##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, DC 20549


Form 10-K


|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|   |  | For the fiscal year ended January 1, 2006.                                                  
|or
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|   |  | For the transition period
    from           to           .                                 

Commission File Number: 000-51535


CARIBOU COFFEE COMPANY, INC.


(Exact name of registrant as specified in its charter)


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

(Registrants telephone number, including area code):


(763) 592-2200


Securities Registered Pursuant to Section 12(b) of the
Act:


None


Securities Registered Pursuant to Section 12(g) of the
Act:


Common Stock, $0.01 Par Value Per Share


o þ


o þ


þ o


10-K 10-K. þ


12b-2


o o þ


12b-2 o þ






DOCUMENTS INCORPORATED BY REFERENCE


10-K.










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##### 



TABLE OF CONTENTS







|                                                                  |  |                                                                                                                          |  |    |  | 
|----------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------ |  | -- |  | 
|PART I.                                                          
|Item 1                                                            |  | Business                                                                                                                 |  | 3 
|Item 1A                                                           |  | Risk Factors                                                                                                             |  | 14
|Item 1B                                                           |  | Unresolved Staff Comments                                                                                                |  | 24
|Item 2                                                            |  | Properties                                                                                                               |  | 24
|Item 3                                                            |  | Legal Proceedings                                                                                                        |  | 25
|Item 4                                                            |  | Submission of Matters to a Vote of Security
    Holders                                                                  |  | 26
|Item 4A                                                           |  | Executive Officers                                                                                                       |  | 26
|                                                                 
|PART II.                                                         
|Item 5                                                            |  | Market for the Registrants Common
    Equity, Related Shareholder Matters and Issuer Purchases of
    Equity Securities |  | 28
|Item 6                                                            |  | Selected Financial Data                                                                                                  |  | 29
|Item 7                                                            |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                                |  | 32
|Item 7A                                                           |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                           |  | 41
|Item 8                                                            |  | Financial Statements and Supplementary
    Data                                                                          |  | 41
|Item 9                                                            |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure                                 |  | 64
|Item 9A                                                           |  | Controls and Procedures                                                                                                  |  | 64
|Item 9B                                                           |  | Other Information                                                                                                        |  | 64
|                                                                 
|PART III.                                                        
|Item 10                                                           |  | Directors and Executive Officers of the
    Registrant                                                                   |  | 64
|Item 11                                                           |  | Executive Compensation                                                                                                   |  | 64
|Item 12                                                           |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Shareholder Matters                       |  | 64
|Item 13                                                           |  | Certain Relationships and Related
    Transactions                                                                       |  | 65
|Item 14                                                           |  | Principal Accountant Fees and Services                                                                                   |  | 65
|                                                                 
|PART IV.                                                         
|Item 15                                                           |  | Exhibits and Financial Statement
    Schedules                                                                           |  | 65
|Signatures                                                        |  | 68                                                                                                                      
|EX-10.13 FORM OF DIRECTORS AND OFFICERS INDEMNIFICATION AGREEMENT
|EX-23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 
|EX-31.1 SECTION 302 CERITIFCATION OF THE CEO                     
|EX-31.2 SECTION 302 CERTIFICATION OF THE CFO                     
|EX-32.1 SECTION 906 CERTIFICATION OF THE CEO                     
|EX-32.2 SECTION 906 CERTIFICATION OF THE CFO                     



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PART I







|        |         
|------- | --------
|Item 1. | Business









| |   |                                                               
| | - | --------------------------------------------------------------
| |  | enhancing our focus on customer service;                      
|
| |  | improving our selection and training of coffeehouse personnel;
|
| |  | strengthening our site selection strategy;                    
|
| |  | increasing coffeehouse openings; and                          
|
| |  | developing new products and promotions.                       



Competitive Strengths






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Unique Customer Experience. Our mission statement is to
    create an experience that makes the day better by
    focusing on elements:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | High-Quality, Differentiated Product. We offer
    high-quality coffee-based, espresso-based and non-coffee-based
    hot and cold beverages that meet the demanding taste preferences
    of our customers. In November 2004, our Colombia Blend was
    recently ranked #1 among 42 Colombian gourmet coffees by a
    leading consumer products research publication. Our coffees are
    craft roasted using the highest grades of arabica beans to
    produce the proper flavor profile for each blend. We also
    enforce strict brewing policies to ensure that our customers
    receive a product that is as fresh as possible. We pride
    ourselves on having one of the most creative and extensive
    selections of high-quality coffee-based, espresso-based and
    non-coffee-based beverages in our industry.

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Coffeehouse Environment. Our coffeehouse interiors
    reflect the atmosphere of a mountain lodge, featuring
    fireplaces, exposed wooden beams and leather sofas and chairs.
    This warm and inviting environment encourages customers to relax
    and enjoy our products, while also providing convenience for
    take-out customers who are focused on quick service.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Dedication to Customer Service. We encourage our
    coffeehouse team members to have personal interaction with
    customers, including knowing customers names and preferred
    beverages, while providing fast service and a quality beverage.
    We also require our team members to be
    drink-certified on an ongoing basis so that our
    beverages are consistently prepared according to our strict
    standards. Our selective hiring, extensive training and
    merit-based compensation policies reinforce our focus on the
    customer experience and drive consistent, excellent customer
    service in our coffeehouses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Strong Brand Awareness. We believe our brand is well
    known within the retail gourmet coffee market, and that we have
    particularly strong brand awareness in markets where we have a
    significant coffeehouse presence. We believe our brand awareness
    has resulted from our marketing efforts, distinctive Caribou
    Coffee logo and signage, all of which will promote our brand as
    we expand into new markets. Through our relationships with
    grocery stores and mass merchandisers, airlines and other
    commercial customers, we are further expanding our brand
    awareness outside our existing markets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Scalable Infrastructure. We have made capital investments
    to build our roasting, packaging and fulfillment infrastructure
    to support the production and distribution of large quantities
    of fresh whole bean coffee. At present, we are operating at less
    than our full roasting capacity, and our existing infrastructure
    is scalable so that we can add additional capacity with limited
    incremental capital expenditures. In addition, when we need to
    add additional roasting, packaging and fulfillment
    infrastructure, we believe that we can do so at a relatively
    inexpensive cost.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Strong Company Culture. We have a strong, well defined,
    service-oriented culture that our employees embrace and that we
    promote internally through company-wide initiatives that
    reinforce our values and goals. We are also committed to
    supporting the ongoing and sustainable production of coffee, and
    we allocate funds to support agriculturally and socially
    responsible initiatives in the countries from which we source
    our coffee beans. For example, we recently established a
    relationship with the Rainforest Alliance, an international
    coalition focused on protecting the environment in
    coffee-producing regions. We also engage in community and
    charitable initiatives, such as donating over $100,000 to the
    Coffee Kids Sumatra Relief Fund to benefit victims of the
    tsunami in Southeast Asia. We donate a percentage of the sales
    from our Amys Blend coffee to the National Breast Cancer
    Foundation, and together with The Coca-Cola Company, we made a
    combined contribution of over $150,000 in 2005. We believe that
    our strong company culture will allow us to maintain our focus
    on quality and customer service as we expand our business.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Experienced Management Team. We are led by a management
    team with significant experience in the restaurant and branded
    consumer products industries. Our Chairman and Chief Executive
    Officer, Michael J. Coles, has more than 40 years of
    specialty retail experience, including co-founding and serving
    as Chief Executive Officer of Great American Cookie Company. The
    members of our senior management team have an average of more
    than 15 years of relevant experience. We believe our
    management team has the requisite skill and depth to lead and
    manage our planned growth.

Growth Strategy






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Continuing to Open New Company-Operated Coffeehouse
    Locations. We have opened 143 company-operated
    locations in the past two fiscal years. During fiscal year 2005,
    we opened 86 coffeehouses and plan to open an additional 90 to
    100 company owned coffeehouses in 2006. We intend to further
    penetrate a number of our existing markets and to expand into
    new markets by opening coffeehouses in a variety of traditional
    retail venues as well as strategically aligning with certain

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | retailers to open coffeehouses within their stores. In order to
    maximize expansion opportunities, we will continue to explore
    different coffeehouse layouts and designs that best fit
    particular venues or locations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Increasing our Comparable Coffeehouse Sales and Enhancing
    Operating Margins. We will continue our efforts to increase
    our comparable coffeehouse sales, including increasing our brand
    awareness through marketing efforts and introducing new products
    and promotions. Through these efforts, we have achieved positive
    comparable coffeehouse sales during each of the last two fiscal
    years. We believe that we have strong brand awareness in markets
    where we have a significant coffeehouse presence and that by
    building a similar coffeehouse base in other metropolitan areas
    we will be able to drive customer awareness and comparable
    coffeehouse sales. As our comparable coffeehouse sales increase,
    we expect our operating margins at those coffeehouses to
    improve. In addition, we are seeking to improve operating
    margins by leveraging our increased purchasing power to
    negotiate more favorable pricing in a variety of areas from
    telecommunications and credit card processing to paper products.
|
| |  | Expanding Complementary Distribution Channels. We are
    continuing our efforts to expand the distribution channels for
    our products to increase our revenue sources, profitability and
    brand awareness in existing and new markets. These complementary
    distribution channels include:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Commercial Channels We will continue to offer
    our products through a number of commercial channels, including
    grocery stores and mass merchandisers, office coffee providers,
    airlines, hotels, sports and entertainment venues and college
    campuses. We intend to build upon our existing relationships
    with grocery stores such as Byerlys and Lunds, airlines
    such as Frontier Airlines and national office coffee providers
    such as Aramark. We are also seeking additional commercial
    customers, including additional relationships with mass
    merchandisers similar to our growing relationships with
    SuperTarget and Sams Club.                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Mail-order and Internet Mail-order and
    Internet-based channels allow us to reach customers familiar
    with our brand who may not have convenient access to our
    coffeehouses. In addition, sales through these channels may help
    us to identify new markets for coffeehouses. Through marketing
    and other brand building initiatives, we intend to leverage our
    existing coffeehouse-based growth to drive additional mail-order
    and Internet sales.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Expanding our Licensing Business. We intend to
    strategically license the Caribou Coffee brand, where we believe
    there are significant opportunities to grow our business. For
    example, we have entered into a master license agreement with a
    local licensee to develop 250 coffeehouses in the Middle East
    through 2012 and have opened the first two coffeehouses under
    this agreement in 2005. We are currently exploring license
    arrangements in other international markets. We also intend to
    license locations in the United States in order to gain access
    to certain attractive locations, such as airports, or to take
    advantage of other strategic opportunities.                                                                                                                                                                                                                                                                                                                                                                  

Menu and Products






| |   |                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Classics traditional coffee and
    cocoa beverages;                                                                                                  
|
| |  | Espresso espresso-based beverages
    such as lattes, cappuccinos and mochas;                                                                         
|
| |  | Cold iced coffees, blended coffee
    coolers in flavors such as vanilla, espresso, caramel and
    chocolate and fruit flavored smoothies;           
|
| |  | Wild signature Caribou
    coffee-based beverages such as Turtle Mocha, Hot Apple Blast,
    Caramel High Rise, Campfire Mocha and Mint Condition; and
|
| |  | Tea a variety of premium
    loose-leaf teas, including black, green and herbal teas.                                                                 

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Coffee Selection and Preparation






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Sourcing. We purchase the highest grades of arabica
    coffee beans through coffee brokers who source beans from
    different parts of the world. We have developed strong
    relationships with some of the industrys most experienced
    and influential coffee brokers, buyers and farmers. Multiple
    times a year, our personnel travel to coffee-growing regions in
    Africa, Indonesia and the Americas to personally select the best
    beans and, working through brokers or directly with growers,
    oversee their preparation for shipment. We taste, or
    cup, each sample before purchasing and again before
    accepting delivery.
|
| |  | Blending. Our blends are created from varietal coffee
    beans sourced throughout the world to create a unique flavor
    profile. Our roastmasters spend significant time each week
    cupping different unblended coffees. The roastmasters are able
    to create custom blends comprised of anywhere from three to
    eight different coffees based on the selection of beans
    available.                                                                                                                                                                                                                                                              
|
| |  | Roasting. We differentiate our coffee by craft
    roasting  custom roasting beans in small batches to
    enhance their unique characteristics. Each batch is roasted for
    the appropriate length of time to                                                                                                                                                                                                                                                                                                                                                                                                                                                

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | achieve the optimal flavor profile for the particular varietal
    or blend. This process allows us to offer a broad spectrum of
    light to dark roasts. Our roastmasters cup each of these roasts
    every day to maintain quality and consistency.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Packaging. Our packaging ensures our coffee remains fresh
    from the time it is roasted until it is brewed. After each
    coffee varietal or blend is roasted to its unique profile, the
    coffee is packaged with one-way valve technology that allows the
    release of carbon dioxide but does not permit the entry of
    oxygen, which can accelerate staleness. We also use a special
    process to displace any residual oxygen in the package to extend
    the freshness of our pre- packaged whole-bean coffee.                                                                                                                                                                                                                                                                                                
|
| |  | Brewing. Consistent, high standard in-store brewing is
    the final step in achieving the best coffee. We install high
    quality grinders, brewers and water filtration systems in every
    coffeehouse and enforce strict brewing and maintenance
    procedures. These procedures include monthly replacement of
    water filtration cartridges, grinding coffee just before brewing
    and serving coffee within one hour of its brew time. Moreover,
    coffee beans are not brewed more than 21 days out of the
    roaster or seven days after the package seal is opened. At our
    coffeehouses and on our website, we offer a free guide titled
    Brew Your Best At Home intended to help whole bean
    customers replicate the quality brewing they find at our
    coffeehouses at their home or office.

Coffeehouse Design and Atmosphere




pick-up




Site Selection and Construction




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Coffeehouse Operations




| |                         
| | ------------------------
| | Coffeehouse Team Members

day-to








| |         
| | --------
| | Training



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| |                   
| | ------------------
| | Hours of Operation





| |                
| | ---------------
| | Quality Control



Commercial Channels






| |   |                                                                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Grocery stores and mass merchandisers  This
    segment includes grocery stores, mass merchandisers and club
    stores. Our existing customers in this channel include
    Byerlys, Lunds, SuperTarget and Sams Club.                                                                                                                     
|
| |  | Office coffee providers  This segment includes
    national and regional providers of coffee to offices and other
    workplaces. Our existing customers in this channel include
    Aramark, Berry Coffee and Standard Coffee.                                                                                                              
|
| |  | Airlines  This segment targets both large
    multi-hub national operators and smaller single-hub regional
    operators, as well as private and corporate jet fleets. Our
    existing customers in this channel are Frontier Airlines and
    NetJets.                                                                                     
|
| |  | Hotels  This segment includes hotel
    restaurants, catering and banquet programs and in-room dining.
    Our existing customers in this channel are The Crowne Plaza
    Hotel and The Marriott City Center in Minneapolis and suburban
    Minneapolis Marriott locations.                                                                
|
| |  | Sports and entertainment venues  This segment
    includes multi-use sports and entertainment facilities that
    serve as the home for major sports teams, music concerts and
    family events. Our existing customers in this channel are The
    Palace of Auburn Hills in metropolitan Detroit and The Target
    Center in Minneapolis.
|
| |  | College campuses  Our products are currently
    served at St. Lawrence College, The College of
    St. Catherines and Bethel University.                                                                                                                                                                                                   

Licensing and Joint Ventures




| |                        
| | -----------------------
| | International Licensing



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start-up






| |                                      
| | -------------------------------------
| | Domestic Licensing and Joint Ventures



start-up


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Mail-Order and Internet Channels




Marketing






| |   |                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Point-of-purchase
    marketing, which encourages existing customers to try new
    products or services, such as our stored-value Caribou Cards;                                                   
|
| |  | Direct marketing, which includes mailings and email
    distributions which are cost-effective methods to reach
    potential new customers and encourage repeat visits from
    existing customers;
|
| |  | Promotions and local coffeehouse marketing, which allow us to
    alert our customers to new products, seasonal merchandise and
    coupon programs;                                                
|
| |  | Community initiatives, which generate favorable publicity and
    help build our brand; and                                                                                                         
|
| |  | Print advertising, which includes advertising in newspapers and
    other publications to attract new customers within a particular
    market.                                                     

word-of




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Purchasing






Competition










Information Systems


point-of


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Service Marks and Trademarks






Employees




Government Regulation






Seasonality




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Available Information


10-K







|         |             
|-------- | ------------
|Item 1A. | Risk Factors

Certain statements we make in this filing, and other written
or oral statements made by or on our behalf, may constitute
forward-looking statements within the meaning of the
federal securities laws. Words or phrases such as should
result, are expected to, we
anticipate, we estimate, we
project, we believe, or similar expressions
are intended to identify forward-looking statements. These
statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from our
historical experience and our present expectations or
projections. We believe that these forward-looking statements
are reasonable; however, you should not place undue reliance on
such statements. Such statements speak only as of the date they
are made, and we undertake no obligation to publicly update or
revise any forward-looking statement, whether as a result of
future events, new information or otherwise. The following risk
factors, and others that we may add from time to time, are some
of the factors that could cause our actual results to differ
materially from the expected results described in our
forward-looking statements.


Risks Related to Our Business




| |                                                                        
| | -----------------------------------------------------------------------
| | We have a history of net losses and may incur losses in
    the future.







| |                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Implementation of our growth strategy may divert
    managements attention from other aspects of our business
    and place a strain on our management, operational and financial
    resources, as well as our information systems.





| |   |                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------
| |  | obtain suitable sites at acceptable costs in highly competitive
    real estate markets;                             
|
| |  | successfully manage new coffeehouses;                                                                                
|
| |  | hire, train and retain qualified personnel;                                                                          
|
| |  | continue to improve and expand our coffee, other beverage and
    food offerings;                                    
|
| |  | expand our commercial sales;                                                                                         
|
| |  | attract licensees who will operate coffeehouses internationally
    and in certain strategic situations domestically;

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| |   |                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------
| |  | continue to upgrade inventory control, marketing and information
    systems; and                                                  
|
| |  | maintain strict quality control from the purchase of coffee
    beans to the cup of freshly brewed coffee in a customers
    hand.





| |                                                                                         
| | ----------------------------------------------------------------------------------------
| | If we fail to continue to develop and maintain our brand,
    our business could suffer.





| |                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We will need to raise significant additional capital in
    order to continue to grow our business, which subjects us to the
    risks that we may be unable to maintain or grow our business as
    planned or that our shareholders may be subject to substantial
    additional dilution.







| |                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------
| | We compete with a number of companies for customers. The
    success of these competitors could have an adverse effect on
    us.





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| |                                                                                  
| | ---------------------------------------------------------------------------------
| | We may not be successful in maintaining or expanding our
    commercial business.





| |                                                                                                          
| | ---------------------------------------------------------------------------------------------------------
| | We may not be able to manage our expected growth, which
    could adversely affect our operating results.





| |                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our new coffeehouses may not achieve market acceptance or
    the same levels of profitability in the geographic regions we
    enter or be profitable in existing markets.







| |                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------
| | A significant interruption in the operation of our
    roasting or distribution facility could potentially disrupt our
    operations.

day-to


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| |                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because our business is highly dependent on a single
    product, gourmet coffee, we are vulnerable to changes in
    consumer preferences and economic conditions that could harm our
    financial results.





| |                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We depend on the expertise of key personnel. If these
    individuals leave or change their role without effective
    replacements, our operations may suffer.





| |                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may not be able to hire or retain additional
    coffeehouse managers and other coffeehouse personnel and our
    recruiting and compensation costs may increase as a result of
    turnover, both of which may increase our costs and reduce our
    profitability and may adversely impact our ability to implement
    our business strategy.





| |                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our roasting methods are essential to the quality of our
    coffee, and our business would suffer if our competitors were
    able to duplicate them.





| |                                                                               
| | ------------------------------------------------------------------------------
| | We are susceptible to adverse trends and economic
    conditions in Minnesota.



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| |                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because we rely heavily on third party shipping companies
    to deliver our coffee, any disruption in their services or
    increase in shipping costs could adversely affect our sales and
    profitability.





| |   |                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------
| |  | have an adverse impact on the quality of the coffee shipped, and
    thereby adversely affect our brand and reputation;
|
| |  | result in the disposal of an amount of coffee that could not be
    shipped in a timely manner; and                    
|
| |  | require us to contract with alternative, and possibly more
    expensive, shipping companies.                          





| |                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------
| | We could be subject to complaints or claims from our
    customers or adverse publicity resulting from those complaints
    or claims.





| |                                                                                                
| | -----------------------------------------------------------------------------------------------
| | Complaints or claims by current, former or prospective
    employees could adversely affect us.





| |                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------
| | We may not be able to renew leases or control rent
    increases at our retail locations or obtain leases for new
    coffeehouses.



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| |                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------
| | Our growth through licensing may not occur as rapidly as
    we currently anticipate and may be subject to additional
    risks.







| |                                                                                                        
| | -------------------------------------------------------------------------------------------------------
| | Growth of our international operations may be adversely
    affected by factors outside of our control.





| |                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------
| | Compliance with health, environmental, safety and other
    government regulations applicable to us could increase costs and
    affect profitability.





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



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| |                                                                                                  
| | -------------------------------------------------------------------------------------------------
| | Our disclosure controls and procedures may not prevent or
    detect all errors or acts of fraud.





| |                                                                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we fail to maintain an effective system of internal
    controls over financial reporting, we may not be able to
    accurately report our financial results or prevent fraud. As a
    result, current and potential shareholders could lose confidence
    in our financial and other public reporting, which would harm
    our business and the trading price of shares of our common
    stock.





| |                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have a significant number of options outstanding to
    acquire shares of our common stock that, when exercised, will
    dilute existing shareholders and could decrease the market price
    of our common stock.





| |                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Changes in other existing financial accounting standards
    or practices or taxation rules or practices may adversely affect
    our results of operations.



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Risks Related to Our Industry




| |                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------
| | Our gourmet coffee contains caffeine and other active
    compounds, the health effects of some of which are not fully
    understood.





| |                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------
| | A shortage in the supply, or an increase in the price, of
    coffee beans could adversely affect our net sales.





| |                                                                                                              
| | -------------------------------------------------------------------------------------------------------------
| | We face the risk of fluctuations in the cost, availability
    and quality of our non-coffee raw ingredients.



Risks Related to Our Structure




| |                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Arcapita has substantial control over us, and could limit
    other shareholders ability to influence the outcome of
    matters requiring shareholder approval and may support corporate
    actions that conflict with other shareholders
    interests.



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| |                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------
| | Our compliance with Shariah principles may make it
    difficult for us to obtain financing and may limit the products
    we sell.





| |                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may be subject to adverse publicity resulting from
    statements about Arcapita or complaints or questions from our
    customers arising from such adverse publicity.





| |                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our annual results and comparable coffeehouse sales may
    fluctuate significantly and could fall below the expectations of
    securities analysts and investors, which could cause the market
    price of our common stock to decline.







| |   |                                                                                                
| | - | -----------------------------------------------------------------------------------------------
| |  | the disposition of coffeehouses;                                                               
|
| |  | the opening of new coffeehouses;                                                               
|
| |  | increases in labor costs;                                                                      
|
| |  | increases in the cost of food products;                                                        
|
| |  | the ability of our licensees to meet their future commitments
    under development agreements;
|
| |  | consumer concerns about food quality;                                                          
|
| |  | the level of competition from existing or new competitors in the
    our industry;             
|
| |  | inclement weather patterns, and                                                                
|
| |  | economic conditions generally, and in each of the markets in
    which we are located.         



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| |                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Provisions in our articles of incorporation and bylaws and
    of Minnesota law have anti-takeover effects that could prevent a
    change in control that could be beneficial to our shareholders,
    which could depress the market price of shares of our common
    stock.





| |   |                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | authorize our board of directors to issue preferred stock and to
    determine the rights and preferences of those shares, which
    would be senior to our common stock, without prior shareholder
    approval;
|
| |  | establish advance notice requirements for nominating directors
    and proposing matters to be voted on by shareholders at
    shareholder meetings;                                                             
|
| |  | provide that directors may be removed by shareholders only for
    cause;                                                                                                                                        
|
| |  | limit the right of our shareholders to call a special meeting of
    shareholders; and                                                                                                                           
|
| |  | impose procedural and other requirements that could make it
    difficult for shareholders to effect some corporate actions.                                                                                     



| |                                                                             
| | ----------------------------------------------------------------------------
| | We will incur increased costs as a result of being a new
    public company.





| |                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because we do not intend to pay dividends, shareholders
    will benefit from an investment in shares of our common stock
    only if it appreciates in value.



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|         |                          
|-------- | -------------------------
|Item 1B. | Unresolved Staff Comments








|        |           
|------- | ----------
|Item 2. | Properties

Locations and Facilities




| |                      
| | ---------------------
| | Coffeehouse Locations



|                 |  |              |     | 
|---------------- |  | ------------ | --- | 
|State            |  | Coffeehouses |    
|                 |  |              |    
|Minnesota(1)     |  |              | 174 | 
|Illinois         |  |              | 59  | 
|Ohio             |  |              | 34  | 
|Michigan(2)      |  |              | 28  | 
|North Carolina   |  |              | 21  | 
|Georgia          |  |              | 17  | 
|Maryland(2)      |  |              | 13  | 
|Wisconsin        |  |              | 10  | 
|Virginia         |  |              | 10  | 
|Washington, D.C. |  |              | 6   | 
|Pennsylvania     |  |              | 5   | 
|Iowa             |  |              | 5   | 
|Colorado         |  |              | 4   | 
|North Dakota     |  |              | 3   | 
|Nebraska         |  |              | 3   | 
|Indiana          |  |              | 1   | 
|International(3) |  |              | 2   | 
|                 |  |              |    | 
|                 |  |              | 395 | 






|    |                                                                                 
|--- | --------------------------------------------------------------------------------
|(1) | includes three licensed locations and five locations owned by
    joint ventures
|   
|(2) | includes two licensed locations                                                 
|   
|(3) | represents two licensed locations in Middle East                                





| |                                   
| | ----------------------------------
| | Headquarters and Roasting Facility



24



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|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings





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








|         |                                     
|-------- | ------------------------------------
|Item 4A. | Executive Officers of the Registrant



|                        |  |     |    |  |          |                                                             
|----------------------- |  | --- | -- |  | -------- | ------------------------------------------------------------
|Name                    |  | Age |    |  | Position
|                        |  |     |    |  |         
|Michael J. Coles        |  |     | 61 |  |          | Chief Executive Officer, President and Chairman of the Board
|George E. Mileusnic     |  |     | 51 |  |          | Chief Financial Officer                                     
|Amy K. ONeil           |  |     | 35 |  |          | Senior Vice President of Store Operations                   
|Janet D. Astor          |  |     | 39 |  |          | Vice President of Real Estate and Store Development         
|Edward T. Boyle         |  |     | 43 |  |          | Vice President of Research and Development                  
|Kathy F. Hollenhorst    |  |     | 43 |  |          | Vice President of Marketing                                 
|Deborah K. Jones        |  |     | 51 |  |          | Vice President of Training                                  
|Dan E. Lee              |  |     | 49 |  |          | General Counsel, Vice President and Secretary               
|Karen E. McBride-Raffel |  |     | 40 |  |          | Vice President of Human Resources                           
|Michael E. Peterson     |  |     | 42 |  |          | Vice President, Controller                                  
|Christopher B. Rich     |  |     | 50 |  |          | Vice President of Global Franchising                        
|Henry A. Stein          |  |     | 48 |  |          | Vice President of Business Development and Commercial Sales 
|R. Paul Turek           |  |     | 50 |  |          | Vice President of Support Operations                        

Michael J. Coles


George E. Mileusnic


Amy K. ONeil


Janet D. Astor


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Edward T. Boyle


Kathy F. Hollenhorst


Deborah K. Jones


Dan E. Lee


Karen E. McBride-Raffel


Michael E. Peterson


Christopher B. Rich


Henry A. Stein


R. Paul Turek


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PART II







|        |                                                                                                                         
|------- | ------------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for the Registrants Common Equity, Related
    Shareholder Matters and Issuer Purchases of Equity
    Securities

Market for the Registrants Stock




|                                  |                                         |      |   |       |     |  |   |       | 
|--------------------------------- | --------------------------------------- | ---- | - | ----- | --- |  | - | ----- | 
|                                  |                                         | High |   |       | Low | 
|                                  |                                         |      |   |       |     | 
|Fiscal Year Ended January 1, 2006 |                                         |      |   |       |     |  |   |      
|                                  | Fourth Quarter                          |      | $ | 12.74 |     |  | $ | 8.55  | 
|                                  | Third Quarter (from September 29, 2005) |      | $ | 15.51 |     |  | $ | 11.35 | 



Dividend Policy




Sales of Unregistered Securities




Use of Proceeds from Registered Securities.


333-126691)


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|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data





|                                                                                                                  |                                                               |                                                     |         |        |              |  |         |              |   |  |            |         |   |            |         |         |   |  |         |         |  
|----------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------- | --------------------------------------------------- | ------- | ------ | ------------ |  | ------- | ------------ | - |  | ---------- | ------- | - | ---------- | ------- | ------- | - |  | ------- | ------- | -
|                                                                                                                  |                                                               | Fiscal Year Ended                                   |        
|                                                                                                                  |                                                               |                                                     |        
|                                                                                                                  |                                                               | December 30,                                        |         |        | December 29, |  |         | December 28, |   |  | January 2, |         |   | January 1, |        
|                                                                                                                  |                                                               | 2001                                                |         |        | 2002         |  |         | 2003         |   |  | 2005       |         |   | 2006       |        
|                                                                                                                  |                                                               |                                                     |         |        |              |  |         |              |   |  |            |         |   |            |        
|                                                                                                                  |                                                               | (In thousands, except per share and operating data) |        
|Statements of Operations Data:                                                                                    |                                                               |                                                     |         |        |              |  |         |              |   |  |            |         |   |            |         |         |   |  |         |        
|Net sales:                                                                                                        |                                                               |                                                     |         |        |              |  |         |              |   |  |            |         |   |            |         |         |   |  |         |        
|                                                                                                                  | Coffeehouses                                                  |                                                     | $       | 95,137 |              |  | $       | 103,291      |   |  | $          | 121,779 |   |            | $       | 157,169 |   |  | $       | 191,310 |  
|                                                                                                                  | Other                                                         |                                                     |         | 5,722  |              |  |         | 4,663        |   |  |            | 1,922   |   |            |         | 3,323   |   |  |         | 6,682   |  
|                                                                                                                  |                                                               |                                                     |         |        |              |  |         |              |   |  |            |         |   |            |        
|Total net sales                                                                                                   |                                                               |                                                     | 100,859 |        |              |  | 107,954 |              |   |  | 123,701    |         |   |            | 160,492 |         |   |  | 197,992 |        
|Cost of sales and related occupancy                                                                               |                                                               |                                                     | 42,583  |        |              |  | 44,883  |              |   |  | 50,641     |         |   |            | 65,320  |         |   |  | 80,242  |        
|Operating expenses                                                                                                |                                                               |                                                     | 36,670  |        |              |  | 40,064  |              |   |  | 49,364     |         |   |            | 65,030  |         |   |  | 80,026  |        
|Opening expenses                                                                                                  |                                                               |                                                     | 580     |        |              |  | 439     |              |   |  | 822        |         |   |            | 1,202   |         |   |  | 2,096   |        
|Depreciation and amortization                                                                                     |                                                               |                                                     | 6,472   |        |              |  | 7,431   |              |   |  | 10,453     |         |   |            | 13,382  |         |   |  | 16,376  |        
|General and administrative expenses                                                                               |                                                               |                                                     | 9,639   |        |              |  | 10,296  |              |   |  | 12,343     |         |   |            | 15,535  |         |   |  | 22,742  |        
|Closing expense and disposal of assets                                                                            |                                                               |                                                     | 383     |        |              |  | 917     |              |   |  | 166        |         |   |            | 1,034   |         |   |  | 572     |        
|                                                                                                                  |                                                               |                                                     |         |        |              |  |         |              |   |  |            |         |   |            |        
|Operating income (loss)                                                                                           |                                                               |                                                     | 4,532   |        |              |  | 3,924   |              |   |  | (88        | )       |   |            | (1,010  | )       |   |  | (4,062  | )      
|Other income (expense):                                                                                           |                                                               |                                                     |         |        |              |  |         |              |   |  |            |         |   |            |         |         |   |  |         |        
|                                                                                                                  | Other income                                                  |                                                     |         |       |              |  |         |             |   |  |            | 35      |   |            |         | 378     |   |  |         | 1,336   |  
|                                                                                                                  | Interest income                                               |                                                     |         | 118    |              |  |         | 29           |   |  |            | 9       |   |            |         | 6       |   |  |         | 266     |  
|                                                                                                                  | Interest expense                                              |                                                     |         | (556   | )            |  |         | (496         | ) |  |            | (511    | ) |            |         | (963    | ) |  |         | (1,602  | )
|                                                                                                                  |                                                               |                                                     |         |        |              |  |         |              |   |  |            |         |   |            |        
|Income (loss) before provision for income taxes, minority
    interest and cumulative effect of accounting change |                                                               |                                                     | 4,094   |        |              |  | 3,457   |              |   |  | (555       | )       |   |            | (1,589  | )       |   |  | (4,062  | )      
|Provision for income taxes                                                                                        |                                                               |                                                     | 600     |        |              |  | 156     |              |   |  | 228        |         |   |            | 220     |         |   |  | 79      |        
|                                                                                                                  |                                                               |                                                     |         |        |              |  |         |              |   |  |            |         |   |            |        
|Income (loss) before minority interest and cumulative effect of
    accounting change                             |                                                               |                                                     | 3,494   |        |              |  | 3,301   |              |   |  | (783       | )       |   |            | (1,809  | )       |   |  | (4,141  | )      
|Minority interest                                                                                                 |                                                               |                                                     | 287     |        |              |  | 188     |              |   |  | 154        |         |   |            | 265     |         |   |  | 319     |        
|                                                                                                                  |                                                               |                                                     |         |        |              |  |         |              |   |  |            |         |   |            |        
|Income (loss) before cumulative effect of accounting change                                                       |                                                               |                                                     | 3,207   |        |              |  | 3,113   |              |   |  | (937       | )       |   |            | (2,074  | )       |   |  | (4,460  | )      
|                                                                                                                  | Cumulative effect of accounting change (net of income tax)(1) |                                                     |         |       |              |  |         |             |   |  |            |        |   |            |         |        |   |  |         | (445    | )
|                                                                                                                  |                                                               |                                                     |         |        |              |  |         |              |   |  |            |         |   |            |        

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|                                                                                   |  |                                                     |        |   |              |   |        |              |  |   |            |   |  |            |        |   |  |   |        |  
|---------------------------------------------------------------------------------- |  | --------------------------------------------------- | ------ | - | ------------ | - | ------ | ------------ |  | - | ---------- | - |  | ---------- | ------ | - |  | - | ------ | -
|                                                                                   |  | Fiscal Year Ended                                   |       
|                                                                                   |  |                                                     |       
|                                                                                   |  | December 30,                                        |        |   | December 29, |   |        | December 28, |  |   | January 2, |   |  | January 1, |       
|                                                                                   |  | 2001                                                |        |   | 2002         |   |        | 2003         |  |   | 2005       |   |  | 2006       |       
|                                                                                   |  |                                                     |        |   |              |   |        |              |  |   |            |   |  |            |       
|                                                                                   |  | (In thousands, except per share and operating data) |       
|Net income (loss)                                                                  |  | $                                                   | 3,207  |   |              | $ | 3,113  |              |  | $ | (937       | ) |  | $          | (2,074 | ) |  | $ | (4,905 | )
|                                                                                   |  |                                                     |        |   |              |   |        |              |  |   |            |   |  |            |       
|Net income (loss) per share:                                                       |  |                                                     |        |   |              |   |        |              |  |   |            |   |  |            |        |   |  |   |        |  
|Net income (loss) before cumulative effect of accounting change                    |  | $                                                   | 0.24   |   |              | $ | 0.23   |              |  | $ | (0.07      | ) |  | $          | (0.15  | ) |  | $ | (0.29  | )
|                                                                                   |  |                                                     |        |   |              |   |        |              |  |   |            |   |  |            |       
|Cumulative effect of accounting change                                             |  |                                                     |       |   |              |   |       |              |  |   |           |   |  |            |       |   |  |   | (0.03  | )
|                                                                                   |  |                                                     |        |   |              |   |        |              |  |   |            |   |  |            |       
|Net income (loss)                                                                  |  |                                                     | 0.24   |   |              |   | 0.23   |              |  |   | (0.07      | ) |  |            | (0.15  | ) |  |   | (0.32  | )
|                                                                                   |  |                                                     |        |   |              |   |        |              |  |   |            |   |  |            |       
|Basic and diluted shares used in calculation of net (loss)
    income per share(2) |  |                                                     | 13,296 |   |              |   | 13,296 |              |  |   | 13,348     |   |  |            | 13,798 |   |  |   | 15,255 |  
|                                                                                   |  |                                                     |        |   |              |   |        |              |  |   |            |   |  |            |       
|Non-GAAP Financial Measures:                                                       |  |                                                     |        |   |              |   |        |              |  |   |            |   |  |            |        |   |  |   |        |  
|EBITDA(3)                                                                          |  | $                                                   | 11,253 |   |              | $ | 11,786 |              |  | $ | 11.561     |   |  | $          | 13,893 |   |  | $ | 14,796 |  
|Adjusted EBITDA(3)                                                                 |  |                                                     | 11,253 |   |              |   | 11,786 |              |  |   | 11,561     |   |  |            | 14,393 |   |  |   | 15,911 |  
|Operating Data:                                                                    |  |                                                     |        |   |              |   |        |              |  |   |            |   |  |            |        |   |  |   |        |  
|Percentage change in comparable coffeehouse sales(4)                               |  |                                                     | 0%     |   |              |   | (2     | )%           |  |   | 3%         |   |  |            | 8%     |   |  |   | 6%     |  
|Coffeehouses open at beginning of year                                             |  |                                                     | 152    |   |              |   | 185    |              |  |   | 203        |   |  |            | 251    |   |  |   | 304    |  
|Coffeehouses opened during the year                                                |  |                                                     | 38     |   |              |   | 24     |              |  |   | 50         |   |  |            | 57     |   |  |   | 86     |  
|Coffeehouses closed during the year                                                |  |                                                     | (5     | ) |              |   | (6     | )            |  |   | (2         | ) |  |            | (4     | ) |  |   | (4     | )
|                                                                                   |  |                                                     |        |   |              |   |        |              |  |   |            |   |  |            |       
|Coffeehouses open at end of year                                                   |  |                                                     | 185    |   |              |   | 203    |              |  |   | 251        |   |  |            | 304    |   |  |   | 386    |  
|Licensed coffeehouses open at end of year                                          |  |                                                     |       |   |              |   |       |              |  |   |           |   |  |            | 2      |   |  |   | 9      |  
|Total coffeehouses open at end of year                                             |  |                                                     | 185    |   |              |   | 203    |              |  |   | 251        |   |  |            | 306    |   |  |   | 395    |  
|                                                                                   |  |                                                     |        |   |              |   |        |              |  |   |            |   |  |            |       

|                                                  |  |              |         |   |              |   |         |              |  |   |            |   |  |            |         |   |  |   |         |  
|------------------------------------------------- |  | ------------ | ------- | - | ------------ | - | ------- | ------------ |  | - | ---------- | - |  | ---------- | ------- | - |  | - | ------- | -
|                                                  |  | As of        |        
|                                                  |  |              |        
|                                                  |  | December 30, |         |   | December 29, |   |         | December 28, |  |   | January 2, |   |  | January 1, |        
|                                                  |  | 2001         |         |   | 2002         |   |         | 2003         |  |   | 2005       |   |  | 2006       |        
|                                                  |  |              |         |   |              |   |         |              |  |   |            |   |  |            |        
|Balance Sheet Data:                               |  |              |         |   |              |   |         |              |  |   |            |   |  |            |         |   |  |   |         |  
|Cash and cash equivalents                         |  | $            | 2,984   |   |              | $ | 2,645   |              |  | $ | 4,779      |   |  | $          | 7,618   |   |  | $ | 33,846  |  
|Total assets                                      |  |              | 47,930  |   |              |   | 51,973  |              |  |   | 62,010     |   |  |            | 86,207  |   |  |   | 147,960 |  
|Total notes payable and revolving credit facility |  |              | 3,821   |   |              |   | 1,668   |              |  |   | 5,334      |   |  |            | 19,924  |   |  |   |        |  
|Accumulated deficit                               |  |              | (20,082 | ) |              |   | (16,969 | )            |  |   | (17,905    | ) |  |            | (19,979 | ) |  |   | (24,885 | )
|Total shareholders equity                        |  |              | 30,339  |   |              |   | 33,496  |              |  |   | 35,817     |   |  |            | 33,793  |   |  |   | 96,926  |  






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In March 2005, the FASB issued Financial Interpretation
    No. 47 (FIN 47), Accounting for Asset
    Retirement Obligations-an interpretation of FASB Statement
    No. 143. FIN 47 requires the recognition of a
    liability for the fair value of a legally-required conditional
    asset retirement obligation when incurred, if the
    liabilitys fair value can be reasonably estimated.
    FIN 47 also clarifies when an entity would have sufficient
    information to reasonably estimate the fair value of an asset
    retirement obligation. The Company is required to record an
    asset and a corresponding liability for the present value of the
    estimated asset retirement obligation associated with the fixed
    assets and leasehold improvements at some of our coffeehouse
    locations. The asset is depreciated over the life of the
    corresponding lease while the liability accretes to the amount
    of the estimated retirement obligation. FIN 47 is effective
    for fiscal years ending after December 15, 2005. The
    Company adopted FIN 47 on October 3, 2005 with a
    $0.4 million

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | cumulative effect of accounting change (net of tax) recorded in
    the Companys results of operations. This charge is a
    combination of depreciation and accretion expense.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(2) | For the fiscal years ended December 30, 2001 and
    December 29, 2002, basic shares were 13,294 and diluted
    shares were 13,296. In each other year presented, the number of
    shares used in the calculation of basic and diluted net (loss)
    income per share is the same because all outstanding stock
    options were antidilutive.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|(3) | EBITDA and Adjusted EBITDA are supplemental non-GAAP financial
    measures. EBITDA is equal to net (loss) income excluding:
    (a) interest expense; (b) interest income;
    (c) depreciation and amortization; and (d) income
    taxes. Our definition of Adjusted EBITDA is different from
    EBITDA because we further adjust net income for: (a) a
    one-time cost to consolidate corporate and operating locations;
    (b) a one-time compensation charge associated with amending
    the terms of our Chief Executive Officers employment
    agreement; and (c) a one-time recognition of derivative
    income associated with the decrease in fair value of the
    IPO  related underwriters over-allotment
    option. For a description of our use of EBITDA and Adjusted
    EBITDA and a reconciliation of net income (loss) to these
    non-GAAP financial measures, see the discussion and related
    table below.
|   
|(4) | Percentage change in comparable coffeehouse sales compares the
    net sales of coffeehouse during a fiscal period to the net sales
    from the same coffeehouses for the equivalent period in the
    prior year. A coffeehouse is included in this calculation
    beginning in its thirteenth full fiscal month of operations. A
    closed coffeehouse is included in the calculation for each full
    month that the coffeehouse was open in both fiscal periods.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our coffeehouse leases are generally short-term
    (5-10 years) and we must depreciate all of the cost
    associated with those leases on a straight-line basis over the
    initial lease term excluding renewal options (unless such
    renewal periods are reasonably assured at the inception of the
    lease). We opened 255 coffeehouses, including nine licensed
    locations, from the beginning of fiscal 2001 through 2005. As a
    result, we believe depreciation expense is disproportionately
    large when compared to the sales from a significant percentage
    of our coffeehouses that are in their initial years of
    operations. Also, many of the assets being depreciated have
    actual useful lives that exceed the initial lease term excluding
    renewal options. Consequently, we believe that adjusting for
    depreciation and amortization is useful for evaluating the
    operating performance of our coffeehouses.
|
| |  | The one-time cost to consolidate corporate and operating
    locations represents a $.5 million charge we recorded in
    fiscal 2004 for the remaining lease payments, reduced by
    estimated sublease rentals that could be reasonably obtained,
    for our previous headquarters and roasting facility. We vacated
    this facility when we consolidated our corporate offices and our
    roasting, packaging, warehousing and distribution activities,
    which we had previously operated out of three separate
    facilities, into a single facility. We believe it is useful to
    exclude this charge from Adjusted EBITDA because it was
    non-recurring and was not reflective of our operating
    performance.                                                                                                                                                                                                                               
|
| |  | In June 2005, we recorded a one-time compensation charge of
    $1.7 million in connection with amending the terms of the
    employment agreement with our Chief Executive Officer. We
    believe that it is useful to exclude this expense from Adjusted
    EBITDA because it was non-recurring and was unrelated to our
    operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | In connection with our initial public offering
    (IPO), we granted the underwriters an option to
    purchase 803,700 shares of the our common stock at
    $14 per share for 30 days beginning on
    September 28, 2005 (the grant date). Since this
    option extended beyond the closing of the IPO, the option
    represented a call option that met the definition of a
    derivative under SFAS No. 133, Accounting for
    Derivative Instruments and Hedging Activities. Accordingly,
    the call option was separately accounted for at fair value with
    the change in fair value between the grant date and
    October 2, 2005 recorded as other income. We used the
    Black-Scholes valuation model to determine                                                                                                                                                                                                                       

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| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the fair value of the call option at the grant date and at
    October 2, 2005 using the following assumptions: 50%
    volatility factor, 30 day life and risk free interest rate
    of 3.43%. At September 28, 2005, we recorded a liability of
    $657,989 with a corresponding decrease to additional paid in
    capital to record the fair value of the call option on such
    date. The fair value of the call option aggregated $34,880 on
    October 2, 2005 and we recorded the decrease in such fair
    value aggregating $623,109 as other income in the statement of
    operations for the thirteen-week period ended October 2,
    2005. The underwriters did not exercise their option and it
    expired on October 28, 2005. We believe that it is useful
    to exclude this expense from Adjusted EBITDA because it was
    non-recurring and was unrelated to our operations.





| |   |                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | as measurements of operating performance because they assist us
    in comparing our operating performance on a consistent basis as
    they remove the impact of items not directly resulting from our
    coffeehouse operations;
|
| |  | for planning purposes, including the preparation of our internal
    annual operating budget;                                                                                                                                      
|
| |  | to establish targets for certain management compensation
    matters; and                                                                                                                                                          
|
| |  | to evaluate our capacity to incur and service debt, fund capital
    expenditures and expand our business.                                                                                                                         





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|                                                   |  |                   |        |   |              |   |        |              |  |   |            |   |  |            |        |   |  |   |        |  
|-------------------------------------------------- |  | ----------------- | ------ | - | ------------ | - | ------ | ------------ |  | - | ---------- | - |  | ---------- | ------ | - |  | - | ------ | -
|                                                   |  | Fiscal Year Ended |       
|                                                   |  |                   |       
|                                                   |  | December 30,      |        |   | December 29, |   |        | December 28, |  |   | January 2, |   |  | January 1, |       
|                                                   |  | 2001              |        |   | 2002         |   |        | 2003         |  |   | 2005       |   |  | 2006       |       
|                                                   |  |                   |        |   |              |   |        |              |  |   |            |   |  |            |       
|                                                   |  | (In thousands)    |       
|Statement of Operations Data:                      |  |                   |        |   |              |   |        |              |  |   |            |   |  |            |        |   |  |   |        |  
|Net income (loss)                                  |  | $                 | 3,207  |   |              | $ | 3,113  |              |  | $ | (937       | ) |  | $          | (2,074 | ) |  | $ | (4,905 | )
|Interest expense                                   |  |                   | 556    |   |              |   | 496    |              |  |   | 511        |   |  |            | 963    |   |  |   | 1,603  |  
|Interest income                                    |  |                   | (118   | ) |              |   | (29    | )            |  |   | (9         | ) |  |            | (6     | ) |  |   | (266   | )
|Depreciation and amortization(1)                   |  |                   | 7,008  |   |              |   | 8,050  |              |  |   | 11,768     |   |  |            | 14,791 |   |  |   | 18,284 |  
|Provision for income taxes                         |  |                   | 600    |   |              |   | 156    |              |  |   | 228        |   |  |            | 219    |   |  |   | 80     |  
|                                                   |  |                   |        |   |              |   |        |              |  |   |            |   |  |            |       
|EBITDA                                             |  |                   | 11,253 |   |              |   | 11,786 |              |  |   | 11,561     |   |  |            | 13,893 |   |  |   | 14,796 |  
|Consolidation of corporate and operating locations |  |                   |       |   |              |   |       |              |  |   |           |   |  |            | 500    |   |  |   |       |  
|Derivative income                                  |  |                   |       |   |              |   |       |              |  |   |           |   |  |            |       |   |  |   | (623   | )
|Amendment of employment agreement                  |  |                   |       |   |              |   |       |              |  |   |           |   |  |            |       |   |  |   | 1,738  |  
|                                                   |  |                   |        |   |              |   |        |              |  |   |            |   |  |            |       
|Adjusted EBITDA                                    |  | $                 | 11,253 |   |              | $ | 11,786 |              |  | $ | 11,561     |   |  | $          | 14,393 |   |  | $ | 15,911 |  
|                                                   |  |                   |        |   |              |   |        |              |  |   |            |   |  |            |       








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations

The following discussion should be read in conjunction with
the consolidated financial statements and related notes that
appear elsewhere in this report. This discussion contains
forward-looking statements that involve risks and uncertainties.
Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of
various factors, including those discussed below and elsewhere
in this report, particularly under the heading Risk
Factors.


Overview








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Critical Accounting Policies




Long-lived assets.


Stock options.


Lease accounting. 85-3,


34



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Income taxes.




Lease financing arrangement and revolving credit
facility.






Fiscal Periods




35



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Results of Operations




|                                                                                                         |                                                              |                   |       |      |            |  |       |            |   |  |       |      |  
|-------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------ | ----------------- | ----- | ---- | ---------- |  | ----- | ---------- | - |  | ----- | ---- | -
|                                                                                                         |                                                              | Fiscal Year Ended |      
|                                                                                                         |                                                              |                   |      
|                                                                                                         |                                                              | December 28,      |       |      | January 2, |  |       | January 1, |  
|                                                                                                         |                                                              | 2003              |       |      | 2005       |  |       | 2006       |  
|                                                                                                         |                                                              |                   |       |      |            |  |       |            |  
|Statement of Operations Data:                                                                            |                                                              |                   |       |      |            |  |       |            |   |  |       |     
|Net Sales:                                                                                               |                                                              |                   |       |      |            |  |       |            |   |  |       |     
|                                                                                                         | Coffeehouses                                                 |                   |       | 98.4 | %          |  |       | 97.9       | % |  |       | 96.6 | %
|                                                                                                         | Other                                                        |                   |       | 1.6  |            |  |       | 2.1        |   |  |       | 3.4  |  
|                                                                                                         |                                                              |                   |       |      |            |  |       |            |  
|Total net sales                                                                                          |                                                              |                   | 100.0 |      |            |  | 100.0 |            |   |  | 100.0 |     
|Costs of sales and related occupancy costs                                                               |                                                              |                   | 40.9  |      |            |  | 40.7  |            |   |  | 40.5  |     
|Operating expenses                                                                                       |                                                              |                   | 39.9  |      |            |  | 40.5  |            |   |  | 40.4  |     
|Opening expenses                                                                                         |                                                              |                   | 0.7   |      |            |  | 0.7   |            |   |  | 1.1   |     
|Depreciation and amortization                                                                            |                                                              |                   | 8.4   |      |            |  | 8.3   |            |   |  | 8.3   |     
|General and administrative expenses                                                                      |                                                              |                   | 10.0  |      |            |  | 9.7   |            |   |  | 11.5  |     
|Closing expense and disposal of assets                                                                   |                                                              |                   | 0.1   |      |            |  | 0.6   |            |   |  | 0.3   |     
|                                                                                                         |                                                              |                   |       |      |            |  |       |            |  
|Operating income (loss)                                                                                  |                                                              |                   | 0.0   |      |            |  | (0.6  | )          |   |  | (2.1  | )   
|                                                                                                         | Other income                                                 |                   |       | 0.0  |            |  |       | 0.2        |   |  |       | 0.7  |  
|                                                                                                         | Interest income                                              |                   |       | 0.0  |            |  |       | 0.0        |   |  |       | 0.1  |  
|                                                                                                         | Interest expense                                             |                   |       | (0.4 | )          |  |       | (0.6       | ) |  |       | (0.8 | )
|                                                                                                         |                                                              |                   |       |      |            |  |       |            |  
|Loss before provision for income taxes, minority interest and
    cumulative effect of accounting change |                                                              |                   | (0.4  | )    |            |  | (1.0  | )          |   |  | (2.1  | )   
|Provision for income taxes                                                                               |                                                              |                   | 0.2   |      |            |  | 0.1   |            |   |  | 0.0   |     
|                                                                                                         |                                                              |                   |       |      |            |  |       |            |  
|Loss before minority interest and cumulative effect of
    accounting change                             |                                                              |                   | (0.6  | )    |            |  | (1.1  | )          |   |  | (2.1  | )   
|Minority interest                                                                                        |                                                              |                   | 0.1   |      |            |  | 0.2   |            |   |  | 0.2   |     
|                                                                                                         |                                                              |                   |       |      |            |  |       |            |  
|Loss before cumulative effect of accounting change                                                       |                                                              |                   | (0.8  | )    |            |  | (1.3  | )          |   |  | (2.3  | )   
|                                                                                                         | Cumulative effect of accounting change (net of income taxes) |                   |       | 0.0  |            |  |       | 0.0        |   |  |       | (0.2 | )
|                                                                                                         |                                                              |                   |       |      |            |  |       |            |  
|Net loss                                                                                                 |                                                              |                   | (0.8  | )%   |            |  | (1.3  | )%         |   |  | (2.5  | )%  
|                                                                                                         |                                                              |                   |       |      |            |  |       |            |  

Fiscal Year 2005 (52 weeks) Compared to Fiscal Year 2004
(53 weeks)




| |          
| | ---------
| | Net Sales

52-week 52-week




| |                   
| | ------------------
| | Costs and Expenses

Cost of sales and related occupancy costs.


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Operating expenses.


Opening expenses.


Depreciation and amortization.


General and administrative expenses.


Closing expenses and disposal of assets.


Other Income. Accounting for
Derivative Instruments and Hedging Activities.


Interest income.


Interest expense.


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Fiscal Year 2004 (53 weeks) Compared to Fiscal Year 2003
(52 weeks)




| |          
| | ---------
| | Net Sales

52-week 52-week




| |                   
| | ------------------
| | Costs and Expenses

Cost of sales and related occupancy costs.


Operating expenses.


Opening expenses.


Depreciation and amortization.


General and administrative expenses.


Closing expenses and disposal of assets.


38



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Interest expense.


Liquidity and Capital Resources












39



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##### Table of Contents





New Accounting Standards


Accounting for Asset
Retirement Obligations-an interpretation of FASB Statement
No. 143.


Inventory Costs,


Exchanges of Nonmonetary Assets  an
amendment of APB Opinion No. 29,




Accounting Changes and Error Corrections Accounting
Changes Reporting
Accounting Changes in Interim Financial Statements


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##### Table of Contents



Contractual Obligations




|                            |       |                |         |         |        |   |            |            |  |            |            |        |           |         |        |        |  |   |        |        | 
|--------------------------- | ----- | -------------- | ------- | ------- | ------ | - | ---------- | ---------- |  | ---------- | ---------- | ------ | --------- | ------- | ------ | ------ |  | - | ------ | ------ | 
|                            |       |                |         | Due     |        |   |            |            |  |            |           
|                            |       |                |         | within  |        |   | Due from 1 |            |  | Due from 3 |            |        | Due after |        
|                            |       | Total          |         |         | 1 Year |   |            | to 3 Years |  |            | to 5 Years |        |           | 5 Years |       
|                            |       |                |         |         |        |   |            |            |  |            |            |        |           |         |       
|                            |       | (In thousands) |        
|Operating lease obligations |       | $              | 149,845 |         |        | $ | 19,428     |            |  | $          | 36,355     |        |           | $       | 32,713 |        |  | $ | 61,349 |       
|Purchase Obligations        |       |                | 6,486   |         |        |   | 6,486      |            |  |            |           |        |           |         |       |        |  |   |       |       
|                            |       |                |         |         |        |   |            |            |  |            |            |        |           |         |       
|                            | Total |                | $       | 156,331 |        |   | $          | 25,914     |  |            | $          | 36,355 |           |         | $      | 32,713 |  |   | $      | 61,349 | 
|                            |       |                |         |         |        |   |            |            |  |            |            |        |           |         |       



Off-Balance Sheet Arrangements




Inflation









|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures About Market
    Risk

Primary Market Risk Exposures




Financial Instruments and Derivative Commodity Instruments











|        |                                            
|------- | -------------------------------------------
|Item 8. | Financial Statements and Supplementary Data

41



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM












| |                  
| | -----------------
| | Ernst & Young LLP





42



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Caribou Coffee Company, Inc. and Affiliates


(A Majority Owned Subsidiary of Caribou Holding Company
Limited)





Consolidated Balance Sheets


|                                     |                                                                                                                                                                                       |                                            |            |             |            |   |             |             |             | 
|------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ---------- | ----------- | ---------- | - | ----------- | ----------- | ----------- | 
|                                     |                                                                                                                                                                                       | January 2,                                 |            |             | January 1, |  
|                                     |                                                                                                                                                                                       | 2005                                       |            |             | 2006       |  
|                                     |                                                                                                                                                                                       |                                            |            |             |            |  
|ASSETS                              
|Current assets:                      |                                                                                                                                                                                       |                                            |            |             |            |   |             |            
|                                     | Cash and cash equivalents                                                                                                                                                             |                                            | $          | 7,618,470   |            |   | $           | 33,846,111  |            
|                                     | Accounts receivable (net of allowance for doubtful accounts of
    approximately $34,900 and $237,595 at January 2, 2005 and
    January 1, 2006)                                     |                                            |            | 857,692     |            |   |             | 1,137,120   |            
|                                     | Other receivables                                                                                                                                                                     |                                            |            | 1,093,675   |            |   |             | 2,260,254   |            
|                                     | Income tax receivable                                                                                                                                                                 |                                            |            | 451,168     |            |   |             | 135,750,    |            
|                                     | Inventories                                                                                                                                                                           |                                            |            | 5,704,440   |            |   |             | 11,182,512  |            
|                                     | Prepaid expenses and other current assets                                                                                                                                             |                                            |            | 441,014     |            |   |             | 1,251,555   |            
|                                     |                                                                                                                                                                                       |                                            |            |             |            |  
|                                     |                                                                                                                                                                                       | Total current assets                       |            |             | 16,166,459 |   |             |             | 49,813,302  | 
|                                     | Property and equipment, net of accumulated depreciation and
    amortization                                                                                                          |                                            |            | 67,639,732  |            |   |             | 96,022,720  |            
|                                     | Notes receivable                                                                                                                                                                      |                                            |            | 80,649      |            |   |             | 64,531      |            
|                                     | Restricted cash                                                                                                                                                                       |                                            |            | 539,983     |            |   |             | 321,030     |            
|                                     | Other assets                                                                                                                                                                          |                                            |            | 1,780,105   |            |   |             | 1,738,717   |            
|                                     |                                                                                                                                                                                       |                                            |            |             |            |  
|                                     |                                                                                                                                                                                       | $                                          | 86,206,928 |             |            | $ | 147,960,300 |            
|                                     |                                                                                                                                                                                       |                                            |            |             |            |  
|                                    
|LIABILITIES AND SHAREHOLDERS EQUITY
|Current liabilities:                 |                                                                                                                                                                                       |                                            |            |             |            |   |             |            
|                                     | Accounts payable                                                                                                                                                                      |                                            | $          | 5,311,686   |            |   | $           | 14,553,743  |            
|                                     | Accrued compensation                                                                                                                                                                  |                                            |            | 4,707,242   |            |   |             | 5,462,657   |            
|                                     | Accrued expenses                                                                                                                                                                      |                                            |            | 5,469,931   |            |   |             | 8,504,552   |            
|                                     | Deferred revenue                                                                                                                                                                      |                                            |            | 5,308,713   |            |   |             | 8,165,260   |            
|                                     |                                                                                                                                                                                       |                                            |            |             |            |  
|                                     |                                                                                                                                                                                       | Total current liabilities                  |            |             | 20,797,572 |   |             |             | 36,686,212  | 
|Revolving credit facility            |                                                                                                                                                                                       |                                            | 19,923,930 |             |            |   |            |            
|Asset retirement liability           |                                                                                                                                                                                       |                                            |           |             |            |   | 760,997     |            
|Deferred rent liability              |                                                                                                                                                                                       |                                            | 8,420,509  |             |            |   | 10,485,177  |            
|Deferred revenue                     |                                                                                                                                                                                       |                                            | 3,055,000  |             |            |   | 2,964,000   |            
|Minority interests in affiliates     |                                                                                                                                                                                       |                                            | 217,206    |             |            |   | 138,159     |            
|                                     |                                                                                                                                                                                       |                                            |            |             |            |  
|                                     |                                                                                                                                                                                       | Total long term liabilities                |            |             | 31,616,645 |   |             |             | 14,348,333  | 
|Commitments and contingencies        |                                                                                                                                                                                       |                                            |            |             |            |   |             |            
|Shareholders equity:                |                                                                                                                                                                                       |                                            |            |             |            |   |             |            
|                                     | Preferred stock, par value $.01, 20,000,000 shares
    authorized; no shares Issued and outstanding                                                                                   |                                            |            |            |            |   |             |            |            
|                                     | Common stock, par value $.01, 200,000,000 shares
    authorized; 19,269,133 and 13,801,436 shares issued and
    outstanding at January 1, 2006 and January 2, 2005,
    respectively |                                            |            | 138,014     |            |   |             | 192,699     |            
|                                     | Treasury stock                                                                                                                                                                        |                                            |            |            |            |   |             | (9,011      | )          
|                                     | Additional paid-in capital                                                                                                                                                            |                                            |            | 53,634,009  |            |   |             | 121,626,855 |            
|                                     | Accumulated deficit                                                                                                                                                                   |                                            |            | (19,979,312 | )          |   |             | (24,884,788 | )          
|                                     |                                                                                                                                                                                       |                                            |            |             |            |  
|                                     |                                                                                                                                                                                       | Total shareholders equity                 |            |             | 33,792,711 |   |             |             | 96,925,755  | 
|                                     |                                                                                                                                                                                       |                                            |            |             |            |  
|                                     |                                                                                                                                                                                       | Total liabilities and shareholders equity |            | $           | 86,206,928 |   |             | $           | 147,960,300 | 
|                                     |                                                                                                                                                                                       |                                            |            |             |            |  



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Caribou Coffee Company, Inc. and Affiliates


(A Majority Owned Subsidiary of Caribou Holding Company
Limited)





Consolidated Statements of Operations


|                                                                                                         |                                                              |              |             |          |            |   |             |            |   |   |             |            |  
|-------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------ | ------------ | ----------- | -------- | ---------- | - | ----------- | ---------- | - | - | ----------- | ---------- | -
|                                                                                                         |                                                              | Years Ended  |            
|                                                                                                         |                                                              |              |            
|                                                                                                         |                                                              | December 28, |             |          | January 2, |   |             | January 1, |  
|                                                                                                         |                                                              | 2003         |             |          | 2005       |   |             | 2006       |  
|                                                                                                         |                                                              |              |             |          |            |   |             |            |  
|Coffeehouse sales                                                                                        |                                                              | $            | 121,778,777 |          |            | $ | 157,169,378 |            |   | $ | 191,309,555 |           
|Other sales                                                                                              |                                                              |              | 1,921,948   |          |            |   | 3,322,861   |            |   |   | 6,682,277   |           
|                                                                                                         |                                                              |              |             |          |            |   |             |            |  
|Total net sales                                                                                          |                                                              |              | 123,700,725 |          |            |   | 160,492,239 |            |   |   | 197,991,832 |           
|Cost of sales and related occupancy costs                                                                |                                                              |              | 50,640,931  |          |            |   | 65,319,899  |            |   |   | 80,242,163  |           
|Operating expenses                                                                                       |                                                              |              | 49,363,795  |          |            |   | 65,029,400  |            |   |   | 80,025,542  |           
|Opening expenses                                                                                         |                                                              |              | 822,165     |          |            |   | 1,201,829   |            |   |   | 2,095,945   |           
|Depreciation and amortization                                                                            |                                                              |              | 10,452,583  |          |            |   | 13,381,562  |            |   |   | 16,375,704  |           
|General and administrative expenses                                                                      |                                                              |              | 12,343,113  |          |            |   | 15,534,987  |            |   |   | 22,742,130  |           
|Closing expense and disposal of assets                                                                   |                                                              |              | 166,577     |          |            |   | 1,034,422   |            |   |   | 571,985     |           
|                                                                                                         |                                                              |              |             |          |            |   |             |            |  
|Operating loss                                                                                           |                                                              |              | (88,439     | )        |            |   | (1,009,860  | )          |   |   | (4,061,637  | )         
|Other income (expense):                                                                                  |                                                              |              |             |          |            |   |             |            |   |   |             |           
|                                                                                                         | Other income                                                 |              |             | 35,097   |            |   |             | 378,309    |   |   |             | 1,336,081  |  
|                                                                                                         | Interest income                                              |              |             | 8,902    |            |   |             | 5,583      |   |   |             | 265,977    |  
|                                                                                                         | Interest expense                                             |              |             | (511,002 | )          |   |             | (963,356   | ) |   |             | (1,602,529 | )
|                                                                                                         |                                                              |              |             |          |            |   |             |            |  
|Loss before provision for income taxes, minority interest and
    cumulative effect of accounting change |                                                              |              | (555,442    | )        |            |   | (1,589,324  | )          |   |   | (4,062,108  | )         
|Provision for income taxes                                                                               |                                                              |              | 227,970     |          |            |   | 219,330     |            |   |   | 79,564      |           
|                                                                                                         |                                                              |              |             |          |            |   |             |            |  
|Loss before minority interest and cumulative effect of
    accounting change                             |                                                              |              | (783,412    | )        |            |   | (1,808,654  | )          |   |   | (4,141,672  | )         
|Minority interest                                                                                        |                                                              |              | 153,415     |          |            |   | 265,163     |            |   |   | 318,943     |           
|                                                                                                         |                                                              |              |             |          |            |   |             |            |  
|Loss before cumulative effect of accounting change                                                       |                                                              |              | (936,827    | )        |            |   | (2,073,817  | )          |   |   | (4,460,615  | )         
|                                                                                                         |                                                              |              |             |          |            |   |             |            |  
|                                                                                                         | Cumulative effect of accounting change (net of income taxes) |              |             |         |            |   |             |           |   |   |             | (444,861   | )
|                                                                                                         |                                                              |              |             |          |            |   |             |            |  
|Net loss                                                                                                 |                                                              | $            | (936,827    | )        |            | $ | (2,073,817  | )          |   | $ | (4,905,476  | )         
|                                                                                                         |                                                              |              |             |          |            |   |             |            |  
|Net loss per share:                                                                                      |                                                              |              |             |          |            |   |             |            |   |   |             |           
|                                                                                                         | Net loss before cumulative effect of accounting change       |              | $           | (0.07    | )          |   | $           | (0.15      | ) |   | $           | (0.29      | )
|                                                                                                         |                                                              |              |             |          |            |   |             |            |  
|                                                                                                         | Cumulative effect of accounting change                       |              |             |         |            |   |             |           |   |   |             | (0.03      | )
|                                                                                                         |                                                              |              |             |          |            |   |             |            |  
|                                                                                                         | Net loss                                                     |              | $           | (0.07    | )          |   | $           | (0.15      | ) |   | $           | (0.32      | )
|                                                                                                         |                                                              |              |             |          |            |   |             |            |  
|Basic and diluted weighted average number of shares outstanding                                          |                                                              |              | 13,347,571  |          |            |   | 13,798,347  |            |   |   | 15,254,761  |           
|                                                                                                         |                                                              |              |             |          |            |   |             |            |  



44



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##### Table of Contents



Caribou Coffee Company, Inc. and Affiliates


(A Majority Owned Subsidiary of Caribou Holding Company
Limited)





Consolidated Statements of Changes in Shareholders
Equity


|                            |                                                               |              |            |           |            |   |         |         |  |          |             |            |             |         |        |               |        |   |             |   |  |   |            |            |  
|--------------------------- | ------------------------------------------------------------- | ------------ | ---------- | --------- | ---------- | - | ------- | ------- |  | -------- | ----------- | ---------- | ----------- | ------- | ------ | ------------- | ------ | - | ----------- | - |  | - | ---------- | ---------- | -
|                            |                                                               | Common Stock |            |           |            |   |         |         |  |          |            
|                            |                                                               |              |            |           | Additional |   |         |         |  |          |             |           
|                            |                                                               | Number of    |            |           |            |   | Paid-In |         |  | Treasury |             |            | Accumulated |         |        | Shareholders |       
|                            |                                                               | Shares       |            |           | Amount     |   |         | Capital |  |          | Stock       |            |             | Deficit |        |               | Equity |  
|                            |                                                               |              |            |           |            |   |         |         |  |          |             |            |             |         |        |               |        |  
|Balance, December 29, 2002, |                                                               |              | 13,293,824 |           |            | $ | 133,294 |         |  |          | 50,331,586  |            |             | $       | (356   | )             |        | $ | (16,968,668 | ) |  | $ | 33,495,856 |           
|                            | Stock repurchase                                              |              |            | (53,333   | )          |   |         |        |  |          |             | (399,467   | )           |         |        | (533          | )      |   |             |  |  |   |            | (400,000   | )
|                            | Issuance of common stock                                      |              |            | 551,878   |            |   |         | 4,630   |  |          |             | 3,641,421  |             |         |        | 889           |        |   |             |  |  |   |            | 3,646,940  |  
|                            | Exercise of stock options                                     |              |            | 2,000     |            |   |         | 20      |  |          |             | 11,230     |             |         |        |              |        |   |             |  |  |   |            | 11,250     |  
|Net loss                    |                                                               |              |           |           |            |   |        |         |  |          |            |            |             |         |       |               |        |   | (936,827    | ) |  |   | (936,827   | )         
|                            |                                                               |              |            |           |            |   |         |         |  |          |             |            |             |         |        |               |        |  
|Balance, December 28, 2003  |                                                               |              | 13,794,369 |           |            |   | 137,944 |         |  |          | 53,584,770  |            |             |         |       |               |        |   | (17,905,495 | ) |  |   | 35,817,219 |           
|                            | Issuance of common stock                                      |              |            | 7,067     |            |   |         | 70      |  |          |             | 39,680     |             |         |        |              |        |   |             |  |  |   |            | 39,750     |  
|                            | Refund of expenses related to sale of common stock            |              |            |          |            |   |         |        |  |          |             | 9,559      |             |         |        |              |        |   |             |  |  |   |            | 9,559      |  
|Net loss                    |                                                               |              |           |           |            |   |        |         |  |          |            |            |             |         |       |               |        |   | (2,073,817  | ) |  |   | (2,073,817 | )         
|                            |                                                               |              |            |           |            |   |         |         |  |          |             |            |             |         |        |               |        |  
|Balance, January 2, 2005    |                                                               |              | 13,801,436 |           |            |   | 138,014 |         |  |          | 53,634,009  |            |             |         |       |               |        |   | (19,979,312 | ) |  |   | 33,792,711 |           
|                            | Stock repurchase                                              |              |            | (1,617    | )          |   |         |         |  |          |             |            |             |         |        | (21,401       | )      |   |             |  |  |   |            | (21,401    | )
|                            | Stock repurchase of fractional shares                         |              |            | (15       | )          |   |         |        |  |          |             | (216       | )           |         |        |              |        |   |             |  |  |   |            | (216       | )
|                            | Issuance of treasury stock in connection with stock options   |              |            | 885       |            |   |         |        |  |          |             |           |             |         |        | 12,390        |        |   |             |  |  |   |            | 12,390     |  
|                            | Issuance of common stock                                      |              |            | 100,000   |            |   |         | 1,000   |  |          |             | 986,750    |             |         |        |              |        |   |             |  |  |   |            | 987,750    |  
|                            | Common stock sold in initial public offering, net of expenses |              |            | 5,358,000 |            |   |         | 53,580  |  |          |             | 67,577,111 |             |         |        |              |        |   |             |  |  |   |            | 67,630,691 |  
|                            | Expiration of underwriters over-allotment option             |              |            |          |            |   |         |        |  |          |             | (623,109   | )           |         |        |              |        |   |             |  |  |   |            | (623,109   | )
|                            | Exercise of stock options                                     |              |            | 10,444    |            |   |         | 105     |  |          |             | 52,310     |             |         |        |              |        |   |             |  |  |   |            | 52,415     |  
|Net loss                    |                                                               |              |           |           |            |   |        |         |  |          |            |            |             |         |       |               |        |   | (4,905,476  | ) |  |   | (4,905,476 | )         
|                            |                                                               |              |            |           |            |   |         |         |  |          |             |            |             |         |        |               |        |  
|Balance, January 1, 2006    |                                                               |              | 19,269,133 |           |            | $ | 192,699 |         |  |          | 121,626,855 |            |             | $       | (9,011 | )             |        | $ | (24,884,788 | ) |  | $ | 96,925,755 |           
|                            |                                                               |              |            |           |            |   |         |         |  |          |             |            |             |         |        |               |        |  



45



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##### Table of Contents



Caribou Coffee Company, Inc. and Affiliates


(A Majority Owned Subsidiary of Caribou Holding Company
Limited)





Consolidated Statements of Cash Flows


|                                                                                    |                                                              |                                                   |                                           |         |            |           |             |            |            |            |             |           |            |            |  
|----------------------------------------------------------------------------------- | ------------------------------------------------------------ | ------------------------------------------------- | ----------------------------------------- | ------- | ---------- | --------- | ----------- | ---------- | ---------- | ---------- | ----------- | --------- | ---------- | ---------- | -
|                                                                                    |                                                              | Years Ended                                       |                                          
|                                                                                    |                                                              |                                                   |                                          
|                                                                                    |                                                              | December 28,                                      |                                           |         | January 2, |           |             | January 1, |           
|                                                                                    |                                                              | 2003                                              |                                           |         | 2005       |           |             | 2006       |           
|                                                                                    |                                                              |                                                   |                                           |         |            |           |             |            |           
|Operating activities                                                                |                                                              |                                                   |                                           |         |            |           |             |            |            |            |             |          
|Net loss                                                                            |                                                              | $                                                 | (936,827                                  | )       |            | $         | (2,073,817  | )          |            | $          | (4,905,476  | )        
|Adjustments to reconcile net loss to net cash provided by
    operating activities: |                                                              |                                                   |                                           |         |            |           |             |            |            |            |             |          
|                                                                                    |                                                              | Depreciation and amortization                     |                                           |         | 11,767,643 |           |             |            | 14,790,877 |            |             |           | 18,283,786 |           
|                                                                                    |                                                              | Amortization of deferred financing fees           |                                           |         | 192,060    |           |             |            | 419,195    |            |             |           | 353,450    |           
|                                                                                    |                                                              | Amortization of management fees                   |                                           |         | 200,000    |           |             |            |           |            |             |           |           |           
|                                                                                    |                                                              | Minority interests in affiliates                  |                                           |         | 153,415    |           |             |            | 265,163    |            |             |           | 318,943    |           
|                                                                                    |                                                              | Provision for closing expense and asset disposals |                                           |         | 141,577    |           |             |            | 698,569    |            |             |           | 274,260    |           
|                                                                                    |                                                              | Non cash compensation                             |                                           |         |           |           |             |            |           |            |             |           | 987,750    |           
|                                                                                    |                                                              | Non cash derivative income                        |                                           |         |            |           |             |            |            |            |             |           | (623,109   | )         
|                                                                                    |                                                              | Non cash accretion expense                        |                                           |         |           |           |             |            |           |            |             |           | 407,535    |           
|                                                                                    |                                                              | Changes in operating assets and liabilities:      |                                           |         |            |           |             |            |            |            |             |           |            |           
|                                                                                    |                                                              |                                                   | Restricted cash                           |         |            |          |             |            |            |           |             |           |            | 218,953    |  
|                                                                                    |                                                              |                                                   | Accounts receivable and other receivables |         |            | (521,560  | )           |            |            | 3,243      |             |           |            | (1,429,889 | )
|                                                                                    |                                                              |                                                   | Income tax receivable                     |         |            | 800,078   |             |            |            | (351,168   | )           |           |            | 315,418    |  
|                                                                                    |                                                              |                                                   | Inventories                               |         |            | (110,978  | )           |            |            | (1,532,834 | )           |           |            | (5,478,072 | )
|                                                                                    |                                                              |                                                   | Prepaid expenses and other assets         |         |            | (119,902  | )           |            |            | (73,548    | )           |           |            | (1,032,017 | )
|                                                                                    |                                                              |                                                   | Accounts payable                          |         |            | 523,099   |             |            |            | 1,683,792  |             |           |            | 9,242,057  |  
|                                                                                    |                                                              |                                                   | Accrued compensation                      |         |            | (639,819  | )           |            |            | (1,956,567 | )           |           |            | 755,415    |  
|                                                                                    |                                                              |                                                   | Accrued expenses                          |         |            | 3,257,091 |             |            |            | 6,554,199  |             |           |            | 1,725,963  |  
|                                                                                    |                                                              |                                                   | Deferred revenue                          |         |            | 1,268,392 |             |            |            | 4,924,180  |             |           |            | 2,765,547  |  
|                                                                                    |                                                              |                                                   | Deferred compensation                     |         |            | (288,077  | )           |            |            | (165,781   | )           |           |            |           |  
|                                                                                    |                                                              |                                                   |                                           |         |            |           |             |            |           
|Net cash provided by operating activities                                           |                                                              |                                                   | 15,686,192                                |         |            |           | 23,185,503  |            |            |            | 22,180,514  |          
|Investing activities                                                                |                                                              |                                                   |                                           |         |            |           |             |            |            |            |             |          
|Payments for property and equipment                                                 |                                                              |                                                   | (20,666,281                               | )       |            |           | (32,352,637 | )          |            |            | (43,214,246 | )        
|                                                                                    |                                                              |                                                   |                                           |         |            |           |             |            |           
|Net cash used in investing activities                                               |                                                              |                                                   | (20,666,281                               | )       |            |           | (32,352,637 | )          |            |            | (43,214,246 | )        
|Financing activities                                                                |                                                              |                                                   |                                           |         |            |           |             |            |            |            |             |          
|Borrowings under revolving credit facility                                          |                                                              |                                                   | 4,300,000                                 |         |            |           | 28,923,930  |            |            |            | 10,000,000  |          
|Repayment of revolving credit facility                                              |                                                              |                                                   | (269,753                                  | )       |            |           | (15,051,081 | )          |            |            | (29,923,930 | )        
|Distribution of minority interests earnings                                        |                                                              |                                                   | (174,489                                  | )       |            |           | (284,499    | )          |            |            | (397,990    | )        
|Net proceeds from initial public offering                                           |                                                              |                                                   |                                          |         |            |           |            |            |            |            | 67,630,691  |          
|Issuance of common stock                                                            |                                                              |                                                   | 3,658,190                                 |         |            |           | 49,309      |            |            |            | 52,415      |          
|Repurchase of common stock                                                          |                                                              |                                                   | (400,000                                  | )       |            |           |            |            |            |            | (21,401     | )        
|Sale of treasury stock                                                              |                                                              |                                                   |                                          |         |            |           |            |            |            |            | 12,390      |          
|Purchase of fractional shares                                                       |                                                              |                                                   |                                          |         |            |           |            |            |            |            | (216        | )        
|Deferred financing fees paid                                                        |                                                              |                                                   |                                          |         |            |           | (1,631,372  | )          |            |            | (90,586     | )        
|                                                                                    |                                                              |                                                   |                                           |         |            |           |             |            |           
|Net cash provided by financing activities                                           |                                                              |                                                   | 7,113,948                                 |         |            |           | 12,006,287  |            |            |            | 47,261,373  |          
|                                                                                    |                                                              |                                                   |                                           |         |            |           |             |            |           
|Increase in cash and cash equivalents                                               |                                                              |                                                   | 2,133,859                                 |         |            |           | 2,839,153   |            |            |            | 26,227,641  |          
|Cash and cash equivalents at beginning of year                                      |                                                              |                                                   | 2,645,458                                 |         |            |           | 4,779,317   |            |            |            | 7,618,470   |          
|                                                                                    |                                                              |                                                   |                                           |         |            |           |             |            |           
|Cash and cash equivalents at end of year                                            |                                                              | $                                                 | 4,779,317                                 |         |            | $         | 7,618,470   |            |            | $          | 33,846,111  |          
|                                                                                    |                                                              |                                                   |                                           |         |            |           |             |            |           
|Supplemental disclosure of cash flow information                                    |                                                              |                                                   |                                           |         |            |           |             |            |            |            |             |          
|                                                                                    | Cash paid (received) during the year for:                    |                                                   |                                           |         |            |           |             |            |            |            |             |           |           
|                                                                                    |                                                              | Interest                                          |                                           |         | 534,894    |           |             |            | 1,037,188  |            |             |           | 1,249,079  |           
|                                                                                    |                                                              | Income taxes                                      |                                           |         | 200,389    |           |             |            | 569,168    |            |             |           | (161,821   | )         
|Noncash financing and investing transactions:                                       |                                                              |                                                   |                                           |         |            |           |             |            |            |            |             |          
|                                                                                    | Deferred compensation                                        |                                                   | $                                         | 431,423 |            |           | $           |           |            |            | $           |          |           
|                                                                                    |                                                              |                                                   |                                           |         |            |           |             |            |           
|                                                                                    | Accrual for leasehold improvements, furniture, and equipment |                                                   | $                                         | 26,028  |            |           | $           | 1,063,274  |            |            | $           | 3,373,326 |           
|                                                                                    |                                                              |                                                   |                                           |         |            |           |             |            |           



46



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##### Table of Contents



CARIBOU COFFEE COMPANY, INC. AND AFFILIATES


(A Majority Owned Subsidiary of Caribou Holding Company
Limited)





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




|   |                                                        
|-- | -------------------------------------------------------
|1. | Business and Summary of Significant Accounting Policies



| |                        
| | -----------------------
| | Description of Business





| |                            
| | ---------------------------
| | Principles of Consolidation





| |                 
| | ----------------
| | Use of Estimates





| |                
| | ---------------
| | Fiscal Year End





| |                          
| | -------------------------
| | Cash and Cash Equivalents





| |                                    
| | -----------------------------------
| | Fair Value of Financial Instruments



47



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##### Table of Contents



CARIBOU COFFEE COMPANY, INC. AND AFFILIATES


(A Majority Owned Subsidiary of Caribou Holding Company
Limited)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |            
| | -----------
| | Inventories

(first-in,




| |                    
| | -------------------
| | Accounts Receivable





| |                  
| | -----------------
| | Other Receivables





| |                       
| | ----------------------
| | Property and Equipment



Accounting for Asset
Retirement Obligations-an interpretation of FASB Statement
No. 143.




| |                        
| | -----------------------
| | Deferred Financing Fees





| |                                                                            
| | ---------------------------------------------------------------------------
| | Impairment of Long-Lived Assets and Long-Lived Assets to
    Be Disposed Of



48



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##### Table of Contents



CARIBOU COFFEE COMPANY, INC. AND AFFILIATES


(A Majority Owned Subsidiary of Caribou Holding Company
Limited)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                   
| | ------------------
| | Stock Compensation

Accounting for Stock Issued to
Employees Accounting for Stock-Based Compensation Accounting for Stock-Based
Compensation  Transition and Disclosure Interim
Financial Reporting


|                                                                                                                                                    |             |              |          |       |            |   |            |            |   |   |            |       |  
|--------------------------------------------------------------------------------------------------------------------------------------------------- | ----------- | ------------ | -------- | ----- | ---------- | - | ---------- | ---------- | - | - | ---------- | ----- | -
|                                                                                                                                                    |             | Years Ended  |         
|                                                                                                                                                    |             |              |         
|                                                                                                                                                    |             | December 28, |          |       | January 2, |   |            | January 1, |  
|                                                                                                                                                    |             | 2003         |          |       | 2005       |   |            | 2006       |  
|                                                                                                                                                    |             |              |          |       |            |   |            |            |  
|Net loss: As reported                                                                                                                               |             | $            | (936,827 | )     |            | $ | (2,073,817 | )          |   | $ | (4,905,476 | )    
|Deduct: Total stock-based employee compensation expense
    determined under fair value based method for all awards, net of
    related tax effects |             |              |         |       |            |   | 399,197    |            |   |   | 311,785    |      
|                                                                                                                                                    |             |              |          |       |            |   |            |            |  
|Pro forma net loss                                                                                                                                  |             | $            | (936,827 | )     |            | $ | (2,473,014 | )          |   | $ | (5,217,261 | )    
|Basic and diluted net loss per share:                                                                                                               |             |              |          |       |            |   |            |            |   |   |            |      
|                                                                                                                                                    | As reported |              | $        | (0.07 | )          |   | $          | (0.15      | ) |   | $          | (0.32 | )
|                                                                                                                                                    |             |              |          |       |            |   |            |            |  
|                                                                                                                                                    | Pro forma   |              | $        | (0.07 | )          |   | $          | (0.18      | ) |   | $          | (0.34 | )
|                                                                                                                                                    |             |              |          |       |            |   |            |            |  



| |                                            
| | -------------------------------------------
| | Coffeehouse Preopening and Closing Expenses

start-up


49



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##### Table of Contents



CARIBOU COFFEE COMPANY, INC. AND AFFILIATES


(A Majority Owned Subsidiary of Caribou Holding Company
Limited)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                    
| | -------------------
| | Revenue Recognition





| |            
| | -----------
| | Advertising





| |                                  
| | ---------------------------------
| | Operating Leases and Rent Expense

Accounting for Leases Accounting for
Operating Leases With Scheduled Rent Increases.




| |             
| | ------------
| | Income Taxes

Accounting for
Income Taxes.




| |                   
| | ------------------
| | Net Loss Per Share



50



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##### Table of Contents



CARIBOU COFFEE COMPANY, INC. AND AFFILIATES


(A Majority Owned Subsidiary of Caribou Holding Company
Limited)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                                         
|-- | ----------------------------------------
|2. | Coffeehouse Closings and Asset Disposals

Accounting for Costs Associated
with Exit or Disposal Activities.


|                                                                             |  |              |           |  |            |   |           |            |  |   |           | 
|---------------------------------------------------------------------------- |  | ------------ | --------- |  | ---------- | - | --------- | ---------- |  | - | --------- | 
|                                                                             |  | Years Ended  |          
|                                                                             |  |              |          
|                                                                             |  | December 28, |           |  | January 2, |   |           | January 1, | 
|                                                                             |  | 2003         |           |  | 2005       |   |           | 2006       | 
|                                                                             |  |              |           |  |            |   |           |            | 
|Coffeehouse closures                                                         |  |              | 2         |  |            |   | 4         |            |  |   | 4         | 
|                                                                             |  |              |           |  |            |   |           |            | 
|Amount charged to operations for closed coffeehouses:                        |  |              |           |  |            |   |           |            |  |   |           | 
|Cash closure costs                                                           |  | $            | 25,000    |  |            | $ | 335,853   |            |  | $ | 297,725   | 
|Net book value of closed coffeehouse property and equipment                  |  |              | 129,835   |  |            |   | 189,714   |            |  |   | 96,331    | 
|Amount charged to operations for other property and equipment
    write-offs |  |              | 11,742    |  |            |   | 8,855     |            |  |   | 177,929   | 
|Amount charged to operations for costs to consolidate facilities             |  |              |          |  |            |   | 500,000   |            |  |   |          | 
|                                                                             |  |              |           |  |            |   |           |            | 
|Coffeehouse closing expense and disposal of assets                           |  | $            | 166,577   |  |            | $ | 1,034,422 |            |  | $ | 571,985   | 
|                                                                             |  |              |           |  |            |   |           |            | 
|Results of operations for unprofitable coffeehouses                          |  | $            | 5,328,135 |  |            | $ | 5,756,280 |            |  | $ | 7,243,203 | 
|                                                                             |  |              |           |  |            |   |           |            | 
|Depreciation expense related to charges for impaired assets                  |  | $            | 1,839,219 |  |            | $ | 985,152   |            |  | $ | 859,940   | 
|                                                                             |  |              |           |  |            |   |           |            | 

|                            |  |              |        |  |            |   |         |            |  |   |         | 
|--------------------------- |  | ------------ | ------ |  | ---------- | - | ------- | ---------- |  | - | ------- | 
|                            |  | As of        |       
|                            |  |              |       
|                            |  | December 28, |        |  | January 2, |   |         | January 1, | 
|                            |  | 2003         |        |  | 2005       |   |         | 2006       | 
|                            |  |              |        |  |            |   |         |            | 
|Coffeehouse closing accrual |  | $            | 45,310 |  |            | $ | 500,000 |            |  | $ | 601,712 | 



|   |                                 
|-- | --------------------------------
|3. | Recent Accounting Pronouncements

Accounting for Asset
Retirement Obligations-an interpretation of FASB Statement
No. 143.


51



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##### Table of Contents



CARIBOU COFFEE COMPANY, INC. AND AFFILIATES


(A Majority Owned Subsidiary of Caribou Holding Company
Limited)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Inventory Costs


Exchanges of Nonmonetary Assets  an
amendment of APB Opinion No. 29,




Accounting Changes and Error Corrections Accounting
Changes Reporting
Accounting Changes in Interim Financial Statements


52



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CARIBOU COFFEE COMPANY, INC. AND AFFILIATES


(A Majority Owned Subsidiary of Caribou Holding Company
Limited)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                          
|-- | -------------------------
|4. | Cash and Cash Equivalents



|                                          |  |             |           |  |            |   |            | 
|----------------------------------------- |  | ----------- | --------- |  | ---------- | - | ---------- | 
|                                          |  | Years Ended |          
|                                          |  |             |          
|                                          |  | January 2,  |           |  | January 1, |  
|                                          |  | 2005        |           |  | 2006       |  
|                                          |  |             |           |  |            |  
|Operating funds                           |  | $           | 7,617,351 |  |            | $ | 7,602,905  | 
|Money market funds/short-term investments |  |             | 1,119     |  |            |   | 26,243,206 | 
|                                          |  |             |           |  |            |  
|                                          |  | $           | 7,618,470 |  |            | $ | 33,846,111 | 
|                                          |  |             |           |  |            |  



|   |                
|-- | ---------------
|5. | Restricted Cash





|   |            
|-- | -----------
|6. | Inventories



|                          |  |             |           |  |            |   |            | 
|------------------------- |  | ----------- | --------- |  | ---------- | - | ---------- | 
|                          |  | Years Ended |          
|                          |  |             |          
|                          |  | January 2,  |           |  | January 1, |  
|                          |  | 2005        |           |  | 2006       |  
|                          |  |             |           |  |            |  
|Coffee                    |  | $           | 2,579,718 |  |            | $ | 5,048,815  | 
|Merchandise held for sale |  |             | 1,086,611 |  |            |   | 3,311,014  | 
|Supplies                  |  |             | 2,038,111 |  |            |   | 2,822,683  | 
|                          |  |             |           |  |            |  
|                          |  | $           | 5,704,440 |  |            | $ | 11,182,512 | 
|                          |  |             |           |  |            |  





|   |                       
|-- | ----------------------
|7. | Property and Equipment



|                                               |  |             |             |   |            |   |             |  
|---------------------------------------------- |  | ----------- | ----------- | - | ---------- | - | ----------- | -
|                                               |  | Years Ended |            
|                                               |  |             |            
|                                               |  | January 2,  |             |   | January 1, |  
|                                               |  | 2005        |             |   | 2006       |  
|                                               |  |             |             |   |            |  
|Leasehold improvements                         |  | $           | 64,519,192  |   |            | $ | 87,516,286  |  
|Furniture, fixtures, and equipment             |  |             | 60,265,603  |   |            |   | 80,531,306  |  
|                                               |  |             |             |   |            |  
|                                               |  |             | 124,784,795 |   |            |   | 168,047,592 |  
|Less accumulated depreciation and amortization |  |             | (57,145,063 | ) |            |   | (72,024,872 | )
|                                               |  |             |             |   |            |  
|                                               |  | $           | 67,639,732  |   |            | $ | 96,022,720  |  
|                                               |  |             |             |   |            |  



53



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CARIBOU COFFEE COMPANY, INC. AND AFFILIATES


(A Majority Owned Subsidiary of Caribou Holding Company
Limited)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|   |                                           
|-- | ------------------------------------------
|8. | Note Payable and Revolving Credit Facility









|                          |  |             |            |  |            |   |   | 
|------------------------- |  | ----------- | ---------- |  | ---------- | - | - | 
|                          |  | Years Ended
|                          |  |            
|                          |  | January 2,  |            |  | January 1,
|                          |  | 2005        |            |  | 2006      
|                          |  |             |            |  |           
|Revolving credit facility |  | $           | 19,923,930 |  |            | $ |  | 
|                          |  |             |            |  |            |  
|                          |  | $           | 19,923,930 |  |            | $ |  | 
|                          |  |             |            |  |            |  

54



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##### Table of Contents



CARIBOU COFFEE COMPANY, INC. AND AFFILIATES


(A Majority Owned Subsidiary of Caribou Holding Company
Limited)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                              |  |             |           |   |            |   |           |  
|----------------------------- |  | ----------- | --------- | - | ---------- | - | --------- | -
|                              |  | Years Ended |          
|                              |  |             |          
|                              |  | January 2,  |           |   | January 1, |  
|                              |  | 2005        |           |   | 2006       |  
|                              |  |             |           |   |            |  
|Deferred financing fees       |  | $           | 1,631,372 |   |            | $ | 1,721,958 |  
|Less accumulated amortization |  |             | (163,137  | ) |            |   | (516,587  | )
|                              |  |             |           |   |            |  
|                              |  | $           | 1,468,235 |   |            | $ | 1,205,371 |  
|                              |  |             |           |   |            |  





|   |                                    
|-- | -----------------------------------
|9. | Equity and Stock Based Compensation



|                                         |  |              |         |   |            |  |         |            |  |  |         |  
|---------------------------------------- |  | ------------ | ------- | - | ---------- |  | ------- | ---------- |  |  | ------- | -
|                                         |  | Years Ended  |        
|                                         |  |              |        
|                                         |  | December 28, |         |   | January 2, |  |         | January 1, | 
|                                         |  | 2003         |         |   | 2005       |  |         | 2006       | 
|                                         |  |              |         |   |            |  |         |            | 
|Expected dividend yield                  |  |              | 0       | % |            |  | 0       | %          |  |  | 0       | %
|Weighted average risk free interest rate |  |              | 3.25    | % |            |  | 3.43    | %          |  |  | 4.01    | %
|Expected life                            |  |              | 5 years |   |            |  | 5 years |            |  |  | 5 years |  
|Volatility                               |  |              | 0       | % |            |  | 0       | %          |  |  | 0-56    | %



55



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##### Table of Contents



CARIBOU COFFEE COMPANY, INC. AND AFFILIATES


(A Majority Owned Subsidiary of Caribou Holding Company
Limited)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                               |           |           |           |           |                  |  |      |                 |  |   |            |            | 
|------------------------------ | --------- | --------- | --------- | --------- | ---------------- |  | ---- | --------------- |  | - | ---------- | ---------- | 
|                               |           | Number of |           |           | Weighted Average |  |      | Range of        | 
|                               |           | Shares    |           |           | Exercise Price   |  |      | Exercise Prices | 
|                               |           |           |           |           |                  |  |      |                 | 
|Outstanding, December 29, 2002 |           |           | 1,410,523 |           |                  |  | 5.61 |                 |  | $ | 3.18-5.62  |           
|                               | Granted   |           |           | 1,040,000 |                  |  |      | 6.70            |  |   |            | 6.70       | 
|                               | Exercised |           |           | (2,000    | )                |  |      | 5.62            |  |   |            | 5.62       | 
|                               | Forfeited |           |           | (826,734  | )                |  |      | 5.61            |  |   |            | 4.87-6.70  | 
|                               |           |           |           |           |                  |  |      |                 | 
|Outstanding, December 28, 2003 |           |           | 1,621,789 |           |                  |  | 6.30 |                 |  |   | 3.18-6.70  |           
|                               | Granted   |           |           | 226,000   |                  |  |      | 6.70            |  |   |            | 6.70       | 
|                               | Exercised |           |           | (7,067    | )                |  |      | 5.62            |  |   |            | 5.62       | 
|                               | Forfeited |           |           | (69,266   | )                |  |      | 6.06            |  |   |            | 3.18-6.70  | 
|                               |           |           |           |           |                  |  |      |                 | 
|Outstanding, January 2, 2005   |           |           | 1,771,456 |           |                  |  | 6.36 |                 |  |   | 3.18-6.70  |           
|                               | Granted   |           |           | 781,867   |                  |  |      | 8.80            |  |   |            | 7.09-14.00 | 
|                               | Exercised |           |           | (11,329   | )                |  |      | 5.71            |  |   |            | 3.18-6.70  | 
|                               | Forfeited |           |           | (337,795  | )                |  |      | 6.55            |  |   |            | 4.87-9.87  | 
|                               |           |           |           |           |                  |  |      |                 | 
|Outstanding, January 1, 2006   |           |           | 2,204,199 |           |                  |  | 7.21 |                 |  | $ | 4.87-14.00 |           
|                               |           |           |           |           |                  |  |      |                 | 









Accounting for
Derivative Instruments and


56



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CARIBOU COFFEE COMPANY, INC. AND AFFILIATES


(A Majority Owned Subsidiary of Caribou Holding Company
Limited)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Hedging Activities.




|    |                                     
|--- | ------------------------------------
|10. | Leasing Arrangements and Commitments





|                      |  |              |            |   |            |   |            |            |  |   |            |  
|--------------------- |  | ------------ | ---------- | - | ---------- | - | ---------- | ---------- |  | - | ---------- | -
|                      |  | Years Ended  |           
|                      |  |              |           
|                      |  | December 28, |            |   | January 2, |   |            | January 1, | 
|                      |  | 2003         |            |   | 2005       |   |            | 2006       | 
|                      |  |              |            |   |            |   |            |            | 
|Minimum rentals       |  | $            | 9,248,352  |   |            | $ | 12,018,384 |            |  | $ | 15,439,020 |  
|Contingent rentals    |  |              | 1,402,745  |   |            |   | 1,659,959  |            |  |   | 1,843,955  |  
|                      |  |              |            |   |            |   |            |            | 
|                      |  |              | 10,651,097 |   |            |   | 13,678,343 |            |  |   | 17,282,795 |  
|Less sublease rentals |  |              | (286,073   | ) |            |   | (257,640   | )          |  |   | (273,227   | )
|                      |  |              |            |   |            |   |            |            | 
|                      |  | $            | 10,365,024 |   |            | $ | 13,420,703 |            |  | $ | 17,009,748 |  
|                      |  |              |            |   |            |   |            |            | 



|           |  |   |             | 
|---------- |  | - | ----------- | 
|2006       |  | $ | 19,427,201  | 
|2007       |  |   | 18,864,656  | 
|2008       |  |   | 17,490,796  | 
|2009       |  |   | 16,762,290  | 
|2010       |  |   | 15,950,912  | 
|Thereafter |  |   | 61,349,029  | 
|           |  |   |            
|           |  | $ | 149,844,885 | 
|           |  |   |            



57



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##### Table of Contents



CARIBOU COFFEE COMPANY, INC. AND AFFILIATES


(A Majority Owned Subsidiary of Caribou Holding Company
Limited)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |             
|--- | ------------
|11. | Income Taxes



|         |              |              |         |         |            |   |         |            |  |   |        |        | 
|-------- | ------------ | ------------ | ------- | ------- | ---------- | - | ------- | ---------- |  | - | ------ | ------ | 
|         |              | Years Ended  |        
|         |              |              |        
|         |              | December 28, |         |         | January 2, |   |         | January 1, | 
|         |              | 2003         |         |         | 2005       |   |         | 2006       | 
|         |              |              |         |         |            |   |         |            | 
|Current: |              |              |         |         |            |   |         |            |  |   |        |       
|         | U.S. Federal |              | $       |        |            |   | $       |           |  |   | $      | 35,440 | 
|         | State        |              |         | 227,970 |            |   |         | 219,330    |  |   |        | 44,124 | 
|         |              |              |         |         |            |   |         |            | 
|         |              | $            | 227,970 |         |            | $ | 219,330 |            |  | $ | 79,564 |       
|         |              |              |         |         |            |   |         |            | 



|                                                           |  |              |          |   |            |   |          |            |  |   |            |  
|---------------------------------------------------------- |  | ------------ | -------- | - | ---------- | - | -------- | ---------- |  | - | ---------- | -
|                                                           |  | Years Ended  |         
|                                                           |  |              |         
|                                                           |  | December 28, |          |   | January 2, |   |          | January 1, | 
|                                                           |  | 2003         |          |   | 2005       |   |          | 2006       | 
|                                                           |  |              |          |   |            |   |          |            | 
|Tax at U.S. Federal statutory rate                         |  | $            | (241,011 | ) |            | $ | (630,522 | )          |  | $ | (1,640,810 | )
|Federal AMT                                                |  |              |         |   |            |   |         |            |  |   | 35,440     |  
|State income taxes, net of U.S. Federal income tax benefit |  |              | 150,460  |   |            |   | 111,757  |            |  |   | (262,803   | )
|State minimum taxes                                        |  |              |         |   |            |   |         |            |  |   | 44,124     |  
|Permanent differences                                      |  |              | 17,841   |   |            |   | 34,381   |            |  |   | (216,903   | )
|Changes in valuation allowance                             |  |              | 317,268  |   |            |   | 820,293  |            |  |   | 2,168,498  |  
|Other, net                                                 |  |              | (16,588  | ) |            |   | (116,579 | )          |  |   | (47,982    | )
|                                                           |  |              |          |   |            |   |          |            | 
|                                                           |  | $            | 227,970  |   |            | $ | 219,330  |            |  | $ | 79,564     |  
|                                                           |  |              |          |   |            |   |          |            | 





58



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##### Table of Contents



CARIBOU COFFEE COMPANY, INC. AND AFFILIATES


(A Majority Owned Subsidiary of Caribou Holding Company
Limited)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                   |  |            |            |   |            |   |            |  
|-------------------------------------------------- |  | ---------- | ---------- | - | ---------- | - | ---------- | -
|                                                   |  | January 2, |            |   | January 1, |  
|                                                   |  | 2005       |            |   | 2006       |  
|                                                   |  |            |            |   |            |  
|Depreciation                                       |  | $          | (2,345,012 | ) |            | $ | 1,737,080  |  
|Deferred rent on leases                            |  |            | 2,753,198  |   |            |   | 520,728    |  
|Net operating loss carryforwards                   |  |            | 4,244,650  |   |            |   | 4,579,923  |  
|Coffeehouse closing and asset reserves             |  |            | 344,000    |   |            |   | 204,582    |  
|Accrued expenses                                   |  |            | 227,055    |   |            |   | 509,141    |  
|Deferred revenue                                   |  |            | 1,435,108  |   |            |   | 1,223,416  |  
|Other                                              |  |            | 1,113,122  |   |            |   | 511,785    |  
|State deferred                                     |  |            |           |   |            |   | 653,964    |  
|                                                   |  |            |            |   |            |  
|Gross deferred income tax assets                   |  |            | 7,772,121  |   |            |   | 9,940,619  |  
|Less deferred income tax asset valuation allowance |  |            | (7,772,121 | ) |            |   | (9,940,619 | )
|                                                   |  |            |            |   |            |  
|Net deferred income tax assets                     |  | $          |           |   |            | $ |           |  
|                                                   |  |            |            |   |            |  



|    |                           
|--- | --------------------------
|12. | Related Party Transactions



| |                     
| | --------------------
| | Management Agreement





| |                      
| | ---------------------
| | Notes from Affiliates





| |                                      
| | -------------------------------------
| | Executive Split Dollar Life Insurance



59



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##### Table of Contents



CARIBOU COFFEE COMPANY, INC. AND AFFILIATES


(A Majority Owned Subsidiary of Caribou Holding Company
Limited)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|    |                      
|--- | ---------------------
|13. | Employee Benefit Plan





|    |                         
|--- | ------------------------
|14. | Master License Agreement







60



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##### Table of Contents



CARIBOU COFFEE COMPANY, INC. AND AFFILIATES


(A Majority Owned Subsidiary of Caribou Holding Company
Limited)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                   
|--- | ------------------
|15. | Net Loss Per Share



|                                                                            |  |              |            |   |            |   |            |            |  |   |            |  
|--------------------------------------------------------------------------- |  | ------------ | ---------- | - | ---------- | - | ---------- | ---------- |  | - | ---------- | -
|                                                                            |  | December 28, |            |   | January 2, |   |            | January 1, | 
|                                                                            |  | 2003         |            |   | 2005       |   |            | 2006       | 
|                                                                            |  |              |            |   |            |   |            |            | 
|Net loss                                                                    |  | $            | (936,827   | ) |            | $ | (2,073,817 | )          |  | $ | (4,905,476 | )
|                                                                            |  |              |            |   |            |   |            |            | 
|Weighted average number of shares outstanding (for basic
    calculation)   |  |              | 13,347,571 |   |            |   | 13,798,347 |            |  |   | 15,254,761 |  
|Effects of dilutive stock options                                           |  |              |           |   |            |   |           |            |  |   |           |  
|                                                                            |  |              |            |   |            |   |            |            | 
|Weighted average number of shares outstanding (for diluted
    calculation) |  |              | 13,347,571 |   |            |   | 13,798,347 |            |  |   | 15,254,761 |  
|                                                                            |  |              |            |   |            |   |            |            | 
|Net loss per share  basic and diluted                                      |  | $            | (0.07      | ) |            | $ | (0.15      | )          |  | $ | (0.32      | )
|                                                                            |  |              |            |   |            |   |            |            | 





|    |                              
|--- | -----------------------------
|16. | Commitments and Contingencies





61



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CARIBOU COFFEE COMPANY, INC. AND AFFILIATES


(A Majority Owned Subsidiary of Caribou Holding Company
Limited)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                                              
|--- | ---------------------------------------------
|17. | Selected Quarterly Financial Data (Unaudited)

|                                          |         |                 |            |       |        |   |            |       |   |   |            |       |   |   |            |      | 
|----------------------------------------- | ------- | --------------- | ---------- | ----- | ------ | - | ---------- | ----- | - | - | ---------- | ----- | - | - | ---------- | ---- | 
|                                          |         | Fiscal Quarters |           
|                                          |         |                 |           
|Year Ended January 2, 2005                |         | First           |            |       | Second |   |            | Third |   |   | Fourth     |      
|                                          |         |                 |            |       |        |   |            |       |   |   |            |      
|Net sales                                 |         | $               | 34,924,703 |       |        | $ | 37,847,714 |       |   | $ | 38,642,233 |       |   | $ | 49,077,589 |     
|Cost of sales and related occupancy costs |         |                 | 14,374,506 |       |        |   | 15,909,052 |       |   |   | 15,650,631 |       |   |   | 19,385,710 |     
|Operating (loss) income                   |         |                 | (383,515   | )     |        |   | (1,299,641 | )     |   |   | (483,630   | )     |   |   | 1,156,921  |     
|Net (loss) income                         |         |                 | (499,841   | )     |        |   | (1,529,224 | )     |   |   | (821,583   | )     |   |   | 776,831    |     
|Net (loss) income per share               |         |                 |            |       |        |   |            |       |   |   |            |       |   |   |            |     
|                                          | Basic   |                 |            | (0.04 | )      |   |            | (0.11 | ) |   |            | (0.06 | ) |   |            | 0.06 | 
|                                          | Diluted |                 |            | (0.04 | )      |   |            | (0.11 | ) |   |            | (0.06 | ) |   |            | 0.06 | 

|                                          |         |                 |            |       |        |   |            |       |   |   |            |       |   |   |            |       |  
|----------------------------------------- | ------- | --------------- | ---------- | ----- | ------ | - | ---------- | ----- | - | - | ---------- | ----- | - | - | ---------- | ----- | -
|                                          |         | Fiscal Quarters |           
|                                          |         |                 |           
|Year Ended January 1, 2006                |         | First           |            |       | Second |   |            | Third |   |   | Fourth     |      
|                                          |         |                 |            |       |        |   |            |       |   |   |            |      
|Net sales                                 |         | $               | 45,039,679 |       |        | $ | 47,913,940 |       |   | $ | 48,654,813 |       |   | $ | 56,383,400 |      
|Cost of sales and related occupancy costs |         |                 | 18,044,841 |       |        |   | 19,371,860 |       |   |   | 19,606,907 |       |   |   | 23,534,259 |      
|Operating income (loss)                   |         |                 | 25,553     |       |        |   | (2,126,391 | )     |   |   | (1,372,532 | )     |   |   | (1,033,131 | )    
|Net loss                                  |         |                 | (437,217   | )     |        |   | (2,668,520 | )     |   |   | (1,198,380 | )     |   |   | (601,362   | )    
|Net loss per share                        |         |                 |            |       |        |   |            |       |   |   |            |       |   |   |            |      
|                                          | Basic   |                 |            | (0.03 | )      |   |            | (0.19 | ) |   |            | (0.08 | ) |   |            | (0.03 | )
|                                          | Diluted |                 |            | (0.03 | )      |   |            | (0.19 | ) |   |            | (0.08 | ) |   |            | (0.03 | )



|    |            
|--- | -----------
|18. | Stock Split



62



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##### Table of Contents



CARIBOU COFFEE COMPANY, INC. AND AFFILIATES


Item 16(b)  Schedule II 
Valuation and Qualifying Accounts and Reserves


|                  |                                               |              |   |           |            |  |   |            |  |             |   |   |  |  |   |           | 
|----------------- | --------------------------------------------- | ------------ | - | --------- | ---------- |  | - | ---------- |  | ----------- | - | - |  |  | - | --------- | 
|                  |                                               | Balance at   |   |           | Additions  |  |   |            |  |            
|                  |                                               | Beginning of |   |           | Charged to |  |   |            |  | Balance at  |  
|Years Ended:      |                                               | Year         |   |           | Expense    |  |   | Deductions |  | End of Year |  
|                  |                                               |              |   |           |            |  |   |            |  |             |  
|December 28, 2003 |                                               |              |   |           |            |  |   |            |  |             |   |   |  |  |   |          
|                  | Allowance for doubtful accounts               |              | $ | 18,900    |            |  | $ | 16,000     |  |             | $ |  |  |  | $ | 34,900    | 
|                  | Deferred income tax asset valuation allowance |              | $ | 7,731,311 |            |  | $ |           |  |             | $ |  |  |  | $ | 6,951,828 | 
|January 2, 2005   |                                               |              |   |           |            |  |   |            |  |             |   |   |  |  |   |          
|                  | Allowance for doubtful accounts               |              | $ | 34,900    |            |  | $ |           |  |             | $ |  |  |  | $ | 34,900    | 
|                  | Deferred income tax asset valuation allowance |              | $ | 6,951,828 |            |  | $ | 820,293    |  |             | $ |  |  |  | $ | 7,772,121 | 
|January 1, 2006   |                                               |              |   |           |            |  |   |            |  |             |   |   |  |  |   |          
|                  | Allowance for doubtful accounts               |              | $ | 34,900    |            |  | $ | 202,695    |  |             | $ |  |  |  | $ | 237,595   | 
|                  | Deferred income tax asset valuation allowance |              | $ | 7,772,121 |            |  | $ | 2,168,498  |  |             | $ |  |  |  | $ | 9,940,619 | 
|                  | Inventory Reserve                             |              | $ |          |            |  | $ | 444,281    |  |             | $ |  |  |  | $ | 444,281   | 

63



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|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure








|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

Conclusion regarding the Effectiveness of Disclosure Controls
and Procedures


13a-15(e) 15d-15(e)







|         |                  
|-------- | -----------------
|Item 9B. | Other Information






PART III







|         |                                                   
|-------- | --------------------------------------------------
|Item 10. | Directors and Executive Officers of the Registrant



8-K







|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

10-K.







|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management and Related Stockholder Matters



64



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##### Table of Contents



10-K.







|         |                                               
|-------- | ----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions

10-K.







|         |                                       
|-------- | --------------------------------------
|Item 14. | Principal Accounting Fees and Services

10-K.





PART IV







|         |                                           
|-------- | ------------------------------------------
|Item 15. | Exhibits and Financial Statement Schedules

10-K.


Index to Consolidated Financial
Statements-Valuation and Qualifying Accounts and Reserves.


10-K:


|                                                                                                                                    |  |      |       | 
|----------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----- | 
|                                                                                                                                    |  | Page |      
|                                                                                                                                    |  |      |      
|Report of Independent Registered Public
    Accounting Firm                                                                         |  |      | 42    | 
|Consolidated Balance Sheets as of
    January 2, 2005 and January 1, 2006                                                           |  |      | 43    | 
|Consolidated Statements of Operations for
    the Years Ended December 28, 2003, January 2, 2005,
    and January 1, 2006           |  |      | 44    | 
|Consolidated Statements of
    Shareholders Equity for the Years Ended December 28,
    2003, January 2, 2005, and January 1, 2006 |  |      | 45    | 
|Consolidated Statements of Cash Flows for
    the Years Ended December 28, 2003, January 2, 2005,
    and January 1, 2006           |  |      | 46    | 
|Notes to Consolidated Financial
    Statements                                                                                      |  |      | 47-62 | 

Index to Financial Statement Schedule.




Listing of Exhibits


|        |    |    |  |                         |  |                                                                                                                                                                                                           
|------- | -- | -- |  | ----------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |    |  |                        
|Number  |    |    |  | Description of Exhibits
|        |    |    |  |                        
|        | 3  | .1 |  |                        |  | Form of Amended and Restated Articles of Incorporation of the
    Company (incorporated by reference to Exhibit 3.1 to the
    Companys Registration Statement on Form S-1/ A filed
    August 25, 2005).
|       
|        | 3  | .2 |  |                        |  | Form of Amended and Restated Bylaws of the Company (incorporated
    by reference to Exhibit 3.2 to the Companys
    Registration Statement on Form S-1/ A filed August 25,
    2005).                   
|       
|        | 4  | .1 |  |                        |  | Form of Registrants Common Stock Certificate (incorporated
    by reference to Exhibit 4.1 to the Companys
    Registration Statement on Form S-1/ A filed
    September 6, 2005).                      
|       
|        | 10 | .1 |  |                        |  | 1994 Stock Awards Plan (incorporated by reference to
    Exhibit 10.1 to the Companys Registration Statement
    on Form S-1 filed July 19, 2005).                                                       

65



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##### Table of Contents



|        |    |      |  |                         |  |                                                                                                                                                                                                                                                              
|------- | -- | ---- |  | ----------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |      |  |                        
|Number  |    |      |  | Description of Exhibits
|        |    |      |  |                        
|        | 10 | .2   |  |                        |  | Form of 1994 Stock Awards Plan Stock Option Grant and Agreement
    (incorporated by reference to Exhibit 10.2 to the
    Companys Registration Statement on Form S-1 filed
    July 19, 2005).                                                             
|       
|        | 10 | .3   |  |                        |  | 2001 Stock Incentive Plan (incorporated by reference to
    Exhibit 10.3 to the Companys Registration Statement
    on Form S-1 filed July 19, 2005).                                                                                                       
|       
|        | 10 | .4   |  |                        |  | Amendment No. 1 to the 2001 Stock Incentive Plan
    (incorporated by reference to Exhibit 10.4 to the
    Companys Registration Statement on Form S-1 filed
    July 19, 2005).                                                                            
|       
|        | 10 | .5   |  |                        |  | Form of 2001 Stock Incentive Plan Stock Option Grant and
    Agreement (incorporated by reference to Exhibit 10.5 to the
    Companys Registration Statement on Form S-1 filed
    July 19, 2005).                                                          
|       
|        | 10 | .6   |  |                        |  | 2005 Equity Incentive Plan (incorporated by reference to
    Exhibit 10.6 to the Companys Registration Statement
    on Form S-1/ A filed August 25, 2005).                                                                                                 
|       
|        | 10 | .7   |  |                        |  | Senior Executive 2005 Supplemental Bonus Plan (incorporated by
    reference to Exhibit 10.7 to the Companys
    Registration Statement on Form S-1/ A filed
    September 20, 2005).                                                                       
|       
|        | 10 | .8   |  |                        |  | Description of Annual Support Center and Field Management Bonus
    Plan (incorporated by reference to Exhibit 10.8 to the
    Companys Registration Statement on Form S-1/ A filed
    August 25, 2005).                                                   
|       
|        | 10 | .9*  |  |                        |  | Amended and Restated Employment Agreement between Caribou Coffee
    Company, Inc. and Michael J. Coles, dated June 29, 2005
    (incorporated by reference to Exhibit 10.9 to the
    Companys Registration Statement on Form S-1 filed
    July 19, 2005).
|       
|        | 10 | .10* |  |                        |  | Bonus Compensation Agreement between Caribou Coffee Company,
    Inc. and Michael J. Coles dated June 29, 2005 (incorporated
    by reference to Exhibit 10.10 to the Companys
    Registration Statement on Form S-1 filed July 19,
    2005).             
|       
|        | 10 | .11* |  |                        |  | Employment Agreement between Caribou Coffee Company, Inc. and
    George E. Mileusnic, dated July 18, 2005 (incorporated by
    reference to Exhibit 10.11 to the Companys
    Registration Statement on Form S-1 filed July 19,
    2005).                 
|       
|        | 10 | .12* |  |                        |  | Employment Agreement between Caribou Coffee Company, Inc. and
    Amy K. ONeil, dated July 18, 2005 (incorporated by
    reference to Exhibit 10.12 to the Companys
    Registration Statement on Form S-1 filed July 19,
    2005).                       
|       
|        | 10 | .13* |  |                        |  | Form of Directors and Officers Indemnification Agreement.                                                                                                                                                                                                    
|       
|        | 10 | .14  |  |                        |  | Master License Agreement between Caribou Coffee Company, Inc.
    and Al-Sayer Enterprises (incorporated by reference to
    Exhibit 10.14 to the Companys Registration Statement
    on Form S-1/ A filed September 14, 2005).                             
|       
|        | 10 | .15* |  |                        |  | Offer Letter from Caribou Coffee Company, Inc. to Janet D.
    Astor, dated November 29, 2004 (incorporated by reference
    to Exhibit 10.15 to the Companys Registration
    Statement on Form S-1/ A filed August 25, 2005).                             
|       
|        | 10 | .16* |  |                        |  | Severance Agreement between Caribou Coffee Company, Inc. and
    Janet D. Astor, dated December 13, 2004 (incorporated by
    reference to Exhibit 10.16 to the Companys
    Registration Statement on Form S-1/ A filed August 25,
    2005).              
|       
|        | 10 | .17* |  |                        |  | Offer Letter from Caribou Coffee Company, Inc. to Kathy F.
    Hollenhorst, dated April 13, 2005 (incorporated by
    reference to Exhibit 10.17 to the Companys
    Registration Statement on Form S-1/ A filed August 25,
    2005).                      
|       
|        | 10 | .18  |  |                        |  | Commercial Lease between Caribou Coffee Company, Inc. and Twin
    Lakes III LLC, dated September 5, 2003 (incorporated
    by reference to Exhibit 10.18 to the Companys
    Registration Statement on Form S-1/ A filed August 25,
    2005).             

66



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##### Table of Contents



|        |    |     |  |                         |  |                                                                                                                                                                                                                                                                                                                                                       
|------- | -- | --- |  | ----------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     |  |                        
|Number  |    |     |  | Description of Exhibits
|        |    |     |  |                        
|        | 10 | .19 |  |                        |  | Second Amended and Restated Lease and License Financing and
    Purchase Option Agreement between Caribou Coffee Company, Inc.
    and Arabica Funding, Inc., dated June 29, 2004
    (incorporated by reference to Exhibit 10.19 to the
    Companys Registration Statement on Form S-1/ A filed
    August 25, 2005)                               
|        | 10 | .20 |  |                        |  | Amendment to Second Amended and Restated Lease and License
    Financing and Purchase Option Agreement between Caribou Coffee
    Company, Inc. and Arabica Funding, Inc., dated March 25,
    2005 (incorporated by reference to Exhibit 10.20 to the
    Companys Registration Statement on Form S-1/ A filed
    August 25, 2005).                
|       
|        | 10 | .21 |  |                        |  | Second Amendment to Second Amended and Restated Lease and
    License Financing and Purchase Option Agreement between Caribou
    Coffee Company, Inc. and Arabica Funding, Inc., dated
    May 10, 2005 (incorporated by reference to
    Exhibit 10.21 to the Companys Registration Statement
    on Form S-1/ A filed August 25, 2005).           
|       
|        | 10 | .22 |  |                        |  | Second Amended and Restated Call Option Letter from Arabica
    Funding, Inc. to Caribou Coffee Company, Inc., dated
    June 29, 2004 (incorporated by reference to
    Exhibit 10.22 to the Companys Registration Statement
    on Form S-1/ A filed August 25, 2005).                                                                             
|       
|        | 10 | .23 |  |                        |  | Second Amended and Restated Put Option Letter from Caribou
    Coffee Company, Inc. to Arabica Funding, Inc., dated
    June 29, 2004 (incorporated by reference to
    Exhibit 10.23 to the Companys Registration Statement
    on Form S-1/ A filed August 25, 2005).                                                                              
|       
|        | 10 | .24 |  |                        |  | Second Amended and Restated Tax Matters Agreement between
    Caribou Coffee Company, Inc. and Arabica Funding, Inc., dated
    June 29, 2004 (incorporated by reference to
    Exhibit 10.24 to the Companys Registration Statement
    on Form S-1/ A filed August 25, 2005).                                                                      
|       
|        | 10 | .25 |  |                        |  | Second Amended and Restated Supplemental Agreement between
    Caribou Coffee Company, Inc. and Arabica Funding, Inc., dated
    June 29, 2004 (incorporated by reference to
    Exhibit 10.25 to the Companys Registration Statement
    on Form S-1/ A filed August 25, 2005).                                                                     
|       
|        | 10 | .26 |  |                        |  | Credit Agreement among Arabica Funding, Inc., as Borrower, The
    Several Lenders from Time to Time Parties thereto, and Fleet
    National Bank, as Administrative Agent, dated as of
    June 29, 2004 (incorporated by reference to
    Exhibit 10.26 to the Companys Registration Statement
    on Form S-1/ A filed August 25, 2005).          
|       
|        | 10 | .27 |  |                        |  | Amendment to Credit Agreement among Arabica Funding, Inc., as
    Borrower, The Several Lenders from Time to Time Parties Thereto,
    and Fleet National Bank, as Administrative Agent, dated as of
    March 2005 (incorporated by reference to Exhibit 10.27 to
    the Companys Registration Statement on Form S-1/ A
    filed August 25, 2005).
|       
|        | 21 | .1  |  |                        |  | List of Subsidiaries (incorporated by reference to
    Exhibit 21.1 to the Companys Registration Statement
    on Form S-1/ A filed September 14, 2005).                                                                                                                                                                                             
|       
|        | 23 | .1  |  |                        |  | Consent of independent registered public accounting firm.                                                                                                                                                                                                                                                                                             
|       
|        | 31 | .1  |  |                        |  | Certification Pursuant to Rule 13a  14(a), as
    Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
    of 2002.                                                                                                                                                                                                                             
|       
|        | 31 | .2  |  |                        |  | Certification Pursuant to Rule 13a  14(a), as
    Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
    of 2002.                                                                                                                                                                                                                             
|       
|        | 32 | .1  |  |                        |  | Certification Pursuant to 18 U.S.C. Section 1350, as
    Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002.                                                                                                                                                                                                                       
|       
|        | 32 | .2  |  |                        |  | Certification Pursuant to 18 U.S.C. Section 1350, as
    Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002.                                                                                                                                                                                                                       






|  |                                                                                                                                        
|- | ---------------------------------------------------------------------------------------------------------------------------------------
|* | Indicates management contracts and compensatory arrangements
    required to be filed pursuant to Item 15(b) of this annual
    report.

Financial Statement Schedules.




67



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##### Table of Contents






SIGNATURES






| |                                 
| | --------------------------------
| | Caribou Coffee Company,
    Inc.



| |     |                     
| | --- | --------------------
| | By: | /s/ Michael J. Coles

| |                                               
| | ----------------------------------------------
| |                                               
| | Name: Michael J. Coles                        
| | Title:   Chief Executive Officer and President





|                                           |  |                                                                                                             |  |                |  | 
|------------------------------------------ |  | ----------------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|Signature                                  |  | Title                                                                                                       |  | Date          
|                                           |  |                                                                                                             |  |               
|                                          
|/s/ Michael J. ColesMichael J. Coles       |  | Chief Executive Officer, President and Chairman of the Board of
    Directors (principal executive officer) |  | March 30, 2006
|                                          
|/s/ George E. MileusnicGeorge E. Mileusnic |  | Chief Financial Officer
    (principal financial officer)                                                   |  | March 30, 2006
|                                          
|/s/ Michael E. PetersonMichael E. Peterson |  | Controller (principal accounting officer)                                                                   |  | March 30, 2006
|                                          
|/s/ Charles H. OgburnCharles H. Ogburn     |  | Director                                                                                                    |  | March 30, 2006
|                                          
|/s/ Charles L. GriffithCharles L. Griffith |  | Director                                                                                                    |  | March 30, 2006
|                                          
|/s/ Jeffery C. NealJeffery C. Neal         |  | Director                                                                                                    |  | March 30, 2006
|                                          
|/s/ Kip R. CaffeyKip R. Caffey             |  | Director                                                                                                    |  | March 30, 2006
|                                          
|/s/ Wallace B. DoolinWallace B. Doolin     |  | Director                                                                                                    |  | March 30, 2006

68