Gourmet coffee, or what is sometimes called specialty coffee, is coffee roasted using premium coffee beans such as the arabica bean. The arabica bean is widely considered superior to its counterpart, the robusta bean, which is used mainly in non-gourmet coffee. High-quality arabica beans usually grow at high elevations, absorb little moisture and mature slowly. These factors result in beans with a mild aroma and a pleasing flavor that is suitable for gourmet coffee. There are various grades of arabica beans, with the highest grades producing better flavors.

According to the Specialty Coffee Association of America, or the SCAA, the U.S. specialty coffee beverage market was approximately $9.6 billion in 2004, up from $8.4 billion in 2002, growing at a 6.9% compounded annual growth rate. That growth has been aided by the growth of U.S. coffeehouses, which grew from 15,400 in 2002 to 18,600 in 2004, representing a 9.9% compounded annual growth rate, as reported by the SCAA.

In addition to the growth in U.S. coffeehouses, it is believed that growth in the retail gourmet coffee market has been aided by several other factors, including broader distribution of gourmet coffees through supermarkets, the introduction of new gourmet coffee products and the popularity of the overall gourmet foods market. It is believed these trends will continue to result in increased consumer awareness and demand for gourmet coffee.

In addition to its beverage products, the Company also offers twenty-seven varieties of whole bean coffee, including eight custom blends, two seasonal blends, nine decaffeinated blends and one certified organic blend. The Company’s Rainforest Blend brand is Fair Tradetm and organic certified. The Fair Trade certification guarantees that a minimum price be paid to coffee farmers, even if the current market price is below the guaranteed minimum, which helps to insure the long-term viability of the producers. The Company offers whole bean coffee in prepackaged sizes or, upon request, it can specially package whole bean coffee from bags being used in the coffeehouse, which allows a customer to customize the size and purchase the freshest coffee in the coffeehouse. The Company will also grind whole bean coffee purchased in its coffeehouses for brewing at home.

The Company is in the process of introducing its ‘Bou Gourmet food offerings throughout its coffeehouses after successful testing in select markets. ‘Bou Gourmet offerings will allow the Company to provide a more consistent variety of baked goods such as muffins, scones, breads, croissants, brownies, danishes, bars, desserts and cookies as well as sandwiches. Through its ‘Bou Gourmet program, the Company will now purchase foods products that are delivered from national rather than local sources.

Finally, the Company offers a number of Caribou-branded and coffee-related equipment and merchandise. These products are displayed in the Company’s coffeehouses near the cash register, in the “grab-n-go” section and on wooden shelves in the “provisions” section. “Grab-n-go” items include Hoof Mintstm (mints imprinted with the shape of caribou tracks) and Reindeer Nibblerstm (espresso beans covered with rich chocolate), among other novelty products. In its “provisions” section, the Company offers various coffee bean grinders, storage canisters, brewing equipment and coffee mugs.

The Company’s products are also available to customers outside of the coffeehouses through its catering service. Coffees are offered in three container sizes, and baked goods are offered a la carte or as part of a coffee combo that pairs coffee and baked goods based on the size of the gathering. This service is operated out of each individual coffeehouse.

Cost of sales and related occupancy costs increased $3.7 million, or 25.5%, to $18.0 million in the first quarter ended April 3, 2005, from $14.4 million in the first quarter ended March 28, 2004.

Operating expenses increased $3.8 million, or 25.9%, to $18.4 million in the first quarter ended April 3, 2005, from $14.6 million in the first quarter ended March 28, 2004.

Opening expenses increased $0.1 million, or 56.3%, to $0.3 million in the first quarter ended April 3, 2005, from $0.2 million in the first quarter ended March 28, 2004.

Lease financing expense, net increased by $0.3 million to $0.4 million in the first quarter ended April 3, 2005, from $0.1 million in the first quarter ended March 28, 2004.