enacted by the states that govern these and other employment law matters. In recent years, there has been an increased legislative, regulatory and consumer focus on nutrition and advertising practices in the food industry. Establishments operating in the quick-service and fast-casual segments have been a particular focus. For example, many state and local jurisdictions have adopted a regulation requiring that restaurants that make calorie information publicly available must include that information on their menus and menu boards. We may in the future become subject to other initiatives in the area of nutrition and calorie disclosure or advertising, such as requirements to provide information about the nutritional and calorie content of our food, which could increase our expenses.

Government mandatory healthcare requirements could adversely affect our profits.

The Company pays a substantial part of the healthcare benefits for team members at the General Manager level and above and for those working at the Company’s corporate office. Other team members can purchase more limited healthcare benefits. Legislation is being proposed at the federal and state levels mandating employers to either provide health care coverage to their employees or pay into a fund that would provide coverage for them. If this type of legislation is enacted in additional geographic areas where we do business, it could have an adverse effect on our profits.

Our federal, state and local tax returns may, from time to time, be selected for audit by the taxing authorities, which may result in tax assessments, interest or penalties that could have a material adverse impact on our results of operations and financial position.

We are subject to federal, state and local taxes in the U.S. In making tax estimates and paying taxes, significant judgment is often required. Although we believe our tax positions and estimates are reasonable, if a taxing authority disagrees with the positions taken by the Company, we could have an additional tax liability, including interest and penalties. If material, payment of such additional amounts could have a material impact on our results of operations and financial position.

We could be party to litigation that could adversely affect us by distracting management, increasing our expenses or subjecting us to material money damages and other remedies.

Our customers occasionally file complaints or lawsuits against us alleging that we are responsible for some illness or injury they suffered at or after a visit to our stores, or that we have problems with food quality or operations. We are also subject to a variety of other claims arising in the ordinary course of our business, including personal injury claims, contract claims and claims alleging violations of federal and state law regarding workplace and employment matters, discrimination and similar matters, and we could become subject to class action or other lawsuits related to these or different matters in the future. Regardless of whether any claims against us are valid, or whether we are ultimately held liable, claims may be expensive to defend and may divert time and money away from our operations and hurt our performance. A judgment significantly in excess of our insurance coverage, or for which we are not covered by insurance, could materially and adversely affect our financial condition or results of operations. Any adverse publicity resulting from these allegations may also materially and adversely affect our reputation or prospects, which in turn could adversely affect our results.

 

24


Table of Contents

In addition, the food services industry has been subject to a growing number of claims based on the nutritional content of food products they sell and disclosure and advertising practices. We may also be subject to this type of proceeding in the future and, even if not, publicity about these matters (particularly directed at the quick-service and fast-casual segments of the industry) may harm our reputation or prospects and adversely affect our results.

We may also incur costs resulting from other security risks we may face in connection with our electronic processing and transmission of confidential customer information.

We rely on commercially available software and other technologies to provide security for processing and transmission of customer credit card data. Approximately 33% of our current revenue is attributable to credit card transactions, and that percentage is expected to climb. Our systems could be compromised in the future, which could result in the misappropriation of customer information or the disruption of systems. Either of those consequences could have a material adverse effect on our reputation and business or subject it to additional liabilities.

FINANCING AND LIQUIDITY RISKS

Our financing agreement imposes restrictions and obligations upon us that limit our ability to operate our business.

Our secured Financing Agreement (the “Financing Agreement”) imposes financial and other restrictive covenants that limit our ability to plan for and respond to changes in our business. Under the agreement, we are required to meet certain financial tests and comply with covenants, which, among other things, limit the incurrence of additional indebtedness, liens, investments, asset sales, acquisitions, and other matters customarily in such agreements. Any failure to comply with these covenants could result in an event of default under this Financing Agreement. Any default under the Financing Agreement may cause an acceleration of all outstanding amounts due under the Financing Agreement, which, if we do not have adequate cash reserves, could be detrimental to our business operations.

In addition, commencing September 11, 2009, the lenders under the Financing Agreement have a put right requiring us to repurchase 2,000,000 shares of common stock held by them at a price of $1.50 per share. Any exercise of this put right could have an adverse effect on our liquidity. The $3.0 million that would be needed to repurchase these shares are classified in restricted cash on our balance sheet.

Insufficient cash flows from operations may adversely affect our financial condition.

We had a net loss of $149.2 million for fiscal 2008 and a net loss of $113.3 million for fiscal 2007. These results have had a negative impact on our financial condition and operating cash flows. We believe the implementation of our strategic priorities will lead to our ability to sustain profitability. Our primary sources of liquidity include cash on hand as a result of the borrowing made under our Financing Agreement, a federal income tax refund of $5.2 million received in February 2009, expected availability of restricted cash and cash flows from operations. We expect that our primary sources of liquidity will be sufficient to fund non-discretionary capital expenditures and working capital through fiscal 2009. However, if we are unable to maintain sufficient working capital, we may be forced to further reduce operating expenses, sell business assets or take other actions, which could be detrimental to our business operations.

Furthermore, we may also explore other ways to improve our working capital. Although we believe there are financing alternatives available, additional capital may not be available on a timely basis or on acceptable terms, if at all. Moreover, in the event that any future financing is completed, to the extent it includes equity securities, the holders of our common stock may experience additional dilution.

 

25


Table of Contents

The inability to fund capital expenditures may adversely impact future growth.

The success of our future growth will depend, to a significant extent, on our ability to fund the necessary capital expenditures. For example, we plan to build a retail food capability across all four day parts (breakfast, lunch, afternoon and dinner). In addition, two other strategic priorities are to implement various technology initiatives which would promote efficiency in customer service and to embark on a store refresh program in selected Company Stores to revitalize their look and feel. To the extent we are not able to fund the necessary capital expenditures to address these priorities, these priorities may take longer to implement and may not be as successful as we expect, which could have a material adverse impact on our business.

RISKS RELATING TO INTELLECTUAL PROPERTY

We may not be able to adequately protect our intellectual property, which could harm the value of our brand and adversely affect our business.

Our intellectual property is material to the conduct of our business. Our ability to implement our business plan successfully depends in part on our ability to build further brand recognition using our trademarks, service marks, trade dress and other proprietary intellectual property, including our name and logos and the unique ambiance of our stores both domestically and overseas. We have secured the ownership and rights to our marks in the United States and have filed or obtained registrations for restaurant services in most other significant foreign jurisdictions. If our efforts to protect our intellectual property are inadequate, or if any third party misappropriates or infringes on our intellectual property, either in print or on the internet, the value of our brands may be harmed, which could have a material adverse effect on our business and might prevent our brands from achieving or maintaining market acceptance. While we have not encountered claims from prior users of intellectual property relating to restaurant services in areas where we operate or intend to conduct material operations, there can be no assurances that we will not encounter such claims. If so, this could harm our image, brand or competitive position and cause us to incur significant penalties and costs.

The Company’s earnings and growth of alternative distribution channels depends in large part on the success of its business partners, and the Company’s reputation may be harmed by actions taken by third parties.

A strategic priority is to seek opportunities to extend the Jamba brand and maximize revenue by leveraging the brand in new and complementary consumer packed product categories. These revenues will be dependent on the success of the licensed products, as well as the capability and execution of our business partner.

For example, in 2008, we launched a line of Jamba Ready-to-Drink beverages under an exclusive worldwide licensing agreement with Nestlé USA. In December 2008, Nestlé voluntarily suspended production and shipments of the beverages due to production issues. While Nestlé has announced that it is fully committed to re-assessing its Jamba Ready-to-Drink beverage proposition so that it can come back stronger and positioned for success in the future, there can be no assurance when and if this may happen.

In the future, we may enter into agreements with other companies for the retail distribution of other product categories involving the licensing of the Jamba Juice trademarks. Any execution failure by our business partner or failure to adhere to the brand experience and standards expected by our customers may damage our reputation and brand value, which may potentially affect the results of operations.

The Company’s success depends on the value of the Jamba brand.

The Jamba brand practice is to inspire and simplify healthy living. We believe we must preserve and grow the value of the Jamba brand in order to be successful in building our business and particularly in building a consumer products growth platform. Brand value is based in part on consumer perceptions and the Jamba brand has been highly rated in several brand studies. Our brand building initiatives involve increasing our product

 

26


Table of Contents

offerings and opening new stores to increase awareness of our brand and create and maintain brand loyalty. If our brand building initiatives are unsuccessful, or if business incidents occur which erode consumer perceptions of our brand, then the value of our products may diminish and we may not be able to implement our business strategy.

RISKS RELATED TO THE FOOD SERVICE BUSINESS

Litigation and publicity concerning food quality, health and other issues, which can result in liabilities and also cause customers to avoid our products, which could adversely affect our results of operations, business and financial condition.

Food service businesses can be adversely affected by litigation and complaints from customers or government authorities resulting from food quality, allergens, illness, injury or other health concerns or operating issues stemming from one retail location or a limited number of retail locations. Adverse publicity about these allegations may negatively affect us, regardless of whether the allegations are true, by discouraging customers from buying our products. We could also incur significant liabilities, if a lawsuit or claim results in a decision against us, or litigation costs, regardless of the result.

Food safety concerns and instances of food-borne illnesses could harm our customers, result in negative publicity and cause the temporary closure of some stores and, in some cases, could adversely affect the price and availability of fruits and vegetables, any of which could harm our brand reputation, result in a decline in revenue or an increase in costs.

We consider food safety a top priority and dedicate substantial resources towards ensuring that our customers enjoy high-quality, safe and wholesome products. However, we cannot guarantee that our internal controls and training will be fully effective in preventing all food-borne illnesses. Furthermore, our reliance on third-party food suppliers and distributors increases the risk that food-borne illness incidents (such as e.coli, hepatitis A, salmonella or listeria) could occur outside of our control and at multiple locations.

Instances of food-borne illnesses, whether real or perceived, and whether at our stores or those of our competitors, could harm customers and otherwise result in negative publicity about us or the products we serve, which could adversely affect revenue. If there is an incident involving our stores serving contaminated products, our customers may be harmed, our revenue may decrease and our brand name may be impaired. If our customers become ill from food-borne illnesses, we could be forced to temporarily close some stores. If we react to negative publicity by changing our menu or other key aspects of the Jamba Juice experience, we may lose customers who do not accept those changes, and may not be able to attract enough new customers to produce the revenue needed to make our stores profitable. In addition, we may have different or additional competitors for our intended customers as a result of making any such changes and may not be able to compete successfully against those competitors. Food safety concerns and instances of food-borne illnesses and injuries caused by food contamination have in the past, and could in the future, adversely affect the price and availability of affected ingredients and cause customers to shift their preferences, particularly if we choose to pass any higher ingredient costs along to consumers. As a result, our costs may increase and our revenue may decline. A decrease in customer traffic as a result of these health concerns or negative publicity, or as a result of a change in our menu or dining experience or a temporary closure of any of our stores, could materially harm our business.

The food service industry has inherent operational risks that may not be adequately covered by insurance.

We may not be adequately insured against all risks and our insurers may not pay a particular claim. Furthermore, in the future, we may not be able to obtain adequate insurance coverage at reasonable rates for our operations. We may also be subject to calls, or premiums, in amounts based not only on our own claim records but also the claim records of all other members of the protection and indemnity associations through which we

 

27


Table of Contents

receive indemnity insurance coverage for tort liability. Our insurance policies also contain deductibles, limitations and exclusions, which, although we believe are standard in the food service industry, may nevertheless increase our costs.

Restaurant companies, including Jamba Juice, have been the target of class action lawsuits and other proceedings alleging, among other things, violations of federal and state workplace and employment laws. Proceedings of this nature, if successful, could result in our payment of substantial damages.

Our results of operations may be adversely affected by legal or governmental proceedings brought by or on behalf of employees or customers. In recent years, a number of restaurant companies, including Jamba Juice Company, have been subject to lawsuits, including class action lawsuits, alleging violations of federal and state law regarding workplace and employment matters, discrimination, tip policy and similar matters. A number of these lawsuits have resulted in the payment of substantial awards by the defendants. Similar lawsuits have been instituted against us in the past alleging violations of state and federal wage and hour laws and failure to pay for all hours worked. Although we are not currently a party to any class action lawsuits, we could incur substantial damages and expenses resulting from lawsuits, which would increase the cost of operating the business and decrease the cash available for our business.

RISKS RELATED TO OWNERSHIP OF COMMON STOCK

We currently fail to meet one of NASDAQ’s listing requirements and if our common stock is delisted it could negatively impact the price of our common stock, our ability to access the capital markets, and trigger a put right.

Our common stock is currently listed on the NASDAQ Global Market. A continual listing requirement of the NASDAQ is that the bid price of our common stock not close below the minimum of $1.00 per share for a 30-consecutive business day period. We are not currently in compliance with this requirement. However, NASDAQ has suspended enforcement of this requirement until April 20, 2009. If, absent a continued suspension of this rule by NASDAQ after April 20, 2009, we fail to regain compliance with the minimum bid price requirement after enforcement of this requirement is resumed on April 20, 2009, or if at any time we fail to satisfy any of the other requirements for continued listing, our common stock could be delisted from the NASDAQ Global Market. The delisting of our common stock would significantly affect the ability of investors to trade our securities and would negatively affect the value and liquidity of our common stock.

If delisted from the NASDAQ Global Market, our common stock will likely be quoted in the over-the-counter market in the so-called “pink sheets” or quoted in the OTC Bulletin Board. In addition, our common stock would be subject to the rules promulgated under the Securities Exchange Act of 1934 relating to “penny stocks.” These rules require brokers who sell securities that are subject to the rules, and who sell to persons other than established customers and institutional accredited investors, to complete required documentation, make suitability inquiries of investors and provide investors with information concerning the risks of trading in the security. These requirements could make it more difficult to buy or sell our common stock in the open market. In addition, the delisting of our common stock could materially adversely affect our ability to raise capital on terms acceptable to us or at all. Delisting from the NASDAQ Global Market could also have other negative results, including the potential loss of confidence by suppliers and employees, the loss of institutional investor interest and fewer business development opportunities.

Furthermore, delisting from the NASDAQ Global Market would trigger a put right on behalf of our lenders requiring us to repurchase 2,000,000 shares of common stock held by them at a price of $1.50 per share.

Our quarterly operating results may fluctuate significantly and could fall below the expectations of securities analysts and investors due to various factors.

Our quarterly operating results may fluctuate significantly because of various factors, including:

 

   

the impact of inclement weather;

 

28


Table of Contents
   

changes in consumer preferences and discretionary spending;

 

   

the timing of new franchise store openings and related revenue;

 

   

labor availability and wages of store management and team members;

 

   

changes in comparable store revenue and customer visits, including as a result of the introduction of new menu items;

 

   

variations in general economic conditions, such as, for example, those relating to changes in gasoline prices;

 

   

negative publicity about the ingredients we use or the occurrence of food-borne illnesses or other problems at our stores;

 

   

increases in infrastructure costs;

 

   

fluctuations in supply prices; and

 

   

fluctuations in the fair value of the derivative liability associated with outstanding warrants.

Because of these factors, results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for any year. Average store revenue or comparable store revenue in any particular future period may decrease. In the future, operating results may fall below the expectations of securities analysts and investors. Any failure to meet expectations, particularly for (i) comparable store sales, (ii) earnings per share, or (iii) new store openings could cause the market price of the Company’s stock to drop significantly.

Results of operations may be volatile as a result of the impact of fluctuations in the fair value of our outstanding warrants from quarter to quarter.

Our outstanding warrants are classified as derivative liabilities and therefore, their fair values are recorded as derivative liabilities on our balance sheet. Changes in the fair values of the warrants will result in adjustments to the amount of the recorded derivative liabilities and the corresponding gain or loss will be recorded in our statement of operations. We are required to assess these fair values of derivative liabilities each quarter and as the value of the warrants is quite sensitive to changes in the market price of our stock, among other things, fluctuations in such value could be substantial and could cause our results to not meet the expectations of securities analysts and investors. These fluctuations will continue to impact our results of operations as described above for as long as the warrants are outstanding. The warrants will expire on June 28, 2009.

Failure of the Company’s internal control over financial reporting could harm its business and financial results.

Our management is responsible for establishing and maintaining effective internal control over financial reporting. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes: (i) maintaining reasonably detailed records that accurately and fairly reflect our transactions; and (ii) providing reasonable assurance that we (a) record transactions as necessary to prepare the financial statements, (b) make receipts and expenditures in accordance with management authorizations, and (c) would timely prevent or detect any unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that we would prevent or detect a misstatement of our financial statements or fraud. Any failure to maintain an effective system of internal control over financial reporting could limit our ability to report our financial results accurately and timely or to detect and prevent fraud. A significant financial reporting failure could cause an immediate loss of investor confidence in us and a sharp decline in the market price of our common stock.

 

29


Table of Contents

Our anti-takeover provisions may delay or prevent a change of control of us, which may adversely affect the price of our common stock.

Certain provisions in our corporate documents and Delaware law may delay or prevent a change of control of us, which could adversely affect the price of our common stock. For example, we have adopted a stockholder rights plan, commonly known as a “poison pill,” which would make it difficult for someone to acquire the Company without the approval of the Board of Directors. Also, the Company’s amended and restated certificate of incorporation and bylaws include other anti-takeover provisions such as:

 

   

Limitations on the ability of stockholders to amend its charter documents, including stockholder supermajority voting requirements;

 

   

The inability of stockholders to act by written consent or to call a special meeting absent the request of the holders of a majority of the outstanding common stock;

 

   

Advance notice requirements for nomination for election to the board of directors and for stockholder proposals; and

 

   

The authority of its board of directors to issue, without stockholder approval, “blank check” preferred stock.

The Company is also afforded the protections of Section 203 of the Delaware General Corporation Law which prevents it from engaging in a business combination with a person who acquires at least 15% of its common stock for a period of three years from the date such person acquired such common stock, unless board of directors or stockholder approval is obtained.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

 

ITEM 2. PROPERTIES

The Company’s corporate headquarters is located at 6475 Christie Avenue, Emeryville, California. This facility is occupied under a lease for approximately 36,000 square feet, at a cost of approximately $1.0 million per year and has a lease term that expires December 31, 2017.

The Company currently operates all of its stores under leases and typically signs five to 15 year leases. The Company does not intend to purchase real estate for any of its sites in the future. The Company believes that the size and flexibility of its format provide it with a competitive advantage in securing sites.

 

30


Table of Contents

The Company currently serves its customers through a combination of Company Stores and Franchise Stores in 21 different states and the Bahamas.

 

     Store Count as of December 30, 2008
     Company
Stores
   Franchise
Stores
   Total

Arizona

   12    22    34

California

   338    50    388

Colorado

   17    6    23

Florida

   22    1    23

Illinois

   34    —      34

Indiana

   1    —      1

Minnesota

   8    1    9

New Jersey

   2    2    4

Nevada

   11    2    13

New York

   20    1    21

Oregon

   9    15    24

Utah

   10    7    17

Washington

   26    11    37

Wisconsin

   1    —      1

Bahamas

   —      1    1

Hawaii

   —      34    34

Idaho

   —      5    5

Massachusetts

   —      1    1

North Carolina

   —      3    3

Oklahoma

   —      8    8

Pennsylvania

   —      2    2

Texas

   —      46    46
              

Total

   511    218    729
              

 

ITEM 3. LEGAL PROCEEDINGS

The Company is party to various legal proceedings arising in the ordinary course of its business, but it is not currently a party to any legal proceeding that management believes would have a material adverse effect on the consolidated financial position or results of operations of the Company.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of our stockholders for the fiscal quarter ended December 30, 2008.

 

31


Table of Contents

PART II

 

ITEM 5. MARKET FOR JAMBA, INC.’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The shares of Jamba, Inc. common stock, warrants and units are currently quoted on the NASDAQ Global Market under the symbols JMBA, JMBAW and JMBAU, respectively. Prior to the Merger on November 29, 2006, our common stock, warrants and units were listed for trading on the American Stock Exchange under the symbols SVI, SVI.WS and SVI.U.

Each unit of Jamba, Inc. consists of one share of Jamba, Inc. common stock and one redeemable common stock purchase warrant. Jamba, Inc. warrants became separable from Jamba, Inc. common stock on July 28, 2005. Each warrant entitles the holder to purchase from Jamba, Inc. one share of common stock at an exercise price of $6.00. The Jamba, Inc. warrants will expire at 5:00 p.m., New York City time, on June 28, 2009, or earlier upon redemption.

The closing price per share of Jamba, Inc. common stock, warrants and units as reported on the NASDAQ Global Market on March 6, 2009, was $0.40, $0.01 and $0.47, respectively.

The following table sets forth, for the fiscal quarter indicated, the quarterly high and low closing sales prices of our units, common stock and warrants as reported on the NASDAQ Global Market, as applicable, for each quarter during the last two fiscal years.

 

     Common Stock    Warrants    Units
     High    Low    High    Low    High    Low

2007 First Quarter

   $ 10.66    $ 8.76    $ 4.74    $ 3.14    $ 14.56    $ 11.80

2007 Second Quarter

     10.30      8.62      4.50      3.11      15.36      11.86

2007 Third Quarter

     8.26      6.27      2.91      1.80      10.93      8.10

2007 Fourth Quarter

     6.34      3.06      1.78      0.54      8.41      3.72

2008 First Quarter

     3.68      2.14      0.58      0.16      4.56      1.65

2008 Second Quarter

     2.64      1.13      0.25      0.06      2.85      1.11

2008 Third Quarter

     1.34      0.55      0.09      0.03      1.70      0.61

2008 Fourth Quarter

     0.73      0.40      0.03      0.01      1.16      0.51

We have not historically paid any cash dividends. We intend to continue to retain earnings for use in the operation and expansion of our business, and therefore do not anticipate paying any cash dividends in the foreseeable future.

As of March 6, 2009, there were 87 holders of record of our common stock, one holder of record of our units and one holder of record of our warrants.

 

32


Table of Contents

Performance Graph

The following graph compares our cumulative total stockholder return since June 30, 2005 with the cumulative total return of (i) the NASDAQ Global Market, (ii) the Russell 2000 Index and (iii) Russell MicroCap Index. The graph assumes that the value of the investment in our common stock and each index (including reinvestment of dividends) was $100 on July 28, 2005. The Company is using the Russell MicroCap Index for the first time in its performance graph because we believe the other companies in that index are currently a better comparison for us, particularly in terms of market capitalization. We also note that due to the drop in our market capitalization, our Common Stock was excluded from the Russell 2000 Index during 2008.

LOGO

 

    7/05   9/05   12/05   3/06   6/06   9/06   1/07   3/07   6/07   9/07   1/08   3/08   6/08   9/08   12/08

Jamba Inc.  

  100.00   101.57   101.85   145.79   141.23   126.96   138.94   130.96   130.39   100.29   52.78   37.80   26.39   12.84   6.56

NASDAQ Composite

  100.00   105.44   108.44   115.87   108.26   112.95   121.59   122.15   130.78   136.32   132.85   114.17   115.36   102.40   77.46

Russell 2000

  100.00   104.69   105.88   120.64   114.58   115.08   125.33   127.77   133.41   129.28   123.36   111.15   111.80   110.56   81.68

Russell MicroCap

  100.00   106.06   107.40   122.58   114.28   113.51   125.16   126.32   130.52   124.50   115.15   100.85   97.28   96.47   69.35

 

33


Table of Contents
ITEM 6. SELECTED FINANCIAL DATA

The table below summarizes the Company’s recent financial information. The historical information was derived from the consolidated financial statements of Jamba, Inc. and subsidiary for the fiscal years ended December 30, 2008, January 1, 2008, January 9, 2007, the transition period of January 1 through January 10, 2006 and the period beginning with Jamba, Inc.’s inception (January 6, 2005) through December 31, 2005. The information for Jamba, Inc. for the fiscal year ended January 9, 2007 includes the operations for Jamba Juice Company from November 29, 2006 through January 9, 2007. The data set forth below should be read in conjunction with the consolidated financial statements and notes thereto in Item 8 and with Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7.

(In thousands, except share data and per share amounts)

Statements of Operations Data

 

    Fiscal Year
Ended
December 30, 2008
    Fiscal Year
Ended
January 1, 2008(1)
    Fiscal Year
Ended
January 9, 2007(2)
    Period from
January 1, 2006 to
January 10, 2006
    Period from
January 6, 2005
(inception) to
December 31, 2005
 

Revenue:

         

Company stores

  $ 333,784     $ 306,035     $ 22,064     $ —       $ —    

Franchise and other revenue

    9,106       11,174       1,051       —         —    
                                       

Total revenue

    342,890       317,209       23,115       —         —    
                                       

Costs and operating expenses:

         

Cost of sales

    89,163       84,226       6,039       —         —    

Labor

    120,251       102,661       8,524       —         —    

Occupancy

    44,868       37,458       3,590       —         —    

Store operating

    43,714       39,942       4,222       —         —    

Depreciation and amortization

    24,717       19,168       1,878       —         —    

General and administrative

    48,057       48,384       6,195       —         —    

Store pre-opening

    2,044       5,863       285       —         —    

Impairment of long-lived assets

    27,802       1,550       —         —         —    

Store lease termination and closure

    10,029       718       —         —         —    

Trademark and goodwill impairment

    84,061       200,624       —         —         —    

Other operating

    3,817       4,806       675       —         —    

Formation and operating

    —         —         —         6       197  
                                       

Total costs and operating expenses

    498,523       545,400       31,408       6       197  
                                       

Loss from operations

    (155,633 )     (228,191 )     (8,293 )     (6 )     (197 )
                                       

Other income (expense):

         

Gain (loss) on derivative liabilities

    7,895       59,424       (57,383 )     173       2,125  

Interest income

    365       3,517       4,177       92       1,453  

Interest expense

    (2,064 )     (181 )     (71 )     —         —    
                                       

Total other income (expense)

    6,196       62,760       (53,277 )     265       3,578  
                                       

Income (loss) before income taxes

    (149,437 )     (165,431 )     (61,570 )     259       3,381  

Income tax benefit (expense)

    274       52,135       2,544       38       (85 )
                                       

Net income (loss)

  $ (149,163 )   $ (113,296 )   $ (59,026 )   $ 297     $ 3,296  
                                       

Weighted-average shares used in the computation of earnings (loss) per share:

         

Basic

    53,252,855       52,323,898       24,478,384       21,000,000       11,777,489  

Diluted

    53,252,855       52,323,898       24,478,384       23,703,268       13,049,709  

Earnings (loss) per share:

         

Basic

  $ (2.80 )   $ (2.17 )   $ (2.41 )   $ 0.01     $ 0.28  

Diluted

  $ (2.80 )   $ (2.17 )   $ (2.41 )   $ 0.01     $ 0.25  

 

(1)

Due to the Company’s change in fiscal year, the fiscal year ended January 1, 2008 contains the results of operations for a 51-week year.

 

(2)

The information for the Company for the fiscal year ended January 9, 2007 includes operations for Jamba Juice Company from November 29, 2006 through January 9, 2007. The information is only a summary and should be read in conjunction with the historical consolidated financial statements and related notes. Proforma information can be found in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7.

 

34


Table of Contents

Selected Balance Sheet Data (at period end)

 

     December 30,
2008
   January 1,
2008
   January 9,
2007
   January 10,
2006
   December 31,
2005

Cash and cash equivalents

   $ 20,822    $ 23,016    $ 87,379    $ 977    $ 977

Cash held in trust

     —        —        —        128,266      128,174

Total assets

     145,720      275,002      467,553      129,339      129,208

Note payable

     22,829      —        —        —        —  

Total liabilities, including $25,241 of common stock subject to possible redemption as of January 10, 2006 and December 31, 2005

     105,299      91,494      181,678      39,232      39,398

Total stockholders’ equity

     40,421      183,508      285,875      90,107      89,810

Total liabilities and stockholders’ equity

     145,720      275,002      467,553      129,339      129,208

 

35


Table of Contents

Jamba Juice Company

The historical information was derived from the consolidated financial statements of Jamba Juice Company as of November 28, 2006 and for the period from June 28, 2006 through November 28, 2006 and as of and for the fiscal years ended June 27, 2006, June 28, 2005 and June 29, 2004 (53 weeks). The information is only a summary and should be read in conjunction with the historical consolidated financial statements and related notes. The historical results included below are not indicative of the future performance of Jamba Juice Company.

(In thousands)

 

     Period From
June 28, 2006 to
November 28,
2006
    Fiscal Years Ended(1)  
     June 27,
2006
    June 28,
2005
    June 29,
2004
 

Statements of Operations Data:

        

Revenue:

        

Company stores

   $ 116,967     $ 243,668     $ 202,073     $ 165,856  

Franchise and other revenue

     4,894       9,337       6,976       6,922  
                                

Total revenue

     121,861       253,005       209,049       172,778  
                                

Costs and operating expenses:

        

Cost of sales

     29,983       61,034       51,299       39,253  

Labor

     37,078       79,664       67,327       55,441  

Occupancy

     12,672       26,982       21,119       14,486  

Store operating

     13,208       28,920       26,525       19,819  

Depreciation and amortization

     5,946       12,905       10,355       7,719  

General and administrative

     14,773       30,011       25,113       23,278  

Store pre-opening

     1,031       2,677       3,077       2,659  

Other operating

     2,093       4,145       1,399       4,939  
                                

Total costs and operating expenses

     116,784       246,338       206,214       167,594  
                                

Income from operations

     5,077       6,667       2,835       5,184  
                                

Other income (expense):

        

Interest income

     79       115       51       59  

Interest expense

     (382 )     (1,203 )     (829 )     (547 )
                                

Total other expense

     (303 )     (1,088 )     (778 )     (488 )
                                

Income before income taxes

     4,774       5,579       2,057       4,696  

Income tax (expense) benefit

     (2,558 )     (2,601 )     (1,972 )     12,250  
                                

Net income

   $ 2,216     $ 2,978     $ 85     $ 16,946  
                                

Selected Balance Sheet Data (at period end):

        

Total assets

   $ 114,915     $ 106,102     $ 93,267     $ 72,172  

Long-term debt and other

     12,054       11,242       22,365       11,386  

Total liabilities

     74,993       68,801       59,513       39,034  

Convertible redeemable preferred stock

     52,162       52,162       52,162       52,162  

Total common stockholders’ deficit

     (12,240 )     (14,861 )     (18,408 )     (19,024 )

Total liabilities and common stockholders’ deficit

     114,915       106,102       93,267       72,172  

 

(1)

Fiscal 2004 includes 53 weeks. All other fiscal years are 52 week periods.

 

36


Table of Contents
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion together with Part II, Item 6 “Selected Financial Data” and our audited consolidated financial statements and the related notes thereto included in Item 8 “Financial Statements and Supplementary Data.” In addition to historical consolidated financial information, this discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Actual results could differ from these expectations as a result of factors including those described under Item 1A, “Risk Factors,” “Special Note Regarding Forward-Looking Statements” and elsewhere in this Form 10-K.

JAMBA, INC. OVERVIEW

Jamba, Inc. (formerly called Services Acquisition Corp. International, “SACI”) is a holding company and through its wholly-owned subsidiary, Jamba Juice Company, owns and franchises Jamba Juice stores. We believe we are the leading retailer of premium quality blended-to-order fruit smoothies, squeezed-to-order juices, blended beverages and healthy snacks. As of December 30, 2008, we had 729 Jamba Juice stores, of which 511 were Company Stores and 218 were Franchise Stores.

We acquired Jamba Juice Company on November 29, 2006 through a merger transaction. The merger transaction was accounted for as a purchase business combination with Jamba, Inc. acquiring Jamba Juice Company.

We are providing results of operations for both the Company and Jamba Juice Company. Our results of operations are presented for four fiscal periods from January 10, 2006 to our most recent fiscal year end, which was December 30, 2008. The most recent of the four fiscal periods is our fiscal year ended December 30, 2008. The prior period presented is our fiscal year ended January 1, 2008. The second prior period presented is our fiscal year ended January 9, 2007, which, because of our acquisition of Jamba Juice Company on November 29, 2006, include the operations of Jamba Juice Company for a six-week period from November 29, 2006 to January 9, 2007. Finally, the fourth fiscal period presented is the ten day transition period from January 1, 2006 to January 10, 2006 which resulted from our initial change in fiscal year which we had implemented with the acquisition.

Fiscal Year

Our fiscal year ends on the Tuesday closest to December 31st and therefore we have a 52 or 53 week fiscal year with the first fiscal quarter being sixteen weeks, the second and third quarters being twelve weeks, and the fourth quarter being twelve or thirteen weeks. Effective June 7, 2007, we changed our fiscal year end from the second Tuesday following December 31 and, as a result, the fourth fiscal quarter of fiscal 2007 was an eleven-week period. We believe that the one week difference in our fiscal year change is insignificant for comparison purposes and would not be material to reporting the overall financial condition or operating results of our Company as a whole. Unless otherwise stated, references to years in the report relate to fiscal years rather than to calendar years. The following fiscal periods are presented in this report.

 

Fiscal Period

 

Period Covered

   Weeks

Fiscal Year 2008

  January 2, 2008 to December 30, 2008    52

Fiscal Year 2007

  January 10, 2007 to January 1, 2008    51

Fiscal Year 2006

  January 11, 2006 to January 9, 2007    52

Transition Period

  January 1, 2006 to January 10, 2006   

All references to store counts, including data for new store openings, are reported net of related store closures, unless otherwise noted.

 

37


Table of Contents

EXECUTIVE OVERVIEW

Fiscal 2008 Financial Results Summary

 

   

Consolidated revenue growth of 8.1% to $342.9 million driven primarily by new Company Store openings and acquisitions.

 

   

Comparable Company Store sales decreased 8.1% for the year with a declining trend over the course of the year.

 

   

Loss from operations of $155.6 million. Loss from operations includes loss of $27.8 million from impairment of long-lived assets, loss of $84.0 million from impairment of goodwill, trademark and other intangibles, loss of $10.0 million from store lease termination and closure costs and $4.2 million in non-cash share-based compensation.

 

   

Net loss of $149.2 million.

 

   

Diluted loss per share of $(2.80).

 

   

General and administrative expense as a percent of total revenue was 14.0%. General and administrative expense include a restructuring charge of $2.2 million associated with severance payable as a result of a reduction of the Company’s workforce and $2.1 million related to the acceleration of stock options.

Fiscal 2008 Challenges

During 2008, we experienced significant declines in our overall business results. We believe such declines have occurred as recent events such as the housing and financial market crisis, rising unemployment, higher costs for consumer staples, and the general decline in consumer confidence all contributed to a deepening economic recession, which has driven a significant adverse impact in consumer discretionary spending and, as a result, in reduced consumer traffic in our stores. Decreases in consumer traffic not only adversely affect our revenue, but caused a de-leveraging of our fixed expenses such as occupancy costs, thereby negatively affecting our operating margins. In addition to the challenging economic conditions, we continued to suffer weather-driven sales volatility and strong competition, particularly in selected markets.

We also believe several operational factors contributed to our operating results in fiscal 2008. Our business model and growth strategy of heavy focus on Company Stores with less emphasis on Franchise Stores, and the associated cost structure of operating Company Stores caused a disproportionate effect with fiscal 2008’s adverse economic conditions. We were also disappointed with the performance of many of our 99 newer stores, which we attribute, in part, to site selection decisions which also compromised our existing Company Stores. These factors, when combined with the unprecedented economic turmoil experienced in fiscal 2008, led to significant profitability challenges and disappointing financial results.

Fiscal 2008 Accomplishments

Since August 2008, when Steven R. Berrard, the Company’s Chairman of the Board, served as interim President and Chief Executive Officer of the Company, we have embarked on several revitalization activities to position the Company for future success. Through fiscal 2008, our revitalization strategy focused on:

Enhancing and managing our liquidity. In September 2008, we completed a $25 million senior debt financing which strengthened our financial position. We also took several cost-cutting actions to improve our working capital position. We also reduced our capital expenditures and moved toward for the short-term, making future capital expenditures discretionary in nature.

Changing our business model. We announced a goal of becoming more evenly weighted between Company Stores and Franchise Stores. We also implemented more stringent site selection criteria for future Company Store development. We also increased the priority to leverage the Jamba brand through consumer products licensing.

 

38


Table of Contents

Improving our Company Store financial performance. We implemented several store-level savings initiatives designed to, among other things: lower costs of goods sold through reformulations and waste improvements; improve store labor savings through operational simplifications, provide better wage and benefit management, and realize the positive effect of our labor planning system; achieve rent and occupancy savings through re-negotiations with landlords and store closures; and reduce controllable and other store costs as a result of better cost controls and processes and the re-negotiations of service contracts.

Reducing our general and administrative expenses. We have eliminated positions and implemented other cost reduction activities. We have also identified technology enhancements that should improve our efficiencies by automating current manual processes. We believe the actions we have taken to date put us on track to achieve our 2009 target for G&A expense to be less than 10% of total revenue, before share-based compensation expenses.

Hiring a permanent CEO and strengthening the management team. In fiscal 2008, we experienced significant changes in our executive management team, including the departure of our chief executive officer, chief financial officer, senior vice president, operations, senior vice president and chief marketing and brand officer, and senior vice president, development. On December 1, 2008, James D. White joined the Company as President and Chief Executive Officer. In addition, as a result of the above-referenced departures, we internally promoted other members of the executive team and increased their responsibilities. We believe this executive team can execute on our revitalization strategies.

Fiscal 2009 and Beyond

In fiscal 2009, we will continue to focus and execute on our revitalization efforts. To that end, the strategic priorities for fiscal 2009, which are described in more detail in Part I, Item 1 “Business,” include:

 

   

building a customer first “operationally focused” service culture;

 

   

building a retail food capability across all four day parts (breakfast, lunch, afternoon, and dinner);

 

   

accelerating the development of franchise and non-traditional stores;

 

   

building a consumer products growth platform; and

 

   

continuing to implement a disciplined expense reduction plan.

There is significant uncertainty with respect to the economy in fiscal 2009. While our revitalization plan addresses factors we can control, we can only mitigate the significant effect an adverse economic environment has on most retailers, including those dependent to a large extent on discretionary consumer spending. Accordingly, we expect to report flat or negative comparable store sales for fiscal 2009. We are also targeting:

 

   

Cost of sales at or below 26% of Company Store revenue after giving effect to increased cost pressure on commodities.

 

   

Labor costs at or below 34% of Company Store revenue.

 

   

Other controllable costs at or below 3.5% of Company Store revenue.

 

   

General and administrative expenses at or below 10% of total revenue, before share-based compensation expense.

We also plan minimal new Company Stores development and 50 or more new Franchise Stores, mostly in the non-traditional format.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires the appropriate application of certain accounting policies, many of which require management

 

39


Table of Contents

to make estimates and assumptions about future events and its impact on amounts reported in the Company’s consolidated financial statements and related notes. Since future events and their impact cannot be determined with certainty, actual results may differ from management’s estimates. Such differences may be material to the consolidated financial statements.

Management of the Company believes its application of accounting policies, and the estimates inherently required therein, are reasonable. These accounting policies and estimates are periodically reevaluated, and adjustments are made when facts and circumstances dictate a change.

The Company’s accounting policies are more fully described in Note 1 “Business and Summary of Significant Accounting Policies” in the “Notes to the Consolidated Financial Statements,” included elsewhere in this annual report on Form 10-K (“2008 Form 10-K”). The Company considers the following policies to be the most critical in understanding the judgments that are involved in preparing the consolidated financial statements.

Impairment of Long-Lived Assets

Long-lived assets, including leasehold improvements, and other fixed assets are reviewed for impairment when indicators of impairment are present. Expected cash flows associated with an asset, in addition to other quantitative and qualitative analyses are the key factors in determining the recoverability of the asset. Identifiable cash flows are measured at the individual store level. The estimate of cash flows is based upon, among other things, certain assumptions about expected future operating performance. Management’s estimates of undiscounted cash flows may differ from actual cash flows due to, among other things, changes in economic conditions, changes to our business model or changes in operating performance. If the sum of the undiscounted cash flows is less than the carrying value of the asset, we recognize an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset.

The Company recorded $27.8 million, $1.6 million and $0 in long-lived asset impairment charges during fiscal 2008, fiscal 2007 and fiscal 2006, respectively.

Trademark, Goodwill and Other Intangible Asset Impairment

The Company accounts for goodwill and other intangible assets in accordance with Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. As required by SFAS No. 142, the Company tests for goodwill impairment annually (at year-end) or whenever events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The required two-step approach uses accounting judgments and estimates of future operating results. Changes in estimates or the application of alternative assumptions could produce significantly different results. Impairment testing is done at a reporting unit level. An impairment loss generally is recognized when the carrying amount of the reporting unit’s net assets exceeds the estimated fair value of the reporting unit. The estimates and judgments that most significantly affect the fair value calculation are assumptions related to revenue growth, discount rate, public-market trading multiples and control premiums. The fair value of the reporting unit is reconciled to the Company’s market capitalization plus an estimated control premium.

Trademarks are not subject to amortization and are tested for impairment annually (at year-end), or more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company performed its test for impairment on trademarks by comparing the fair value of the trademarks to their carrying amounts. An impairment loss is generally recognized when the carrying amount of the trademarks is less than the fair value. The fair value of trademarks was estimated using the income approach-relief from royalty method, which is based on the projected cost savings attributable to the ownership of the trademarks.

As a result of the evaluation of goodwill and trademarks, the Company recorded a non-cash impairment charge of $1.4 million and $82.6 million related to goodwill and trademarks, respectively, in fiscal 2008. The

 

40


Table of Contents

Company also recorded a non-cash impairment charge of $111.0 million and $89.6 million related to goodwill and trademarks, respectively, in fiscal 2007.

Intangible assets subject to amortization (primarily franchise agreements, employment/nonsolicitation agreements, reacquired franchise rights and a favorable lease portfolio) are tested for recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Intangible assets are amortized over their estimated useful lives using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise realized. Estimated useful lives for the franchise agreements are 13.4 years. The useful life of reacquired franchise rights is the remaining term of the respective franchise agreement. The useful life of the favorable lease portfolio is based on the related lease term.

Rent Expense

Minimum rental expenses are recognized over the term of the lease. We recognize minimum rent starting when possession of the property is taken from the landlord, which normally includes a construction period prior to store opening. When a lease contains a predetermined fixed escalation of the minimum rent, we recognize the related rent expense on a straight-line basis and record the difference between the recognized rental expense and the amounts payable under the lease as deferred rent liability. We also receive tenant allowances which are included in deferred rent liability. Tenant allowances are amortized as a reduction to rent expense in the consolidated statements of operation over the term of the lease.

Certain leases provide for contingent rents that are not measurable at inception. These contingent rents are primarily based on a percentage of revenue that are in excess of a predetermined level. These amounts are excluded from minimum rent and are included in the determination of rent expense when it is probable that the expense has been incurred and the amount can be reasonably estimated.

Jambacard Revenue Recognition

The Company, through its subsidiary Jamba Juice Company, sells jambacards to its customers in its retail stores and through its website at www.jambajuice.com. The Company’s jambacards do not have an expiration date. The Company recognizes income from jambacards when (i) the jambacard is redeemed by the customer or (ii) the likelihood of the jambacard being redeemed by the customer is remote (also referred to as “breakage”) and it determines that it does not have a legal obligation to remit the value of unredeemed jambacards to the relevant jurisdictions. Management of the Company establishes when redemption is determined to be remote based upon historical redemption patterns. Management of the Company has evaluated the redemption patterns associated with its jambacards and has concluded that redemptions become remote after three years of inactivity. As a result, the Company recognized income from jambacard breakage of $2.1 million in fiscal 2008, $1.5 million in fiscal 2007 and $0.3 million in fiscal 2006. Jambacard breakage income is recorded as a reduction in other operating expenses in our consolidated statements of operations.

Jamba Juice Company has sold the jambacard since November of 2002. The jambacard works as a reloadable gift or debit card. At the time of the initial load, in an amount between $5 and $500, the Company records an obligation that is reflected as jambacard liability on the consolidated balance sheets. The Company relieves the liability and records the related revenue at the time a customer redeems any part of the amount on the card. The card does not have any expiration provisions and is not refundable, except as otherwise required by law.

Self-Insurance Reserves

The Company was self-insured through September 30, 2008 for existing and prior years’ exposures related to workers’ compensation, and healthcare benefits. Liabilities associated with the risks that the Company retains are estimated in part, by considering historical claims experience, demographic factors, severity factors, and

 

41


Table of Contents

other actuarial assumptions. The estimated accruals for these liabilities are based on statistical analyses of historical industry data as well as our actual historical trends. If actual claims experience differs from our assumptions, historical trends, and estimates, changes in our insurance reserves would impact the expense recorded in our consolidated statements of operations. The Company changed to a guaranteed cost program for workers compensation effective October 1, 2008.

Income Taxes

The provision for income taxes is determined in accordance with the provisions of SFAS No. 109, Accounting for Income Taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Any effect on deferred tax assets and liabilities due to a change in tax rates is recognized in income in the period that includes the enactment date. In establishing deferred income tax assets and liabilities, management of the Company makes judgments and interpretations based on enacted tax laws and published tax guidance applicable to the Company’s operations. The Company records deferred tax assets and liabilities and evaluates the need for valuation allowances to reduce deferred tax assets to estimated realizable amounts. Changes in the Company’s valuation of the deferred tax assets or changes in the income tax provision may affect its annual effective income tax rate.

A valuation allowance is provided for deferred tax assets when it is “more likely than not” that some portion of the deferred tax asset will not be realized. Because of the Company’s recent history of operating losses, management believes the recognition of the deferred tax assets arising from the above-mentioned future tax benefits is currently not likely to be realized and, accordingly, has provided a valuation allowance. A full valuation allowance has been recorded for the net deferred tax assets at December 30, 2008, which increases the valuation allowance by $59.7 million for the fiscal year ended December 30, 2008.

In July 2006, the FASB issued Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes. FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financials in accordance with SFAS No. 109. FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This pronouncement also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Effective January 10, 2007, the Company adopted the provisions of FIN No. 48 and the provisions of FIN No. 48 have been applied to all income tax positions commencing that date. There was no effect on beginning retained earnings of applying the provisions of FIN No. 48 in the consolidated balance sheets as of January 10, 2007. The Company classifies estimated interest and penalties related to the underpayment of income taxes as a component of income tax expense in the accompanying consolidated statements of operations.

Prior to fiscal 2007, the Company determined its tax contingencies in accordance with SFAS No. 5, Accounting for Contingencies. The Company recorded estimated tax liabilities to the extent the contingencies were probable and could be reasonably estimated.

Share-based compensation

The Company accounts for share-based compensation under SFAS No. 123R, “Share-Based Payment” (“SFAS 123R”). The fair value of options granted is estimated at the date of grant using a Black-Scholes option-pricing model. Option valuation models, including Black-Scholes, require the input of highly subjective assumptions, and changes in the assumptions used can materially affect the grant date fair value of an award. These assumptions include the risk-free rate of interest, expected dividend yield, expected volatility and the expected life of the award. The risk-free rate of interest is based on the zero coupon U.S. Treasury rates

 

42


Table of Contents

appropriate for the expected term of the award. Expected dividends are zero based on history of not paying cash dividends on the Company’s common stock. Expected volatility is based on a 50/50 blend of historic, daily stock price observations of the Company’s common stock since its inception and historic, daily stock price observations of the Company’s peers (companies in Jamba Juice Company’s industry that are viewed as a “concept” and a leader in the premium, specialty growth segment) during the period immediately preceding the share-based award grant that is equal in length to the award’s expected term. SFAS 123R also requires that estimated forfeitures be included as a part of the grant date estimate. We use historical data to estimate expected employee behaviors related to option exercises and forfeitures. There is currently no market-based mechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these valuation models or assumptions, nor is there a means to compare and adjust the estimates to actual values, except for annual adjustments to reflect actual forfeitures.

Accounting for Warrants and Derivative Instruments

On July 6, 2005, the Company consummated its initial public offering of 15,000,000 warrants (the “Warrants”). On July 7, 2005, the Company consummated the closing of an additional 2,250,000 warrants that were subject to the underwriters’ over-allotment option. Each Warrant entitles the holder to purchase from the Company one share of its common stock at an exercise price of $6.00 per share and expires on June 28, 2009. These Warrants are freely traded on the NASDAQ Global Market under the symbol “JMBAW.”

The Company sold to the representative of the underwriter, for $100, an option to purchase up to a total of 750,000 units (the “Units”). Each Unit consists of one share of common stock and one redeemable common stock purchase warrant (“Embedded Warrants”). The Embedded Warrants issuable upon exercise of this option are identical to those sold in the initial public offering, except that the Embedded Warrants have an exercise price of $7.50 (125% of the exercise price of the Warrants). These Units are freely traded on the NASDAQ Global Market under the symbol “JMBAU.” This option is exercisable at $10.00 per Unit and expires on June 29, 2010.

The Emerging Issues Task Force (“EITF”) Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in, a Company’s Own Stock (“EITF 00-19”), requires freestanding contracts that are settled in a company’s own stock, including common stock warrants, to be designated as an equity instrument, asset, or a liability. Under the provisions of EITF 00-19, a contract designated as an asset or a liability must be carried at fair value on a company’s balance sheet, with any changes in fair value recorded in the company’s results of operations. A contract designated as an equity instrument must be included within equity, and no fair value adjustments are required from period to period. In accordance with EITF 00-19, the 17,250,000 Warrants issued to purchase common stock are separately accounted for as liabilities. The fair value of these Warrants is shown on the Company’s consolidated balance sheets and the unrealized changes in the values of these derivatives are shown in the Company’s consolidated statements of operations as “Gain (loss) on derivative liabilities.” Since these warrants are freely traded on the NASDAQ Global Market, the fair value of the Warrants is estimated based on the market price of a warrant at each period-end. To the extent that the market price increases or decreases, the Company’s derivative liabilities will also increase or decrease, impacting the Company’s consolidated statements of operations.

Fair values for exchange-traded securities and derivatives are based on quoted market prices. Where market prices are not readily available, fair values are determined using market-based pricing models incorporating readily observable market data and requiring judgments and estimates. The option to purchase 750,000 shares is considered an equity instrument, as the underlying shares do not need to be registered, and all other criteria to be accounted for as an equity instrument have been fulfilled. The accounting for the Embedded Warrants follows the same accounting guidelines as the 17,250,000 warrants discussed previously, and is considered a liability in accordance with EITF 00-19.

The Company used the fair value to estimate the fair value of the Embedded Warrants as of January 9, 2007 and used the Black-Scholes pricing model for all other reporting periods. Option valuation models, including

 

43


Table of Contents

Black-Scholes, require the input of highly subjective assumptions, and changes in the assumptions used can materially affect the fair value. These assumptions include the risk-free rate of interest, expected dividend yield, expected volatility, and the expected life of the award. The risk-free rate of interest is based on the zero coupon U.S. Treasury rates appropriate for the expected term of the award and was 0.5% as of December 30, 2008, 3.1% as of January 1, 2008, and 4.7% as of January 9, 2007. Expected dividends are zero based on history of not paying cash dividends on the Company’s common stock. The Company does not have any plans to pay dividends in the future. The expected term was determined to be the remaining contractual life of the option or derivative of 1.5 years as of December 30, 2008, 2.5 years as of January 1, 2008, and 3.5 years as of January 9, 2007.

Due to its limited trading history as an operating entity, the Company uses volatility rates based on a 50/50 blend of historic, daily stock price observations of the Company’s common stock since its inception and historic, daily stock price observations of the Company’s peers (companies in Jamba Juice Company’s industry that are viewed as a “concept” and a leader in the premium, specialty growth segment) for a period prior to the balance sheet date that is equal in length to the expected term. Prior to the Merger, the Company used volatility rates based upon a sample of comparable special purpose acquisition corporations. The volatility factor used in Black-Scholes has a significant effect on the resulting valuation of the derivative liabilities on the Company’s consolidated balance sheets. The volatility index used for the calculation was 71.6% as of December 30, 2008, 42.6% as of January 1, 2008, and 34.4% as of January 9, 2007. The Company used the relative fair value to estimate the fair value of the Embedded Warrants as of January 9, 2007 and used the Black-Scholes pricing model for all other reported periods. Relative fair value is estimated as the difference between the closing market price of the Company’s common stock and the exercise price of the derivative. The Company’s stock price and volatility estimates will likely change in the future, and will therefore affect the derivative liabilities recorded. To the extent that the Company’s stock price increases or decreases, its derivative liabilities will also increase or decrease, absent any change in volatility rates and risk-free interest rates.

The estimated fair value of the warrants was $0.1 million, $9.3 million and $69.5 million as of December 30, 2008, January 1, 2008, and January 9, 2007, respectively. The estimated fair value of the Embedded Warrants was $0 as of December 30, 2008 and January 1, 2008 and $1.7 million as of January 9, 2007. Such amounts are recorded as derivative liabilities in the consolidated balance sheets.

The Company issued new warrants to purchase 304,581 shares of Company common stock (the “Rolled-Over Warrants”) on November 29, 2006, in exchange for the then outstanding warrants of Jamba Juice Company. These Rolled-Over Warrants contained terms and expiration dates that were substantially similar to the terms contained in the original Jamba Juice Company warrants. Since the Rolled-Over Warrants do not contain a requirement to register the underlying shares and none of the other criteria that would require the Rolled-Over Warrants to be treated as derivative instruments have been met, the Rolled-Over Warrants are considered an equity instrument and were recorded as part of the purchase price of Jamba Juice Company at their acquisition date estimated fair value of $2.3 million.

 

44


Table of Contents

JAMBA, INC. RESULTS OF OPERATIONS—FISCAL 2008 COMPARED TO FISCAL 2007

The discussion that follows should be read in conjunction with the consolidated financial statements and notes thereto. Our consolidated results of operations for fiscal 2008 and 2007 are summarized below.

(In thousands, except share data and per share amounts)

 

     Fiscal year ended  
     December 30,
2008
        %(1)         January 1,
2008
        %(1)      

Revenue:

        

Company stores

   $ 333,784     97.3 %   $ 306,035     96.5 %

Franchise and other revenue

     9,106     2.7 %     11,174     3.5 %
                            

Total revenue

     342,890     100.0 %     317,209     100.0 %
                            

Costs and operating expenses:

        

Cost of sales

     89,163     26.7 %     84,226     27.5 %

Labor

     120,251     36.0 %     102,661     33.5 %

Occupancy

     44,868     13.4 %     37,458     12.2 %

Store operating

     43,714     13.1 %     39,942     13.1 %

Depreciation and amortization

     24,717     7.2 %     19,168     6.0 %

General and administrative

     48,057     14.0 %     48,384     15.3 %

Store pre-opening

     2,044     0.6 %     5,863     1.8 %

Impairment of long-lived assets

     27,802     8.1 %     1,550     0.5 %

Store lease termination and closure

     10,029     2.9 %     718     0.2 %

Trademark and goodwill impairment

     84,061     24.5 %     200,624     63.2 %

Other operating

     3,817     1.1 %     4,806     1.5 %
                            

Total costs and operating expenses

     498,523     145.4 %     545,400     171.9 %
                            

Loss from operations

     (155,633 )   (45.4 )%     (228,191 )   (71.9 )%
                            

Other income (expense):

        

Gain from derivative liabilities

     7,895     2.3 %     59,424     18.7 %

Interest income

     365     0.1 %     3,517     1.1 %

Interest expense

     (2,064 )   (0.6 )%     (181 )   (0.1 )%
                            

Total other income, net

     6,196     1.8 %     62,760     19.7 %
                            

Loss before income taxes

     (149,437 )   (43.6 )%     (165,431 )   (52.2 )%

Income tax benefit

     274     0.1 %     52,135     16.4 %
                            

Net loss

   $ (149,163 )   (43.5 )%   $ (113,296 )   (35.8 )%
                            

Weighted-average shares used in the computation of loss per share:

        

Basic

     53,252,855         52,323,898    

Diluted

     53,252,855         52,323,898    

Loss per share:

        

Basic

   $ (2.80 )     $ (2.17 )  

Diluted

   $ (2.80 )     $ (2.17 )  

 

(1)

Cost of sales, labor, occupancy and store operating expense percentages are calculated using Company Stores revenue. All other line items are calculated using Total revenue. Certain percentage amounts do not sum to total due to rounding.

 

45


Table of Contents

Revenue

(in 000’s)

 

     Year Ended
December 30, 2008
   % of Total
Revenue
    Year Ended
January 1, 2008
   % of Total
Revenue
 

Revenue:

          

Company stores

   $ 333,784    97.3 %   $ 306,035    96.5 %

Franchise and other revenue

     9,106    2.7 %     11,174    3.5 %
                          

Total revenue

   $ 342,890    100.0 %   $ 317,209    100.0 %
                          

Total revenue is comprised of revenue from Company Stores and royalties and fees from Franchise Stores. Total revenue increased 8.1% to $342.9 million for fiscal 2008, compared to $317.2 million for the prior year. Company Store revenue increased 9.1% to $333.8 million compared to $306.0 million for the prior year. The increase in Company Store revenue is primarily associated with the impact from the increased net number of Company Stores operating in fiscal 2008 as compared to the prior year. The net number of Company Stores operating in fiscal 2008 is comprised of the opening of 35 new Company Stores during fiscal 2008, the full year impact of 99 new Company Stores opened during fiscal 2007, and the full year impact of 34 former Franchise Stores acquired by the Company in fiscal 2007, partially offset by the closures of 38 Company Stores in fiscal 2008, three of which occurred during the first fiscal 2008 quarter, 11 of which occurred during the second fiscal 2008 quarter, two of which occurred during the third fiscal 2008 quarter, and 22 of which occurred during the fourth fiscal 2008 quarter. Company Store comparable sales decreased by (8.1)% for fiscal 2008. Company Store comparable sales represents the change in year-over-year sales for all Company Stores opened for at least 13 full fiscal periods. At the end of fiscal 2008, 94% of our Company Stores base had been open for at least 13 full fiscal periods. The decrease in Company Store comparable sales was driven primarily by a decrease in transaction count, partially offset by an increase in average check.

Franchise and other revenue decreased 18.5% to $9.1 million for fiscal 2008, compared to $11.2 million for the prior year. The number of Franchise Stores as of December 30, 2008 and January 1, 2008 was 218 and 206, respectively. The decrease in franchise and other revenue in fiscal 2008 compared to the prior year was attributable to $1.3 million deferred royalties from JJC Florida, LLC recognized in fiscal 2007 and the decreased royalty revenue in fiscal 2008 of existing Franchise Stores. As Franchise Stores are operated similarly and are experiencing similar market conditions as Company Stores, the mature Franchise Stores will be experiencing similar year-over-year decreases in revenue.

Cost of Sales

(in 000’s)

 

     Year Ended
December 30, 2008
   % of
Company
Store
Revenue
    Year Ended
January 1, 2008
   % of
Company
Store
Revenue
 

Cost of sales

   $ 89,163    26.7 %   $ 84,226    27.5 %

Cost of sales is mostly comprised of fruit, dairy and other products used to make smoothies and juices, as well as paper products. Cost of sales increased 5.9% to $89.2 million for fiscal 2008, compared to $84.2 million for the prior year. The $4.9 million increase in cost of sales was due primarily to the increase in Company Store sales as a result of the increased net number of Company Stores operating in fiscal 2008 as compared to the prior year. Despite increases in commodities prices, as a percentage of Company Store revenue, costs of sales decreased to 26.7% for fiscal 2008 compared to 27.5% for the prior year. The decrease of cost of sales as a percentage of Company Store revenue was accomplished in several ways, including a favorable net impact as a result of the product mix shift to higher margin products, price increases taken during fiscal 2008, reduction in waste through improved inventory management, and several cost savings initiatives implemented in fiscal 2008.

 

46


Table of Contents

Labor

(in 000’s)

 

     Year Ended
December 30, 2008
   % of
Company
Store
Revenue
    Year Ended
January 1, 2008
   % of
Company
Store
Revenue
 

Labor

   $ 120,251    36.0 %   $ 102,661    33.5 %

Labor costs are comprised of store management salaries and bonuses, hourly team member payroll, training costs and other associated fringe benefits. Labor costs increased 17.1% to $120.3 million for fiscal 2008 compared to $102.7 million for the prior year. The $17.6 million increase in labor costs was due primarily to the increased net number of Company Stores operating in fiscal 2008 as compared to the prior year and the effect of state and federal minimum wage increases that occurred during fiscal 2008 at new and existing Company Stores which was partially offset by reduced improved labor management in those stores. The increase in labor costs as a percentage of Company Store revenue to 36.0% for fiscal 2008 as compared to 33.5% for the prior year was due to a combination of the deleverage of the fixed portion of labor costs resulting from the decrease in Company Store comparable sales and federal and state minimum wage increases affecting most states in which we operate. Although there is an additional federal minimum wage adjustment scheduled to become effective in July 2009, we do not anticipate the July 2009 adjustment will materially affect labor cost in fiscal 2009 because the states in which we have the highest concentrations of employees have already adjusted their state minimum wages to levels that equal or exceed the new Federal minimum wage rate that will take effect in July 2009.

Occupancy

(in 000’s)

 

     Year Ended
December 30, 2008
   % of
Company
Store
Revenue
    Year Ended
January 1, 2008
   % of
Company
Store
Revenue
 

Rent

   $ 35,235      $ 30,224   

Common area maintenance, real estate taxes, licenses and insurance

     9,633        7,234   
                  

Total occupancy

   $ 44,868    13.4 %   $ 37,458    12.2 %
                  

Occupancy costs include both fixed and variable portions of rent, real estate taxes, property insurance and common area maintenance charges for all Company Store locations. Occupancy costs increased 19.8% to $44.9 million for fiscal 2008 compared to $37.5 million for the prior year. The $7.4 million increase in occupancy costs was due to the increased net number of Company Stores operating in fiscal 2008 as compared to the prior year. The increase in occupancy costs as a percentage of Company Store revenue to 13.4% in fiscal 2008 as compared to 12.2% for the prior year was primarily due to the deleverage of the fixed portion of occupancy costs resulting from the decrease in Company Store comparable sales.

Store Operating

(in 000’s)

 

     Year Ended
December 30, 2008
   % of
Company
Store
Revenue
    Year Ended
January 1, 2008
   % of
Company
Store
Revenue
 

Marketing expenses

   $ 8,656      $ 9,600   

Utilities

     11,490        9,325   

Repairs and maintenance

     5,906        4,144   

Credit card fees

     3,869        3,504   

Other

     13,793        13,369   
                  

Total store operating

   $ 43,714    13.1 %   $ 39,942    13.1 %
                  

 

47


Table of Contents

Marketing expenses decreased by 9.8% to $8.7 million for fiscal 2008 compared to $9.6 million for the prior year. The $0.9 million decrease in marketing expenses was primarily due to lower promotional spending during fiscal 2008 compared to fiscal 2007 as part of the Company’s cost-saving initiatives.

Utilities expense increased by 23.2% to $11.5 million for fiscal 2008 compared to $9.3 million for the prior year. The $2.2 million increase in utilities expense was primarily due to an increase in the net number of Company Stores operating in fiscal 2008.

Repairs and maintenance expense increased by 42.5% to $5.9 million for fiscal 2008 compared to $4.1 million for the prior year. The $1.8 million increase in repairs and maintenance expense was primarily due to an increase in the net number of Company Stores operating in fiscal 2008 and the consolidation of “refurbishment” costs into “repair and maintenance” costs in fiscal 2008 where such refurbishment costs were classified as Store Operating “other” expenses in fiscal 2007.

Credit card fees increased by 10.4% to $3.9 million for fiscal 2008 compared to $3.5 million for the prior year. The $0.4 million increase in credit card fees was primarily due to an increase in the volume of total credit card transactions partially offset by lower credit card fees per transaction as a result of renegotiated terms with our credit card processing provider.

Other store operating expenses increased by 3.2% to $ 13.8 million for fiscal 2008 compared to $13.4 million for the prior year. The $0.4 million increase in other store operating expense was primarily due to an increase in the net number of Company Stores operating in fiscal 2008 partially offset by savings resulting from various cost savings initiatives and the treatment of refurbishment costs as described above.

Total store operating expenses increased 9.4% to $43.7 million for fiscal 2008 compared to $39.9 million for the prior year. The $3.8 million increase in total store operating expenses was primarily due to the increased net number of Company Stores operating in fiscal 2008 as compared to the prior year.

Total store operating expenses remained constant as a percentage of Company Store revenue for fiscal 2008 as compared to the prior year primarily due to decreases in national and local marketing expenses and cost savings initiatives implemented in fiscal 2008, partially offset by the deleverage of the fixed portion of store operating expenses resulting from the decrease in Company Store comparable sales.

Depreciation and Amortization

(in 000’s)

 

     Year Ended
December 30, 2008
   % of
Total
Revenue
    Year Ended
January 1, 2008
   % of
Total
Revenue
 

Depreciation and amortization

   $ 24,717    7.2 %   $ 19,168    6.0 %

Depreciation and amortization expenses include the depreciation of fixed assets and the amortization of intangible assets. Depreciation and amortization increased 28.9% to $24.7 million for fiscal 2008 compared to $19.2 million for the prior year. The $5.5 million increase in depreciation and amortization is due to depreciation on the increased net number of Company Stores operating in fiscal 2008 combined with increased amortization due to intangible assets write-offs associated with employment agreements for separated executives and favorable leases of certain closed Company Stores. The increase of depreciation and amortization as a percentage of total revenue to 7.2% for fiscal 2008 as compared to 6.0% for the prior year was primarily due to the intangible assets write-offs and deleverage of depreciation costs resulting from the decrease in Company Store comparable sales.

 

48


Table of Contents

General and Administrative

(in 000’s)

 

     Year Ended
December 30, 2008
   % of
Total
Revenue
    Year Ended
January 1, 2008
   % of
Total
Revenue
 

Wages and payroll related expenses

   $ 28,072      $ 26,586   

Relocation and recruiting

     306        1,704   

Accounting and legal fees

     3,919        6,724   

Share-based compensation

     4,213        4,214   

Outside services

     3,106        3,068   

Other

     8,441        6,088   
                  

Total general and administrative

   $ 48,057    14.0 %   $ 48,384    15.3 %
                  

General and administrative (“G&A”) expenses include costs associated with our corporate headquarters in Emeryville, CA, field supervision, bonuses, legal, accounting and professional fees and share-based compensation.

Wages and payroll related expenses increased by 5.6% to $28.1 million for fiscal 2008 compared to $26.6 million for the prior year. The $1.5 million increase in wages and payroll related expenses was primarily due to one-time severance costs, the signing bonus associated with the hiring of our new Chief Executive Officer, and full fiscal year effect of new hires made in fiscal 2007. These increases of approximately $3.2 million were partially offset by reductions in our workforce implemented during late fiscal 2008.

Relocation and recruiting expenses decreased by 82.0% to $0.3 million for fiscal 2008 compared to $1.7 million for the prior year. The $1.4 million decrease in relocation and recruiting expense was primarily due to more moderate hiring during fiscal 2008 compared to high levels of growth we experienced the prior year.

Accounting and legal fees decreased by 41.7% to $3.9 million for fiscal 2008 compared to $6.7 million for the prior year. The $2.8 million decrease in accounting and legal fees was primarily due to a decrease in accounting fees combined with lower public company costs incurred, and lower costs incurred for the use of outside counsel in connection with litigation and other matters in fiscal 2008 compared to the prior year.

Share-based compensation expense was flat for fiscal 2008 compared to the prior year, primarily due to a decrease in our stock price which caused a corresponding reduction in the exercise price of options that we granted in fiscal 2008 as compared to fiscal 2007, which was offset by $2.1 million charged for the acceleration of vesting on options held by certain of our executives who separated from the Company in late fiscal 2008.

Outside services increased 1.2% to $3.1 million for fiscal 2008 compared to $3.0 million for the prior year. The $0.1 million increase was due to payments to certain members of our Board of Directors and other advisors as additional compensation for services rendered in connection with our management transition and revitalization efforts, and a $0.2 million recruitment fee related to the hiring of our new Chief Executive Officer, partially offset by a decrease in Board of Director fees for certain Board members who voluntarily declined their quarterly Board compensation and other decreases associated with cost savings initiatives.

Other G&A expenses increased by 38.6% to $8.4 million for fiscal 2008 compared to $6.1 million for the prior year. The $2.3 million increase in other G&A expenses was primarily due to implementation of internal business and infrastructure projects, the reduction in the amount of corporate G&A expenses being capitalized versus expensed due to the decrease in the number of new stores opened in fiscal 2008 as compared to the prior year, project costs related to new product launches and an increase in rent which was partially offset by a decrease in the usage of contract services.

 

49


Table of Contents

Total G&A expenses decreased 0.7% to $48.1 million for fiscal 2008 compared to $48.4 million for the prior year. The $0.3 million decrease in Total G&A expenses is due to lower accounting and legal fees, lower contract services fees, lower relocation and recruiting costs, headcount reduction and cost-saving initiatives that began in May 2008, aggregating to a $6.0 million reduction in Total G&A fees. The decrease in G&A expenses in fiscal 2008 was almost fully offset by one-time severance costs, employee-related special charges and other expenses, project costs associated with new product launches, costs associated with the hiring of our new Chief Executive Officer and costs associated with the management transition and revitalization efforts, aggregating to $3.4 million and the $2.3 million reduction of overhead capitalization due to reduced store openings.

As a percentage of total revenue, total G&A expenses decreased to 14.0% for fiscal 2008, compared to 15.3% for the prior year. This decrease in G&A expenses as a percentage of total revenue was attributable to increased total revenue.

Store Pre-opening

(in 000’s)

 

     Year Ended
December 30, 2008
   % of
Total
Revenue
    Year Ended
January 1, 2008
   % of
Total
Revenue
 

Store pre-opening

   $ 2,044    0.6 %   $ 5,863    1.8 %

Store pre-opening costs are primarily expenses incurred for training new store personnel, pre-opening marketing and pre-opening rent. Store pre-opening costs decreased 65.1% to $2.0 million for fiscal 2008 compared to $5.9 million for the prior year. The $3.8 million decrease in store pre-opening expense was due to the opening of 35 new Company Stores in fiscal 2008 as compared to the opening 99 new Company Stores in the prior year.

Impairment of long-lived assets

(in 000’s)

 

     Year Ended
December 30, 2008
   % of
Total
Revenue
    Year Ended
January 1, 2008
   % of
Total
Revenue
 

Impairment of long-lived assets

   $ 27,802    8.1 %   $ 1,550    0.5 %

Impairment of long-lived assets which includes leasehold improvements and other fixed assets represents non-cash charges related to the write off of the carrying value of store fixed assets for underperforming Company Stores that are currently operating and was $27.8 million for fiscal 2008 compared to $1.6 million for fiscal 2007. During fiscal 2008, we impaired 144 Company Stores as compared to 20 Company Stores in fiscal 2007.

Store Lease Termination and Closure

(in 000’s)

 

     Year Ended
December 30, 2008
   % of
Total
Revenue
    Year Ended
January 1, 2008
   % of
Total
Revenue
 

Store lease termination and closure

   $ 10,029    2.9 %   $ 718    0.2 %

Store lease termination and closure costs were $10.0 million in fiscal 2008 compared to $0.7 million in fiscal 2007. During fiscal 2008, the Company announced a restructuring plan to, among other things, close certain underperforming Company Stores. We closed 38 Company Stores in fiscal 2008, 30 of which were closed prior to their lease expiration, as compared to five Company Stores in fiscal 2007, four of which were closed prior to their contractual lease expiration date.

 

50


Table of Contents

Lease termination costs consist primarily of the costs of future obligations related to closed store locations. Discounted liabilities for future lease costs and the fair value of related subleases of closed locations are recorded when the stores are closed. All other costs related to closed units are expensed as incurred. In assessing the discounted liabilities for future costs of obligations related to closed stores, we make assumptions regarding amounts of future subleases. If these assumptions or their related estimates change in the future, we may be required to record additional exit costs or reduce exit costs previously recorded. Exit costs recorded for each of the periods presented include the effect of such changes in estimates (See Note 8 in Notes to Consolidated Financial Statements).

Trademark and Goodwill Impairment

(in 000’s)

 

     Year Ended
December 30, 2008
   % of
Total
Revenue
    Year Ended
January 1, 2008
   % of
Total
Revenue
 

Trademark and goodwill impairment

   $ 84,061    24.5 %   $ 200,624    63.2 %

Trademark and goodwill impairment in fiscal 2008 was $84.0 million, of which $82.6 million related to the impairment of our trademark, $0.6 million related to the impairment of goodwill from our purchase of the 65% interest in JJC Florida, LLC and $0.8 million related to the impairment of our 35% interest in JJC Florida, LLC. In fiscal 2007, goodwill impairment was $111.0 million and trademark impairment was $89.6 million. Impairment losses related to the difference between the fair value and recorded value for goodwill and trademarks (see Note 5 and Note 6 in Notes to Consolidated Financial Statements). For more information, please see the “Critical Accounting Policies and Estimates” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Other Operating Expense

(in 000’s)

 

     Year Ended
December 30, 2008
   % of
Total
Revenue
    Year Ended
January 1, 2008
   % of
Total
Revenue
 

Other operating expense

   $ 3,817    1.1 %   $ 4,806    1.5 %

Other operating expenses, which consist primarily of franchise support expenses, losses on disposals, amortization of jambacard™ liability and income from jambacard™ breakage, decreased 20.6% to $3.8 million for fiscal 2008 compared to $4.8 million for fiscal 2007. Franchise support expenses are costs associated with franchise employee support provided to JJC Florida, LLC. This decrease in other operating expenses was primarily attributable to a $2.0 million increase in jambacard breakage ($1.6 million of which resulted from a decrease in amortization of jambacard™ liability) and a $0.3 million decrease in franchise support expenses due primarily to reductions in headcount, which was partially offset by a $1.0 million expense resulting from the write-off of loan origination fees and $0.9 million increase in loss from disposals offset. The decrease of other operating expenses as a percentage of total revenue decreased to 1.1% in fiscal 2008 as compared to 1.5% in fiscal 2007, and this decrease was primarily attributable to the same causes.

Other Income (Expense)

Gain from derivative instruments was $7.9 million and $59.4 million for fiscal 2008 and fiscal 2007, respectively. Our warrants and put and call agreement both are recorded as derivative liabilities. The gain from warrants was $9.2 million in fiscal 2008 as compared to $59.4 million in fiscal 2007 and represents the unrealized gain or loss due to the change in the fair value of the Company’s warrants. During fiscal 2008, the Company also entered into the Financing Agreement that resulted in a put and call agreement. The unrealized loss from this put and call agreement was $1.3 million in fiscal 2008. The Company’s warrants are recorded as

 

51


Table of Contents

derivative liabilities, instead of equity instruments. For more information, please see the “Critical Accounting Policies and Estimates” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Interest income decreased to $0.4 million for fiscal 2008 from $3.5 million for fiscal 2007. Interest income represents interest earned on cash held in the Company’s investment account. The decrease in interest income was primarily due to the deployment of cash in fiscal 2007 to fund new Company Stores openings and day to day operations. While cash on hand as of December 30, 2008 was $20.8 million as compared to $23.0 million at the end of fiscal 2007, the average cash balance during fiscal 2008 was significantly lower during the year, until funding was provided with the Financing Agreement in September, 2008.

Interest expense increased to $2.1 million for fiscal 2008 from $0.2 million for fiscal 2007. Interest expense for fiscal 2008 represents interest paid on borrowings from our Financing Agreement. We did not have any outstanding borrowings in fiscal 2007. Interest expense for fiscal 2007 represents fees for the Company’s unused line of credit.

Income Tax Benefit (Expense)

The Company’s income tax benefit (expense) was $0.3 million in fiscal 2008 and $52.1 million in fiscal 2007. The effective tax rates were (0.2)% and (31.5)%, respectively. The most significant item affecting the Company’s effective tax rate for fiscal 2008 is the establishment of a valuation allowance against the net deferred tax assets. The two most significant items affecting the Company’s effective tax rate for fiscal 2007 are the unrealized gain on our derivative liability of $59.4 million and the impairment of goodwill of $91.5 million which is the portion of the goodwill impairment that does not have a future tax benefit.

 

52


Table of Contents

JAMBA, INC. RESULTS OF OPERATIONS—FISCAL 2007 COMPARED TO FISCAL 2006 (AS REPORTED AND PROFORMA)

Jamba, Inc. consolidated results of operations for fiscal 2007 and 2006, presented on both a reported and proforma basis are summarized below.

(In thousands, except share data and per share amounts)

 

     As Reported     Proforma  
     Fiscal Year
Ended
January 1,
2008
    Fiscal Year
Ended
January 9,
2007
    Fiscal Year
Ended
January 9,
2007
 

Revenue:

      

Company stores

   $ 306,035     $ 22,064     $ 258,274  

Franchise and other revenue

     11,174       1,051       10,771  
                        

Total revenue

     317,209       23,115       269,045  
                        

Operating expenses:

      

Cost of sales

     84,226       6,039       66,385  

Labor costs

     102,661       8,524       83,778  

Occupancy costs

     37,458       3,590       30,905  

Store operating expense

     39,942       4,222       30,611  

Depreciation and amortization

     19,168       1,878       14,446  

General and administrative expense

     48,384       6,195       35,318  

Store pre-opening expense

     5,863       285       2,687  

Impairment of long-lived assets

     1,550       —         1,147  

Store lease termination and closure

     718       —         1,440  

Trademark and goodwill impairment

     200,624       —         —    

Other operating expense

     4,806       675       5,520  
                        

Total operating expenses

     545,400       31,408       272,237  
                        

Loss from operations

     (228,191 )     (8,293 )     (3,192 )
                        

Other income (expense):

      

Gain (loss) on derivative liabilities

     59,424       (57,383 )     (57,383 )

Interest income

     3,517       4,177       3,699  

Interest expense

     (181 )     (71 )     (178 )
                        

Total other income (expense)

     62,760       (53,277 )     (53,862 )
                        

Loss before income taxes

     (165,431 )     (61,570 )     (57,054 )

Income tax benefit (expense)

     52,135       2,544       (404 )
                        

Net loss

   $ (113,296 )   $ (59,026 )   $ (57,458 )
                        

Weighted-average shares used in the computation of earnings per share:

      

Basic

     52,323,898       24,478,384       51,880,141  

Diluted

     52,323,898       24,478,384       51,880,141  

Loss per share:

      

Basic

   $ (2.17 )   $ (2.41 )   $ (1.11 )

Diluted

   $ (2.17 )   $ (2.41 )   $ (1.11 )

 

53


Table of Contents

PROFORMA RECONCILIATION

The following tables provide a reconciliation from the as reported results to the proforma results presented above for Jamba, Inc. for the fiscal year ended January 9, 2007.

 

     Fiscal Year Ended January 9, 2007  
     As Reported     Pre-merger
Activity(1)
    Adjustments     Proforma  

Revenue:

        

Company stores

   $ 22,064     $ 236,210     $ —       $ 258,274  

Franchise and other revenue

     1,051       9,720       —         10,771  
                                

Total revenue

     23,115       245,930       —         269,045  
                                

Operating expenses:

        

Cost of sales

     6,039       60,346       —         66,385  

Labor costs

     8,524       75,254       —         83,778  

Occupancy costs

     3,590       25,759       1,556 (2)     30,905  

Store operating expense

     4,222       26,389       —         30,611  

Depreciation and amortization

     1,878       11,951       617 (3)     14,446  

General and administrative expense

     6,195       28,753       370 (4)     35,318  

Store pre-opening expense

     285       2,402       —         2,687  

Impairment of long-lived assets

     —         1,147       —         1,147  

Store lease termination and closure

     —         1,440       —         1,440  

Other operating expense

     675       2,761       2,084 (5)     5,520  
                                

Total operating expenses

     31,408       236,202       4,627       272,237  
                                

Income (loss) from operations

     (8,293 )     9,728       (4,627 )     (3,192 )
                                

Other income (expense):

        

Loss from derivative liabilities

     (57,383 )     —         —         (57,383 )

Interest income

     4,177       140       (618 )(6)     3,699  

Interest expense

     (71 )     (1,010 )     903 (7)     (178 )
                                

Total other income (expense)

     (53,277 )     (870 )     285       (53,862 )
                                

Income (loss) before income taxes

     (61,570 )     8,858       (4,342 )     (57,054 )

Income tax benefit (expense)

     2,544       (4,685 )     1,737 (8)     (404 )
                                

Net income (loss)

   $ (59,026 )   $ 4,173     $ (2,605 )   $ (57,458 )
                                

Weighted-average shares used in the computation of earnings (loss) per share:

        

Basic

     24,478,384         27,401,757 (9)     51,880,141  

Diluted

     24,478,384         27,401,757 (9)     51,880,141  

Loss per share:

        

Basic

   $ (2.41 )       $ (1.11 )

Diluted

   $ (2.41 )       $ (1.11 )

 

(1)

Pre-merger activity represents results of operations of Jamba Juice Company from January 11, 2006 to November 28, 2006.

 

(2)

Adjustment to include the effect of the acquisition write off of deferred rent balances.

 

(3)

Adjustment to include the effect of amortization of acquisition related intangible assets.

 

(4)

Adjustment to include the effect of non-cash share-based compensation expense related to stock options and restricted stock awards granted, net of reversal of transaction costs expensed by Jamba Juice Company.

 

(5)

Adjustment to include the effect of acquisition write down of our jambacard liability.

 

54


Table of Contents

(6)

Adjustment to include the effect of interest income from purchase transaction.

 

(7)

Adjustment to include the effect of interest expense from purchase transaction.

 

(8)

Income tax effect of adjustments.

 

(9)

Adjustment to include the effect of common stock issued in connection with the purchase transaction.

Revenue

(in 000’s)

 

     As Reported     Proforma  
     Year Ended
January 1, 2008
   % of
Revenue
    Year Ended
January 9, 2007
   % of
Revenue
    Year Ended
January 9, 2007
   % of
Revenue
 

Revenue:

               

Company stores

   $ 306,035    96.5 %   $ 22,064    95.5 %   $ 258,274    96.0 %

Franchise and other revenue

     11,174    3.5 %     1,051    4.5 %     10,771    4.0 %
                                       

Total revenue

   $ 317,209    100.0 %   $ 23,115    100.0 %   $ 269,045    100.0 %
                                       

Our total revenue is comprised of revenue from Company Stores and royalties and fees from stores owned by franchisees. Total revenue for fiscal 2007 was $317.2 million, as compared to revenue of $23.1 million (reported) and $269.0 million (proforma) for fiscal 2006. The increase was primarily associated with the opening of 99 Company Stores in fiscal 2007, the acquisition of 34 stores from franchisees in fiscal 2007 and seven stores from a franchisee in the fourth quarter of fiscal 2006 and menu price increases taken during fiscal 2007. Company Stores comparable sales for fiscal 2007 increased by 0.5% versus fiscal 2006 (proforma) which was impacted by lower California Company Store comparable sales and the closing of five Company Stores in fiscal 2007.

Company Store revenue is primarily from smoothie and juice sales and for fiscal 2007 was $306.0 million. The number of Company Stores as of January 1, 2008 was 501 stores, up from 373 stores as of January 9, 2007.

Franchise and other revenue for fiscal 2007 was $11.2 million, as compared to revenues of $1.1 million (reported) and $10.8 million (proforma) for fiscal 2006. These amounts include franchise royalties of $7.2 million in fiscal 2007, as compared to franchise royalties of $0.5 million (reported) and $5.8 million (proforma) for fiscal 2006 and franchise support revenues of $2.9 million for fiscal 2007, as compared to franchise support revenues of $0.4 million (reported) and $3.8 million (proforma) for fiscal 2006. The increase in franchise royalties on a proforma basis is due primarily to the recognition of $1.6 million of deferred royalties from JJC Florida, LLC in fiscal 2007. Franchise support revenues relate to fees and reimbursements that we received for franchise employee support provided to a joint venture in Florida, known as JJC Florida LLC, which owns 13 stores, and a Midwest franchisee whose stores we acquired in fiscal 2006.

Cost of Sales

(in 000’s)

 

     As Reported     Proforma  
     Year Ended
January 1, 2008
   % of
Company
Store
Revenue
    Year Ended
January 9, 2007
   % of
Company
Store
Revenue
    Year Ended
January 9, 2007
   % of
Company
Store
Revenue
 

Cost of sales

   $ 84,226    27.5 %   $ 6,039    27.4 %   $ 66,385    25.7 %

Cost of sales is mostly comprised of fruit, dairy and other products used to make smoothies and juices, as well as paper products. The increase of cost of sales as a percentage of Company Stores revenues is primarily associated with higher fresh orange, orange juice and dairy ingredient costs, increased freight costs and coupons issued in support of the roll out of new products in fiscal 2007. Also contributing to the increase in cost of sales was a higher sales mix of products with higher cost.

 

55


Table of Contents

Labor Costs

(in 000’s)

 

     As Reported     Proforma  
     Year Ended
January 1, 2008
   % of
Company
Store
Revenue
    Year Ended
January 9, 2007
   % of
Company
Store
Revenue
    Year Ended
January 9, 2007
   % of
Company
Store
Revenue
 

Labor costs

   $ 102,661    33.5 %   $ 8,524    38.6 %   $ 83,778    32.4 %

Labor costs are comprised of store management salaries and bonuses, hourly team member payroll and training costs, and other payroll-related items. The increase of labor costs as a percentage of Company Stores revenue on a proforma basis is primarily associated with federal and state minimum wage increases and decreased leverage due to lower California Company Stores comparable sales, partially offset by menu price increases taken in fiscal 2007. On a reported basis, labor costs decreased as a percentage of Company Store revenue in fiscal 2007 as compared to fiscal 2006 as a result of prior year deleverage resulting from lower sales in the slower Winter months, which include the six week period from the Merger to the end of fiscal 2006.

Occupancy Costs

(in 000’s)

 

    As Reported     Proforma  
    Year Ended
January 1, 2008
  % of
Company
Store
Revenue
    Year Ended
January 9, 2007
  % of
Company
Store
Revenue
    Year Ended
January 9, 2007
  % of
Company
Store
Revenue
 

Rent

  $ 30,224     $ 2,906     $ 25,142  

Common area maintenance, real estate taxes, and insurance

    7,234       684       5,763  
                       

Total occupancy costs

  $ 37,458   12.2 %   $ 3,590   16.3 %   $ 30,905   12.0 %
                       

Occupancy costs include both fixed and variable portions of rent, real estate taxes, property insurance and common area maintenance charges for all Company Store locations. The increase of occupancy costs as a percentage of Company Stores revenue on a proforma basis is primarily associated with occupancy costs in certain geographic regions outpacing initial sales volumes of new Company Stores in those regions. On a reported basis, occupancy costs decreased in fiscal 2007 as compared to fiscal 2006 as a result of prior year deleverage resulting from lower sales in the slower Winter months, which include the six week period from the Merger to the end of fiscal 2006.

Store Operating Expenses

(in 000’s)

 

    As Reported     Proforma  
    Year Ended
January 1, 2008
  % of
Company
Store
Revenue
    Year Ended
January 9, 2007
  % of
Company
Store
Revenue
    Year Ended
January 9, 2007
  % of
Company
Store
Revenue
 

Marketing expenses

  $ 9,600     $ 1,599     $ 5,338  

Utilities

    9,325       748       7,700  

Repairs and maintenance

    4,144       455       3,016  

Credit card fees

    3,504       260       2,592  

Other

    13,369       1,160       11,965  
                       

Total store operating expenses

  $ 39,942   13.1 %   $ 4,222   19.1 %   $ 30,611   11.9 %
                       

 

56


Table of Contents

Store operating expenses consist primarily of various store-level costs such as repairs and maintenance, refurbishments, cleaning supplies, bank charges, utilities and marketing. The increase of store operating expenses as a percentage of Company Stores revenue on a proforma basis is primarily associated with the increase in marketing expenses to support our fiscal 2007 product initiatives and increased credit card fees due to increasing jambacard sales, combined with decreased leverage due to lower California Company Store comparable sales, partially offset by menu price increases taken during fiscal 2007. Looking forward, we expect increases in credit card fees to continue, which is expected to be offset by leverage from higher sales. On a reported basis, store operating expenses decreased in fiscal 2007 as compared to fiscal 2006 as a result of prior year deleverage resulting from lower sales in the slower Winter months, which include the six week period from the Merger to the end of fiscal 2006.

Depreciation and Amortization

(in 000’s)

 

    As Reported     Proforma  
    Year Ended
January 1, 2008
  % of
Total
Revenue
    Year Ended
January 9, 2007
  % of
Total
Revenue
    Year Ended
January 9, 2007
  % of
Total
Revenue
 

Depreciation and amortization

  $ 19,168   6.0 %   $ 1,878   8.1 %   $ 14,446   5.4 %

Depreciation and amortization expenses include the depreciation and amortization of fixed assets and the amortization of intangible assets. The increase in depreciation and amortization expenses as a percentage of total revenues on a proforma basis was primarily due to the additional depreciation on the 99 new Company Stores opened in fiscal 2007; our acquisition of 34 stores from our franchisees in fiscal 2007 and seven stores from a franchisee in the fourth quarter of fiscal 2006; and the opening of 49 Company Stores in fiscal 2006 combined with decreased leverage due to lower California Company Store comparable store sales, partially offset by menu price increases taken during fiscal 2007. On a reported basis, depreciation and amortization decreased in fiscal 2007 as compared to fiscal 2006 as a result of prior year deleverage resulting from lower sales in the slower Winter months, which include the six week period from the Merger to the end of fiscal 2006.

General and Administrative Expenses

(in 000’s)

 

     As Reported     Proforma  
     Year Ended
January 1, 2008
   % of
Total
Revenue
    Year Ended
January 9, 2007
   % of
Total
Revenue
    Year Ended
January 9, 2007
   % of
Total
Revenue
 

Wages and payroll related expenses

   $ 26,586      $ 2,694      $ 20,947   

Accounting and legal fees

     6,724        1,189        3,499   

Share-based compensation

     4,214        508        508   

Outside services

     3,068        571        2,378   

Other

     7,792        1,233        7,986   
                           

Total general and administrative expenses

   $ 48,384    15.3 %   $ 6,195    26.8 %   $ 35,318    13.1 %
                           

General and administrative expenses include costs associated with our support center in Emeryville, CA, field supervision, recruiting, training, human resources, and local marketing personnel, as well as bonuses, legal and professional fees and share-based compensation. The increase in general and administrative expenses on a proforma basis as a percentage of total revenue is primarily due to the planned increase in infrastructure to build for future store growth combined with costs such as those associated with the Merger, the move of the support

 

57


Table of Contents

center from San Francisco, CA to Emeryville, CA, legal and accounting costs associated with the preparation of first-time post-merger public company filings with the Securities and Exchange Commission, and costs associated with the internal control requirements of the Sarbanes-Oxley Act of 2002. In addition, we also experienced decreased leverage due to lower California Company Store comparable store sales, partially offset by menu price increases taken during fiscal 2007. On a reported basis, general and administrative expense as a percentage of total revenue decreased in fiscal 2007 as compared to fiscal 2006 as a result of prior year deleverage resulting from lower sales in the slower Winter months, which include the six week period from the Merger to the end of fiscal 2006, and as a result of transaction costs associated with the Merger in the prior year. We anticipate general and administrative expenses as a percentage of total revenue will decrease in fiscal 2008.

Store Pre-opening Expense

(in 000’s)

 

     As Reported     Proforma  
     Year Ended
January 1, 2008
   % of
Total
Revenue
    Year Ended
January 9, 2007
   % of
Total
Revenue
    Year Ended
January 9, 2007
   % of
Total
Revenue
 

Store pre-opening expense

   $ 5,863    1.8 %   $ 285    1.2 %   $ 2,687    1.0 %

Store pre-opening costs are largely expenses incurred for training new store personnel and pre-opening marketing costs. The increase in store pre-opening costs as a percentage of total revenue on a proforma basis is primarily associated with 99 new Company Stores openings in fiscal 2007, decreased leverage due to lower California Company Store comparable store sales, partially offset by menu price increases taken during fiscal 2007.

Impairment of long-lived assets

(in 000’s)

 

     As Reported     Proforma  
     Year Ended
January 1, 2008
   % of
Total
Revenue
    Year Ended
January 9, 2007
   % of
Total
Revenue
    Year Ended
January 9, 2007
   % of
Total
Revenue
 

Impairment of long-lived assets

   $ 1,550    0.5 %   $ —      0.0 %   $ 1,147    0.4 %

Impairment of long-lived assets which includes leasehold improvements and other fixed assets represents non-cash charges related to the write off of the carrying value of store fixed assets and was $1.6 million for fiscal 2007 compared to $1.1 million for fiscal 2006 (proforma). During fiscal 2007, we impaired 20 stores as a result of early termination of leases as compared to seven stores in fiscal 2006.

Store Lease Termination and Closure

(in 000’s)

 

     As Reported     Proforma  
     Year Ended
January 1, 2008
   % of
Total
Revenue
    Year Ended
January 9, 2007
   % of
Total
Revenue
    Year Ended
January 9, 2007
   % of
Total
Revenue
 

Store lease termination and closure

   $ 718    0.2 %   $ —      0.0 %   $ 1,440    0.5 %

Store lease termination and closure costs were $0.7 million in fiscal 2007 compared to $1.4 million in fiscal 2006 (proforma). During fiscal 2007, we closed five stores as compared to four stores in fiscal 2006. Two of the four stores closed during fiscal 2006 were closed prior to lease termination.

 

58


Table of Contents

Other Operating Expense

(in 000’s)

 

     As Reported     Proforma  
     Year Ended
January 1, 2008
   % of
Total
Revenue
    Year Ended
January 9, 2007
   % of
Total
Revenue
    Year Ended
January 9, 2007
   % of
Total
Revenue
 

Other operating expense

   $ 4,806    1.5 %   $ 675    2.9 %   $ 5,520    2.1 %

Other operating expenses consist primarily of franchise support expenses, losses on disposals and amortization of jambacard liability, offset by income from jambacard breakage. These amounts include $2.8 million for fiscal 2007 and $0.7 million (reported) and $4.0 million (proforma) for fiscal 2006, for franchise support expenses, which are costs associated with franchise employee support provided to JJC Florida LLC, which owns 13 stores, and a Midwest franchisee whose stores we acquired in the fourth quarter of fiscal 2006. Franchise support expenses are offset by franchise support revenue, which is recorded in franchise and other revenue. Also contributing to other operating expenses were losses on disposal of assets of $1.2 million in fiscal 2007 and $0.6 million (reported) and $1.9 million (proforma) in fiscal 2006, and amortization of jambacard liability of $2.1 million in fiscal 2007 and $0 (reported) and $0 million (proforma) in fiscal 2006. Offsetting these costs was $1.5 million in fiscal 2007 and $0.3 million (reported) and $1.1 million (proforma) in fiscal 2006 of income recognized from jambacard breakage.

Trademark and goodwill impairment

Goodwill impairment of $111.0 million and trademark impairment of $89.6 million was recorded in fiscal 2007 to reflect the impairment losses related to the difference between the fair value and recorded value for goodwill and trademarks. For more information, please see the “Critical Accounting Policies and Estimates” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations. No goodwill or trademark impairment was recognized by the Company on a proforma or reported basis in fiscal 2006.

Other Income (Expense)

Gain from derivative instruments of $59.4 million and loss of $57.4 million (reported) for fiscal 2007 and fiscal 2006, respectively, represents the unrealized gain or loss due to the change in the fair value of our warrants. Our warrants are recorded as derivative liabilities, instead of equity instruments. For more information, please see the “Critical Accounting Policies and Estimates” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Interest income decreased to $3.5 million for fiscal 2007 from $4.2 million (reported) and $3.7 million (proforma) for fiscal 2006. Interest income represents interest earned on cash held in our investment account. The decrease in interest income was primarily due to the deployment of cash to fund new Company Stores openings and the acquisition of stores from franchisees. Cash on hand as of January 1, 2008 was $23.0 million.

Income Tax Benefit (Expense)

Our income tax benefit (expense) was $52.1 million in fiscal 2007 and $2.5 million (reported) and $(0.4) million (proforma) in fiscal 2006. The effective tax rates were (31.5)%, (4.1)% and 0%, respectively. The two most significant items affecting our effective tax rate for fiscal 2007 are the unrealized gain on our derivative liability of $59.4 million and the impairment of goodwill of $91.5 million which is the portion of the goodwill impairment that does not have a future tax benefit. The most significant item affecting the 2006 effective tax rate was the unrealized loss on our derivative liability of $57.4 million. The unrealized change in the fair value of derivatives and the impairment of goodwill recorded in the consolidated financial statements do not result in taxable income or tax deductible expenses.

 

59


Table of Contents

JAMBA, INC. RESULTS OF OPERATIONS FOR JANUARY 1, 2006 TO JANUARY 10, 2006

The 10-day transition period of the Company from January 1, 2006 to January 10, 2006 is not material to the consolidated financial statements as a whole. During this 10-day period, we earned approximately $92,000 in interest income from cash held in the Company’s trust account and recorded a gain on derivative liabilities of $173,000 representing the change in fair value of the Company’s warrants.

JAMBA JUICE COMPANY OVERVIEW

The following is a discussion of Jamba Juice Company’s financial condition and results of operations for the 22-week period from June 28, 2006 to November 28, 2006 (“22 Week Period”), and fiscal years ended June 27, 2006 (“JJC fiscal 2006”) and June 28, 2005 (“JJC fiscal 2005”), respectively. You should read this section together with Jamba Juice Company’s consolidated financial statements, including the notes to those consolidated financial statements that appear elsewhere in this annual report on Form 10-K. Prior to the Merger, Jamba Juice Company’s fiscal year ended on the Tuesday preceding June 30. JJC fiscal 2006 and JJC fiscal 2005 each included 52 weeks.

JAMBA JUICE COMPANY RESULTS OF OPERATIONS—FOR THE PERIOD JUNE 28, 2006 TO NOVEMBER 28, 2006

The results of operations for Jamba Juice Company are presented for the 22 Week Period, which coincides with the twenty-two week period from the completion of Jamba Juice Company’s fiscal year ended June 27, 2006 to consummation of the Merger on November 29, 2006. Jamba Juice Company’s store revenue is seasonal with a disproportionate amount of sales occurring during the summer months. The 22 Week Period encompasses a significant portion of the summer selling season.

Revenue for Jamba Juice Company is comprised of revenue from Jamba Juice Company owned stores (“Company Stores”) and royalties and fees from franchised locations. For the 22 Week Period, revenue from Company Stores and fees from franchised locations represented 96.0% and 4.0% of total revenue, respectively, which compare to 96.3% and 3.7% of total revenue, respectively, for JJC fiscal 2006.

Revenue, primarily from smoothie and juice sales, was $121.9 million for the 22 Week Period and was driven primarily from $102.8 million in comparable store revenue for Company Stores. Also contributing was $14.1 million from new Company Store revenue, which resulted from net unit growth of 18 stores at the end of the period up from 342 Company Stores as of June 27, 2006.

Franchise and other revenue for the 22 Week Period was $4.9 million, which resulted primarily from franchise royalties of $2.6 million related to fees from Jamba Juice Company’s franchisees, and $1.8 million received for franchise employee support provided during the period. The $1.8 million is a reimbursement for employment services that Jamba Juice Company provided to a Midwest franchisee and a joint venture in Florida, known as JJC Florida LLC. The number of franchise stores as of November 28, 2006 was 227, up from 217 as of June 27, 2006.

Jamba Juice Company also entered into an agreement with Safeway, Inc. in which 21 Jamba Juice Company kiosks are to be opened within Safeway grocery stores. Jamba Juice Company kiosks within Safeway stores are operated by Safeway employees. As of November 28, 2006, 13 of the 21 kiosks were open.

Cost of sales of $30.0 million for the 22 Week Period is comprised of fruit, dairy and other products used to make smoothies and juices, as well as paper products. As a percentage of Company Store revenue, these costs were 25.6% compared to 25.0% for JJC fiscal 2006.

Labor costs consist of store management salaries and bonuses, hourly team member payroll and training costs and other payroll-related items. Labor costs for the 22 Week Period were $37.1 million, and as a percentage of Company Store revenue were 31.7% compared to 32.7% for JJC fiscal 2006. This decrease in percentage was a result of higher summer seasonal sales that allowed Jamba Juice Company to leverage its fixed labor costs.

 

60


Table of Contents

Occupancy costs include both fixed and variable portions of rent, real estate taxes, property insurance and common area maintenance charges for all store locations. Occupancy costs for the 22 Week Period were $12.7 million, primarily consisting of $10.3 million in rent and $1.9 million in common area maintenance, real estate taxes and insurance. As a percentage of Company Store revenue, these costs were 10.8% compared to 11.1% for JJC fiscal 2006. This decrease in percentage was attributable to seasonal sales leverage.

Store operating expenses consist primarily of various store-level costs such as repairs and maintenance, refurbishments, cleaning supplies, bank charges, utilities and marketing. Store operating expenses for the 22 Week Period were $13.2 million and as a percentage of Company Store revenue were 11.3% compared to 11.9% for fiscal 2006. This amount was composed primarily of $3.7 million in utilities, $1.9 million of repairs and refurbishment expenses, $1.5 million of marketing expenses, and $1.2 million in credit card fees. The remaining approximately $4.9 million reflects various other expenses to operate our stores.

Depreciation and amortization expenses include the depreciation and amortization of fixed assets and the amortization of intangible assets. Depreciation and amortization for the 22 Week Period was $5.9 million, and as a percentage of total revenue was 4.9% compared to 5.1% for JJC fiscal 2006.

General and administrative expenses include costs associated with the Company’s support center in San Francisco, field supervision, recruiting, training, human resources and local marketing personnel, as well as bonuses, legal and professional fees. General and administrative expenses for the 22 Week Period were $14.8 million, and as a percentage of total revenue were 12.1% compared to 11.9% for JJC fiscal 2006.

Store pre-opening costs are largely costs incurred for training new store personnel and pre-opening marketing. Jamba Juice Company opened 18 stores during the 22 Week Period. Store pre-opening costs for the 22 Week Period were $1.0 million.

Other operating expenses consist primarily of franchise support expenses, losses on disposals, asset impairment and store closures and income from jambacard breakage. Other operating expenses for the 22 Week Period were $2.1 million, and as a percentage of total revenue were 1.7% compared to 1.6% for JJC fiscal 2006. Of the $2.1 million, $1.7 million was due to franchise support expenses that are costs associated with our Midwest franchisee and Florida joint venture stores. This franchise support is directly related to employment services and is offset by franchise support revenue recorded as franchise and other revenue. Also contributing to other operating expenses was $1.2 million from losses on disposals, asset impairment and store closures. Offsetting these costs was $0.8 million of income from jambacard breakage recognized during the 22 Week Period.

Jambacards have been sold since November 2002, the cards have no expiration date and are reloadable. Jambacard breakage income is recognized when the Company determines the likelihood of a jambacard being redeemed by a customer is remote based on an analysis of redemption data and redemption patterns. The Company collected monthly redemption data, analyzed the redemption pattern since the introduction of the jambacard program in November of 2002 and determined that after three years of inactivity, the redemptions of jambacards are deemed to be remote. In determining the amount of the liability to relieve, in addition to the redemption analysis, Jamba Juice Company performed an analysis of Jamba Juice Company’s requirement to remit unclaimed property or escheat in the states where Jamba Juice Company does business. Based on a review of the application of various state unclaimed property laws and jambacard sales by state, Jamba Juice Company estimated its escheat requirement and determined the appropriate liability for both estimated future redemptions and escheat requirements. The balance of the jambacard liability as of November 28, 2006 was $17.7 million.

Interest expense for the 22 Week Period was $0.4 million. This was a function of interest rates and borrowings on the credit line during the period with an average loan amount of $5.4 million.

Income tax expense for the 22 Week Period was $2.6 million. This was a function of income before income taxes of $4.8 million and an effective tax rate of 53.6% during the 22 Week Period.

 

61


Table of Contents

KEY FINANCIAL METRICS

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

The following table sets forth operating data that do not otherwise appear in our consolidated financial statements as of and for the fiscal year ended December 30, 2008 and January 1, 2008:

 

     Fiscal Year Ended  
     December 30,
2008
    January 1,
2008
 

Operating Data

    

Percentage change in comparable Company Store sales (1)

   (8.1 )%   0.5 %

Total Company Stores

   511     501  

Total Franchise Stores

   218     206  

Total Stores

   729     707  

 

(1)

Percentage change in comparable Company Store revenue compares the revenue of Company Stores during a 13 period fiscal year to the revenue from the same Company Stores for the equivalent period in the prior year. A Company Store is included in this calculation after its thirteenth full fiscal period of operations. Revenue from franchised stores are not included in the comparable Company Store revenue.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows Summary

The following table summarizes our cash flows for each of the past two full fiscal years since the acquisition of Jamba Juice Company (in thousands).

 

     December 30,
2008
    January 1,
2008
 

Net cash provided by operating activities

   $ 8,164     $ 12,698  

Net cash used in investing activities

     (33,050 )     (81,293 )

Net cash provided by financing activities

     22,692       4,232  
                

Net decrease in cash and cash equivalents

   $ (2,194 )   $ (64,363 )
                

Operating Activities

In fiscal 2008, net cash provided by operating activities was approximately $8.2 million, compared with net cash provided by operating activities of approximately $12.7 million in fiscal 2007. Cash provided by operating activities for fiscal 2008 and fiscal 2007 resulted primarily from working capital. The decrease in net cash provided by operating activities for fiscal 2008 as compared to fiscal 2007 primarily resulted from changes in working capital.

Investing Activities

In fiscal 2008, net cash used in investing activities was approximately $33.1 million, compared with net cash used in investing activities of approximately $81.3 million in fiscal 2007. Capital expenditures are the largest component of our investing activities and include expenditures for the funding of the development or acquisition of new Company Stores and acquisition of personal property and equipment for existing Company Stores. The

 

62


Table of Contents

required cash investment for new Company Stores varies depending on the size of the new Company Store, geographic location, degree of work performed by the landlord and complexity of site development issues. Capital expenditures for fiscal 2008 total approximately $30.2 million as compared to approximately $52.3 million in fiscal 2007. During fiscal 2007, we also purchased a $4.3 million certificate of deposit that is restricted and collateralized and acquired 34 former Franchise Stores from three franchisees for approximately $24.1 million.

The decrease in capital expenditures resulted primarily from the Company’s decision to substantially slow new Company Store development and Franchise Store acquisitions. In fiscal 2009, we expect capital expenditures to be up to $13 million depending on liquidity. We expect to open less than ten new Company Stores as we focus our growth on franchise development. We anticipate investing in new equipment to support building our food capability and, on a discretionary basis, embark on a Company Store “refresh program” and upgrade our information system technology. We may also invest in manufacturing and/or distribution capabilities as we build a consumer products growth platform.

Financing Activities

In fiscal 2008, net cash provided by financing activities was $22.7 million, compared with net cash provided by financing activities of $4.2 million in fiscal 2007. In September 2008, the Company closed a new secured financing agreement totaling $25 million (see Note 9 in the Notes to the Consolidated Financial Statements). At closing, the Company borrowed the full amount available under the Financing Agreement, which primarily accounted for the net cash provided by financing activities in fiscal 2008. The net cash provided by financing activities in fiscal 2007 primarily resulted from the exercise of warrants.

Liquidity

As of December 30, 2008, we had cash and cash equivalents of $20.8 million compared to $23.0 million as of January 1, 2008. Our primary sources of liquidity are the cash on hand as a result of made under our new financing agreement and cash flows provided by operating activities. In addition, in February 2009, we received a federal income tax refund of $5.2 million. We hold $7.7 million in restricted cash and investments, approximately $4.3 million which represents cash held in a certificate of deposit to collateralize our letters of credit, which is required, because we were partially self-insured for workers’ compensation and health insurance, $3.0 million of which represents restricted cash as provided for in our financing agreement and $0.4 million of which represents cash held in a certificate of deposit for an outstanding letter of credit. In fiscal 2009, we anticipate a reduction in the amount required to collateralize our letter of credit with respect to our self-insured workers’ compensation insurance, which would reduce the extent of restrictions upon our cash.

Our primary liquidity and capital requirements are for working capital and general corporate needs and the fiscal 2009 capital expenditures described above. We expect that our primary sources of liquidity will be sufficient to fund working capital and general corporate needs and the non-discretionary capital expenditures for at least the next 12 months. The use of cash to fund discretionary capital expenditures will be based on the need to conserve our capital.

The adequacy of our available funds will depend on many factors, including the macroeconomic environment, the operating performance of our Company Stores, the successful expansion of our franchise and licensing programs, the successful rollout and consumer acceptance of our food initiatives, and continued compliance with our financing agreement. Given these uncertainties, we plan to evaluate other sources of capital, including, but not limited to, seeking to raise such capital through public or private equity or debt financing and selectively refranchising Company Stores. Future capital funding transactions may result in dilution to current stockholders. We cannot ensure that such capital will be available on favorable terms, or at all.

In addition, as described above, on September 11, 2008, the Company entered into a Financing Agreement (the “Financing Agreement”) with Victory Park Management, LLC, as agent, and its affiliated funds as lenders (“Lenders”) whereby the Lenders purchased an aggregate of $25 million worth of two-year senior secured term

 

63


Table of Contents

notes from the Company (the “Senior Notes”). The Senior Notes are described in Note 9 in the Notes to Consolidated Financial Statements and elsewhere herein. The Financing Agreement is the Company’s principal source of external financing.

The Financing Agreement contains customary representations and covenants as well as customary events of default and certain default provisions that could result in acceleration of payment of the Senior Notes issued in connection with the Financing Agreement. As of December 30, 2008, the Company was in compliance with these representations and covenants and was not in default of the Financing Agreement. The financial covenants in the Financing Agreement include the requirement for store-level EBITDA on a consolidated basis to be $35 million for the thirteen (13) four-week close periods through maturity of the debt.

Pursuant to the terms of the Financing Agreement, store-level EBITDA means the consolidated net income (or loss) minus (i) cash extraordinary gains, (ii) non-cash extraordinary gains, (iii) other non-cash gains, and (iv) interest income plus (without duplication) (i) cash extraordinary losses, (ii) non-cash extraordinary losses, (iii) non-cash impairment losses, (iv) other non-cash losses, (v) income taxes, (vi) interest expense, (vii) depreciation and amortization, (viii) pre-opening expenses in accordance with each newly opened Restaurant owned by Borrowers and their Subsidiaries, (ix) Open Store Lease Termination Expenses, (x) Unopened Store Lease Termination Expenses, (xi) General and Administrative Expenses, and (xii) such other non-cash charges as may be approved by Agent in its sole discretion, plus (or minus) such other adjustments as may be reasonably recommended by a third party auditor selected by or otherwise reasonably acceptable to Victory Park for the purposes of normalizing store-level EBITDA.

The Company’s store-level EBITDA was $44.9 million for fiscal 2008 as compared to $52.9 million for fiscal 2007 and therefore satisfied the store-level EBITDA financial covenant in the Financing Agreement. A reconciliation of store-level EBITDA as of December 30, 2008 and January 1, 2008 to cash provided by operating activities along with the components of store-level EBITDA follows:

 

     Fiscal 2008     Fiscal 2007  

Net loss

   $ (149,163 )   $ (113,296 )

Gain from derivative liabilities

     (7,895 )     (59,424 )

Interest income

     (365 )     (3,517 )

Trademark, long-lived asset and store impairment

     111,863       202,174  

Income tax benefit

     (274 )     (52,135 )

Interest expense

     2,064       181  

Depreciation and amortization

     24,717       19,168  

Store pre-opening

     2,044       5,863  

Store lease termination and closure costs

     10,029       718  

General and administrative expenses

     48,057       48,384  

Other operating expenses

     3,817       4,806  
                

Store-level EBITDA

   $ 44,894     $ 52,922  

General and administrative

     (48,057 )     (48,384 )

Store pre-opening

     (2,044 )     (5,863 )

Other operating expenses

     (3,817 )     (4,806 )

Income tax benefit

     274       52,135  

Interest income

     365       3,517  

Interest expense

     (2,064 )     (181 )

Share-based compensation

     4,213       4,214  

Deferred income taxes

     (323 )     (52,223 )

Deferred rent

     4,261       7,163  

Equity loss from joint ventures

     416       204  

Other non cash items

     4,366       1,886  

Change in assets and liabilities, net

     5,680       2,114  
                

Cash provided by operating activities

   $ 8,164     $ 12,698  
                

 

64


Table of Contents

We disclose store-level EBITDA because it is the principal financial covenant in the Financing Agreement. Our calculation of store-level EBITDA is not necessarily comparable to similarly titled measures used by other companies. In addition, store-level EBITDA: (a) does not represent net income or cash flows from operating activities as defined by GAAP; (b) is not necessarily indicative of cash available to fund our cash flow needs; and (c) should not be considered an alternative to net income, operating income, cash flows from operating activities or our other financial information as determined under GAAP.

Failure to comply with the store-level EBITDA financial covenant would cause the Company to default under the Financing Agreement. In the absence of a waiver of, or forbearance with respect to, such a default from Lenders, the Company could be obligated to repay the outstanding indebtedness under the Financing Agreement in advance of its scheduled maturity. In the event the Company was to fail to comply with this financial covenant, the Company would attempt to negotiate a waiver of such noncompliance. There can be no assurance that the Company would be able to negotiate such a waiver, and the costs and conditions associated with any such waiver could be significant. Failure to negotiate such a waiver would cause us to seek other sources of capital and could force us to sell business assets or take other actions which could be detrimental to our business operations.

As part of the Financing Agreement, the Company issued to Lenders two million shares of its common stock with certain registration rights, and entered into a Common Stock Put and Call Agreement with the Lenders (the “Put and Call Agreement”). Under the terms of the Put and Call Agreement, the lenders have a put right requiring us to repurchase the shares at a price of $1.50 per share after the earlier of the first anniversary of the closing date, the payment in full of the Senior Notes or the occurrence of certain events of default under the Financing Agreement or certain other events (the “Put Right”). The Put Right expires under certain circumstances, including if the average daily trading price for our common stock on the NASDAQ Global Market for 20 of 30 business days after the first anniversary of the closing date is greater than $1.50 per share, with average daily trading volume during such period of at least 250,000 shares, or the lenders’ sale of the shares to an unaffiliated third party.

The Company’s common stock has traded below $1.50 from the beginning of fiscal 2009. If the Put Right is exercised by Lenders, the Company will be required to purchase the shares for $3.0 million, which could force us to reduce operating expenses to maintain sufficient working capital.

Contractual Obligations

The following table summarizes contractual obligations and borrowings as of December 30, 2008, and the timing and effect that such commitments are expected to have on the Company’s liquidity and capital requirements in future periods. The Company expects to fund these commitments primarily with operating cash flows generated in the normal course of business.

 

     Payments Due by Period (in 000’s)
     Total    Less Than
1 Year
   1-2 Years    3-4 Years    5 or More
Years

Operating lease obligations(1)

   $ 221,711    $ 38,492    $ 65,979    $ 57,100    $ 60,140

Purchase obligations(2)

     64,916      28,696      5,743      3,245      27,232

Note payable – principal and interest(3)

     32,442      5,098      27,344      —        —  

Capital leases

     527      246      281      —        —  
                                  

Total

   $ 319,596    $ 72,532    $ 99,347    $ 60,345    $ 87,372
                                  

 

(1)

Our wholly owned subsidiary, Jamba Juice Company, is a party to each Company Store lease obligation. The operating lease obligations represent future minimum lease payments under non-cancelable operating leases as of December 30, 2008. The minimum lease payments do not include common area maintenance

 

65


Table of Contents
 

(“CAM”) charges, insurance, contingent rent obligations or real estate taxes, which are also required contractual obligations under our operating leases. In the majority of our operating leases, CAM charges are not fixed and can fluctuate from year to year. Total CAM charges, insurance, contingent rent obligations, license, permits and real estate taxes for our fiscal year ended December 30, 2008 were $9.6 million.

 

(2)

We negotiate pricing and quality specifications for many of the products used in Company Stores and Franchise Stores. This allows for volume pricing and consistent quality of products that meet our standards. Although we negotiate and contract directly with manufacturers, co-packers or growers for our products, we purchase these products from third-party centralized distributors. These distributors source, warehouse and deliver specified products to both Company Stores and Franchise Stores. We also have contracts with certain vendors which require minimum purchases that are included in the purchase obligations noted above.

 

(3)

In connection with the financing, we issued to the Lenders two million shares of our common stock which are subject to the Put and Call Agreement described above. Under the Put and Call Agreement, the Lenders have a put right requiring us to repurchase all or a portion of the shares at a price of $1.50 per share after the earlier of the first anniversary of the closing date, the payment in full of the Senior Notes or the occurrence of certain events of default under the Financing Agreement or certain other events. While this contractual agreement may in the future result in an obligation for us to pay up to $3 million, given that this amount is not truly determinable or certain to be paid at this point in time, it is not included in the table above. The Company also has a call right requiring the Lenders to sell the Shares to the Company at $1.50 per share before the earlier of the first anniversary of the closing date, the payment in full of the Senior Notes or the occurrence of certain events of default under the Financing Agreement. Because the put and call rights are considered a freestanding instrument, the two million shares issued in connection therewith are classified and recorded at their fair value of $2.0 million under derivative liabilities. See Note 9 in Notes to Consolidated Financial Statements for discussion of our Financing Agreement.

Effective January 10, 2007, we adopted the provisions of FIN No. 48, Accounting for Uncertainty in Income Taxes. As of December 30, 2008, our gross unrecognized tax benefits totaled $1.5 million and are not included in the table as a reasonably reliable estimate of the timing of future payments, if any, cannot be predicted.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

New Accounting Standards

See the Recent Accounting Pronouncements section in Note 1 of our Notes to Consolidated Financial Statements for a summary of new accounting standards.

SEASONALITY AND QUARTERLY RESULTS

Our business is subject to seasonal fluctuations. We expect to realize significant portions of our revenue during the second and third quarters of the fiscal year, which align with the warmer summer season. In addition, quarterly results are affected by the timing of the opening of new Company Stores and weather conditions. However, growth of our store locations may conceal or diminish the financial statement impact of such seasonal influences. Because of the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.

INFLATION

We do not believe that inflation has had a material impact on our results of operations in recent years. However, we cannot predict what effect inflation may have on our operations in the future.

 

66


Table of Contents
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rates

We are exposed to financial market risks due to our Financing Agreement. The Financing Agreement calls for outstanding amounts to bear a variable interest rate equal to 6-month LIBOR plus an applicable margin, subject to a floor of 12.5%. At December 30, 2008, a one percent change in LIBOR would not have any impact on our results of operations for our Financing Agreement because the current LIBOR plus the applicable margin are below the floor rate.

We do not enter into market risk sensitive instruments for trading purposes. We are exposed to financial market risks due primarily to changes in interest rates, which it moderates primarily by managing the maturities of its financial instruments. We do not use derivatives to alter the interest characteristics of its financial instruments. We do not believe a change in interest rate will materially affect our financial position or results of operations. A one percent change of the interest rate would result in an annual change in the results of operations of $0.2 million.

Commodities Prices

We purchase significant amounts of fruits and dairy products to support the needs of our Company Stores. The price and availability of these commodities directly impacts the results of operations and can be expected to impact the future results of operations.

We purchase fruit based on short-term seasonal pricing agreements. These short-term agreements generally set the price of procured frozen fruit and 100% pure fruit concentrates for less than one year based on estimated annual requirements. In order to mitigate the effects of price changes in any one commodity on its cost structure, we contract with multiple suppliers both domestically and internationally. These agreements typically set the price for some or all of our estimated annual fruit requirements, protecting us from short-term volatility. Nevertheless, these agreements typically contain a force majeure clause, which, if utilized (such as hurricanes in 2004 that destroyed the Florida orange crop and more recently with the 2007 freeze that affected California citrus), may subject us to significant price increases.

Our pricing philosophy is not to attempt to change consumer prices with every move up or down of the commodity market, but to take a longer term view of managing margins and the value perception of its products in the eyes of our customers. Our objective is to maximize our revenue through increased customer traffic. In cases such as the recent increase in minimum wage and increases in orange and dairy prices, we instituted price increases.

Derivative Instruments

We do not purchase derivative instruments on the open market. However, we have classified certain warrants and our put and call agreement as derivative instruments (warrants of $0.1 million and the put call liability of $2.0 million were recorded as a short term liability at December 30, 2008). Classification of the warrants as derivative liabilities was required because, for each instrument, there is a possibility that the instrument could be required to be settled in stock that requires registration. We are required to mark these instruments to market as of the end of each reporting period and to recognize the change in fair value in our consolidated statements of operations. Our stock price has been historically volatile and the fair values of these instruments are sensitive to changes in our underlying stock price. Also, we may be subject to changes in the risk free interest rate. As such, the carrying amount of these instruments may be volatile from period to period. For the period from January 6, 2005 (inception) to December 30, 2008, we recorded a cumulative gain on derivative instruments of $12.2 million for our warrants and our put and call agreement, such amount representing the change in fair value between the initial recording of the derivative and the fair value as of December 30, 2008. For fiscal 2008, the gain on derivative liabilities from the warrants was $9.2 million, representing the change in fair value between January 1, 2008 and December 30, 2008 and the loss on our put and call agreement was $1.3 million.

 

67


Table of Contents
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Jamba, Inc.:

We have audited the accompanying consolidated balance sheet of Jamba, Inc. and subsidiary as of December 30, 2008, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the fiscal year ended December 30, 2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Jamba, Inc. and subsidiary as of December 30, 2008, and the results of its operations and its cash flows for the fiscal year ended December 30, 2008, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Jamba, Inc.’s internal control over financial reporting as of December 30, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 16, 2009 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

 

/s/    KPMG LLP

San Francisco, California

March 16, 2009

 

68


Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Jamba, Inc.

Emeryville, California

We have audited the accompanying consolidated balance sheet of Jamba, Inc. and subsidiary (the “Company”) as of January 1, 2008 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the fiscal years ended January 1, 2008 and January 9, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Jamba, Inc. and subsidiary as of January 1, 2008 and the results of their operations and their cash flows for the fiscal years ended January 1, 2008 and January 9, 2007, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1, on January 10, 2007, the Company adopted Statement of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes.

 

/s/    Deloitte & Touche LLP

San Francisco, California

March 14, 2008

 

69


Table of Contents

JAMBA, INC.

CONSOLIDATED BALANCE SHEETS

 

(Dollars in thousands, except share and per share amounts)    December 30,
2008
    January 1,
2008
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 20,822     $ 23,016  

Restricted cash and investments

     5,059       1,916  

Receivables, net of allowances of $416 and $133

     4,594       6,402  

Inventories

     3,435       3,582  

Prepaid and refundable income taxes

     5,670       5,814  

Prepaid rent

     185       3,261  

Prepaid expenses and other current assets

     1,328       1,607  

Deferred income taxes

     —         6,928  
                

Total current assets

     41,093       52,526  

Property, fixtures and equipment, net

     95,154       128,861  

Trademarks and other intangible assets, net

     2,998       87,599  

Restricted cash

     2,659       2,950  

Deferred income taxes

     354       —    

Other long-term assets

     3,462       3,066  
                

Total assets

   $ 145,720     $ 275,002  
                

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 8,089     $ 14,487  

Accrued compensation and benefits

     7,667       6,490  

Workers’ compensation and health self-insurance reserves

     1,922       1,796  

Accrued jambacard liability

     30,764       28,576  

Current portion of capital lease obligations

     246       —    

Other accrued expenses

     12,074       8,277  

Derivative liabilities

     2,098       9,290  
                

Total current liabilities

     62,860       68,916  

Note payable

     22,829       —    

Long-term capital lease obligations

     281       —    

Long-term workers’ compensation and health insurance reserves

     2,659       2,950  

Deferred income tax

     —         7,269  

Deferred rent and other long-term liabilities

     16,670       12,359  

Commitments and contingencies (Notes 10 and 16)

     —         —    
                

Total liabilities

     105,299       91,494  
                

Stockholders’ equity:

    

Common stock, $.001 par value, 150,000,000 shares authorized; 54,690,728 and 52,637,131 shares issued and outstanding

     55       53  

Additional paid-in capital

     358,258       352,184  

Accumulated deficit

     (317,892 )     (168,729 )
                

Total stockholders’ equity

     40,421       183,508  
                

Total liabilities and stockholders’ equity

   $ 145,720     $ 275,002  
                

See Notes to Consolidated Financial Statements.

 

70


Table of Contents

JAMBA, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

(Dollars in thousands, except share and per share amounts)    Fiscal Year
Ended
December 30,
2008
    Fiscal Year
Ended
January 1,
2008
    Fiscal Year
Ended
January 9,
2007
 

Revenue:

      

Company stores

   $ 333,784     $ 306,035     $ 22,064  

Franchise and other revenue

     9,106       11,174       1,051  
                        

Total revenue

     342,890       317,209       23,115  
                        

Costs and operating expenses:

      

Cost of sales

     89,163       84,226       6,039  

Labor

     120,251       102,661       8,524  

Occupancy

     44,868       37,458       3,590  

Store operating

     43,714       39,942       4,222  

Depreciation and amortization

     24,717       19,168       1,878  

General and administrative

     48,057       48,384       6,195  

Store pre-opening

     2,044       5,863       285  

Impairment of long-lived assets

     27,802       1,550       —    

Store lease termination and closure

     10,029       718       —    

Trademark and goodwill impairment

     84,061       200,624       —    

Other operating

     3,817       4,806       675  
                        

Total costs and operating expenses

     498,523       545,400       31,408  
                        

Loss from operations

     (155,633 )     (228,191 )     (8,293 )
                        

Other income (expense):

      

Gain (loss) on derivative liabilities

     7,895       59,424       (57,383 )

Interest income

     365       3,517       4,177  

Interest expense

     (2,064 )     (181 )     (71 )
                        

Total other income (expense)

     6,196       62,760       (53,277 )
                        

Loss before income taxes

     (149,437 )     (165,431 )     (61,570 )

Income tax benefit

     274       52,135       2,544  
                        

Net loss

   $ (149,163 )   $ (113,296 )   $ (59,026 )
                        

Weighted-average shares used in the computation of loss per share:

      

Basic

     53,252,855       52,323,898       24,478,384  

Diluted

     53,252,855       52,323,898       24,478,384  

Loss per share:

      

Basic

   $ (2.80 )   $ (2.17 )   $ (2.41 )

Diluted

   $ (2.80 )   $ (2.17 )   $ (2.41 )

See Notes to Consolidated Financial Statements.

 

71


Table of Contents

JAMBA, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

     Common Stock    Additional
Paid-In
Capital
    Retained
Earnings
(Accumulated
Deficit)
    Stockholders’
Equity
 
(Dollars in thousands, except share amounts)    Shares    Amount       

Balance as of January 10, 2006

   21,000,000    $ 21    $ 86,493     $ 3,593     $ 90,107  

Issuance of shares in private placement

   30,879,999      31      231,569       —         231,600  

Private placement fees

   —        —        (6,750 )     —         (6,750 )

Reclass of common stock subject to redemption

   —        —        25,241       —         25,241  

Exercise of warrants

   1,617      —        7       —         7  

Share-based compensation expense

   —        —        427       —         427  

Assumption of Jamba Juice Company options and warrants at fair value

   —        —        4,269       —         4,269  

Net loss

   —        —        —         (59,026 )     (59,026 )
                                    

Balance as of January 9, 2007

   51,881,616      52      341,256       (55,433 )     285,875  

Exercise of warrants

   669,500      1      6,500       —         6,501  

Exercise of stock options

   51,640      —        214       —         214  

Share-based compensation expense

   —        —        4,214       —         4,214  

Restricted shares vested in 2007

   34,375      —        —         —         —    

Net loss

   —        —        —         (113,296 )     (113,296 )
                                    

Balance as of January 1, 2008

   52,637,131      53      352,184       (168,729 )     183,508  

Share-based compensation expense

   —        —        4,213       —         4,213  

Issuance of shares

   1,097      —        —         —         —    

Restricted shares vested in 2008

   52,500      —        —         —         —    

Common stock issued in connection with Financing Agreement

   2,000,000      2      1,861       —         1,863  

Net loss

   —        —        —         (149,163 )     (149,163 )
                                    

Balance as of December 30, 2008

   54,690,728    $ 55    $ 358,258     $ (317,892 )   $ 40,421  
                                    

See Notes to Consolidated Financial Statements.

 

72


Table of Contents

JAMBA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(Dollars in thousands)   Fiscal Year
Ended
December 30,
2008
    Fiscal Year
Ended
January 1,
2008
    Fiscal Year
Ended
January 9,
2007
 

Cash provided by (used in) operating activities:

     

Net loss

  $ (149,163 )   $ (113,296 )   $ (59,026 )

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

     

Depreciation and amortization

    24,717       19,168       1,878  

Trademark and goodwill impairment

    84,061       200,624       —    

Impairment of long-lived assets

    27,802       —         —    

Lease termination, store closure costs and disposals

    11,734       3,488       587  

Jambacard breakage income and amortization, net

    1,687       629       (305 )

Share-based compensation

    4,213       4,214       426  

Bad debt and inventory reserves

    579       37       26  

Deferred rent

    4,261       7,163       333  

Deferred income taxes

    (323 )     (52,223 )     (2,837 )

Equity (income) loss from joint ventures

    416       204       (19 )

(Gain) loss on derivative liabilities

    (7,895 )     (59,424 )     57,383  

Other

    395       —         —    

Changes in operating assets and liabilities:

     

Receivables, net

    1,083       (3,019 )     (1,916 )

Inventories

    (207 )     (924 )     406  

Prepaid rent

    3,076       (1,381 )     —    

Prepaid taxes

    144       (3,317 )     —    

Prepaid expenses and other current assets

    452       20       2,864  

Other long-term assets

    200       (152 )     (2,832 )

Accounts payable

    (322 )     (16 )     (520 )

Accrued compensation and benefits

    1,177       617       481  

Workers’ compensation and health insurance reserves

    (165 )     —         —    

Accrued jambacard liability

    501       8,235       5,187  

Litigation settlement payable

    —         (614 )     83  

Accrued expenses and other liabilities

    (2,026 )     2,789       (2,909 )

Other long-term liabilities

    1,767       (124 )     5  
                       

Cash provided by (used in) operating activities

    8,164       12,698       (705 )
                       

Cash used in investing activities:

     

Capital expenditures

    (30,173 )     (52,269 )     (4,772 )

Cash paid in acquisitions, net of cash acquired

    —         (24,105 )     (245,350 )

Increase in restricted cash and investments

    (2,852 )     (4,866 )     —    

Cash in trust

    —         —         128,266  

Investment in joint ventures

    (25 )     (53 )     (20 )
                       

Cash used in investing activities

    (33,050 )     (81,293 )     (121,876 )
                       

Cash provided by financing activities:

     

Borrowings on debt facilities

    23,022       —         —    

Payments on debt facility

    (1,088 )     —         (15,875 )

Payment of debt issuance costs

    (1,326 )     —         —    

Proceeds from common stock

    1,863       —         —    

Net put/call obligation

    703       —         —    

Payment on capital lease obligations

    (482 )     —         —    

Cash from private placement and exercise of warrants

    —         4,018       224,858  

Proceeds from exercise of stock options

    —         214       —    
                       

Cash provided by financing activities

    22,692       4,232       208,983  
                       

Net (decrease) increase in cash and equivalents

    (2,194 )     (64,363 )     86,402  

Cash and equivalents at beginning of period

    23,016       87,379       977  
                       

Cash and equivalents at end of period

  $ 20,822     $ 23,016     $ 87,379  
                       

Supplemental cash flow information:

     

Cash paid for interest

  $ 1,803     $ 186     $ —    

Income taxes paid

    69       2,344       104  

Noncash investing and financing activities:

     

Property, fixtures and equipment acquired through use of deposit

  $ —       $ 2,706     $ —    

Noncash property, fixtures and equipment additions

  $ 1,534     $ 8,965     $ 2,959  

Fair value of options and warrants assumed in connection with the Merger

  $ —       $ —       $ 4,269  

See Notes to Consolidated Financial Statements.

 

73


Table of Contents

JAMBA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business—Jamba, Inc. and its subsidiary (the “Company”) was incorporated in Delaware on January 6, 2005 as a blank check company formed to serve as a vehicle for the acquisition of a then unidentified operating business. The registration statement for the Company’s initial public offering (the “Offering”) was declared effective June 29, 2005. On July 6, 2005, the Company consummated its initial public offering and received net proceeds of approximately $110.9 million and executed the over-allotment option offering on July 7, 2005 and received net proceeds of approximately $17.0 million. The Company’s management had broad discretion with respect to the specific application of the net proceeds of the Offering, although substantially all of the net proceeds of the Offering were intended to be generally applied toward consummating a merger with an operating company. This operating company was subsequently identified as Jamba Juice Company.

On March 10, 2006, the Company entered into an Agreement and Plan of Merger with Jamba Juice Company (the “Merger Agreement”). On November 29, 2006 (the “Merger Date”), the Company consummated the merger with Jamba Juice Company (the “Merger”) whereby Jamba Juice Company became a wholly owned subsidiary of the Company. For accounting purposes, the Merger was treated as a purchase business combination. The results of Jamba Juice Company are included in the consolidated financial statements subsequent to the Merger Date. During the periods prior to the Merger, the Company was in the development stage.

The Company offers a wide variety of fresh blended-to-order smoothies, fresh-squeezed juices, baked goods and snacks through retail stores. As of December 30, 2008, there were 729 locations consisting of 511 company owned and operated stores and 218 franchise stores operating in 21 states and the Bahamas; notwithstanding the single Bahamas location, the Company has no other international locations. Of these 729 locations, 388 were located in California. Jamba Juice Company began operations in 1990.

Basis of Presentation—The consolidated financial statements include the accounts of the Company and, subsequent to the Merger, its wholly owned subsidiary, Jamba Juice Company. All intercompany balances and transactions have been eliminated. The equity method of accounting is used to account for joint ventures owned by Jamba Juice Company because Jamba Juice Company exercises significant influence over operating and financial policies of its partners. Accordingly, the carrying value of these investments is reported in other long-term assets, and the Company’s equity in the net income and losses of these investments is reported in other operating expenses.

Fiscal Year End— On November 29, 2006, Jamba, Inc.’s board of directors approved a change to the Company’s fiscal year end from December 31 to the second Tuesday following December 31 of the ensuing year. The Company’s prior fiscal year started on January 11, 2006 and ended on January 9, 2007, which is referred to as fiscal 2006.

On June 7, 2007, Jamba, Inc.’s board of directors approved a change to the Company’s fiscal year end from the second Tuesday following December 31 to the Tuesday closest to December 31. The Company’s most recently completed fiscal year started on January 2, 2008 and ended on December 30, 2008, which is referred to as fiscal 2008. The Company’s previously completed fiscal year started on January 10, 2007 and ended on January 1, 2008, which is referred to as fiscal 2007. The Company believes that the one week in our fiscal year change is insignificant for comparative purposes and would not be material to reporting the overall financial conditions or operating results of the Company as a whole.

Significant Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that

 

74


Table of Contents

JAMBA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

affect the reported amounts of assets, liabilities, revenue and expenses and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates, and such differences could affect the results of operations reported in future periods.

Concentrations of Risk—The Company maintains food distribution contracts primarily with one supplier, Southwest Traders, Inc. This supplier provided approximately 81% of cost of sales for fiscal 2008 and fiscal 2007 and approximately 82% in fiscal 2006, which potentially subjects the Company to a concentration of business risk. If this supplier had operational problems or ceased making product available to the Company, operations could be adversely affected.

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company places its cash and cash equivalents with high-quality financial institutions. Balances in the Company’s cash accounts frequently exceed the Federal Deposit Insurance Corporation insurance limit.

Self-Insurance Reserves—The Company is self-insured through September 30, 2008 for existing and prior years’ exposures related to workers’ compensation and healthcare benefits. Liabilities associated with the self-insured risks are not discounted and are estimated, in part, by considering historical claims experience, demographic factors, severity factors and other actuarial assumptions. The estimated accruals for these liabilities could be significantly affected if future occurrences and claims differ from these assumptions and historical trends.

Cash and Cash Equivalents—The Company considers all highly liquid instruments with maturities of three months or less when purchased to be cash equivalents. As of December 30, 2008 and January 1, 2008, the Company did not have any investments with maturities greater than three months.

Restricted Cash and Investments— The Company held $7.7 million in restricted cash, of which $5.0 million was classified as a current asset and $2.7 million classified as a long-term asset, at December 30, 2008, representing cash held in a certificate of deposit to collateralize the Company’s letters of credit, which is required since the Company was self-insured for workers’ compensation and health insurance. Also included in restricted cash is $3.0 million related to the Company’s Financing Agreement (See Note 9).

The Company held $4.9 million in restricted cash at January 1, 2008. Approximately $3.0 million, classified as a long-term asset, represents cash held in a certificate of deposit to collateralize the Company’s letters of credit and approximately $1.9 million was classified as a current asset. Of the $1.9 million current restricted cash, $1.4 million related to letters of credit required for the Company’s workers’ compensation and $0.5 million represents the cash holdback related to one of the Company’s acquisitions. The $0.5 million holdback was released in April 2008.

Receivables—Receivables primarily represent amounts due from royalty fees, advertising fees, construction allowances and jambacards issued by the franchisees. The allowance for doubtful accounts is the Company’s estimate of the amount of probable credit losses in the Company’s existing accounts receivable.

Inventories—Inventories include only the purchase cost and are stated at the lower of cost or market. Cost is determined using the first-in, first-out method (FIFO). Inventories consist of food, beverages and available-for-sale promotional products.

Property, Fixtures and Equipment—Property, fixtures and equipment acquired in the Merger are stated at estimated fair value as of the Merger Date. Property, fixtures and equipment acquired subsequent to the Merger

 

75


Table of Contents

JAMBA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

are recorded at cost. Expenditures for major additions and improvements are capitalized and minor replacements, maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful life. The estimated useful life for leasehold improvements is the lesser of 10 years or the term of the underlying lease. The estimated useful life for furniture, fixtures and equipment is three to seven years.

Impairment of Long-Lived Assets—Long-lived assets, including leasehold improvements, and other fixed assets are reviewed for impairment when indicators of impairment are present. Expected cash flows associated with an asset, in addition to other quantitative and qualitative analyses, are the key factors in determining the recoverability of the asset. Identifiable cash flows are measured at the individual store level. The estimate of cash flows is based upon, among other things, certain assumptions about expected future operating performance. Management’s estimates of undiscounted cash flows may differ from actual cash flows due to, among other things, changes in economic conditions, changes to our business model or changes in operating performance. If the sum of the undiscounted cash flows is less than the carrying value of the asset, the Company recognizes an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset.

The Company recorded $27.8 million, $1.6 million and $0 in long-lived asset impairment charges during fiscal 2008, fiscal 2007 and fiscal 2006, respectively.

Trademark, Goodwill and Other Intangible Asset Impairment—The Company accounts for goodwill and other intangible assets in accordance with Financial Accounting Standards Board (“FASB”) Statement No. 142, Goodwill and Other Intangible Assets. As required by FASB Statement No. 142, the Company tests for goodwill impairment annually (at year-end) or whenever events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The required two-step approach uses accounting judgments and estimates of future operating results. Changes in estimates or the application of alternative assumptions could produce significantly different results. Impairment testing is done at a reporting unit level. An impairment loss generally is recognized when the carrying amount of the reporting unit’s net assets exceeds the estimated fair value of the reporting unit. The estimates and judgments that most significantly affect the fair value calculation are assumptions related to revenue growth, discount rate, public market trading multiples and control premiums. The fair value of the reporting unit is reconciled to the Company’s market capitalization plus an estimated control premium.

Trademarks are not subject to amortization and are tested for impairment annually (at year-end), or more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company performed its test for impairment on trademarks by comparing the fair value of the trademarks to their carrying amounts. An impairment loss is generally recognized when the carrying amount of the trademarks is less than the fair value. The fair value of trademarks was estimated using the income approach-relief from royalty method, which is based on the projected cost savings attributable to the ownership of the trademarks.

As a result of the evaluation of goodwill and trademarks, the Company recorded a non-cash goodwill impairment charge of $1.4 million related to impairment from the acquisition of the remaining interest in JJC Florida (see Note 2) and the impairment of the Company’s previously held 35% interest in JJC Florida and $82.6 million related to trademarks, respectively, in fiscal 2008. The Company also recorded a non-cash impairment charge of $111.0 million and $89.6 million related to goodwill and trademarks, respectively, in fiscal 2007.

Intangible assets subject to amortization (primarily franchise agreements, employment/nonsolicitation agreements, reacquired franchise rights and a favorable lease portfolio) are tested for recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Intangible assets

 

76


Table of Contents

JAMBA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

are amortized over their estimated useful lives using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise realized. Useful lives for the franchise agreements and employment agreements are 13.4 years and 4.0 years, respectively. The useful life of reacquired franchise rights represents the remaining term of the franchise agreement. The useful life of the favorable lease portfolio is based on the related lease term.

Jambacards—The Company, through its subsidiary, Jamba Juice Company, has been selling jambacards to its customers in its retail stores and through its website since November 2002. The Company’s jambacards do not have an expiration date. An obligation is recorded at the time of either an initial load or a subsequent reload in the accrued jambacard liability line item on the Company’s consolidated balance sheets. The Company recognizes income from jambacards when (i) the jambacard is redeemed by the customer or (ii) the likelihood of the jambacard being redeemed by the customer is remote (also referred to as “jambacard breakage”) and the Company determines that it does not have a legal obligation to remit the unredeemed jambacards to the relevant jurisdictions. The Company determines the jambacard breakage amount based upon its historical redemption patterns. The Company has concluded that after three years of inactivity the likelihood of redemption becomes remote and recognizes breakage income at that time. Jambacard breakage income is included in other operating expenses in the consolidated statements of operations.

As a result of the Merger, the jambacard liability was adjusted to fair value by discounting the projected cash flows to present value, which are the costs to service deferred revenue, plus an estimated operating margin. The adjustment is being amortized over the expected life of the jambacard and resulted in $0.4 million and $2.1 million of expense during fiscal 2008 and fiscal 2007, respectively, which offset the amount recorded as jambacard breakage income. The Company recorded $2.1 million, $1.5 million and $0.3 million of jambacard breakage income during fiscal 2008, fiscal 2007 and fiscal 2006, respectively.

Rent Expense—Under the provisions of certain of our leases, there are rent holidays and/or escalations in payments over the base lease term, as well as renewal periods. The effects of rent holidays and escalations are reflected in rent costs on a straight-line basis over the expected lease term, which includes cancelable option periods when it is deemed to be reasonably assured that the Company will exercise such option periods due to the fact that the Company would incur an economic penalty for not doing so. The lease term commences on the date when the Company become legally obligated for the rent payments which generally coincides with the time when the landlord delivers the property for us to develop. All rent costs recognized during construction periods are classified as pre-opening expenses.

In accordance with FAS