COFFEE PEOPLE INC, SB-2/A, 1996-09-26

COFFEE PEOPLE INC
SB-2/A, 1996-09-26
EATING & DRINKING PLACES

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<PAGE>
PROSPECTUS
1,550,000 SHARES

[LOGO]
COMMON STOCK
----------------

Of the 1,550,000 shares of Common Stock ("Common Stock") offered by this
Prospectus, 1,225,000 shares are being offered by Coffee People, Inc. ("Coffee
People" or the "Company") and 325,000 shares are being offered by certain
stockholders (the "Selling Stockholders"). The Company will receive
approximately $84,000 of proceeds from the sale of Common Stock by one of the
Selling Stockholders. See "Use of Proceeds." Prior to this offering, there has
been no public market for the Common Stock. See "Underwriting" for information
relating to the factors considered in determining the initial public offering
price. The Common Stock has been approved for listing on the Nasdaq National
Market under the symbol "MOKA."
--------------------------

SEE "RISK FACTORS" COMMENCING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF COMMON STOCK.
------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT (1) COMPANY (2) STOCKHOLDERS
<S> <C> <C> <C> <C>
Per Share........................ $9.00 $0.63 $8.37 $8.37
Total (3)........................ $13,950,000 $976,500 $10,337,250 $2,636,250
</TABLE>

(1) In addition, the Company has agreed to pay to Black & Company, Inc. and
Pacific Crest Securities Inc., as representatives of the Underwriters (the
"Representatives"), a nonaccountable expense allowance and to sell to the
Representatives, for nominal consideration, warrants to purchase up to
122,500 shares of Common Stock (the "Representatives' Warrants") at a price
equal to 120% of the Price to Public. The Company and the Selling
Stockholders have agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."

(2) Before deducting offering expenses payable by the Company estimated at
$450,000, including the Representatives' nonaccountable expense allowance.
Includes approximately $84,000 of proceeds from the sale of Common Stock by
one of the Selling Stockholders.

(3) The Company has granted to the Underwriters an option (the "Overallotment
Option"), exercisable within 30 days from the date of this Prospectus, to
purchase up to 160,000 additional shares of Common Stock, on the same terms
as set forth above, solely to cover overallotments, if any. If the
Overallotment Option is exercised in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $15,390,000,
$1,077,300, and $11,676,450, respectively. See "Underwriting."
--------------------------

The shares of Common Stock are being offered by the Underwriters named
herein, subject to prior sale, when, as and if delivered to and accepted by
them, and subject to certain other conditions. The Underwriters reserve the
right to reject any order in whole or in part and to withdraw, cancel or modify
the offering without notice. It is expected that delivery of the shares of
Common Stock offered hereby will be made in New York, New York on or about
September 30, 1996.
--------------------------

BLACK & COMPANY, INC. PACIFIC CREST SECURITIES INC.

THE DATE OF THIS PROSPECTUS IS SEPTEMBER 25, 1996.
<PAGE>
[PHOTOS AND CAPTIONS]

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

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<PAGE>
PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE
IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS
PROSPECTUS HAS BEEN ADJUSTED TO REFLECT A 3-FOR-2 SPLIT OF THE COMPANY'S
OUTSTANDING COMMON STOCK EFFECTED IN JULY 1996. THE INFORMATION CONTAINED HEREIN
ASSUMES NO EXERCISE OF THE OVERALLOTMENT OPTION OR ANY OUTSTANDING OPTIONS OR
WARRANTS AND THAT WARRANTS TO PURCHASE 131,250 SHARES OF COMMON STOCK (THE
"PERFORMANCE WARRANTS") WILL BE TERMINATED UPON THE COMPLETION OF THIS OFFERING.
FOR PURPOSES OF THIS PROSPECTUS, THE PERFORMANCE WARRANTS ARE DEEMED NOT TO BE
OUTSTANDING UNLESS OTHERWISE INDICATED. SEE "DESCRIPTION OF SECURITIES --
WARRANTS -- PERFORMANCE WARRANTS."

THE COMPANY

Coffee People sells coffee beverages, coffee beans, cookies, pastries, ice
cream, shakes and coffee related merchandise. The Company distributes its
products through its Company-owned retail stores that include neighborhood
coffee houses, drive-through espresso bars, airport stores and specialty kiosks.
The Company believes it differentiates itself from other specialty coffee
retailers by being more customer focused, by providing superior coffee and
service and by being constantly innovative. The Company believes its stores
offer an atmosphere that welcomes customers in a friendly and inviting setting
designed to encourage a feeling of customer "ownership" and provide a community
focus that fosters brand recognition and consumer loyalty.

Coffee People's distinctive philosophy balances the values and interests of
its customers, its employees, its stockholders, the communities it serves and
the environment. Coffee People believes that its commitment to both COFFEE and
PEOPLE provides value to its customers. Coffee People fulfills this commitment
by serving consistently high-quality products, by employing the highest
standards of customer service and by creating a relaxed and inviting atmosphere
that attracts and welcomes a diverse blend of people. Coffee People donates at
least 10% of annual net earnings to the communities it serves, including the
people of the coffee producing countries. The Company believes that this policy
fosters long-term customer loyalty.

Coffee People's combination of its distinctive concept and focused
management has resulted in unit economics which the Company believes are among
the highest in the retail specialty coffee industry. The 11 neighborhood and
drive-through stores that were open for the full year of 1995 generated average
revenues of $736,000 and average store contribution margins of 21.1%. See
"Selected Financial Data."

Coffee People's objective is to be a leading national specialty coffee
retailer and coffee house operator through a program of rapid expansion and
consistent profitability. The Company seeks to achieve this objective by
cultivating its customers' sense of ownership, by creating innovative products
and offering an extensive menu, by selecting superior sites for new stores and
by achieving operational excellence.

Coffee People currently operates 18 retail stores in the Portland, Oregon
metropolitan area and one store in Eugene, Oregon. The Company's expansion
strategy is to open multiple stores in new markets where it believes it can
become a leading specialty coffee retailer. The Company plans to open at least
30 new retail stores by the end of 1997 and to continue its national expansion
thereafter. The new stores to be opened by the end of 1997 will likely be
located in Orange County, California, Denver, Colorado and other metropolitan
areas in the midwestern and western United States. The Company has developed a
flexible prototype design for its neighborhood coffee house to provide
uniformity and ease of replication during its national expansion. The Company
estimates the cost of constructing a new neighborhood store is approximately
$325,000.

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<PAGE>
THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the
Company.......................... 1,225,000 shares
Common Stock offered by the
Selling Stockholders............. 325,000 shares
Common Stock to be outstanding
after the offering............... 3,227,869 shares (1)
Use of Proceeds................... To open new stores as the Company expands into new
markets and for general corporate purposes, including
working capital
Nasdaq National Market symbol..... MOKA
</TABLE>

- ------------------------
(1) Excludes 931,575 shares of Common Stock reserved for issuance under the
Company's 1993, 1994, 1995 and 1996 stock option plans (the "Stock Option
Plans"), a warrant and the Company's Employee Stock Purchase Plan ("ESPP"),
of which 469,838 shares of Common Stock were issuable upon exercise of
options and a warrant outstanding as of June 30, 1996 at a weighted average
exercise price of $8.17 per share. See "Management -- Stock Option Plans"
and "Description of Securities -- Warrants."

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<PAGE>
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------ ---------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
STATEMENTS OF INCOME DATA:
Total revenues............................. $5,466 $7,708 $11,257 $5,245 $5,876
Income from operations..................... 291 181 414 181 177
Net income................................. 248 116 211 92 133
Earnings per share (1)................... $ 0.13 $ 0.06 $ 0.06
Shares used in computing earnings per
share (2)................................. 1,632,128 1,626,011 2,160,095

OPERATING DATA: (unaudited)
Number of stores open for full period...... 6 7 17 17 19
Number of stores open at end of period..... 7 17 19 18 19
Store contribution margin (3).............. 21.4% 18.7% 18.1% 17.7% 17.7%
Percentage change in comparable store
sales (4)................................. 9.3% 7.3% (8.7)% (7.0)% 2.2%
Average sales for neighborhood and drive-
through stores open for full period....... $ 845 $ 934 $ 736 $ 357 $ 360
Number of neighborhood and drive-through
stores open for full period............... 5 6 11 11 12
Average sales for airport and kiosk stores
open for full period...................... $ 217 $ 222 $ 417 $ 195 $ 208
Number of airport and kiosk stores open for
full period............................... 1 1 6 6 7

JUNE 30, 1996
DECEMBER 31, ---------------------------
1995 ACTUAL ADJUSTED (5)
------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
BALANCE SHEET DATA:
Cash and cash equivalents............................................... $ 260 $3,390 $13,277
Working capital (deficiency)............................................ (690) 2,847 12,734
Total assets............................................................ 2,836 6,121 16,008
Long-term debt and capital lease obligations, net of current portion.... 567 499 499
Stockholders' equity.................................................... 855 4,704 14,507
</TABLE>

- ------------------------------
(1) The year ended December 31, 1995 was the first full year that the Company
was subject to federal and state corporate income taxes following the
termination of its Subchapter S election on August 22, 1994. Guidelines of
the Securities and Exchange Commission (the "Commission") allow earnings per
share data to be presented only when a company converts to a taxable status.
Accordingly, earnings per share data have been presented only for the year
ended December 31, 1995 and for the six months ended June 30, 1995 and 1996.

(2) Includes Common Stock equivalents of 228,527, 223,839 and 194,527 at
December 31, 1995 and June 30, 1995 and 1996, respectively, relating to
outstanding options and warrants (including the Performance Warrants)
calculated using the treasury stock method. Pursuant to Commission Staff
Accounting Bulletin 83, Common Stock options and warrants granted and shares
issued during the 12 months immediately preceding the offering date at a
price below the proposed offering price of the Company's initial public
offering are reflected in the earnings per share calculation as if they had
been outstanding for the periods presented. See "Management -- Stock Option
Plans," "Description of Securities -- Warrants" and Note 1 of Notes to
Financial Statements.

(3) Store contribution margin represents overall store level operating income
(after deduction of depreciation and amortization) expressed as a percentage
of total retail sales.

(4) The percentage change in comparable store sales represents the change in
total retail sales revenue for stores operated throughout a full calendar
year or six month period, as the case may be, and throughout the prior full
calendar year or six month period.

(5) Adjusted to reflect the sale of 1,225,000 shares of Common Stock offered by
the Company hereby at an initial public offering price of $9.00 per share
(after deducting the underwriting discount and estimated offering expenses)
and the application of the net proceeds thereof. See "Use of Proceeds."

5
<PAGE>
RISK FACTORS

THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF THE FEDERAL SECURITIES LAWS. ACTUAL RESULTS AND THE TIMING OF CERTAIN
EVENTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING
STATEMENTS DUE TO A NUMBER OF FACTORS, INCLUDING THOSE SET FORTH BELOW AND
ELSEWHERE IN THIS PROSPECTUS. IN ADDITION TO THE OTHER INFORMATION IN THIS
PROSPECTUS, THE FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY BY POTENTIAL
PURCHASERS IN EVALUATING AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY.

GROWTH STRATEGY RISKS. The Company has embarked upon a growth strategy that
includes opening at least 30 new stores in two or more new markets by the end of
1997, and continuing its national expansion thereafter. The Company has never
opened more than 10 stores in a calendar year. There can be no assurance that
the Company will be able to open its planned new stores or operate them
profitably. In addition, there can be no assurance that store construction will
be completed on schedule or within budgeted cost estimates. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Overview." The Company's ability to open new stores on schedule and on budget
depends upon many factors outside of its control, including difficulties in
locating suitable sites or negotiating acceptable lease terms, and delays in
obtaining required state and local building permits and other approvals. The
Company estimates that it will take approximately six to eight months between
the date it identifies a suitable site and the date it opens a new store. Any
delay in opening new stores could have a material adverse effect on the
Company's national expansion plans. Opening new stores in close proximity to
existing stores could also have the effect of drawing sales away from existing
stores.

UNCERTAIN MARKET ACCEPTANCE OUTSIDE OF OREGON. The Company has not opened a
store outside of Oregon. Eighteen of the Company's 19 stores are located in the
Portland, Oregon metropolitan area and one is located in Eugene, Oregon. A
downturn in economic conditions in Oregon could have a material adverse effect
on the Company. Furthermore, there can be no assurance that the Company's
concept and products will be as well accepted in other markets or that the
Company will be successful in selecting new markets and store sites. See
"Business -- Site Selection Strategy and Expansion Plans."

UNCERTAIN ABILITY TO MANAGE GROWTH. The Company intends to pursue an
aggressive growth strategy that will include new store development and may
include acquiring complementary businesses. This growth strategy will require,
among other changes, expanded operational, financial, purchasing, management
information and other systems and the implementation of control procedures to
accommodate the Company's expanded operations. The Company's future operating
results will depend upon its ability to develop its infrastructure commensurate
with revenue growth and its ability to attract, hire, assimilate and retain
skilled management and other personnel. Failure to manage growth effectively
could have a material adverse effect on the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- Site Selection Strategy and Expansion Plans."

NEED FOR ADDITIONAL FINANCINGS. The Company's growth strategy will require
additional financings to develop or acquire new stores in addition to the new
stores it plans to open by the end of 1997. Such financings may involve public
or private offerings of debt or equity securities, and may include conventional
bank debt. Such financings may cause additional dilution to purchasers in this
offering. The Company currently has no commitments for any such financings and
there can be no assurance that any such financings can be obtained on terms
acceptable to the Company, or at all. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."

DEPENDENCE ON SINGLE COFFEE SUPPLIER. The Company does not roast any of its
own coffees. Since the Company was founded, it has bought all of its coffee from
Coffee Bean International, Inc. ("CBI"), a Portland, Oregon roaster, under
periodic supply agreements. The current one-year supply agreement terminates on
November 30, 1996 (the "Supply Agreement"). The Company has no other

6
<PAGE>
established supply relationships. The Supply Agreement generally requires the
Company to purchase all of its vendor-roasted coffee from CBI. If CBI were
unable or unwilling to continue to supply high quality roasted beans to the
Company, whether because of a failure to renew the Supply Agreement upon its
termination or for any other reason, there is no assurance that the Company
would be able quickly to establish alternative sources of supply or, if
established, that such sources of supply would be able to provide the Company
with the quantities or the quality of roasted beans that the Company requires.
Accordingly, the termination or nonrenewal of the Supply Agreement could have a
material adverse effect on the Company.

FLUCTUATIONS IN AVAILABILITY AND COST OF GREEN COFFEE. CBI, and any other
supplier from whom the Company might purchase coffee, is subject to volatility
in the supply and price of green coffee beans. Although most coffee trades in
the commodity market, coffee of the quality sought by the Company tends to trade
on a negotiated basis at a substantial premium above commodity coffee pricing,
depending upon the supply and demand at the time of purchase. Supply and price
can be affected by many factors such as weather, politics and economics in the
producing countries. At various times, organizations such as the International
Coffee Organization and other groups such as the Association of Coffee Producing
Countries have attempted to reach agreements or take actions that would cause
prices to rise.

Coffee prices are extremely volatile. The Company believes that increases in
the cost of its purchased coffee can, to a certain extent, be passed through to
its customers in the form of higher prices for beans and beverages sold in the
Company's stores. The Company believes that its customers will accept reasonable
price increases made necessary by increased costs. The Company's ability to
raise prices, however, may be limited by competitive pressures if other major
specialty coffee retailers do not raise prices in response to increased coffee
prices. The Company's inability to pass through higher coffee prices in the form
of higher retail prices for beans and beverages could have a material adverse
effect on the Company. Alternatively, if coffee prices remain too low, there
could be adverse impacts on the level of supply and quality of coffees available
from producing countries, which could have a material adverse effect on the
Company.

DEPENDENCE ON KEY PERSONNEL. The Company is highly dependent on the
services of James L. Roberts, its Chairman and Chief Executive Officer, Taylor
H. Devine, its President and Chief Operating Officer, Kenneth B. Ross, its Chief
Financial Officer, Patricia J. Roberts, its Vice President - Human Relations and
upon other members of its senior management team. Loss of the services of any of
these persons could have a material adverse effect on the Company. The Company
carries a life insurance policy on Mr. Devine of $1,000,000. The Company does
not carry key person life insurance on any of its other personnel.

COMPETITION. The specialty coffee market is intensely competitive and is
becoming more so. Many of the Company's competitors have greater financial and
marketing resources, brand name recognition and a larger customer base than the
Company. The specialty coffee industry is currently characterized by a small
number of large, well-capitalized companies and a large number of small
companies and single-unit operators. The activities of large companies such as
Starbucks are increasing the appreciation and awareness of specialty coffee
across the country. At the same time, the national press has focused attention
on the growth opportunities associated with operating coffee stores and espresso
carts. This attention, combined with relative ease of entry into this business,
has resulted in a rapid increase in the number of small independent specialty
coffee companies and single-unit operators.

Coffee People competes against virtually all coffee sellers. A number of
nationwide coffee manufacturers, such as Kraft General Foods, Proctor and
Gamble, and Nestle, distribute coffee products in supermarkets and convenience
stores, which may serve as substitutes for Coffee People coffees. Other
specialty coffee companies, such as Starbucks, Millstone Coffee, Seattle's Best
Coffee and Green Mountain Coffee Roasters, sell whole bean coffees in
supermarkets and variety and discount stores.

7
<PAGE>
In the retail area, the Company competes for whole bean and beverage sales
with national and regional chains, franchise operators and local specialty
coffee stores. There are a large number of competing specialty coffee retailers,
many of whom have significantly more retail outlets than the Company. In
addition, Coffee People competes with and will continue to compete with local
competitors in the specialty coffee business.

The Company expects intense competition both within its primary geographic
territory, the Pacific Northwest, and in new geographic locations across the
United States in which the Company will seek to expand. In all of these markets,
national and regional competitors as well as local companies have established
themselves as strong competitors with loyal customer followings. The specialty
coffee business is expected to become even more competitive as local and
regional companies expand and attempt to build brand awareness in new markets.

Coffee People also competes against other specialty retailers and
restaurants for suitable sites for new retail stores. There can be no assurance
that management will be able to secure suitable sites at acceptable rent levels.
See "Business -- Competition."

SEASONAL FLUCTUATIONS AND QUARTERLY OPERATING RESULTS. The Company's
business is seasonal and consequently the Company may experience fluctuations in
its quarterly results of operations. Historically, the Company's retail sales
have been highest during the second and third quarters which include the spring
and summer months and have been lowest in the first quarter. The Company's
results of operations for any particular quarter may not necessarily be
indicative of operating results for any other particular quarter or for the
year. The Company's expansion plans may also cause fluctuations in quarterly
results from operations if the Company is unable to manage its growth
successfully or experiences increased expenses or operating losses for newly
opened stores. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

DEPENDENCE ON SINGLE PRODUCT LINE. Approximately two-thirds of the
Company's revenue is derived from the sale of coffee beverages. Any significant
health concerns with respect to coffee could result in decreased coffee
consumption and have a material adverse effect on the Company.

POSSIBLE TERMINATION OF CERTAIN STORE LEASES. One of the Company's stores
is operated at a location for which there is currently no term lease in effect.
The lessor at such location, therefore, could at any time demand that the
Company vacate the premises on 30 days prior written notice. The Company is
negotiating with the lessor for a long-term lease. There can be no assurance,
however, that a lease for such location will be obtainable on commercially
reasonable terms, or at all. In addition, another of the Company's stores is
operated pursuant to a lease which expires on December 31, 1996. There can be no
assurance that the Company will be able to renew its lease for such location.
The loss of either of such store locations would have a material adverse effect
on the Company. See "Business -- Facilities."

GOVERNMENT REGULATION. The food service industry is subject to extensive
federal, state and local government regulation relating to the development and
operation of food service outlets, including laws and regulations relating to
building and seating requirements, the preparation and sale of food,
cleanliness, safety in the workplace, accommodations for the disabled and the
Company's relationship with its employees, such as minimum wage requirements,
anti-discrimination laws, overtime and working conditions and citizenship
requirements. The failure to obtain or retain necessary food licenses,
substantial increases in the minimum wage or substantial increases in payroll
taxes to fund mandatory health-care or employee benefit programs could have a
material adverse effect on the Company. See "Business -- Government Regulation."

CONTINUED CONTROL BY MANAGEMENT. Following completion of this offering, the
directors and officers of the Company will beneficially own, in the aggregate,
approximately 35.5% of the outstanding Common Stock. As a result, such persons
may as a practical matter be able to delay or prevent a change of control of the
Company that is favored by the other stockholders and may be able to effect

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many fundamental corporate changes such as amendment of the Company's Restated
Articles of Incorporation (the "Articles") and the election of directors. See
"Management" and "Principal and Selling Stockholders."

MANAGEMENT CONFLICTS OF INTEREST. Two of the Company's directors and
principal stockholders, Jeffrey M. Ferguson and Gary G. Talboy, engage in
independent businesses which compete or which may compete with the business of
the Company. Mr. Ferguson, who is also an officer of the Company, is an officer
and part owner of Coffee Creations, Inc., an Oregon corporation that develops
and markets wholesale specialty coffee beverages and products. The Company's
Black Tiger Sparkling Coffee is produced and manufactured by Coffee Creations,
Inc. Mr. Talboy is an independent consultant who assists roasters in identifying
sources for green coffee and assists farmers in the coffee producing countries
to develop means of producing and marketing better quality green coffees.
Messrs. Ferguson and Talboy are also the former owners of CBI, which is the sole
source of coffee supply for the Company. Messrs. Ferguson and Talboy sold CBI in
June 1991 in exchange for cash and promissory notes due on April 30, 2001. See
"Management" and "Certain Transactions."

The nature of these independent business interests and the interest which
Messrs. Ferguson and Talboy have in the continued profitability of CBI present
potential conflicts of interest that could affect the policy decisions they make
as principal stockholders, directors and officers of the Company including, for
example, regarding whether the Company should engage in certain lines of
business that might compete with CBI and whether the Company should add product
lines that might compete with Coffee Creations, Inc. To the extent that these
potential conflicts of interest result in actual conflicts, the Company's
ability to take advantage of business opportunities might be limited, which
could have a material adverse effect on the Company.

CERTAIN ANTI-TAKEOVER PROVISIONS. The Board of Directors of the Company has
the authority to issue up to 10,000,000 shares of preferred stock and to fix the
rights, preferences, privileges and restrictions of those shares without any
further vote or action by the stockholders. The potential issuance of preferred
stock may have the effect of delaying or preventing a change in control of the
Company, may discourage bids for the Common Stock at a premium over the market
price of the Common Stock and may adversely affect the market price of, and the
voting and other rights of the holders of, the Common Stock. Certain provisions
of the Company's Articles and Restated Bylaws, as well as provisions of the
Oregon Business Corporation Act and the Oregon Control Share Act, could also
have the effect of delaying or preventing a change of control of the Company.
See "Description of Securities."

NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. Prior to this
offering, there has been no active public market for the Common Stock. The
Common Stock has been approved for quotation on the Nasdaq National Market.
There can be no assurance, however, that an active trading market for the Common
Stock will develop or be sustained after the offering. The initial public
offering price was determined through negotiations between the Company and the
Representatives. See "Underwriting." The market price of the Common Stock could
be subject to significant fluctuations in response to variations in actual and
anticipated operating results, changes in earnings estimates by analysts, lack
of liquidity, failure by the Company to achieve its growth plans and other
events or factors. The market for securities of small market capitalization
companies has been highly volatile in recent years, often as a result of factors
unrelated to their operations.

DILUTION; DIVIDEND POLICY. Purchasers of shares of Common Stock in this
offering will experience immediate and substantial dilution in the net tangible
book value of their shares. The exercise of outstanding options and warrants
would also result in additional dilution to purchasers in this offering. See
"Dilution." The Company does not intend to pay cash dividends in the foreseeable
future. See "Dividend Policy."

SHARES ELIGIBLE FOR FUTURE SALE. Sales of a substantial number of shares of
Common Stock in the public market following this offer could adversely affect
the market price of the Common Stock and the Company's ability to raise capital
in the future in the equity markets. Upon completion of this

9
<PAGE>
offering, there will be 3,227,869 shares of Common Stock outstanding. Of these
shares, the 1,550,000 shares sold in this offering and the 107,694 shares sold
in the Company's Regulation A offering completed in December 1994 will be
eligible for immediate resale without restriction under the Securities Act of
1933, as amended (the "Securities Act"), unless purchased by an "affiliate" of
the Company, as that term is defined under Rule 144 under the Securities Act.
Upon expiration of lock-up agreements with the Representatives 180 days after
the date of this Prospectus (or earlier with the consent of Black & Company,
Inc.), 1,502,250 shares will be eligible for immediate resale subject to the
limitations of Rule 144. An additional 67,925 shares not subject to lock-up
agreements may be sold immediately, subject to the limitations of Rule 144. In
addition, holders of 731,250 shares of Common Stock outstanding and issuable
upon exercise of an outstanding warrant are entitled to certain registration
rights. As of June 30, 1996, options to purchase 334,838 shares of Common Stock
had been granted under the Stock Option Plans. Promptly after the conclusion of
this offering, the Company intends to file a registration statement on Form S-8
under the Securities Act covering 796,575 shares of Common Stock reserved for
issuance under the Stock Option Plans and the ESPP. See "Management -- Stock
Option Plans," "Description of Securities -- Registration Rights" and "Shares
Eligible for Future Sale."

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<PAGE>
THE COMPANY

Coffee People had its origins on December 1, 1983 when Jim and Patty Roberts
opened the first Coffee People store in Portland, Oregon. In June 1985, Mr. and
Mrs. Roberts sold the store to Jeffrey M. Ferguson and Gary G. Talboy, who were
then the owners of CBI, the principal supplier to Coffee People. Messrs.
Ferguson and Talboy hired Mr. and Mrs. Roberts to continue to operate the
business. Coffee People, Inc. was incorporated in Oregon on November 7, 1991. On
January 2, 1992, the Company succeeded to the business of a partnership operated
under the Coffee People name by Messrs. Ferguson and Talboy. Messrs. Ferguson
and Talboy sold one-half of the capital stock of the Company to Mr. and Mrs.
Roberts in January 1993. See "Certain Transactions."

The Company's corporate offices are located at 3259 NW 29th Avenue,
Portland, Oregon 97210. The Company's telephone number is (503) 223-7714.

USE OF PROCEEDS

The net proceeds to the Company from the sale of 1,225,000 shares of Common
Stock offered by it at an initial public offering price of $9.00 per share are
estimated to be $9,887,250 ($11,226,450 if the Overallotment Option is exercised
in full). Net proceeds to the Company include approximately $84,000 of proceeds
from the sale of shares by one of the Selling Stockholders. This sum represents
principal and accrued interest on a note evidencing a stock subscription by the
Selling Stockholder and will be paid to the Company immediately following the
offering.

The Company intends to use the net proceeds to open at least 30 retail
stores as it expands into two or more new markets and for general corporate
purposes, including working capital. The Company may also use a portion of the
net proceeds of the offering to acquire complementary businesses, although the
Company has no present understandings, commitments or agreements with respect to
any acquisitions. Pending such uses, the net proceeds of the offering received
by the Company will be invested in short-term, interest-bearing securities.

DIVIDEND POLICY

The Company intends to retain all earnings for use in its business and
therefore does not anticipate paying any cash dividends in the future. As of the
date of this Prospectus, the Company's bank credit arrangements prohibit the
payment of cash dividends.

In 1994 the Company declared cash dividends of $176,000 to stockholders in
connection with the Company's status as a Subchapter S corporation. The Company
terminated its Subchapter S status on August 22, 1994.

11
<PAGE>
CAPITALIZATION

The following table sets forth the Company's capitalization at June 30,
1996, and as adjusted as of such date to reflect the issuance of 1,225,000
shares of Common Stock offered hereby by the Company at an initial public
offering price of $9.00 per share and the application of the estimated net
proceeds thereof.

<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------
ACTUAL AS ADJUSTED
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt and capital lease obligations, less current
portion........................................................... $ 499 $ 499
Stockholders' equity: (1)
Preferred Stock; 10,000,000 shares authorized; none outstanding,
actual or as adjusted........................................... -- --
Common Stock; 50,000,000 shares authorized; 2,002,869
outstanding, actual; 3,227,869 shares outstanding, as
adjusted........................................................ 4,737 14,540
Stock subscription notes receivable (2)............................ (353) (269)
Retained earnings.................................................. 320 320
----------- -----------
Total stockholders' equity......................................... 4,704 14,591
----------- -----------
Total capitalization............................................. $ 5,203 $ 15,090
----------- -----------
----------- -----------
</TABLE>

- ------------------------
(1) Excludes 931,575 shares of Common Stock reserved for issuance under the
Stock Option Plans, a warrant and the Company's ESPP, of which 469,838
shares of Common Stock were issuable upon exercise of options and a warrant
outstanding as of June 30, 1996 at a weighted average exercise price of
$8.17 per share. See "Management -- Stock Option Plans" and "Description of
Securities -- Warrants."

(2) Adjusted to reflect payment of principal and interest of $84,000 from a
Selling Stockholder on a subscription note receivable. See Note 9 of Notes
to Financial Statements.

12
<PAGE>
DILUTION

As of June 30, 1996, the Company had a net tangible book value of
approximately $4,704,000, or $2.35 per share. Net tangible book value per share
equals the Company's total stockholders' equity less intangible assets divided
by the number of shares of outstanding Common Stock. Without taking into account
any changes in net tangible book value after June 30, 1996, other than giving
effect to the sale of the 1,225,000 shares of Common Stock offered by the
Company hereby at an initial public offering price of $9.00 per share (and after
deducting the underwriting discount and estimated offering expenses) and payment
to the Company of approximately $84,000 on a stock subscription note receivable
by a Selling Stockholder, the pro forma net tangible book value of the Company
as of June 30, 1996 would have been approximately $14,591,000 or $4.52 per
share. This represents an immediate increase in net tangible book value of $2.17
per share to existing stockholders and an immediate dilution of $4.48 per share
to new investors in the offering. The following table illustrates the per share
dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share...................... $ 9.00
Net tangible book value at June 30, 1996........................... $ 2.35
Increase attributable to new investors............................. 2.17
---------
Pro forma net tangible book value per share after the offering....... 4.52
---------
Dilution per share to new investors.................................. $ 4.48
---------
---------
</TABLE>

The following table sets forth on a pro forma basis as of June 30, 1996 the
number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by existing stockholders
and by new investors at an initial public offering price of $9.00 per share
(before deducting the underwriting discount and estimated offering expenses):

<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION
------------------------ --------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............................. 2,002,869 62.0% $ 5,459,462 33.1% $ 2.73
New investors..................................... 1,225,000 38.0 11,025,000 66.9% $ 9.00
----------- ----- -------------- -----
Total........................................... 3,227,869 100.0% $ 16,484,462 100.0%
----------- ----- -------------- -----
----------- ----- -------------- -----
</TABLE>

- ------------------------
(1) Does not reflect the sale of Common Stock by the Selling Stockholders. The
sale of Common Stock by the Selling Stockholders in this offering will
reduce the number of shares held by existing stockholders as of June 30,
1996 to 1,677,869 or approximately 52.0% (or approximately 49.5%, if the
Overallotment Option is exercised in full) of the total number of shares of
Common Stock outstanding and will increase the number of shares to be
purchased by new investors to 1,550,000, or approximately 48.0% (1,710,000,
or approximately 50.0%, if the Overallotment Option is exercised in full) of
the total number of shares of Common Stock outstanding after this offering.

The foregoing computations assume the exercise of no stock options or
warrants. As of June 30, 1996, options and a warrant to purchase 469,838 shares
of Common Stock were outstanding with a weighted average exercise price of $8.17
per share. To the extent these options and the warrant are exercised, there will
be further dilution to investors in this offering. See "Management -- Stock
Option Plans," "Description of Securities -- Warrants" and Notes 8 and 14 of
Notes to Financial Statements.

13
<PAGE>
SELECTED FINANCIAL DATA

Except as otherwise indicated as unaudited, the selected financial and
operating data presented below for, and as of the end of, each of the years in
the three-year period ended December 31, 1995 have been derived from the audited
financial statements of the Company included elsewhere in this Prospectus. The
selected financial and operating data for, and as of the end of each of the
years ended December 31, 1991 and 1992 have been derived from the unaudited
financial statements of the Company not included herein. The selected financial
and operating data for the six months ended June 30, 1995 and 1996 have been
derived from the unaudited financial statements of the Company included
elsewhere in this Prospectus. In the opinion of management, the unaudited
information presented in the following table reflects all adjustments, which are
of a normal recurring nature, necessary to present fairly the information as set
forth therein. Operating results for the six months ended June 30, 1996 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1996.

The selected financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Financial Statements and Notes thereto included elsewhere in this
Prospectus.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------------------- -------------------------
1991 1992 1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues:
Retail sales................... $3,512 $4,458 $5,396 $7,588 $11,045 $5,147 $5,776
Wholesale and other............ -- 40 70 120 212 98 100
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenues............... 3,512 4,498 5,466 7,708 11,257 5,245 5,876
Cost of sales and related
occupancy expenses.............. 1,797 2,154 2,499 3,788 5,388 2,531 2,783
Store operating expenses......... 1,173 1,418 1,733 2,314 3,451 1,617 1,804
Other operating expenses......... -- 10 25 40 63 30 25
Depreciation and amortization.... 60 75 119 175 391 167 232
General and administrative
expenses........................ 291 775 799 1,210 1,550 719 855
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income from operations......... 191 66 291 181 414 181 177
Other income, net................ 2 1 -- 39 43 20 82
Interest expense................. (10) (8) (43) (88) (134) (59) (43)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before provision for
income taxes (1)................ 183 59 248 132 323 142 216
Provision for income taxes....... -- (17) -- (16) (112) (50) (83)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income....................... $ 183 $ 42 $ 248 $ 116 $ 211 $ 92 $ 133
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
Earnings per share (2)......... $ 0.13 $ 0.06 $ 0.06
Shares used in computing earnings
per share (3)................... 1,632,128 1,626,011 2,160,095
</TABLE>

- ------------------------------
(1) The Company operated for income tax purposes as a general partnership in
1991, as a C corporation under the Internal Revenue Code of 1986, as amended
(the "Code"), in 1992, as a Subchapter S corporation under the Code from
January 1, 1993 through August 22, 1994, and as a C corporation thereafter.

(2) The year ended December 31, 1995 was the first full year that the Company
was subject to federal and state corporate income taxes following the
termination of its Subchapter S election on August 22, 1994. Commission
guidelines allow earnings per share data to be presented only when a company
converts to a taxable status. Accordingly, earnings per share data have been
presented only for the year ended December 31, 1995 and for the six months
ended June 30, 1995 and 1996.

(3) Includes Common Stock equivalents of 228,527, 223,839 and 194,527 at
December 31, 1995 and June 30, 1995 and 1996, respectively, relating to
outstanding options and warrants (including the Performance Warrants)
calculated using the treasury stock method. Pursuant to Commission Staff
Accounting Bulletin 83, Common Stock options and warrants granted and shares
issued during the 12 months immediately preceding the offering date at a
price below the offering price of the Company's initial public offering are
reflected in the earnings per share calculation as if they had been
outstanding for the periods presented. See "Management -- Stock Option
Plans," "Description of Securities -- Warrants" and Note 1 of Notes to
Financial Statements.

14
<PAGE>

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------- JUNE 30,
1991 1992 1993 1994 1995 1996
----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............... $ 86 $ 157 $ 253 $ 472 $ 260 $3,390
Working capital (deficiency)............ 42 (24) (217) (571) (690) 2,847
Total assets............................ 565 664 888 2,512 2,836 6,121
Long-term debt and capital lease
obligations, net of current portion.... -- -- 424 450 567 499
Stockholders' equity (deficit).......... 267 309 (198) 669 855 4,704
</TABLE>

- ------------------------------
(1) Store contribution margin represents overall store level operating income
(after deduction of depreciation and amortization) expressed as a percentage
of total retail sales.

(2) The percentage change in comparable store sales represents the change in
total retail sales revenue for stores operated throughout a full calendar
year or six month period, as the case may be, and throughout the prior full
calendar year or six month period.

15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Coffee People had its origins in 1983. As of June 30, 1996, the Company
operated 19 stores. See "The Company."

In 1994, the Company raised net proceeds of $802,000 in a Regulation A stock
offering which it used to build five Aero Moka stores at Portland International
Airport and two Motor Moka drive-through stores. In January 1996, the Company
raised net proceeds of $3,725,000 in a private placement of Common Stock. Coffee
People intends to use the net proceeds from this offering and the private
placement to open at least 30 new stores in two or more new markets by the end
of 1997.

The Company opened two new stores in 1995 as it concentrated on raising
capital and prepared for its national expansion. The Company has devoted 1996 to
building its management team, developing its infrastructure, developing its new
store prototype, selecting new markets and identifying sites within those
markets. Because of the small number of new stores opened in 1995 and because of
the relatively long lead time to develop new stores, the Company will not
realize significant sales increases in 1996.

New stores typically incur higher than normal operating costs and lower than
normal revenues during the first few months of store operation. Based on its
experience, the Company expects a store to break even at the store level by the
third month of operation and to make a profit after the allocation of general
and administrative expenses by the sixth month of operation. There can be no
assurance, however, that the Company will be able to achieve these results. See
"Risk Factors -- Growth Strategy Risks" and "Risk Factors -- Uncertain Market
Acceptance Outside of Oregon."

Store opening costs, including employee recruiting and training and new
store marketing and promotion expenses, are expensed by the Company as incurred.
The concentration of these costs in periods when a large number of new stores
are being opened is expected to significantly affect the Company's operating
results for such periods.

As new markets are developed and as new stores mature, the Company expects
average store sales to increase. However, as the Company strives to build
overall market share, annual average store sales and year over year comparable
store sales comparisons may decline as new stores are built in relatively close
proximity to existing stores.

For the six months ended June 30, 1996 and for the years 1995 and 1994, the
Company achieved overall store contribution margins of 17.7%, 18.1% and 18.7%,
respectively. The primary reason for the decline in store contribution margins
is higher store operating expenses for the Company's stores at Portland
International Airport as compared with the Company's non-airport stores.
Although the airport stores incur higher operating expenses and lower store
contribution margins than the Company's neighborhood and drive-through stores,
the Company believes its airport stores provide visibility and strengthen brand
awareness for Coffee People products. As new stores are opened, the Company
expects sales from the airport stores to decline as a percentage of total
revenues.

The following discussion should be read in conjunction with the Selected
Financial Data of the Company and the Financial Statements and related notes
thereto appearing elsewhere in this Prospectus.

16
<PAGE>
RESULTS OF OPERATIONS

The following table sets forth certain financial data for the Company for
the periods indicated as a percentage of total revenue, except as otherwise
indicated:

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
--------------------------------------------------------------- ------------------------
1991 1992 1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Retail sales...................... 100.0% 99.1% 98.7% 98.4% 98.1% 98.1% 98.3%
Wholesale and other............... 0.0 0.9 1.3 1.6 1.9 1.9 1.7
----- ----- ----- ----- ----- ----- -----
Total revenues.................. 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of sales and related occupancy
expenses........................... 51.2 47.9 45.7 49.1 47.8 48.2 47.4
Store operating expenses (1)........ 33.4 31.8 32.1 30.5 31.2 31.4 31.2
Other operating expenses............ 0.0 0.2 0.5 0.6 0.5 0.6 0.4
Depreciation and amortization....... 1.7 1.7 2.2 2.3 3.5 3.2 4.0
General and administrative
expenses........................... 8.2 17.2 14.6 15.7 13.8 13.7 14.6
----- ----- ----- ----- ----- ----- -----
Income from operations............ 5.5 1.5 5.3 2.3 3.7 3.5 2.9
Other income, net................... 0.1 0.0 0.0 0.5 0.4 0.4 1.4
Interest expense.................... (0.4) (0.2) (0.8) (1.1) (1.2) (1.1) (0.7)
----- ----- ----- ----- ----- ----- -----
Income before provision for income
taxes.............................. 5.2 1.3 4.5 1.7 2.9 2.8 3.6
Provision for income taxes (2)...... 0.0 (0.4) 0.0 (0.2) (1.0) (1.0) (1.4)
----- ----- ----- ----- ----- ----- -----
Net income.......................... 5.2% 0.9% 4.5% 1.5% 1.9% 1.8% 2.2%
----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- -----
</TABLE>

- ------------------------
(1) As a percentage of retail sales.

(2) The Company operated for income tax purposes as a general partnership in
1991, as a C corporation under the Code in 1992, as a Subchapter S
corporation under the Code from January 1, 1993 through August 22, 1994, and
as a C corporation thereafter.

SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995

REVENUES. Total revenues increased 12.0% to $5,876,000 for the six months
ended June 30, 1996 from $5,245,000 for the same period in 1995. Retail sales
increased 12.2% to $5,776,000 for the 1996 period from $5,147,000 for the 1995
period.

Comparable store sales for the 17 stores open for the full six months ended
June 30, 1996 and 1995 increased 2.2% due primarily to higher transaction
volumes at two of the newly opened stores which were building sales during the
1995 period. Comparable store sales during the 1996 period were adversely
affected by a 20.6% decline in sales at one of the Company's stores located in a
shopping center that is undergoing redevelopment. The increase in comparable
store sales represents 17.6% of the overall increase in sales. Incremental sales
from the store opened during the six months ended June 30, 1995 contributed
40.1% of the increase in retail sales and incremental sales from the store
opened after June 30, 1995 contributed 42.3% of the increase.

Wholesale and other sales increased 2.0% to $100,000 for the six months
ended June 30, 1996 from $98,000 for the same period in 1995. The Company
expects wholesale and other sales to be substantially eliminated by the end of
1996 because of management's decision to turn over the servicing of the
Company's wholesale business to an outside firm. In the future, Coffee People
will receive a fee based upon the wholesale sales generated by the outside firm.

COSTS AND EXPENSES. Cost of sales and related occupancy expenses as a
percentage of total revenues decreased to 47.4% for the six months ended June
30, 1996 from 48.2% for the same period in

17
<PAGE>
1995, due primarily to a decrease in cost of goods sold which was offset in part
by an increase in occupancy expenses. The decrease in cost of goods sold was due
to lower coffee prices which were offset in part by higher prices for pastry
products. The increase in occupancy expenses was due primarily to the impact of
the percentage rent paid on sales generated at the Company's stores at Portland
International Airport.

Store operating expenses as a percentage of retail sales remained relatively
stable at 31.2% for the six months ended June 30, 1996 as compared to 31.4% for
the same period in 1995.

Depreciation and amortization as a percentage of total revenues increased to
4.0% for the six months ended June 30, 1996 from 3.2% for the same period in
1995, due primarily to the impact of higher build-out costs for the stores
opened in 1994 and 1995. These stores carry higher depreciation expense as a
percentage of total revenues than stores opened prior to 1994.

General and administrative expenses increased to $855,000 for the six months
ended June 30, 1996 from $719,000 for the same period in 1995 due primarily to
the addition of key management personnel, including the Company's President and
Chief Operating Officer, and other costs necessary to achieve the Company's
growth plans. As a percentage of total revenues, general and administrative
expenses increased to 14.6% in the 1996 period from 13.7% in the 1995 period.

AVERAGE STORE SALES AND STORE CONTRIBUTION MARGIN. For the six months ended
June 30, 1996, the Company's neighborhood and drive-through stores open for the
full period achieved average store sales of $360,000 and an average store
contribution margin of 21.1% compared to $357,000 and 20.0% in the same period
of 1995. The five airport stores and one kiosk store open for the full period
achieved average store sales of $208,000 and an average store contribution
margin of 10.4% compared to $195,000 and 15.7% for the same period of 1995. The
difference between the contribution margins realized on the Company's
neighborhood stores compared to its airport stores is primarily a result of the
percentage rent paid at Portland International Airport on sales generated at the
airport stores. The decline in store contribution margins at the Company's
airport stores is due primarily to higher labor costs and depreciation expenses
incurred at these airport stores.

OTHER INCOME. Other income as a percentage of total revenues increased to
1.4% for the six months ended June 30, 1996 from 0.4% for the same period in
1995 due to interest earned on the proceeds from the Company's private placement
completed in January 1996.

INTEREST EXPENSE. Interest expense as a percentage of total revenues
decreased to 0.7% for the six months ended June 30, 1996 from 1.1% for the same
period in 1995, primarily as a result of utilizing portions of the proceeds from
the Company's private placement to reduce interest-bearing obligations.

1995 COMPARED TO 1994

REVENUES. Total revenues increased to $11,257,000 for the year ended
December 31, 1995 from $7,708,000 for the year ended December 31, 1994. Retail
sales increased to $11,045,000 in 1995 from $7,588,000 in 1994.

Comparable store sales for the seven stores open for the full years of 1995
and 1994 decreased 8.7% due to the Company's decision to open new stores in
close proximity to existing units. Although this decision resulted in a decrease
in comparable store sales, the Company believes that it was able to increase
market share, enhance its brand recognition and better serve customers in the
Portland, Oregon metropolitan area. Incremental sales from the new stores opened
in 1994 and 1995 accounted for the entire increase in retail sales which was
partly offset by the decline in comparable store sales.

COSTS AND EXPENSES. Cost of sales and related occupancy expenses as a
percentage of total revenues decreased to 47.8% in 1995 from 49.1% in 1994 due
primarily to a decrease in cost of goods sold offset by an increase in occupancy
expenses. The decrease in cost of goods sold was due to lower coffee prices
achieved in 1995 as a result of the new supply contract negotiated in October
1994. The increase in occupancy expenses as a percentage of total revenues was
due primarily to the percentage rent paid on sales generated at the Company's
stores at Portland International Airport.

18
<PAGE>
Store operating expenses as a percentage of retail sales increased to 31.2%
in 1995 from 30.5% in 1994 primarily because of the impact of higher labor costs
incurred at the Company's units at Portland International Airport.

Depreciation and amortization as a percentage of total revenues increased to
3.5% in 1995 from 2.3% in 1994, due to the impact of higher build-out costs for
stores opened in 1994 and 1995. These stores carry higher depreciation expense
as a percentage of total revenues than stores opened before 1994.

General and administrative expenses as a percentage of total revenues
decreased to 13.8% in 1995 from 15.7% in 1994 as a result of increased total
revenues without a proportionate increase in overhead.

AVERAGE STORE SALES AND STORE CONTRIBUTION MARGIN. For 1995, the Company's
neighborhood and drive-through stores open for the full year achieved average
store sales of $736,000 and an average store contribution margin of 21.1%,
compared to $934,000 and 20.6%, respectively, for 1994. The Company's airport
and kiosk stores open for the full year achieved average store sales of $417,000
and an average store contribution margin of 13.9% as compared to $222,000 and
22.7%, respectively, for 1994. The increase in average store sales for the
Company's airport and kiosk stores resulted from the opening of several
higher-volume airport stores in late 1994. The difference between the
contribution margins realized on the Company's neighborhood stores compared to
its airport stores is primarily a result of the percentage rent paid at Portland
International Airport on sales generated at the airport stores. The decline in
store contribution margins at the Company's airport stores is due primarily to
higher labor costs and depreciation expenses at these stores.

INCOME TAXES. For the period from January 1, 1994 through August 22, 1994,
the Company elected to be taxed under the provisions of Subchapter S of the
Code. Under those provisions the Company did not pay federal or state corporate
income tax on its taxable income. Accordingly, no provision for income taxes was
made for that period.

1994 COMPARED TO 1993

REVENUES. Total revenues increased to $7,708,000 for the year ended
December 31, 1994 from $5,466,000 for the year ended December 31, 1993. Retail
sales increased to $7,588,000 in 1994 from $5,396,000 in 1993.

Comparable store sales for the six stores open for the full years of 1993
and 1994 increased 7.3% due to increased transaction volumes, higher average
dollar values per transaction and an overall increase of approximately 7.0% in
the price of coffee beverages effected in August 1994. The increase in
comparable store sales represents 14.8% of the overall increase in retail sales.
Incremental sales from the store relocated in 1993 contributed 5.7% of the
increase. Incremental sales from the 10 stores opened in 1994 accounted for the
remaining 79.5% of the retail sales increase.

COSTS AND EXPENSES. Cost of goods sold and related occupancy expenses as a
percentage of total revenues increased to 49.1% in 1994 from 45.7% in 1993, due
to an increase in cost of goods sold resulting from higher costs for coffee, and
an increase in occupancy expenses due primarily to the impact of the percentage
rent paid on sales generated at the Company's stores at Portland International
Airport.

Store operating expenses as a percentage of retail sales decreased to 30.5%
in 1994 from 32.1% in 1993, due primarily to lower labor costs achieved as a
result of staffing efficiencies.

Depreciation and amortization as a percentage of total revenues increased to
2.3% in 1994 from 2.2% in 1993.

General and administrative expenses increased to $1,210,000 in 1994 from
$799,000 in 1993, primarily as a result of salaries for additional management
personnel needed to accommodate the Company's growth. As a percentage of total
revenues, general and administrative expenses increased to 15.7% in 1994 from
14.6% in 1993.

19
<PAGE>
AVERAGE STORE SALES AND STORE CONTRIBUTION MARGIN. For 1994, the Company's
neighborhood and drive-through stores open for the full year achieved average
store sales of $934,000 and an average store contribution margin of 20.6%
compared to $845,000 and 21.4%, respectively, in 1993. The increase in average
store sales for the Company's neighborhood and drive-through stores was
primarily due to increased transaction volumes, higher average dollar values per
transaction and an overall price increase of approximately 7.0% in coffee
beverages effected in August 1994. The decline in store contribution margin was
primarily due to higher costs for coffee, which was partially offset by lower
labor costs. The Company's one kiosk store open for the full year of 1994
achieved sales of $222,000 and a store contribution margin of 22.7% compared to
$217,000 and 25.9%, respectively, in 1993.

INCOME TAXES. For the year ended December 31, 1993 the Company elected to
be taxed under Subchapter S of the Code. Therefore the Company did not pay
federal or state corporate income taxes on its taxable income, and no provision
for income taxes was made for that year.

QUARTERLY COMPARISONS

The following tables set forth certain unaudited financial data for each of
the quarters in 1994, 1995 and the six months ended June 30, 1996. In the
opinion of management of the Company, such unaudited information has been
prepared on the same basis as the audited financial information appearing
elsewhere in this Prospectus and includes all adjustments, consisting only of
normal recurring adjustments, necessary for the fair presentation of the results
of operations for those periods. The operating results for any quarter are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1994 1994 1994 1994 1995 1995 1995
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA:
Revenues:
Retail Sales................... $1,459 $1,752 $2,049 $2,328 $2,407 $2,740 $2,984
Wholesale and other............ 22 24 32 42 48 50 50
--------- --------- --------- --------- --------- --------- ---------
Total revenues............... 1,481 1,776 2,081 2,370 2,455 2,790 3,034
Cost of sales and related
occupancy expenses.............. 721 870 1,065 1,132 1,176 1,355 1,465
Store operating expenses......... 446 499 677 692 770 847 939
Other operating expenses......... 9 11 9 11 15 15 16
Depreciation and amortization.... 29 34 50 62 81 86 104
General and administrative
expenses........................ 242 267 309 392 361 358 387
--------- --------- --------- --------- --------- --------- ---------
Income from operations......... 34 95 (29) 81 52 129 123
Other income, net................ 5 9 20 5 11 9 8
Interest expense................. (13) (21) (25) (29) (29) (30) (36)
--------- --------- --------- --------- --------- --------- ---------
Income before provision for
income taxes.................... 26 83 (34) 57 34 108 95
Provision for income taxes (1)... -- -- 4 (20) (12) (38) (32)
--------- --------- --------- --------- --------- --------- ---------
Net income....................... $ 26 $ 83 $ (30) $ 37 $ 22 $ 70 $ 63
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Number of stores open for full
period.......................... 7 8 9 12 17 17 18
Number of stores open at end of
period.......................... 8 9 12 17 17 18 18

DEC. 31, MARCH 31, JUNE 30,
1995 1996 1996
-------- --------- --------
<S> <C> <C> <C>

STATEMENT OF INCOME DATA:
Revenues:
Retail Sales................... $2,914 $2,793 $2,983
Wholesale and other............ 64 52 48
-------- --------- --------
Total revenues............... 2,978 2,845 3,031
Cost of sales and related
occupancy expenses.............. 1,392 1,334 1,449
Store operating expenses......... 895 873 931
Other operating expenses......... 17 13 12
Depreciation and amortization.... 120 114 118
General and administrative
expenses........................ 444 419 436
-------- --------- --------
Income from operations......... 110 92 85
Other income, net................ 15 37 45
Interest expense................. (39) (22) (21)
-------- --------- --------
Income before provision for
income taxes.................... 86 107 109
Provision for income taxes (1)... (30) (41) (42)
-------- --------- --------
Net income....................... $ 56 $ 66 $ 67
-------- --------- --------
-------- --------- --------
Number of stores open for full
period.......................... 18 19 19
Number of stores open at end of
period.......................... 19 19 19
</TABLE>

- ------------------------------
(1) The Company operated for income tax purposes as a general partnership in
1991, as a C corporation under the Code in 1992, as a Subchapter S
corporation under the Code from January 1, 1993 through August 22, 1994, and
as a C corporation thereafter.

20
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1994 1994 1994 1994 1995 1995 1995
----------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Retail sales............... 98.5% 98.6% 98.5% 98.2% 98.0% 98.2% 98.4%
Wholesale and other........ 1.5 1.4 1.5 1.8 2.0 1.8 1.6
----------- ----- ----- ----- ----- ----- -----
Total revenues........... 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of sales and related
occupancy expenses.......... 48.7 49.0 51.2 47.8 47.9 48.6 48.3
Store operating expenses
(1)......................... 30.6 28.5 33.0 29.7 32.0 30.9 31.5
Other operating expenses..... 0.6 0.6 0.4 0.5 0.6 0.5 0.5
Depreciation and
amortization................ 2.0 1.9 2.4 2.6 3.3 3.1 3.4
General and administrative
expenses.................... 16.3 15.0 14.8 16.5 14.7 12.8 12.8
----------- ----- ----- ----- ----- ----- -----
Income from operations..... 2.3 5.3 (1.4) 3.4 2.1 4.6 4.1
Other income, net............ 0.4 0.6 1.0 0.2 0.5 0.4 0.2
Interest expense............. (0.9) (1.2) (1.2) (1.2) (1.2) (1.1) (1.2)
----------- ----- ----- ----- ----- ----- -----
Income before provision for
income taxes................ 1.8 4.7 (1.6) 2.4 1.4 3.9 3.1
Provision for income taxes
(2)......................... 0.0 0.0 0.2 (0.8) (0.5) (1.4) (1.0)
----------- ----- ----- ----- ----- ----- -----
Net income................... 1.8% 4.7% (1.4)% 1.6% 0.9% 2.5% 2.1%
----------- ----- ----- ----- ----- ----- -----
----------- ----- ----- ----- ----- ----- -----

DEC. 31, MARCH 31, JUNE 30,
1995 1996 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Retail sales............... 97.9% 98.2% 98.4%
Wholesale and other........ 2.1 1.8 1.6
----- ----- -----
Total revenues........... 100.0 100.0 100.0
Cost of sales and related
occupancy expenses.......... 46.7 46.9 47.8
Store operating expenses
(1)......................... 30.7 31.3 31.2
Other operating expenses..... 0.6 0.5 0.4
Depreciation and
amortization................ 4.0 4.0 3.9
General and administrative
expenses.................... 14.9 14.7 14.4
----- ----- -----
Income from operations..... 3.7 3.2 2.8
Other income, net............ 0.5 1.4 1.5
Interest expense............. (1.3) (0.8) (0.7)
----- ----- -----
Income before provision for
income taxes................ 2.9 3.8 3.6
Provision for income taxes
(2)......................... (1.0) (1.5) (1.4)
----- ----- -----
Net income................... 1.9% 2.3% 2.2%
----- ----- -----
----- ----- -----
</TABLE>

- ------------------------------
(1) As a percentage of retail sales.

The Company's total revenues increased in each quarter with the exception of
the quarters ended December 31, 1995 and March 31, 1996, in which the Company
experienced seasonal sales declines typically associated with the fall and
winter months.

LIQUIDITY AND CAPITAL RESOURCES

The Company's principal capital requirement is for financing to develop or
acquire retail stores. The Company plans to open at least 30 new retail stores
by the end of 1997 and to continue further expansion thereafter.

The cost of neighborhood and drive-through stores built or acquired during
1995 and 1994, including leasehold improvements and equipment, ranged from an
average of $77,000 for the three Motor Moka drive-through stores, which required
minimal retrofitting, to an average of $278,000 for the three neighborhood
stores constructed during those years. The Company estimates that the cost of
constructing a new neighborhood coffee house based on its new prototype design,
including site selection costs, lease negotiation, store design, permitting,
architectural fees, construction supervision, leasehold improvements and
equipment, will be approximately $325,000. There can be no assurance, however,
that costs of constructing new stores will not substantially exceed such amount.
See "Business -- Site Selection and Expansion Plans" and "Risk Factors -- Growth
Strategy Risks."

As of June 30, 1996, the Company had $3,390,000 in cash and equivalents.
Working capital as of June 30, 1996, totaled $2,847,000, as compared to working
capital deficiencies of $690,000 and $571,000 at December 31, 1995 and 1994,
respectively.

For the six months ended June 30, 1996, and for 1995 and 1994, cash provided
by operating activities was $148,000, $416,000, and $868,000, respectively.

The Company has financed its recent growth primarily through the sale of
equity securities, the issuance of notes payable and the periodic use of bank
debt. For the six months ended June 30, 1996,

21
<PAGE>
the Company had net cash provided by financing activities of $3,482,000,
primarily as a result of $3,725,000 in net proceeds received from a private
placement of Common Stock completed in January 1996. For 1995 and 1994, net cash
provided by financing activities totaled $232,000 and $800,000, respectively.

For the six months ended June 30, 1996, and for 1995 and 1994, net cash used
in investing activities was $500,000, $860,000, and $1,449,000, respectively.
The primary use of net cash used in investing activities is capital expenditures
for new retail stores. The Company currently estimates that capital expenditures
through the end of 1997 will be approximately $10.0 million, substantially all
of which will be used to develop new stores.

The Company has a bank line of credit providing for borrowings through
August 1, 1997 of up to $500,000. Borrowings bear interest at the rate of 0.5%
over the bank's prime rate (8.25% as of June 30, 1996) and are secured by
substantially all of the Company's assets, including accounts receivable,
inventories, trade fixtures and equipment. As of June 30, 1996, there were no
borrowings outstanding under the line of credit; however, $73,000 of the line
was reserved for a letter of credit issued in August 1995. The line of credit
agreement contains restrictive covenants relating to certain financial ratios as
well as the bank's standard covenants and restrictions. As of June 30, 1996, the
Company was in compliance with all such debt covenants.

The Company believes that the net proceeds of this offering, other financing
sources, anticipated cash flow from operations and existing cash will be
sufficient to meet the Company's anticipated capital requirements for planned
expansion for at least the next 12 months.

COFFEE PRICES AND AVAILABILITY

The Company believes that it has adequate sources of supply of high-quality
specialty coffee to meet its expansion needs for the foreseeable future.

The Company has experienced price fluctuations for its purchased coffee over
the last several years. During 1994 the Company experienced price increases as
world coffee prices rose in response to a crop-damaging freeze in Brazil.
Commencing in October 1994, the Company realized price reductions for its
purchased coffee as a result of renegotiating its supply contract. These
reductions continued during 1995 as world coffee prices moderated.

SEASONALITY

The Company's business is subject to seasonal fluctuations, due to seasonal
changes and general economic conditions, among other factors. Historically, the
Company's net sales are highest during the second and third quarters which
include the spring and summer months. Quarterly results are also affected by the
timing of the opening of new stores, which may be delayed for reasons outside of
the Company's control. See "Risk Factors -- Growth Strategy Risks," and "--
Quarterly Comparisons." The Company's results of operations for any individual
quarter may not be indicative of the results to be achieved for the full year.

22
<PAGE>
BUSINESS

GENERAL

Coffee People sells coffee beverages, coffee beans, cookies, pastries, ice
cream, shakes and coffee related merchandise. Sales of coffee beverages comprise
approximately two-thirds of the Company's revenues, with bakery and ice cream
products accounting for approximately one-fifth of the Company's revenues. The
Company's objective is to be a leading national specialty coffee retailer and
coffee house operator through a program of rapid expansion and consistent
profitability.

The Company distributes products through its Company-owned retail stores,
including neighborhood coffee houses, drive-through espresso bars and specialty
kiosks. Coffee People plans to open at least 30 retail stores by the end of 1997
in selected midwestern and western states, and to continue further expansion
thereafter. The Company currently operates 18 stores in the Portland, Oregon
metropolitan area and one store in Eugene, Oregon.

INDUSTRY OVERVIEW

The specialty coffee retail business in the United States is growing rapidly
and is disproportionately concentrated in the Pacific Northwest, particularly
Washington and Oregon. Industry sources estimate that total retail sales of
specialty coffee through all distribution channels will grow to $5.0 billion by
1999 from an estimated $1.5 billion in 1989 and that coffee cafes, including
espresso carts and kiosks, will be the fastest growing distribution channel. It
is estimated that the number of coffee cafes, espresso bars and espresso carts
will increase from approximately 3,000 in 1995 to approximately 10,000 by 1999.

Industry observers suggest that several factors underlie the recent increase
in demand for specialty coffees, which are made from superior beans roasted to
specifications that produce coffee with more flavor and consumer appeal. A high
proportion of consumers in the United States now recognize and appreciate the
difference in quality between instant and canned coffees and specialty coffees.
Industry sources estimate that approximately 31.0% of all coffee consumed in the
United States in 1995 was specialty coffee, an increase from approximately 3.6%
in 1983.

Another factor leading to the increase in specialty coffee consumption is
the growing popularity of specialized coffee beverages in which coffee or
espresso is combined with steamed milk to produce lattes, cappuccinos and
similar beverages. These specialty coffee beverages are typically served in
restaurants and coffee houses using sophisticated, high-pressure machines.

In addition to increased consumer awareness and appreciation of specialty
coffee, the rapid growth in the specialty coffee retail business has been
attributed to an increased desire by consumers for a small indulgence. Specialty
coffee beverages and complementary products offered in a pleasant environment
provide consumers the opportunity to enjoy that small indulgence. Industry
observers have also noted that the increasing number of people seeking a
non-alcoholic locale where they can go as an alternative to home and work is
contributing to the popularity of specialty coffee houses.

The rapid expansion of Starbucks and other specialty coffee houses
nationwide has also contributed to greater consumer awareness and appreciation
of specialty coffee. With the exception of Starbucks, the specialty coffee
retail segment remains relatively unbranded. The Company believes that while
Starbucks will continue to dominate the segment, some of the regional chains
that differentiate themselves through distinctive product offerings, alternative
store designs and disciplined management will emerge as successful national
retailers.

THE COFFEE PEOPLE APPROACH

The Company believes it can be a leading specialty coffee retailer in its
selected markets by differentiating itself from other coffee houses. The Company
believes it can achieve this differentiation by being more customer focused than
the competition, by providing superior coffee and service and by being
constantly innovative. The Company believes its stores offer an atmosphere that
welcomes customers in a friendly and inviting setting designed to encourage a
feeling of customer

23
<PAGE>
"ownership" and provide a community focus that fosters brand recognition and
consumer loyalty. Central to the Coffee People approach is its experienced
management team, its focus on operational excellence, its strong unit economics
and its sophisticated site selection processes.

THE COFFEE PEOPLE PHILOSOPHY

Coffee People's approach results from its distinctive philosophy that
balances the values and interests of its customers, its employees, its
stockholders, the communities in which it operates and the environment. Coffee
People believes that its commitment to both COFFEE and PEOPLE provides value to
its customers. Coffee People fulfills this commitment by serving consistently
high-quality products, employing the highest standards of customer service and
creating a relaxed and inviting atmosphere that attracts and welcomes a diverse
blend of people. Coffee People's philosophy is embodied in its mission
statement:

THE COFFEE PEOPLE MISSION

"COFFEE PEOPLE SEEKS TO LEAD AN EMERGING 'COFFEE NATION' IN THE CREATION
OF THE BEST COFFEE COMPANY IN THE WORLD, UNITING A DIVERSE GROUP OF
PEOPLE IN AN ATMOSPHERE OF ACCEPTANCE AND RESPECT WHERE ALL CAN ENJOY
COFFEE'S ENERGY AND NATURALNESS.

SUCCESS IN THIS ENDEAVOR WILL LEAD TO A VIABLE, THRIVING BUSINESS BY
PROVIDING ENJOYMENT FOR OUR CUSTOMERS, A GOOD RETURN ON INVESTMENT FOR
OUR STOCKHOLDERS AND FULFILLING CAREER OPPORTUNITIES FOR OUR EMPLOYEES
AND THEIR FAMILIES.

FURTHERMORE, WE BELIEVE OUR PROSPERITY IS GIVEN TO US BY OUR CUSTOMERS
TO BE HELD IN TRUST. THEREFORE, COFFEE PEOPLE IS COMMITTED TO RETURNING
AT LEAST 10% OF ALL AFTER-TAX EARNINGS TO THE COMMUNITY, INCLUDING THE
PEOPLE OF THE COFFEE PRODUCING COUNTRIES."

The principal elements of the Coffee People philosophy are:

CUSTOMER FOCUS. Coffee People believes in the worth of its customers.
Satisfied customers are essential to the Company's success. The Company is
dedicated to providing its customers with superior coffee -- the most flavorful,
the most creatively blended, made with the highest quality beans. High-quality
coffee, the basis for the name COFFEE People. The Company also is dedicated to
providing its customers with the highest quality service, combining speed,
consistency and courtesy in an atmosphere that is friendly, relaxed and
inviting. High-quality service, the basis for the name Coffee PEOPLE.

EMPLOYEE DEVELOPMENT. Coffee People believes in the worth of its employees.
Happy employees ("Human Beings," as referred to by the Company) are essential to
providing superior customer service. The Company is dedicated to creating an
environment that provides its employees with opportunities for personal growth,
advancement and fulfillment. Through a variety of educational workshops,
seminars and other programs, the Company trains its employees to provide
customers with the type of service that fosters long-term customer
relationships.

Coffee People seeks the advice and opinions of its Human Beings regarding
changes in policies or store operations. This process was formalized in 1995
with the creation of the Coffee People Senate. Senators include store managers,
assistant managers and hourly shift supervisors. The Coffee People Senate
provides employees with a voice in management and gives Coffee People advance
insight into how proposed actions may be perceived by its employees and
customers.

COMMUNITY SUPPORT. Coffee People believes in the worth of the communities
it serves. Supportive communities are essential to the loyal customer base the
Company seeks to attract. Coffee People contributes cash, coffee products and
equipment equal to at least 10% of its annual net earnings to various charitable
organizations, often by donating the entire gross receipts from a new store's
opening day celebration. The Company is particularly supportive of the
internationally recognized "Coffee Kids" program that seeks to improve the
living and working conditions in the coffee producing countries. The Company
believes its charitable donation policy fosters long-term customer loyalty.

24
<PAGE>
The Coffee People Senate recently organized Human Beings Against Drug Abuse
("HBAD") as a means of communicating to the Company's employees, customers and
neighbors that Coffee People stores are drug-free zones and that illegal drugs
will not be tolerated. HBAD assists local youth organizations in their efforts
to combat drug abuse in teens and young adults.

ENVIRONMENTAL RESPONSIBILITY. Coffee People believes in the worth of
preserving the environment. The Company believes its environmentally responsible
practices provide satisfaction both to the Company's employees and customers.
Coffee People recycles whenever possible and promotes reusable mugs by
customers, including the popular Coffee People Road Tour Mug, which greatly
reduces the amount of paper products used.

THE COFFEE PEOPLE STRATEGY

The Company's objective is to be a leading national specialty coffee
retailer and coffee house operator through a program of rapid expansion and
consistent profitability. The key elements of the Company's strategy include:

CULTIVATE CUSTOMERS' SENSE OF OWNERSHIP. Coffee People strives to foster
long-term loyalty and a sense of ownership in its customers by being continually
receptive to evolving customer desires. The Company is dedicated to providing
its customers with the highest quality of service emphasizing speed, consistency
and courtesy in stores designed to welcome customers in a friendly, relaxing and
inviting atmosphere. Many creative product names, such as Mindsweeper, were
first suggested by Coffee People's customers.

OFFER INNOVATIVE PRODUCTS AND EXTENSIVE MENU. Coffee People offers
innovative products and an extensive menu that appeals to a diverse blend of
people. The Company has developed proprietary brands that foster a high degree
of market differentiation and customer loyalty. For example, the Company has
expanded the Black Tiger brand from an espresso beverage to include ice cream
and shakes, a breakfast cereal and a sparkling coffee drink, making Black Tiger
one of the Company's top-selling brands.

ACHIEVE OPERATIONAL EXCELLENCE. Coffee People's senior management team has
extensive experience in the specialty coffee industry, from selecting the beans
to serving the cup. The Company believes that its training and incentive
programs create knowledgeable and loyal employees who consistently exceed
customers' expectations for friendliness and quality of service. Coffee People
strives to achieve exceptional financial results from each of its stores by
closely managing sales, costs and customer satisfaction.

FOCUS ON SUPERIOR SITE SELECTION AND RAPID NATIONAL EXPANSION. Coffee
People uses extensive marketing and demographic research to select store sites
it believes show a high likelihood of financial success. The Company intends to
develop Coffee People into a national brand by opening multiple stores in new
markets where it can become a leading specialty retailer. The Company plans to
open at least 30 new retail stores by the end of 1997 and to continue its
national expansion thereafter.

COFFEE PEOPLE PRODUCTS AND SUPPLIERS

PRODUCTS. The Company offers a broad product line including specialty
coffees, coffee beans, pastries and cookies, ice cream and shakes and coffee
related merchandise. A typical store's menu includes the following items, among
others:

HUMAN BEING ORGANIC ESPRESSO-TM- DRINKS

BLACK FOREST MOCHA-TM-
ESPRESSO WITH STEAMED CHERRY
CHOCOLATE, WHIPPED CREAM AND
A CHOCOLATE COVERED CHERRY

VELVET HAMMER-TM-
ESPRESSO MOCHA MADE WITH SPICY
MEXICAN STYLE CHOCOLATE

FABULOUS COFFEE CHARGER-TM-
NON-ALCOHOLIC COFFEE LIQUEUR STEAMER
SUPERCHARGED WITH ESPRESSO

25
<PAGE>
BLACK TIGER-REGISTERED TRADEMARK- ESPRESSO DRINKS

BLACK TIGER MINDSWEEPER-TM-
LATTE MADE WITH BLACK TIGER-REGISTERED TRADEMARK-,
COFFEE PEOPLE'S EXCLUSIVE ITALIAN
STYLE HIGH-CAFFEINE BLEND

BLACK TIGER SLAMMAHAMMA-TM-
VELVET HAMMER-TM- MADE WITH BLACK TIGER-REGISTERED TRADEMARK-

BLACK TIGER SLAMMER-TM-
BLACK TIGER-REGISTERED TRADEMARK- ESPRESSO

HOUSE COFFEES

DEPTH CHARGE-TM-
HUMAN BEING HOUSE COFFEE
WITH A SHOT OF ESPRESSO

COFFEE ON ICE

BLACK TIGER SPARKLING COFFEE-TM-
SOPHISTICATED ADULT REFRESHMENT,
WITHOUT THE ALCOHOL

[CAPTION]

26
<PAGE>
FABULOUS COFFEE COOLER-TM-
A NON-ALCOHOLIC COFFEE LIQUOR
AND CREAM FLAVORED CHILLER

ICE CREAM SHAKES

BLACK TIGER-REGISTERED TRADEMARK-
BLACK TIGER-REGISTERED TRADEMARK- ICE CREAM BLENDED
WITH BLACK TIGER-REGISTERED TRADEMARK- ESPRESSO

CAPPUCCINO BORGIA SHAKE-TM-
CHOCOLATE ICE CREAM, FRESH
ORANGE AND ESPRESSO
VELVET HAMMER-TM-
VELVET HAMMER-TM- ICE CREAM
BLENDED WITH ESPRESSO

SPECIALTY COFFEE BEANS

<TABLE>
<CAPTION>
COFFEE PEOPLE SPECIAL
BLENDS NEW WORLD COFFEES AFRICAN COFFEES INDONESIAN COFFEES
- --------------------------- --------------------------- --------------------------- ---------------------------
<S> <C> <C> <C>
Coffee People's Best-TM- Colombian Supremo Ethiopian Mocha Harrar Celebes Kalossi
Black Velvet Colombian Ethiopian Yrgacheffe Sumatra Blue Lintong
Tiger-Registered Trademark-
Perfect Breakfast-TM- Guatemalan Estate Kenya AA Estate Sumatra Estate Mandheling
Human Being Espresso-TM- Mexico Pluma Tanzanian Peaberry Java Estate
Haitian Bleu-TM- 100% Kona Zimbabwe 053 New Guinea Estate
</TABLE>

SUPPLIERS

COFFEE. Coffee People's supplier purchases coffee from a variety of coffee
producing countries. The Company believes that its contacts in the coffee
producing countries will ensure a continued supply of the high-quality beans
used in its products. The Company does not roast any of its coffee beans because
of the ready availability of high-quality roasters in the United States. The
Company buys its coffee from Coffee Bean International, Inc. ("CBI"), a
Portland, Oregon based roaster that uses Coffee People's proprietary roasting
specifications. The Company believes CBI has adequate capacity to fulfill the
Company's needs for the foreseeable future. See "Risk Factors -- Dependence on
Single Coffee Supplier."

BAKERY GOODS AND ICE CREAM. The Company obtains bakery goods and ice cream
from local vendors with reputations for superior quality. Cookies are made based
on recipes developed by Coffee People. By offering alternative selections such
as ice cream and non-coffee beverages for people who do not drink coffee, Coffee
People believes it creates an inclusive, welcoming setting for all to enjoy its
products.

DISTRIBUTION STRATEGY AND STORE TYPES

The Company's principal distribution channel is retail stores, including
neighborhood coffee houses, drive-through espresso bars, airport stores and
specialty kiosks. The objective of each of the Company's stores is to provide
the "Coffee People Experience" to customers in a relaxed, friendly and inviting
setting. Coffee People intends to develop other distribution points such as mail
order catalogs, airlines and co-developed stores that feature coffee and other
complementary products.

The first Coffee People retail store opened in 1983. Eighteen additional
retail stores opened between 1987 and 1995. The Company opened its first Motor
Moka drive-through espresso bar in 1990, and believes this was one of the first
drive-through espresso bars in the country. In 1994, the Company opened its Aero
Moka outlets at Portland International Airport.

The Company has four store types:

NEIGHBORHOOD COFFEE HOUSE. Neighborhood coffee houses are located in both
urban and suburban neighborhoods and business districts and are designed to
preserve and nurture the special feeling

27
<PAGE>
of community traditionally associated with coffee houses. This type of store
offers a complete line of Coffee People products and features retail sales of
roasted coffee beans. The Company has seven of these stores in the Portland,
Oregon metropolitan area and one store in Eugene, Oregon.

The Company has developed a flexible prototype design for its neighborhood
coffee house to provide uniformity and ease of replication during its national
expansion. The basic design will be modified to meet local conditions in new
markets. The prototype design was developed from extensive customer surveys and
focus group analyses. The layout emphasizes comfort with larger, softer chairs
and is designed to increase coffee bean and merchandise sales. Neighborhood
coffee houses range in size from approximately 1,500 to 2,500 square feet.

DRIVE-THROUGH ESPRESSO BAR. The second type of store is the drive-through
espresso bar that operates under the Motor Moka brand. The Company has four of
these stores in Portland, Oregon, one of which has indoor seating. The Company
intends to provide indoor seating in all stores of this type where feasible.
Drive-through stores without indoor seating generally will have a walk-up
window. These stores are designed to maximize customer convenience by
eliminating the need to park a car and walk into a store.

AIRPORT STORE. The third type of store is designed for major airports. The
Company has six of these stores at Portland International Airport operating
under the Aero Moka brand. These stores include quick grab-and-go kiosks, coffee
bars and a sit-and-relax cafe. The Company believes these types of stores
provide visibility and increase brand recognition.

SPECIALTY KIOSK. The fourth type of Coffee People store is a specialty
kiosk for placement in high-traffic locations such as supermarkets and office
building lobbies. The Company has one of these store types and intends to add
more as attractive opportunities arise.

STORE ECONOMICS. The Company believes that its distinctive neighborhood and
drive-through store concepts, innovative product offerings and strong management
produce unit economics among the highest in the retail specialty coffee
industry. The 11 neighborhood and drive-through stores that were open for the
full year of 1995 generated average store sales of $736,000 and achieved an
average store contribution margin of 21.1%. The six airport and kiosk stores
that were open for the full year of 1995 generated average store sales of
$417,000 and achieved an average store contribution margin of 13.9%. The
difference between the two contribution margins is due primarily to the
percentage rent paid at Portland International Airport and to higher labor costs
and depreciation expenses at the airport stores. The Company's planned national
expansion will focus on neighborhood and drive-through stores, which the Company
believes offer the most attractive economic and marketing opportunities. See
"Selected Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

The cost of opening a new store depends upon the type of store, the nature
of any improvements that already exist at the site, the availability of tenant
improvement allowances and other factors. The Company estimates that the cost of
opening a new neighborhood coffee house store will be approximately $325,000.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

SITE SELECTION STRATEGY AND EXPANSION PLANS

Coffee People believes that superior site selection is among the most
critical elements influencing its long-term success. The Company has conducted
extensive demographic surveys through a national firm to identify potential
markets and the neighborhoods within those markets most likely to be receptive
to Coffee People. Using proprietary site-selection criteria, the Company narrows
its search for new store sites to specific street intersections.

The Company's expansion strategy is to open multiple stores in new markets
where it believes it can become a leading specialty coffee retailer. The Company
intends to open at least 30 new retail stores by the end of 1997 and to continue
its national expansion thereafter. The new stores to be opened by the end of
1997 will likely be located in Orange County, California, Denver, Colorado and

28
<PAGE>
other metropolitan areas in the midwestern and western United States. Coffee
People will also seek to acquire specialty retailers as opportunities arise that
satisfy the Company's economic, site-selection and other strategic criteria.

The Company recently strengthened its senior management team in anticipation
of its national expansion plans. Taylor H. Devine, who joined the Company as
President and Chief Operating Officer in September 1995, has over 30 years of
experience with rapidly growing national retail companies, including Blockbuster
Video and Mrs. Field's Cookies. Steven P. Crantz, who joined the Company as Vice
President -- Development in March 1996, has 19 years of experience in developing
multiple national retail stores including with Marriott Hotels and Resorts and
Country Harvest Buffet Restaurants.

The Company has developed Black Tiger Units ("BTUs") to assist in opening
stores in new markets. Each BTU generally consists of four individuals with
experience as store managers or assistant store managers. BTU members are chosen
because of their skills in instilling in new employees the values that make up
the Coffee People Experience. BTUs assist in new store development and generally
will operate new stores for some period following their opening to provide
consistency in service and quality.

MARKETING STRATEGY

Coffee People's central marketing strategy is to offer quality products and
service that create customer loyalty in a satisfying environment. To effect this
strategy, Coffee People markets the Coffee People Experience.

The Company believes it addresses its customers in a distinctive tone of
voice. For example, the Company's paper cups feature the Coffee People Bill of
Rights, which expresses concerns about the issues of the day, creates a
fictional history that gives the Company a sense of depth and gently pokes fun
at itself and its obsession with coffee. This voice forms a character that the
Company uses to create a strong sense of personality and brand recognition.

<TABLE>
<S> <C>
THE COFFEE PEOPLE
BILL OF RIGHTS

1. PEOPLE OF COFFEE, YOU HAVE
CERTAIN RIGHTS. AMONG THESE ARE
THE RIGHTS OF SPRING, THE RIGHT
TO PEACE, FREEDOM & COFFEE. IN
THAT ORDER.

2. YOU HAVE THE RIGHT TO REMAIN
SILENT. YOU HAVE THE RIGHT TO
BECOME AN ATTORNEY. IF YOU
CANNOT BECOME AN ATTORNEY,
SOMEONE WILL BECOME ONE FOR
YOU.
The Company seeks to create new brands and products associated with
the brand. For example, in 1987 Coffee People created a new category of
specialty coffee, a high-caffeine coffee of a more rustic Italian taste,
and named it Black Tiger. It was first served as brewed hot coffee and as
a distinctive line of espresso drinks. Later, ice cream featuring the
coffee was developed. The ice cream was combined with espresso and the
Black Tiger milkshake was created. The Company has expanded the product
line to include Black Tiger Sparkling Coffee, Black Tiger granola, a
breakfast cereal, and ancillary products. Black Tiger products now account
for a significant amount of the Company's total revenues.

The Company believes that this kind of branded product line expansion
has been successful in attracting the Company's customers to new products
and building incremental sales. The Company also seeks ways to weave its
branded product themes into the architectural elements of its stores.
Sales of Coffee People Farthings and Notes (tokens and certificates
redeemable for product) further contribute to the customer's feeling of
being a citizen of the Coffee People Republic.
</TABLE>

29
<PAGE>

<TABLE>
<S> <C>
3. YOU HAVE THE RIGHT TO WANDER, IN
YOUR OWN WAY, THE GARDEN OF
HYDRAULICS THAT IS ESPRESSO.

4. YOU HAVE THE RIGHT TO FORM YOUR
OWN OPINIONS. YOU MAY EVEN HAVE THE
RIGHT TO ADDRESS THE NATION
TONIGHT DURING THE DINNER HOUR.
CHECK LOCAL LISTINGS.
The Company also seeks to entertain and educate its customers through
featured coffees of the month, brewing demonstrations and coffee tastings
that explore the origins and preparation of coffee. The Company promotes
some new products by temporarily decorating stores to match various
themes. For example, in the summer of 1996 the Company decorated some of
its stores as "Black Tiger Lounges" to promote three new coffee beverages,
Cuba Libra-TM-, Espresso Highball-TM- and Brandy Mochapolean-TM-, designed
to enhance the perception that drinking Coffee People coffee is a special
event to be enjoyed at all times of the day. The Company believes that
these types of activities help develop a loyal customer base.

5. YOU HAVE THE RIGHT TO EXPECT
FREEDOM FROM BACKTALK. HOWEVER,
SEEN FROM OUTER SPACE MUCH OF
THE GLOBE APPEARS TO BE BLUE.
THEREFORE, O WANDERER, SPEAK
SOFTLY TO US.

6. COFFEE ISN'T ALWAYS THE ANSWER.
CERTAINLY NOT. BUT IT REMAINS A
BEAUTIFUL QUESTION WE ARE
INCLINED TO ASK.
Coffee People emphasizes the themes of energy and naturalness in its
products and marketing. For example, the Black Tiger brand connotes
energy. The organically grown Human Being coffee, which forms the base of
all of the Company's regular espresso beverages, is a natural product with
positive implications for the world's coffee growing regions.
</TABLE>

COMPETITION
The specialty coffee market is intensely competitive and is becoming more
so. Many of the Company's competitors have greater financial and marketing
resources, brand name recognition and a larger customer base than the Company.
The specialty coffee industry is currently characterized by a small number of
large, well-capitalized companies and a large number of small companies and
single-unit operators. The activities of large companies such as Starbucks are
increasing the appreciation and awareness of specialty coffee across the
country. At the same time, the national press has focused attention on the
growth opportunities associated with operating coffee stores and espresso carts.
This attention, combined with relative ease of entry into this business, has
resulted in a rapid increase in the number of small independent specialty coffee
companies and single-unit operators.

In the retail area, the Company competes for whole bean and beverage sales
with national and regional chains, franchise operators and local specialty
coffee stores. There are a large number of competing specialty coffee retailers,
many of whom have significantly more retail outlets than the Company. In
addition, Coffee People competes with and will continue to compete with local
competitors in the specialty coffee business.

30
<PAGE>
INTELLECTUAL PROPERTY

The Company does not own any patents. The Company's principal United States
trademarks include Coffee People-Registered Trademark-, Black
Tiger-Registered Trademark-, Good Coffee No Backtalk-Registered Trademark-, Java
Noir-Registered Trademark-, Black Tiger Sparkling Coffee-TM- and Human Being
Organic Espresso-TM-. The Company's principal United States service mark
registrations include Coffee People-Registered Trademark-, Motor
Moka-Registered Trademark- and Motorist's Espresso Bar-Registered Trademark-.
The Company has an application pending in the United States to register the name
Aero Moka-TM-. The Company has applied for trademark and service mark protection
for the name Coffee People in Canada and Japan.

GOVERNMENT REGULATION

The food service industry is subject to extensive federal, state and local
government regulation relating to the development and operation of food service
outlets, including laws and regulations relating to building and seating
requirements, the preparation and sale of food, cleanliness, safety in the
workplace, accommodations for the disabled and the Company's relationship with
its employees, such as minimum wage requirements, anti-discrimination laws,
overtime and working conditions and citizenship requirements. The failure to
obtain or retain necessary food licenses, substantial increases in the minimum
wage or substantial increases in payroll taxes to fund mandatory health-care or
employee benefit programs could have a material adverse effect on the Company.
Because few, if any, of the Company's employees are paid at a level below the
recently increased federal minimum wage, the Company does not anticipate that
the recent change to the federal minimum wage law will have a material effect on
the Company. See "Risk Factors -- Government Regulation."

FACILITIES

The Company leases its corporate offices and all of its retail locations.
The Company's retail stores range from 150 to 2,500 square feet with lease rates
ranging from approximately $1,200 to $6,375 per month. The monthly lease rate
for certain stores is based on that store's monthly sales revenue. As of June
30, 1996, the Company leased all 19 of its retail stores. In addition, the
Company has entered into leases for two new neighborhood-type stores to be
opened in Tigard, Oregon and in the Denver, Colorado metropolitan area. The
Company anticipates opening both stores by the end of 1996. There can be no
assurance, however, that the stores will be opened within such period.

One of the Company's stores is operated at a location for which there is
currently no term lease in effect. The lessor at such location, therefore, could
at any time demand that the Company vacate the premises on 30 days prior written
notice. The Company is negotiating with the lessor for a long-term lease. There
can be no assurance, however, that a lease for such location will be obtainable
on commercially reasonable terms, or at all. Another of the Company's stores is
operated pursuant to a lease which expires on December 31 , 1996. There can be
no assurance that the Company will be able to renew its lease for such location.
The loss of either of such store locations would have a material adverse effect
on the Company. See "Business -- Facilities."

As a requirement of its lease with the Port of Portland for the six Aero
Moka stores at Portland International Airport, the Company is required to enter
into a joint venture with a certified disadvantaged business enterprise for one
of the Company's stores at Portland International Airport. Upon entry into the
joint venture, the Company will have a 49% ownership in that store. The Company
has had continuing discussions with the Port of Portland to discuss ways in
which this requirement can be met.

One of the Company's stores is leased from the owner by certain affiliates
of the Company. The Company is permitted to operate at such location and makes
all rental payments under the lease agreement. However, the Company has no
written sublease relating to the store. See "Certain Transactions."

The Company's corporate offices consist of approximately 3,000 square feet
with an annual lease rate of approximately $20,300. The Company anticipates
relocating its corporate offices in 1997 at what is likely to be a substantially
higher lease rate.

HUMAN BEINGS

As of June 30, 1996, the Company had 285 employees. None of the Company's
employees are covered by a collective bargaining agreement. The Company believes
its employee relations are good.

LEGAL PROCEEDINGS

The Company is not involved in any material litigation or proceeding and is
not aware of any material litigation or proceeding threatened against it.

31
<PAGE>
MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The directors and executive officers of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------- --- --------------------------------------------
<S> <C> <C>
James L. Roberts 47 Chairman of the Board and Chief Executive
Officer
Taylor H. Devine 55 President, Chief Operating Officer and
Director
Kenneth B. Ross 47 Chief Financial Officer and Secretary
Steven P. Crantz 40 Vice President -- Development
Patricia J. Roberts 45 Vice President -- Human Resources
Jeffrey M. Ferguson (1) 46 Vice President -- Coffee and Director
Gary G. Talboy (1)(2) 47 Director
Douglas L. Ayer (1)(2) 59 Director
</TABLE>

- ------------------------
(1) Member of Compensation Committee

(2) Member of Audit Committee

Mr. Roberts opened the first Coffee People store with his wife, Patricia J.
Roberts, in 1983. Mr. Roberts has served as Chief Executive Officer and as a
director of the Company since it was organized in 1992, and was President of the
Company from 1992 to September 1995. From 1982 until 1985, he was employed as
inside sales manager for Coffee Bean International, Inc. Mr. Roberts received a
B.A. in English from the University of Oregon in 1971 and attended its Master of
Fine Arts program in creative writing until 1973.

Mr. Devine joined Coffee People in September 1995 as President, Chief
Operating Officer and a director. Mr. Devine served as President and a director
of Takeout Taxi Holdings, Inc., a multi-restaurant marketing and delivery
company, from January 1992 to September 1995. From October 1987 until December
1991, Mr. Devine served in several capacities, including Vice President of
International Operations, with Blockbuster Entertainment Corporation.
Previously, Mr. Devine was founder, President and Chief Executive Officer of
Inform, Inc. and served as Executive Vice President and Chief Operating Officer
for Field Financial Corporation (dba Mrs. Fields Cookies) from August 1982 until
December 1985. Mr. Devine received a B.A. degree from Hillsdale College in 1963
and an M.B.A. from the University of Chicago in 1991.

Mr. Ross joined Coffee People in November 1993 as Chief Financial Officer.
He was appointed Secretary in August 1996. From 1979 to November 1993, he
engaged in the private practice of law in Portland, Oregon. He has also taught
accounting and real estate classes at Portland State University. Mr. Ross
received a B.S. degree in engineering from Oregon State University in 1971, an
M.B.A. from the University of Southern California in 1973 and a J.D. from Lewis
and Clark College, Northwestern School of Law in 1978. Mr. Ross is a Certified
Public Accountant and an Attorney at Law.

Mr. Crantz joined Coffee People in April 1996 as Vice President --
Development. Prior to joining the Company, from October 1994 through March 1996
he was Vice President of Real Estate and Construction for Country Harvest Buffet
Restaurants, Inc. From August 1993 through October 1994, Mr. Crantz served as
President and Chief Executive Officer of American Capital Resources, Inc., a
privately held business equipment financing firm. Mr. Crantz was a founder and
served as Chairman from January 1992 through October 1994 of National Capital
Services, a privately held firm providing management services to the FDIC and
RTC in connection with managing assets from failed banks and thrifts. From
January 1985 through January 1992, Mr. Crantz held various positions with
Marriott

32
<PAGE>
Hotels and Resorts, including Vice President of Development, Divisional Vice
President of Development for Courtyard by Marriott, and Divisional Vice
President for Development for Fairfield Inn by Marriott. He received a B.B.A.
from Pacific Lutheran University in 1977.

Mrs. Roberts opened the first Coffee People store with her husband, James L.
Roberts, in 1983 and has worked full time in the business since 1985. From 1982
to 1985, she was employed by Coffee Bean International, Inc. as sales and
customer service representative. From 1985 to 1994, she held various positions
with the Company. Mrs. Roberts was Vice President -- Operations of the Company
from 1994 to August 1996, when she was appointed Vice President -- Human
Resources.

Mr. Ferguson has been a director and officer of the Company since it was
organized in 1992. From 1985 until 1992, Mr. Ferguson was a 50% partner in the
partnership that was the predecessor to Coffee People. Currently, Mr. Ferguson
is primarily involved with Coffee Creations, Inc., a company which he co-founded
in 1988 to develop specialty coffee beverages and products. Coffee Creations,
Inc. competes from time to time with Coffee People in the development of new
products and may compete with Coffee People in the future. See "Certain
Transactions." He was a co-founder of Coffee Bean International, Inc., in which
he served as Secretary-Treasurer from 1976 until 1991, when he and Mr. Talboy
sold the business. He has been active with the Organic Crop Improvement
Association and has been active in organic coffee certification efforts. He
received a B.S. in English from Southern Oregon State College in 1971. Mr.
Ferguson is a co-founder of the Specialty Coffee Association of America (the
"SCAA") and has been active in that organization since 1982.

Mr. Talboy has been a director of the Company since it started corporate
operations in 1992. He was Secretary-Treasurer of the Company from 1992 to
August 1996. From 1985 until 1992, Mr. Talboy was a 50% partner in the
partnership that was the predecessor of Coffee People. Currently, Mr. Talboy is
primarily active as a coffee industry consultant through his company, Specialty
Coffee Consultants. Through this business, Mr. Talboy assists roasters in
identifying sources for green coffee and in helping farmers in the coffee
producing countries develop means of producing and marketing better quality
green coffees. He is a co-founder of Coffee Bean International, Inc., in which
he served as President from 1976 until he and Mr. Ferguson sold the business in
1991. Mr. Talboy is also a founding director of the SCAA and was selected by the
SCAA as an industry representative to serve consecutive terms on the board of
the Coffee Development Group, a United States organization funded by the
International Coffee Organization. He received a B.S. in marketing from Southern
Oregon State College in 1971.

Mr. Ayer has been a director of the Company since January 1996, when
International Capital Partners, Inc. ("ICP"), of which he is President and
Managing Partner, represented investors in a private placement of Common Stock
of the Company. Mr. Ayer has been associated with ICP since 1989 when it was
founded. He serves on the board of directors of four private companies and two
public companies, Bio Dental Technologies Corp. and BioPool International Inc.
Prior to joining ICP, Mr. Ayer was Chief Executive Officer and a principal
stockholder of Carnetrics, Inc., a privately held manufacturer of custom
fabricated engineered metal components. Mr. Ayer holds a B.S. cum laude from
Princeton University and an M.B.A. from Harvard Business School.

EXECUTIVE COMPENSATION

The following table summarizes the compensation earned by the Company's
Chief Executive Officer. None of the Company's other executive officers received
compensation in excess of $100,000 for services rendered to the Company in all
capacities in 1995.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------
NAME AND PRINCIPAL POSITION SALARY BONUS
--------- ---------
<S> <C> <C>
James L. Roberts................................................................. $ 74,682 --
Chairman of the Board and Chief Executive Officer
</TABLE>

33
<PAGE>
EMPLOYMENT AGREEMENTS

The Company has employment agreements with James L. Roberts, its Chairman
and Chief Executive Officer, Taylor H. Devine, its President and Chief Operating
Officer, Steven P. Crantz, its Vice President -- Development, and Patricia J.
Roberts, its Vice President -- Human Resources.

The agreement with Mr. Roberts is for a five-year term through December 31,
1997. The agreement provides for a base salary during 1996 and 1997 of at least
$69,378 and $71,459, respectively. The agreement may be terminated by either Mr.
Roberts or the Company upon 21 days prior written notice. If the agreement is
terminated by the Company without cause, Mr. Roberts is entitled to a payment of
$25,000. The agreement may also be terminated without notice by the Company for
cause. In addition to his base salary under the agreement, Mr. Roberts receives
$12,000 annually for serving on the Board of Directors.

The agreement with Mr. Devine is for a five-year term, ending December 31,
2000. The agreement provides for a base annual salary of $150,000, with the
potential for scheduled increases if certain annual sales targets are met.
Bonuses are paid to Mr. Devine based on a percentage of the Company's pre-tax
operating income, and based on certain pre-tax operating margin targets, as
established by the Board of Directors. Upon completion of this offering, the
agreement provides that the Company will grant to Mr. Devine an option for
63,000 shares of Common Stock at an exercise price equal to the fair market
value of the Common Stock on the date of the initial public offering. The
agreement may be terminated by either Mr. Devine or the Company on 30 days prior
written notice. In the event of termination by the Company without cause, Mr.
Devine is entitled to receive payment of his base salary for a period of six
months following termination, plus a prorated bonus accrued through the date of
termination. The Company may also terminate the agreement without prior notice
for cause. Upon termination for cause, or termination at the election of Mr.
Devine, he is entitled to a severance payment of one month's base salary plus
prorated bonus accrued to the date of termination.

The agreement with Mr. Crantz is for a five-year term through April 14,
2001. The agreement provides for a base annual salary of $90,000, plus a bonus
based on the performance of new stores opened. Mr. Crantz may terminate the
agreement upon 30 days prior written notice, and the Company may terminate the
agreement upon 90 days prior written notice. If so terminated, Mr. Crantz is
entitled to a pro rata portion of his bonus accrued during the year of
termination. The Company may also terminate the agreement for cause.

The agreement with Mrs. Roberts is for a five-year term through December 31,
1997. The agreement provides for a base salary during 1996 and 1997 of at least
$42,784 and $44,065, respectively. The agreement may be terminated by either
Mrs. Roberts or the Company upon 21 days prior written notice. If the agreement
is terminated by the Company without cause, Mrs. Roberts is entitled to a
payment of $5,000. The agreement may also be terminated by the Company without
notice for cause.

STOCK OPTION PLANS

In 1993, 1994, 1995 and 1996 the Board of Directors and the stockholders
adopted the 1993 Stock Option Plan, the 1994 Stock Option Plan, the 1995 Stock
Option Plan and the 1996 Stock Option Plan, respectively (collectively, the
"Stock Option Plans"). The Stock Option Plans are administered by a committee
comprised of "disinterested directors," for purposes of Rule 16b-3 under the
Exchange Act (the "Plan Administrator"). The Option Plans provide for the grant
of options to purchase up to an aggregate of 646,575 shares of Common Stock to
officers, key employees and consultants. Options granted under the Stock Option
Plans may be either incentive stock options ("ISOs") within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or
non-statutory stock options ("NSOs"). Pursuant to the Stock Option Plans, the
Plan Administrator has the authority to determine in its discretion the
recipients of grants, the number of options to be granted and other terms and
provisions of each option.

34
<PAGE>
ISOs may be issued only to employees of the Company. The exercise price for
ISOs granted under the Stock Option Plans may not be less than 100 percent of
the fair market value of the Common Stock at the time of the grant and the
aggregate fair market value (as determined at the time of the grant) of shares
issuable upon exercise of incentive stock options for the first time in any one
calendar year may not exceed $100,000. Options granted under the Stock Option
Plans have a maximum term of 10 years from the date of the grant. In the case of
ISOs granted to holders of more than 10 percent of the voting power of the
Company, the exercise price may not be less than 110 percent of the fair market
value and the option by its terms may not be exercisable more than 5 years after
the date or grant. NSOs may be granted at not less than 85 percent of the fair
market value of the Common Stock at the date of the grant. Options granted under
the Stock Option Plans become exercisable in whole or in part from time to time
as determined by the Plan Administrator. Options are not transferable other than
by will or the laws of descent and distribution, and each option is exercisable
during the lifetime of the optionee only by such optionee.

As of June 30, 1996, options to purchase 334,838 shares of Common Stock were
granted and outstanding under the Stock Option Plans, at a weighted average
exercise price of $8.24.

EMPLOYEE STOCK PURCHASE PLAN

On June 3, 1994, the Company adopted an Employee Stock Purchase Plan (the
"ESPP"). Under the ESPP, 150,000 shares of Common Stock have been reserved for
issuance to and purchase by employees of the Company. As of the date of this
Prospectus, no shares of Common Stock have been sold under the ESPP.

All employees with over six months of service who work more than 20 hours
per week and who do not own stock or options for more than 5% of the Company's
stock are eligible to participate in the ESPP.

The Company expects to implement the ESPP through periodic issuances of
Common Stock. The Company also may implement the ESPP through open market
purchases of Common Stock. Upon implementation, at the beginning of each
applicable subscription period, the Company will offer to each participant in
the ESPP an option to purchase a maximum number of shares based upon a
percentage of the participant's base compensation for the period divided by 85%
of the market value of the Common Stock at that time. At the end of each period,
each participant can acquire such shares at the lower of 85% of the fair market
value at the beginning or at the end of the period. The ESPP allows participants
to authorize payroll deductions or to make cash payments to be applied toward
the purchase of shares of Common Stock. Unless a participant gives written
notice to the Company, the option to purchase Common Stock with the cash value
of his or her account will be deemed to have been automatically exercised at the
end of each applicable period. Upon written notice at any time prior to the end
of an applicable period, a participant may elect to withdraw the value of his or
her account at such time.

The ESPP is intended to qualify as an "employee stock purchase plan" under
Section 423 of the Code. Under that Code section, employees may not be granted
options if immediately after the grant such employee would own stock or hold
options to purchase stock possessing 5% or more of the voting power or value of
all stock of the Company, nor may any participant purchase Common Stock having a
fair market value exceeding $25,000 in any calendar year.

The Board of Directors may at any time amend or terminate the ESPP, except
that the approval of the Company's stockholders is required within 12 months of
the adoption of any amendment increasing the number of shares authorized for
issuance under the ESPP. Unless extended by the Board of Directors, the ESPP
will terminate on the earlier of ten years from its effective date, or when all
of the shares reserved for issuance under the ESPP have been issued. As of the
date of this Prospectus, no shares of Common Stock have been issued or sold
under the ESPP.

35
<PAGE>
CERTAIN TRANSACTIONS

Effective January 4, 1993, the Company redeemed a total of 282,094.5 shares
of Common Stock owned by each of Jeffrey M. Ferguson and Gary G. Talboy. The
total purchase price was $500,750. As part of the consideration for the
redemption, the Company gave promissory notes in the amount of $245,000 to each
of Messrs. Ferguson and Talboy. Monthly payments in the amount of $2,975 are
made on each of the notes, which bear interest at the rate of 2% over the prime
rate of interest (8.5% at June 30, 1996). Mr. Ferguson's note was prepaid in
full in August 1995. Mr. Talboy's note may be prepaid in full at any time
without penalty. His note is secured by substantially all of the Company's
assets, including accounts receivable, inventories, trade fixtures and
equipment, tangible and intangible personal property, after acquired property
and the proceeds thereof. Mr. Talboy's security interest is subordinate to the
security interest held by the Company's bank.

Simultaneously, Messrs. Ferguson and Talboy each sold 281,219 shares of
Common Stock (in the aggregate, 50% of the then outstanding shares) to James L.
Roberts and Patricia J. Roberts. As part of the consideration for the purchase,
Mr. and Mrs. Roberts gave each of Messrs. Ferguson and Talboy promissory notes
in the original principal amount of $249,500. The promissory notes bear interest
at the rate of 2% over the prime rate of interest (8.5% at June 30, 1996). The
notes may be prepaid in full at any time without penalty. The notes are secured
by a pledge of substantially all shares of Common Stock of the Company owned by
Mr. and Mrs. Roberts. As of June 30, 1996, the aggregate outstanding principal
and accrued but unpaid interest on the promissory notes were $444,498 and
$88,252, respectively. Immediately following this offering, Mr. and Mrs. Roberts
intend to pay all accrued interest on the notes and make principal payments
sufficient to bring the notes current.

On March 18, 1994, the Company issued 16,500 shares of Common Stock to each
of Messrs. Ferguson and Talboy in satisfaction of $132,000 due to them
consisting of $108,600 in dividends payable with respect to Subchapter S
distributions and $23,400 of the current portion of long-term notes.

On December 31, 1993, Kenneth B. Ross, Chief Financial Officer and
Secretary, exercised incentive stock options for 37,500 shares of Common Stock
and paid for such shares by giving a promissory note to the Company in the
amount of $83,333. The note bears interest at the rate of 8.5% per annum and is
due on December 31, 1998. On January 17, 1995, Mr. Ross exercised incentive
stock options for 26,250 shares of Common Stock and paid for such shares by
giving promissory notes to the Company in the aggregate amount of $58,333. The
notes bear interest at the rate of 8.5% per annum and are due December 31, 1999.
The notes provide that in the event any of the stock is sold before the notes
mature, all accrued interest and a pro rata portion of the principal balance
must be paid in full.

In January 1994, the Company entered into a lease agreement with Timothy M.
O'Callaghan, then Vice President -- Real Estate of the Company, for the lease of
property at Southeast 102nd and Stark Streets, Portland, Oregon, where the
Company now operates a Motor Moka drive-through store. The initial term of the
lease is for a period of six years which expires on February 28, 2000. The lease
automatically renews for an additional five-year period and contains one further
renewal option to extend the term of the lease through October 16, 2008, unless
the Company delivers notice that it is not exercising the renewal option. The
sublease requires the Company to pay Mr. O'Callaghan monthly the sum of $2,677
plus one-half of the net profits from the operation of the store, in addition to
amounts due under the ground lease underlying the Company's sublease, which
amount is currently $1,895. For purposes of determining the profits under the
sublease, the Company may offset a full allocable portion of corporate overhead
expenses. These lease terms may not be as favorable to the Company as the
Company might have been able to obtain from an unrelated third party.

Messrs. Ferguson and Talboy are the former owners of CBI, the Company's sole
coffee supplier. See "Risk Factors -- Dependence on Single Coffee Supplier" and
"Business -- Coffee People Products and Suppliers -- Suppliers." They sold CBI
on June 7, 1991, in exchange for cash and promissory notes due April 30, 2001.
At the time of the sale, Messrs. Ferguson and Talboy also owned the predecessor
of Coffee People as equal partners. As part of the consideration of the sale of
CBI, Coffee

36
<PAGE>
People and CBI entered into a supply agreement, which has subsequently been
replaced by the Supply Agreement, which requires Coffee People to purchase all
of its vendor-roasted coffee requirements from CBI. See "Risk Factors --
Dependence on Single Coffee Supplier."

The Company's Black Tiger Sparkling Coffee is manufactured by Coffee
Creations, Inc. ("Coffee Creations") an Oregon corporation owned in part by Mr.
Ferguson. Coffee Creations also develops and manufactures other specialty coffee
beverages and products, including other sparkling coffees, which do and may
compete with Coffee People's products. Coffee People has not claimed and does
not expect to claim any interest in the competing products developed by Coffee
Creations. Mr. Ferguson considers the formula for Black Tiger Sparkling Coffee
to be owned by Coffee Creations and considers only the name for Black Tiger
Sparkling Coffee to be owned by Coffee People. Coffee People currently purchases
all of its Black Tiger Sparkling Coffee from Coffee Creations, but is not
obligated to do so. During 1995 and the first six months of 1996, Coffee People
paid Coffee Creations approximately $13,500 and $7,500, respectively, for
purchases of product. During the first six months of 1996, sales of Black Tiger
Sparkling Coffee accounted for less than 1% of the Company's revenues.
Accordingly, sales of this product do not constitute a significant part of the
Company's business and the Company does not consider itself to be materially
dependent on Coffee Creations as the source for this product. However, in order
to establish a supply relationship with another source, Coffee People would
either have to duplicate the formula or develop an alternative formula with the
characteristics of quality and taste contained in the existing product.

On May 23, 1994, the Company entered into an Equipment Lease Agreement with
First Portland Leasing Company for the lease of approximately $75,000 of
equipment. The lease runs for three years and requires monthly payments of
$2,799 each. The Company also has an option to purchase the leased equipment
upon the payment of $7,553 at the conclusion of the lease term. The lease has
been guaranteed by Mr. and Mrs. Roberts, by Mr. Ferguson and by Mr. Ross.

On July 1, 1994, Mr. Talboy purchased the land and building on which the
Company operates its Motor Moka drive-through espresso bar at 525 N.E. Grand
Avenue, Portland, Oregon. Immediately following the closing of Mr. Talboy's
purchase, the Company leased the property from Mr. Talboy under a 15-year lease
that requires the Company to pay Mr. Talboy base rent of $6,375 per month. The
lease provides for rent escalation in 2000 and annually thereafter based upon
the increase in the consumer price index in effect at the end of 1997 and also
requires the Company to pay all utilities, insurance, property taxes, and
repairs and maintenance relating to the property. These lease terms may not be
as favorable to the Company as the Company might have been able to obtain from
an unrelated third party.

The Company's retail store at 817 NW 23rd Avenue, Portland, Oregon is leased
by Mr. Ferguson, Mr. Talboy and Mr. and Mrs. Roberts (dba Coffee People
Immediate Care Center). The Company is permitted to operate at such location and
makes all rental payments under the lease agreement for such location without
incurring any additional obligation to the lessees. However, the Company has no
written sublease agreement relating to the store.

In September 1995, the Company granted options to Taylor H. Devine for
150,000 shares of Common Stock at an exercise price of $10.00 per share, which
options vest annually through January 1, 2000.

In January 1996, the Company issued a warrant to purchase 135,000 shares of
Common Stock at an exercise price of $8.00 per share to ICP. Douglas L. Ayer, a
director of the Company, is President and Managing Partner of ICP.

In March 1996, the Company granted options to Mr. Ross for the purchase of
30,000 shares of Common Stock at an exercise price of $10.00 per share, which
options vest annually through July 1, 2000.

37
<PAGE>
In April 1996, the Company granted options to Steven P. Crantz for the
purchase of 45,000 shares of Common Stock at an exercise price of $10.00 per
share, which options vest annually through January 1, 2003.

The Company's obligations under lease agreements with respect to one of its
stores and its corporate headquarters are guaranteed by Mr. and Mrs. Roberts. A
second store lease is guaranteed by Mr. Roberts, Mr. Ferguson and Mr. Talboy.

38
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of June 30, 1996, and as adjusted to
reflect the sale of the shares offered by this Prospectus, by (i) each person
who is known by the Company to own beneficially more than 5% of the Common
Stock, (ii) each of the Company's directors, (iii) the Chief Executive Officer,
(iv) the Selling Stockholders and (v) all directors and executive officers as a
group. To the Company's knowledge, each named beneficial owner has sole voting
and investment power with respect to the shares listed except as indicated
below.

<TABLE>
<CAPTION>
SHARES OWNED SHARES OWNED
BEFORE THE OFFERING AFTER THE OFFERING
---------------------- SHARES BEING ----------------------
NAME OF OWNER (1) NUMBER PERCENT OFFERED NUMBER PERCENT
----------- --------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
James L. Roberts (2)................................ 562,500 28.1% 150,000 412,500 12.8%
Patricia J. Roberts (3)............................. 562,500 28.1 150,000 412,500 12.8
Zesiger Capital Group, LLC (4)...................... 525,000 26.2 125,000 400,000 12.4
320 Park Avenue
New York, NY 10022
Gary G. Talboy...................................... 297,750 14.9 12,500 285,250 8.8
Jeffrey M. Ferguson (5)............................. 281,550 14.1 12,500 269,050 8.3
Douglas L. Ayer(6).................................. 135,000 6.3 -- 135,000 4.0
John Estok (7)...................................... 75,000 3.7 25,000 50,000 1.5
Taylor H. Devine (8)................................ 31,200 1.5 -- 31,200 1.0
All directors and executive officers as a group
(2)(3)(5)(6)(8)(9)................................. 1,381,950 63.5% 175,000 1,206,950 35.5%
</TABLE>

- ------------------------
(1) Unless otherwise indicated, the address for each person in this table is c/o
Coffee People, Inc., 3259 NW 29th Avenue, Portland, Oregon 97210.

(2) Includes 281,250 shares owned by his wife, Patricia J. Roberts.
Substantially all of such shares have been pledged to Jeffrey M. Ferguson
and Gary G. Talboy to secure promissory notes. See "Certain Transactions."
Shares Being Offered include 75,000 shares being offered by Mrs. Roberts.

(3) Includes 281,250 shares owned by her husband, James L. Roberts.
Substantially all of such shares have been pledged to Jeffrey M. Ferguson
and Gary G. Talboy to secure promissory notes. See "Certain Transactions."
Shares Being Offered include 75,000 shares being offered by Mr. Roberts.

(4) Consists of shares over which Zesiger Capital Group, LLC has dispositive
power pursuant to authority granted by its investment clients. Zesiger
Capital Group, LLC disclaims beneficial ownership of all such shares.

(5) Includes 2,400 shares held in trusts for his children for which he serves as
trustee.

(6) Includes 135,000 shares issuable upon exercise of a warrant owned by
International Capital Partners, Inc., of which Mr. Ayer is President and
Managing Partner.

(7) Includes 75,000 shares acquired in exchange for promissory notes in the
aggregate amount of $166,667. The notes bear interest at the rate of 8.5%
per annum and are due on December 31, 1998. If any of the shares are sold
before the notes mature, all accrued interest and a pro rata portion of the
principal balance must be paid in full. Immediately following this offering,
Mr. Estok will pay the Company $84,000 in principal and accrued interest on
the notes. See "Use of Proceeds."

(8) Includes 30,000 shares issuable upon exercise of stock options.

(9) Includes 9,750 shares issuable upon exercise of stock options held by an
executive officer.

39
<PAGE>
DESCRIPTION OF SECURITIES

The Company's Articles authorize the issuance of up to 50,000,000 shares of
Common Stock and 10,000,000 shares of Series Preferred Stock ("Preferred
Stock"). The following description of the Company's capital stock is qualified
in all respects by reference to the Articles, which have been filed as an
exhibit to the Registration Statement of which this Prospectus forms a part.

COMMON STOCK

Holders of Common Stock are entitled to receive dividends when and as
declared by the Board of Directors out of any funds lawfully available therefor
and, in the event of liquidation or distribution of assets, are entitled to
participate ratably in the distribution of such assets remaining after payment
of liabilities, in each case subject to any preferential rights granted to any
series of Preferred Stock that may then be outstanding. The Common Stock does
not have any preemptive rights or redemption, conversion or sinking fund
provisions. All of the issued and outstanding shares of Common Stock are, and
all shares of Common Stock to be outstanding upon completion of the offering
will be, validly issued, fully paid and nonassessable. Holders of Common Stock
are entitled to one vote per share on all matters to be voted upon by the
stockholders. Holders of Common Stock do not have cumulative voting rights in
the election of directors. The Articles authorize the Board of Directors to
provide for staggered terms for directors whenever the Board of Directors is
comprised of six or more members.

PREFERRED STOCK

The Articles authorize the Board of Directors, without further shareholder
authorization, to issue Preferred Stock in one or more series and to fix the
terms and provisions of each series, including dividend rights and preferences,
conversion rights, voting rights, redemption rights, and rights on liquidation,
including preferences over Common Stock, all of which could adversely affect the
rights of holders of Common Stock. The issuance of any series of Preferred Stock
under certain circumstances could have the effect of delaying or preventing a
change of control of the Company, could adversely affect the rights of the
holders of Common Stock, may discourage bids for the Common Stock at a premium
over the market price and may adversely affect the market price of, and the
voting and other rights of the holders of, the Common Stock. No Preferred Stock
is outstanding and the Company has no present plans to issue any shares of
Preferred Stock.

WARRANTS

FINANCING WARRANT.

In connection with the sale in a private transaction of 596,250 shares of
Common Stock in January 1996 (the "Private Placement"), the Company issued a
warrant entitling the holder to purchase 135,000 shares of Common Stock at an
exercise price of $8.00 per share (the "Financing Warrant"). The Financing
Warrant expires one year following the closing of this offering. The exercise
price of the Financing Warrant is subject to adjustment under certain
circumstances to protect the holder thereof from dilution.

PERFORMANCE WARRANTS.

In connection with the Private Placement, the Company issued warrants to
certain investors entitling the holders thereof to purchase an aggregate of
131,250 shares of Common Stock at $0.0067 per share (the "Performance
Warrants"). The Performance Warrants are not exercisable prior to March 31,
1999, except that they may be exercised at any time after January 1, 1999 if the
Company (i) fails to achieve earnings before interest and taxes plus
depreciation and amortization ("EBITDA") of at least $1.25 per share for 1997
and (ii) has not sold Common Stock pursuant to a public offering meeting certain
conditions. The Performance Warrants will be cancelled if the Company either (a)
achieves EBITDA in 1997 and 1998 of at least $1.25 and $1.91 per share,
respectively, or (b) closes prior to December 31, 1998 an underwritten public
offering of its Common Stock which generates at least $6 million of gross
proceeds, at a price which results in a 35 percent or greater compound annual
return on the Common Stock acquired by the holders of the Performance Warrants
in the Private Placement. Compound annual return is calculated for these
purposes by valuing the stock sold in the

40
<PAGE>
underwritten public offering at the gross price per share to the underwriters,
measured at the date of the closing of the offering. The number of shares
issuable upon exercise of the Performance Warrants is subject to adjustment
under certain circumstances to protect the holders thereof from dilution. The
Performance Warrants will be cancelled following the completion of this
offering.

REPRESENTATIVES' WARRANTS.

In connection with this offering, the Company has authorized the issuance of
Representatives' Warrants and has reserved for issuance 122,500 shares of Common
Stock issuable upon exercise of such warrants. The Representatives' Warrants
will entitle the holders to acquire 122,500 shares of Common Stock at an
exercise price per share equal to $10.80. The Representatives' Warrants will be
exercisable at any time from the first anniversary of the date of this
Prospectus until the fifth anniversary of the date of this Prospectus. The
Representatives' Warrants may be cancelled by the Company at any time upon at
least 90 days written notice to the holders thereof, if the closing price per
share of the Common Stock for the 30 consecutive days immediately preceding the
date notice of cancellation is given equals or exceeds $15.12. See
"Underwriting."

The foregoing discussion of the Financing Warrant, the Performance Warrants
and the Representatives' Warrants is qualified in its entirety by reference to
the detailed provisions of the agreements governing such warrants, each of which
has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part.

For the life of the Financing Warrant, the Performance Warrants and the
Representatives' Warrants, the holders thereof have the opportunity to profit
from a rise in the market price of the Common Stock without assuming the risk of
ownership of the shares of Common Stock issuable upon exercise of such warrants.
Warrant holders may be expected to exercise their warrants at a time when the
Company would likely be able to obtain any needed capital by an offering of
Common Stock on terms more favorable than those provided for by the warrants.
Further, the terms on which the Company could obtain additional capital during
the life of the warrants may be adversely affected by their existence.

REGISTRATION RIGHTS

The holders of 731,250 shares of Common Stock (including shares issuable
upon exercise of the Financing Warrant) are entitled to certain rights with
respect to registration of such shares under the Securities Act. If the Company
proposes to register any of the Common Stock, either for its own account or for
the account of other security holders, such holders are entitled to written
notice of the registration and are entitled to include, at the Company's
expense, shares held by such holders, subject to certain limitations and
exceptions. Such rights do not apply with respect to this offering. In addition,
at any time after six months following the closing of this offering, the holders
of 50% or more of such shares may require the Company on one occasion to use its
best efforts to register under the Securities Act, at the Company's expense,
such holders' shares of Common Stock.

STATE LEGISLATION

The Company is subject to certain provisions of the Oregon Business
Combination Act that govern business combinations between corporations and
interested stockholders (the "Business Combination Act"). The Business
Combination Act generally provides that if a person or entity acquires 15% or
more of the voting stock of an Oregon corporation (an "Interested Shareholder"),
the corporation and the Interested Shareholder, or any affiliated entity of the
Interested Shareholder, may not engage in certain business combination
transactions for three years following the date the person became an Interested
Shareholder. Business combination transactions for this purpose include (a) a
merger or plan of share exchange, (b) any sale, lease, mortgage or other
disposition of 10% or more of the assets of the corporation and (c) certain
transactions that result in the issuance of capital stock to the Interested
Shareholder. These restrictions do not apply if (i) the Interested Shareholder,
as a result of the transaction in which such person became an Interested
Shareholder, owns at least 85% of the outstanding voting stock of the
corporation (disregarding shares owned by directors who are also officers and
certain employee benefit plans), (ii) the board of directors approves the share
acquisition

41
<PAGE>
or business combination before the Interested Shareholder acquires 15% or more
of the corporation's outstanding voting stock or (iii) the board of directors
and the holders of at least two-thirds of the outstanding voting stock of the
corporation (disregarding shares owned by the Interested Shareholder) approve
the transaction after the Interested Shareholder acquires 15% or more of the
corporation's voting stock.

The Company is also subject to the Oregon Control Share Act (the "Control
Share Act"). The Control Share Act generally provides that a person (the
"Acquiror") who acquires voting stock of an Oregon corporation in a transaction
which results in the Acquiror holding more than each of 20%, 33 1/3% or 50% of
the total voting power of the corporation (a "Control Share Acquisition") cannot
vote the shares it acquires in the Control Share Acquisition ("Control Shares")
unless voting rights are accorded to the Control Shares by (a) a majority of
each voting group entitled to vote and (b) the holders of a majority of the
outstanding voting shares, excluding the Control Shares held by the Acquiror and
shares held by the corporation's officers and inside directors. The term
"Acquiror" is broadly defined to include persons acting as a group.

The Acquiror may, but is not required to, submit to the corporation an
"Acquiring Person Statement" setting forth certain information about the
Acquiror and its plans with respect to the corporation. The Acquiring Person
Statement may also request that the corporation call a special meeting of
stockholders to determine whether the voting rights will be restored to the
Control Shares. If the Acquiror does not request a special meeting of
stockholders, the issue of voting rights of Control Shares will be considered at
the next annual or special meeting of stockholders. If the Acquiror's Control
Shares are accorded voting rights and represent a majority or more of all voting
power, stockholders who do not vote in favor of the restoration of such voting
rights will have the right to receive the appraised "fair value" of their
shares, which may not be less than the highest price paid per share by the
Acquiror for the Control Shares.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock is ChaseMellon
Shareholder Services, Inc., Seattle, Washington.

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for the Common
Stock. Future sales of substantial amounts of Common Stock in the public market,
including shares issued under the ESPP, upon the exercise of options granted
pursuant to the Company's Stock Option Plans and outstanding warrants, could
adversely affect the prevailing market prices of the Common Stock.

Upon completion of this offering, the Company will have 3,227,869 shares of
Common Stock outstanding. Of these shares, the 1,550,000 shares sold in this
offering and the 107,694 shares sold in the Company's Regulation A offering
completed in December 1994 will be eligible for immediate resale without
restriction under the Securities Act, unless purchased by an "affiliate" of the
Company, as that term is defined in Rule 144 under the Securities Act, which
will be subject to the resale limitations of Rule 144. Upon expiration of
lock-up agreements with the Representatives 180 days after the date of this
Prospectus (or earlier with the consent of Black & Company, Inc.), 1,502,250
shares of Common Stock issued in private transactions not involving a public
offering, treated as "restricted securities" as defined in Rule 144, will be
eligible for immediate resale subject to the limitations of Rule 144. An
additional 67,925 are not subject to lock-up agreements and may be sold
immediately, subject to Rule 144. In addition, holders of 731,250 shares of
Common Stock outstanding and issuable upon exercise of an outstanding warrant
are entitled to certain registration rights. See "Description of Securities --
Registration Rights."

In general, under Rule 144 a person (or persons whose shares are aggregated)
who has beneficially owned restricted shares for at least two years is entitled
to sell within any three-month period a number of shares that does not exceed
the greater of 1% of the then outstanding shares of the Common Stock
(approximately 32,000 shares immediately after this offering) or the average
weekly

42
<PAGE>
trading volume of the Common Stock during the four calendar weeks preceding the
date on which notice of the sale is filed with the Commission. Sales under Rule
144 are also subject to certain manner of sale provisions, notice requirements
and the availability of current public information about the Company. Any person
(or persons whose shares are aggregated) who is not deemed to have been an
affiliate of the Company at any time during the 90 days preceding a sale, and
who has beneficially owned shares for at least three years, is entitled to sell
such shares under Rule 144 without regard to the volume limitations, manner of
sale provisions, public information requirements or notice requirements.

The Company intends to file promptly after the date of this Prospectus a
Registration Statement on Form S-8 under the Securities Act to register 796,575
shares of the Common Stock reserved for issuance upon exercise of options under
the Company's Stock Option Plans and upon sale under the ESPP. Shares acquired
upon the exercise of such options after the effective date of that Registration
Statement generally will be eligible for sale without restriction in the public
market by holders who are not affiliates of the Company, unless such shares are
subject to lock-up agreements with the Representatives. See "Underwriting."

43
<PAGE>
UNDERWRITING

The Underwriters named below (the "Underwriters"), represented by Black &
Company, Inc. and Pacific Crest Securities Inc. (the "Representatives"), have
severally agreed, subject to the terms and conditions contained in the
Underwriting Agreement, to purchase from the Company and the Selling
Stockholders the number of shares of Common Stock indicated below opposite their
respective names at the initial public offering price less the underwriting
discount set forth on the cover page of this Prospectus. The Underwriting
Agreement provides that the obligations of the Underwriters are subject to
certain conditions, and that the Underwriters are committed to purchase all of
such shares, if any are purchased.

<TABLE>
<CAPTION>
NUMBER OF
FIRM SHARES TO BE
UNDERWRITER PURCHASED
-----------------
<S> <C>
Black & Company, Inc................................................................. 500,000
Pacific Crest Securities Inc......................................................... 500,000
Adams, Harkness & Hill, Inc.......................................................... 75,000
Needham & Company, Inc............................................................... 75,000
Ladenburg, Thalmann & Co. Inc........................................................ 75,000
Josephthal Lyon & Ross Incorporated.................................................. 75,000
Cruttenden Roth Incorporated......................................................... 50,000
Van Kasper & Company................................................................. 50,000
LT Lawrence & Company, Inc........................................................... 50,000
Wedbush Morgan Securities Inc........................................................ 50,000
Paulson Investment Company, Inc...................................................... 50,000
-----------------
Total............................................................................ 1,550,000
-----------------
-----------------
</TABLE>

The Company has been advised by the Representatives that the Underwriters
propose to offer the shares to the public at the initial public offering price
set forth on the cover page of this Prospectus, and to certain dealers at that
price less a concession of not more than $0.36 per share, and that the
Underwriters and such dealers may reallow to other dealers, including the
Underwriters, a discount not in excess of $0.10 per share. After the initial
public offering, the public offering price and concessions and discounts may be
changed by the Representatives.

The Underwriters do not intend to confirm sales of more than 5% of the
Common Stock offered hereby to any account over which they exercise
discretionary authority.

The Company has granted the Overallotment Option to the Underwriters,
exercisable for a period of 30 days after the date of this Prospectus, to
purchase up to an additional 160,000 shares of Common Stock from the Company at
the initial public offering price less the underwriting discount set forth on
the cover page of this Prospectus. The Underwriters may exercise the
Overallotment Option only to cover overallotments, if any. To the extent the
Overallotment Option is exercised, each Underwriter will become obligated,
subject to certain conditions, to purchase approximately the same percentage of
such additional shares as the number of shares of Common Stock to be purchased
by the Underwriter shown in the table above bears to the total number of shares
shown in the table.

The Company and certain stockholders, officers and directors of the Company,
who will own or control a total of 1,502,250 shares of Common Stock following
the offering, and persons holding options and a warrant to purchase 469,838
shares of Common Stock, have agreed not to offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock for a period of 180 days after
the date of this Prospectus without the consent of the Representatives, subject
to certain limited exceptions.

44
<PAGE>
The Underwriting Agreement provides that the Company and the Selling
Stockholders will indemnify the Underwriters against certain liabilities under
the Securities Act, or will contribute to payments the Underwriters may be
required to make in respect thereof. The Company will pay the Representatives a
nonaccountable expense allowance of 0.5% of the offering proceeds.

The Company has agreed to sell to the Representatives, for nominal
consideration, warrants to purchase from the Company up to 122,500 shares of
Common Stock at an exercise price per share equal to $10.80. The
Representatives' Warrants are exercisable for a period of four years beginning
one year from the date of this Prospectus, and are not transferable except to
officers or partners of the Representatives or by operation of law. The Company
has granted certain rights to the holders of the Representatives' Warrants to
register under the Securities Act the Common Stock issuable upon exercise of the
Representatives' Warrants. The Representatives' Warrants will be callable by the
Company upon 90 days notice following the first time when the closing price of
the Common Stock exceeds $15.12 per share for 30 consecutive days.

In connection with the Private Placement, Pacific Crest Securities Inc.
("Pacific Crest") was engaged by the Company as its investment banking
representative and financial advisor. As compensation for these services, the
Company paid to Pacific Crest a fee of $200,000 in cash upon the closing of the
Private Placement. The Company also reimbursed Pacific Crest for its reasonable
out-of-pocket costs in excess of $3,000 related to the Private Placement. The
Company also agreed that through January 11, 1998 the Company will first offer
to Pacific Crest the right to (i) act as the Company's agent in any private
equity financings, (ii) act as the Company's managing underwriter in any public
offering of the Company's shares involving gross proceeds of $10 million or
less, (iii) act as co-manager in any underwriting in which Pacific Crest is not
the managing underwriter, and (iv) act as the Company's advisor in any merger
and acquisition activities. Any such future arrangement is contingent upon the
Company and Pacific Crest reaching a satisfactory agreement on reasonable fees,
which are to be negotiated in good faith prior to any engagement. Also in
connection with the Private Placement, persons affiliated or associated with
Pacific Crest acquired an aggregate of 49,800 shares of the Common Stock of the
Company for the same price per share and on the same terms as other purchasers
in the Private Placement.

Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price was determined by negotiations between
the Company, the Selling Stockholders and the Representatives. Among the factors
considered in determining the initial public offering price were the history of
and the prospects for the Company and the industry in which it competes, an
assessment of the Company's management, its past and present operations, its
past and present earnings and the trend of such earnings, the prospects for
future earnings, the present state of the Company's development, the general
condition of the securities markets at the time of the offering and the market
prices of publicly traded common stocks of comparable companies in recent
periods.

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company and the Selling Stockholders by Tonkon, Torp, Galen, Marmaduke & Booth,
Portland, Oregon. Certain legal matters in connection with the issuance of the
Common Stock will be passed upon for the Underwriters by Stoel Rives LLP,
Portland, Oregon.

EXPERTS

The financial statements included in the Prospectus and elsewhere in the
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said reports.

45
<PAGE>
AVAILABLE INFORMATION

Following this offering, the Company will be subject to the requirements of
the Exchange Act and thus will file periodic reports, proxy statements and other
information with the Commission. A Registration Statement on Form SB-2 relating
to the Common Stock being offered hereby has been filed by the Company with the
Commission. As permitted by the rules and regulations of the Commission, this
Prospectus does not contain all the information set forth in the Registration
Statement. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement, including
the exhibits thereto and schedules filed therewith. Copies of the Registration
Statement and reports filed under the Exchange Act may be obtained from the
Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street
NW, Washington, D.C. 20549, and at the Commission's regional offices located at
7 World Trade Center, Suite 1300, New York, New York 10048, and 1400 Citicorp
Center, 500 West Madison Street, Chicago, Illinois 60661, upon payment of
prescribed fees. Statements contained in this Prospectus as to the contents of
any contract or other document are not necessarily complete and, in each
instance, reference is made to the copy of such contract or document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference.

The Company intends to furnish to its stockholders annual reports containing
audited financial statements and quarterly reports for the first three quarters
of each fiscal year containing unaudited interim financial information.

46
<PAGE>
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Public Accountants................................................................... F-2

Balance Sheets as of December 31, 1994 and 1995, and as of June 30, 1995 and 1996 (unaudited).............. F-3

Statements of Income for the years ended December 31, 1993, 1994 and 1995, and for the six months ended
June 30, 1995 and 1996 (unaudited)........................................................................ F-4

Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1993 1994 and 1995 and for
the six months ended June 30, 1995 and 1996 (unaudited)................................................... F-5

Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and for the six months ended
June 30, 1995 and 1996 (unaudited)........................................................................ F-6

Notes to Financial Statements.............................................................................. F-7
</TABLE>

F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of
Coffee People, Inc.:

We have audited the accompanying balance sheets of Coffee People, Inc. (an
Oregon corporation) as of December 31, 1994 and 1995, and the related statements
of income, changes in stockholders' equity (deficit) and cash flows for each of
the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Coffee People, Inc. as of
December 31, 1994 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Portland, Oregon,
March 29, 1996 (except with respect to
the matters discussed in Note 14, as to
which the date is July 26, 1996)

F-2
<PAGE>
COFFEE PEOPLE, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1994 1995 1996
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 1)............................ $ 472 $ 260 $ 3,390
Accounts receivable........................................... 12 9 28
Inventories (Note 1).......................................... 204 264 208
Prepaid expenses.............................................. 86 112 36
Deferred tax assets (Notes 1 and 5)........................... 15 13 13
Other current assets.......................................... 14 -- --
--------- --------- ---------
Total current assets........................................ 803 658 3,675
PROPERTY AND EQUIPMENT, NET (NOTES 1 AND 2)..................... 1,613 2,155 2,366
OTHER ASSETS.................................................... 96 23 80
--------- --------- ---------
Total assets................................................ $ 2,512 $ 2,836 $ 6,121
--------- --------- ---------
--------- --------- ---------

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and capital lease
obligations (Note 4)......................................... $ 55 $ 112 $ 127
Current portion of long-term debt to related parties (Note
4)........................................................... 17 35 17
Line of credit (Note 3)....................................... -- 175 --
Note payable (Note 4)......................................... 80 -- --
Accounts payable.............................................. 941 775 485
Accrued liabilities........................................... 180 196 183
Income taxes payable (Notes 1 and 5).......................... 12 55 16
Other current liabilities..................................... 89 -- --
--------- --------- ---------
Total current liabilities................................... 1,374 1,348 828
DEFERRED TAX LIABILITY (Notes 1 and 5).......................... 19 66 90
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (Note 4)........... 26 370 328
LONG-TERM DEBT TO RELATED PARTIES (Note 4)...................... 424 197 171
COMMITMENTS (Note 7)
STOCKHOLDERS' EQUITY (Notes 8, 9, 12 and 14):
Preferred stock, no par value; authorized 10,000,000 shares,
none issued or outstanding................................... -- -- --
Common stock, no par value; authorized, 50,000,000 shares;
issued, 1,909,383, 1,936,233, and 2,002,869 shares;
outstanding, 1,378,194, 1,405,044 and 2,002,869 shares....... 1,417 1,476 4,737
Stock subscription notes receivable (Note 9).................. (257) (341) (353)
Warrants outstanding (Note 14)................................ -- -- --
Treasury stock, at cost; 531,189, 531,189 and 0 shares........ (467) (467) --
Retained earnings (accumulated deficit)....................... (24) 187 320
--------- --------- ---------
Total stockholders' equity.................................. 669 855 4,704
--------- --------- ---------
Total liabilities and stockholders' equity.................. $ 2,512 $ 2,836 $ 6,121
--------- --------- ---------
--------- --------- ---------
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-3
<PAGE>
COFFEE PEOPLE, INC.
STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

PROVISION FOR INCOME TAXES
(Notes 1 and 5)....................................... -- (16) (112) (50) (83)
--------- --------- --------- --------- ---------
NET INCOME............................................. $ 248 $ 116 $ 211 $ 92 $ 133
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
EARNINGS PER SHARE (Note 1)............................ $ 0.13 $ 0.06 $ 0.06
--------- --------- ---------
--------- --------- ---------
SHARES USED IN COMPUTING EARNINGS PER SHARE (Note 1)... 1,632,128 1,626,011 2,160,095
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-4
<PAGE>
COFFEE PEOPLE, INC.

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
STOCK RETAINED
COMMON STOCK SUBSCRIPTION EARNINGS
---------------------- TREASURY NOTES (ACCUMULATED
SHARES AMOUNT STOCK RECEIVABLE DEFICIT) TOTAL
----------- --------- ----------- ------------ ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1992.............. 1,689,189 $ 267 $ -- $ -- $ 41 $ 308
Purchase of treasury stock............ (564,189) -- (501) -- -- (501)
Exercise of stock options (Notes 8 and
9)................................... 75,000 167 -- (167) -- --
Net income............................ -- -- -- -- 248 248
Dividends............................. -- -- -- -- (253) (253)
----------- --------- ----------- ------------ ------------- ---------
BALANCE, December 31, 1993.............. 1,200,000 434 (501) (167) 36 (198)
Issuance of treasury stock............ 33,000 98 34 -- -- 132
Exercise of stock options (Notes 8 and
9)................................... 37,500 83 -- (83) -- --
Interest income on stock subscription
notes at 8.5% per annum, net (Note
9)................................... -- -- -- (7) -- (7)
Direct Public Offering (Note 12)...... 107,694 802 -- -- -- 802
Net income............................ -- -- -- -- 116 116
Dividends............................. -- -- -- -- (176) (176)
----------- --------- ----------- ------------ ------------- ---------
BALANCE, December 31, 1994.............. 1,378,194 1,417 (467) (257) (24) 669
Exercise of stock options (Notes 8 and
9)................................... 26,850 59 -- (58) -- 1
Interest income on stock subscription
notes at 8.5% per annum (Note (9).... -- -- -- (26) -- (26)
Net income............................ -- -- -- -- 211 211
----------- --------- ----------- ------------ ------------- ---------
BALANCE, December 31, 1995.............. 1,405,044 1,476 (467) (341) 187 855
Private Placement, net of offering
costs (unaudited).................... 596,250 3,258 467 -- -- 3,725
Exercise of stock options
(unaudited).......................... 1,575 3 -- -- -- 3
Interest income on stock subscription
notes at 8.5% per annum
(unaudited).......................... -- -- -- (12) -- (12)
Net income (unaudited)................ -- -- -- -- 133 133
----------- --------- ----------- ------------ ------------- ---------
BALANCE, June 30, 1996 (unaudited)...... 2,002,869 $ 4,737 $ -- $ (353) $ 320 $ 4,704
----------- --------- ----------- ------------ ------------- ---------
----------- --------- ----------- ------------ ------------- ---------
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-5
<PAGE>
COFFEE PEOPLE, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 248 $ 116 $ 211 $ 92 $ 133
Adjustments to reconcile net income to net cash provided by
operating activities-
Depreciation and amortization............................. 119 175 391 167 232
Deferred provision for income taxes....................... -- 4 49 23 24
Interest income on stock subscriptions.................... -- (21) (26) (12) (12)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable.............. 1 (8) 3 (10) (19)
(Increase) decrease in inventories...................... (9) (45) (60) (58) 56
(Increase) decrease in prepaid expenses................. (11) (57) (26) 54 76
Decrease (increase) in other current assets............. 5 (14) 14 13 --
Increase (decrease) in accounts payable................. 60 639 (166) (38) (289)
Increase (decrease) in accrued liabilities.............. 57 49 16 24 (13)
(Decrease) increase in income taxes payable............. (22) 12 43 20 (40)
(Decrease) increase in other current liabilities........ (2) 18 (33) (33) --
--------- --------- --------- --------- ---------
Net cash provided by operating activities............. 446 868 416 242 148
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net..................... (224) (1,368) (933) (564) (443)
(Increase) decrease in other assets......................... (9) (81) 73 (2) (57)
--------- --------- --------- --------- ---------
Net cash used in investing activities................. (233) (1,449) (860) (566) (500)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt and capital lease
obligations................................................ -- 204 682 285 --
Repayment of debt and capital lease obligations............. -- (168) (115) (202)
Repayment of related party debt............................. (8) (70) (227) (15) (44)
Proceeds from private placement, net........................ -- -- -- -- 3,725
Issuance of Common Stock, net............................... -- 801 1 1 3
Dividends................................................... (109) (135) (56) (38) --
--------- --------- --------- --------- ---------
Net cash (used in) provided by financing activities... (117) 800 232 118 3,482
--------- --------- --------- --------- ---------
INCREASE (DECREASE) IN CASH................................... 96 219 (212) (206) 3,130
CASH AND CASH EQUIVALENTS, beginning of the period............ 157 253 472 472 260
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, end of the period.................. $ 253 $ 472 $ 260 $ 266 $ 3,390
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-6
<PAGE>
COFFEE PEOPLE, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

THE COMPANY

Coffee People, Inc. (the Company), an Oregon corporation, sells coffee
beverages, coffee beans, cookies, pastries, ice cream, shakes and coffee related
merchandise. Eighteen of the Company's nineteen stores are located in Portland,
Oregon and one is located in Eugene, Oregon. A downturn in economic conditions
in Oregon could have a material adverse effect on the Company.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments consist of accounts receivable and debt
instruments. At December 31, 1995 and 1994, the fair value of the Company's
receivables and debt under loans approximated the carrying value.

INTERIM FINANCIAL INFORMATION

The interim financial statements included herein have been prepared, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission (the SEC). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the management of the Company believes that the
disclosures are adequate to make the information presented not misleading.
Interim financial statements are by necessity somewhat tentative; judgments are
used to estimate interim amounts for items that are normally determinable only
on an annual basis. For example, the effective income tax rate is based on
estimates of annual amounts of taxable income.

The interim period information included herein reflects all adjustments
which are, in the opinion of management of the Company, necessary for a fair
statement of the results of the respective interim periods. Results of
operations for interim periods are not necessarily indicative of results to be
expected for an entire year.

ADVERTISING

Advertising costs are expensed as incurred. For the years ended December 31,
1993, 1994 and 1995, advertising costs were $54, $69 and $49, respectively.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include cash and short-term investments with
original maturity dates of three months or less.

INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of roasted coffee, food, beverages, supplies and other merchandise
held for sale.

F-7
<PAGE>
COFFEE PEOPLE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
PROPERTY AND EQUIPMENT

Property and equipment is stated at cost. Depreciation is computed on the
straight-line basis over the estimated useful lives of the assets ranging from
three to seven years. Leasehold improvements are capitalized and amortized on a
straight-line basis over the shorter of the initial lease term or the estimated
useful lives of the assets, generally three to seven years.

Maintenance and repairs are charged to expense as incurred. Major repairs
and improvements are capitalized and depreciated.

STORE OPENING COSTS

Costs incurred in connection with start-up and promotion of new stores are
expensed as incurred.

INCOME TAXES

For the year ended December 31, 1993 and for the period from January 1, 1994
through August 22, 1994, the Company elected to be taxed under the provisions of
Subchapter S of the Internal Revenue Code. Under those provisions, the Company
did not pay federal or state corporate income taxes on its taxable income.
Instead, the stockholders were individually responsible for federal and state
income taxes. Accordingly, no provision for income taxes was made for the year
ended December 31, 1993, or for the period from January 1, 1994 through August
22, 1994.

Subsequent to August 22, 1994, the Company was subject to federal and state
corporate income taxes. Income taxes were provided for on the basis of earnings
reported for financial reporting purposes. Deferred income taxes are provided
for in accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS 109). Deferred taxes are determined based on
the estimated future tax effects of differences between the financial statement
and tax bases of assets and liabilities given the provisions of enacted tax laws
and tax rates. Deferred income tax expenses or credits are based on the changes
in the financial statement basis versus the tax basis in the Company's assets or
liabilities from year to year. The cumulative effect of adopting SFAS 109 was
not material.

EARNINGS PER SHARE

The year ended December 31, 1995 was the first full year that the Company
was subject to federal and state corporate income taxes (see Income Taxes
above). SEC guidelines allow earnings per share data to be presented only when a
company converts to a taxable status. Accordingly, earnings per share data has
been presented only for the year ended December 31, 1995 and the six-month
periods ended June 30, 1995 and 1996.

Earnings per share amounts are based on the average number of shares of
Common Stock and dilutive Common Stock equivalents outstanding, using the
treasury stock method, during the year after giving retroactive effect of a
3-for-2 stock split declared on July 26, 1996 (Note 14). Common stock
equivalents include shares issuable upon exercise of outstanding stock options.
In addition, pursuant to SEC Staff Accounting Bulletin 83, Common Stock options
and warrants granted and shares issued during the 12 months immediately
preceding the offering date at a price below the proposed offering price of the
Company's initial public offering are reflected in the earnings per share
calculation as if they had been outstanding for all periods presented (using the
treasury stock method and the initial public offering price).

F-8
<PAGE>
COFFEE PEOPLE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Certain of the warrants included in the earnings per share calculation are
subject to cancellation if certain conditions are met (see related discussion at
Note 14). The pro forma earnings per share and shares used in pro forma earnings
per share calculations assuming cancellation of the performance warrants are as
follows:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER --------------------
31, 1995 1995 1996
----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Net income........................................ 211 92 133
Pro forma earnings per share...................... $ 0.14 $ 0.06 $ 0.07
Shares used in computing pro forma earnings per
share............................................ 1,500,975 1,494,858 2,028,942
</TABLE>

RECLASSIFICATIONS

Certain balances for prior periods have been reclassified to conform with
the June 30, 1996 presentation.

RECENT PRONOUNCEMENTS

In March 1995, the Financial Accounting Standards Board issued Statement No.
121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of," which requires the Company to review for
impairment of long-lived assets, certain identifiable intangibles and goodwill
related to those assets whenever events or changes in circumstances indicate
that the carrying amount of an asset might not be recoverable. In certain
situations, an impairment loss would be recognized. SFAS 121 will become
effective for the Company's year ending December 31, 1996. The Company has
reviewed the implications of SFAS 121 and, based on its initial evaluation, does
not expect it to have a material impact on the Company's financial condition or
results of operations.

In October 1995, the Financial Accounting Standards Board issued Statement
No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," which establishes
a fair value-based method of accounting for stock-based compensation plans and
requires additional disclosures for those companies that elect not to adopt the
new method of accounting. The Company will continue to account for stock-based
compensation under APB Opinion No. 25, "Accounting for Stock Issued to
Employees." SFAS 123 disclosures will be effective for the year ending December
31, 1996.

2. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1994 1995 1996
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Leasehold improvements.................................. $ 1,091 $ 1,764 $ 1,773
Machinery and equipment................................. 941 1,156 1,308
Capital leases.......................................... 110 116 116
Construction in progress................................ 3 28 310
--------- --------- -----------
2,145 3,064 3,507
Less -- Accumulated depreciation........................ (532) (909) (1,141)
--------- --------- -----------
$ 1,613 $ 2,155 $ 2,366
--------- --------- -----------
--------- --------- -----------
</TABLE>

F-9
<PAGE>
COFFEE PEOPLE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

3. LINE OF CREDIT:
In August 1995, the Company entered into a line of credit agreement with a
bank in the amount of $300. The interest rate for amounts drawn under the line
is 1% over the prime rate (9.5% at December 31, 1995). Out of the $300 credit
line, the sum of $73 is reserved for use under a letter of credit dated August
1995. The line expires in September 1996.

4. DEBT:
Debt consists of the following at December 31:

<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Note payable to bank, payable in monthly installments of $6 each, plus interest at 9%,
commencing September 1, 1995, due August 1, 1998..................................... $ -- $ 184
Note payable to stockholder, payable in monthly installments of $3, including interest
at 2% over the prime rate (11% at December 31, 1995), due December 1, 2002........... 424 197
Note payable to the Port of Portland, payable in monthly installments of $5,
commencing April 8, 1995, including interest at 12%, due March 8, 2003............... -- 268
Other notes payable................................................................... 92 --
--------- ---------
516 649
Less -- Current portion............................................................... (122) (110)
--------- ---------
$ 394 $ 539
--------- ---------
--------- ---------
</TABLE>

The bank note and line of credit (Note 3) is secured by substantially all of
the Company's assets including accounts receivable, inventories, trade fixtures
and equipment. These debt agreements contain restrictions relating to specified
financial ratios as well as the lender's standard covenants and restrictions. As
of December 31, 1995, the Company was in compliance with all debt covenants. The
proceeds from the bank note were used to pay off a note to one of the
stockholders.

The stockholder note is secured by substantially all of the Company's assets
and is subordinated to the bank note.

The principal payments on long-term debt are as follows at December 31,
1995:

<TABLE>
<S> <C>
1996......................................... $ 110
1997......................................... 115
1998......................................... 98
1999......................................... 58
2000......................................... 66
Thereafter................................... 202
---------
$ 649
---------
---------
</TABLE>

F-10
<PAGE>
COFFEE PEOPLE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

4. DEBT: (CONTINUED)
The Company has capital leases for certain equipment. Future minimum
payments under the capital leases are as follows at December 31, 1995:

<TABLE>
<S> <C>
1996.................................................. $ 48
1997.................................................. 27
1998.................................................. 5
----
80
Less -- Portion representing interest................. (15)
----
Present value of net minimum lease payments........... 65
Less -- Current portion............................... (37)
----
Long-term obligations under capital leases............ $ 28
----
----
</TABLE>

5. INCOME TAXES:
The components of the provision for income taxes consist of the following:

<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal............................. $ -- $ 9 $ 59 $ 24 $ 48
State............................... -- 3 4 3 11
--------- --------- --------- --------- ---------
-- 12 63 27 59
Deferred.............................. -- 4 49 23 24
--------- --------- --------- --------- ---------
Total provision................... $ -- $ 16 $ 112 $ 50 $ 83
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>

The reconciliation of the statutory federal income tax rates to the
Company's effective income tax rates is as follows:

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEARS ENDED DECEMBER 31, 30,
------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Federal statutory rate................................ 34.0% 34.0% 34.0% 34.0% 34.0%
State income taxes, net of federal benefit............ -- 5.9 2.6 3.4 3.4
Effect of graduated tax rates......................... -- (7.7) (1.3) (3.3) (0.3)
Effect of change in tax status (Note 1)............... (34.0) (18.2) -- -- --
Other................................................. -- (1.9) (0.6) 1.3 1.1
----- ----- --- --- ---
-- 12.1% 34.7% 35.4% 38.2%
</TABLE>

F-11
<PAGE>
COFFEE PEOPLE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

5. INCOME TAXES: (CONTINUED)
The components of the net deferred tax assets and liabilities consist of the
following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1994 1995 1996
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current deferred tax assets --
Basis difference in accrued liabilities......... $ 3 $ 3 $ 3
Tax deduction carryforwards..................... 12 10 10
--------- --------- -----------
Total current deferred tax asset............ $ 15 $ 13 $ 13
--------- --------- -----------
--------- --------- -----------
Long-term deferred tax asset --
Tax credit carryforwards........................ $ -- $ 32 $ 37
Long-term deferred tax liability --
Basis difference in property, plant and
equipment...................................... (19) (98) (127)
--------- --------- -----------
Net long-term deferred tax liability........ $ (19) $ (66) $ (90)
--------- --------- -----------
--------- --------- -----------
</TABLE>

The Company believes that deferred tax assets will be fully realized based
upon future reversals of existing taxable temporary differences, future earnings
or available tax strategies. Accordingly, there was no valuation allowance on
deferred tax assets at December 31, 1994 and 1995 and June 30, 1996.

6. OPERATING LEASES:
The Company leases certain retail store, office and warehouse facilities
under operating leases expiring through the year 2009. Most lease agreements
contain renewal options and rent escalation clauses. Certain leases provide for
contingent rentals based upon gross sales.

Rental expense under these lease agreements for the years ended December 31,
1993, 1994 and 1995 was as follows:

<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Minimum rentals...................................................... $ 311 $ 460 $ 828
Contingent rentals................................................... 19 28 84
--------- --------- ---------
$ 330 $ 488 $ 912
--------- --------- ---------
--------- --------- ---------
</TABLE>

Minimum future rental payments under these agreements as of December 31,
1995 are as follows:

<TABLE>
<S> <C>
1996............................................................... $ 693
1997............................................................... 616
1998............................................................... 551
1999............................................................... 519
2000............................................................... 418
Thereafter......................................................... 1,479
---------
$ 4,276
---------
---------
</TABLE>

7. COMMITMENTS:
The Company has an agreement with a supplier to purchase substantially all
of the Company's coffee requirements through November 30, 1996. Management
believes that other suppliers could provide similar products. Any supplier from
whom the Company might purchase coffee is subject to

F-12
<PAGE>
COFFEE PEOPLE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

7. COMMITMENTS: (CONTINUED)
volatility in the supply and price of coffee beans. A change in suppliers,
however, could impact the terms currently received by the Company. Such a change
could have a negative impact on operating results.

As a requirement of the lease with the Port of Portland, the Company is
committed to enter into a joint venture with a third party for one of the
Company's stores at Portland International Airport. Once the agreement is
finalized, the Company will have a 49% ownership interest in that store.

8. INCENTIVE PLANS:

AUTHORIZED STOCK

In June 1995, the Company restated its Articles of Incorporation to
authorize 50,000,000 shares of no par value Common Stock and 10,000,000 shares
of no par value preferred stock.

STOCK OPTION PLANS

At December 31, 1995, the Company had three Stock Option Plans -- the 1993
Stock Option Plan adopted in December 1993, the 1994 Stock Option Plan adopted
in March 1994, and the 1995 Stock Option Plan adopted in June 1995
(collectively, the Plans). Under the Plans, key employees and consultants may be
granted either incentive stock options or nonqualified stock options. Incentive
stock options must comply with the requirements of the Internal Revenue Code
(the Code), may be granted only to employees and may be granted at not less than
the fair market value of the stock at the date of grant. Nonqualified options
may be granted to employees and consultants at not less than 85% of the fair
market value of the stock at the date of grant. Canceled options are available
for future grant.

The following table shows the activity for the aforementioned stock option
plans:

<TABLE>
<CAPTION>
NUMBER OF PRICE PER
SHARES SHARE
---------- ----------------
<S> <C> <C>
Outstanding at December 31, 1992............................... -- $ --
Granted...................................................... 225,000 2.22
Exercised.................................................... (75,000) 2.22
Canceled..................................................... -- --
---------- ----------------
Outstanding at December 31, 1993............................... 150,000 2.22
Granted...................................................... 105,000 4.00 - 8.00
Exercised.................................................... (37,500) 2.22
Canceled..................................................... (12,900) 2.22
---------- ----------------
Outstanding at December 31, 1994............................... 204,600 2.22 - 8.00
Granted...................................................... 196,500 8.00 - 10.00
Exercised.................................................... (26,850) 2.22
Canceled..................................................... (22,237) 2.22 - 8.00
---------- ----------------
Outstanding at December 31, 1995............................... 352,013 2.22 - 10.00
Granted...................................................... 85,500 10.00
Exercised.................................................... (1,575) 2.22
Canceled..................................................... (101,100) 2.22 - 8.00
---------- ----------------
Outstanding at June 30, 1996 (unaudited)....................... 334,838 $2.22 - 10.00
---------- ----------------
---------- ----------------
</TABLE>

F-13
<PAGE>
COFFEE PEOPLE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

8. INCENTIVE PLANS: (CONTINUED)
For all three plans, there were 183,638 and 311,737 (unaudited) shares of
unissued Common Stock reserved for issuance at December 31, 1995 and June 30,
1996, respectively. Options to purchase 81,359 and 69,544 (unaudited) shares of
Common Stock were exercisable at December 31, 1995 and June 30, 1996,
respectively.

EMPLOYEE STOCK PURCHASE PLAN

In June 1994, the Board of Directors adopted and the shareholders approved
an Employee Stock Purchase Plan (the ESPP). Under the ESPP, 150,000 shares of
Common Stock have been reserved for issuance to and purchase by employees of the
Company. All employees with over six months of service who work more than 20
hours per week and who do not own stock and stock options for more than 5% of
the Company's stock are eligible to participate in the ESPP. The ESPP is
intended to qualify as an "employee stock purchase plan" under Section 423 of
the Code. Under that section of the Code, employees may not be granted options
if, immediately after the grant, such employee would own stock or hold options
to purchase stock possessing 5% or more of the voting power or value of all
stock of the Company, nor may any participant purchase Common Stock having a
fair market value exceeding $25,000 in any calendar year. No shares have been
issued or purchased under the Plan.

9. STOCK SUBSCRIPTION NOTES RECEIVABLE:
During December 1993, upon exercise of incentive stock options by an officer
and by a key employee, the Company issued 75,000 shares of Common Stock in
exchange for notes. On January 4, 1994, a key employee exercised incentive stock
options for 37,500 shares of Common Stock in exchange for notes. The notes bear
interest at the rate of 8.5% per annum from the dates of exercise, and are due
in full on December 31, 1998. The notes provide that in the event any of the
stock is sold before the notes mature, all accrued interest and a pro rata
portion of the principal balance must be paid.

On January 17, 1995, an officer exercised incentive stock options for 26,250
shares of Common Stock in exchange for notes. The notes bear interest at the
rate of 8.5% per annum from the date of exercise and are due in full on December
31, 1999.

In the event any of the stock is sold before the notes mature, all accrued
interest and a pro rata portion of the principal balance must be paid.

10. RETIREMENT PLAN:
Effective on May 1, 1994, the Company adopted a tax deferred savings plan
(the 401(k) Plan). All employees with over six months service and who work an
average of 30 hours per week or more are eligible to participate in the 401(k)
Plan. Participants who choose to participate may contribute up to 20% of their
pretax compensation to the 401(k) Plan subject to the statutorily prescribed
annual limits. All contributions to the 401(k) Plan, including Company
contributions, are fully vested and nonforfeitable at all times. The Company
made contributions of $6 and $12 during 1994 and 1995, respectively.

F-14
<PAGE>
COFFEE PEOPLE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

11. STATEMENT OF CASH FLOWS:
The Company made the following cash payments:

<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED ENDED JUNE
DECEMBER 31, 30,
---------------- ----------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest (includes $37, $40, $35, $19
and $10 paid to related parties)....... $ 37 $ 71 $134 $ 60 $ 44
Taxes................................... -- -- 32 32 101
</TABLE>

Noncash investing and financing activities are as follows:

<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED ENDED JUNE
DECEMBER 31, 30,
---------------- ----------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Issuance of Common Stock................ $167 $ 83 $ 58 $ -- $ --
Stock subscription note receivable,
net.................................... 167 89 84 13 12
Issuance of treasury stock to related
parties in satisfaction of dividends
payable and long-term debt
obligations............................ -- 132 -- -- --
Reduction of other assets and stock
subscription note receivable interest
in lieu of dividend payments........... -- 22 -- -- --
Purchase of treasury stock in exchange
for long term debt..................... 501 -- -- -- --
Decrease in deferred income tax asset... 5 -- -- -- --
</TABLE>

12. DIRECT PUBLIC OFFERING:
During 1994, the Company completed a direct public offering under Regulation
A of the Securities Act of 1933, as amended, in which the Company sold 107,694
shares or Common Stock at $8 per share. The Company's proceeds from the direct
public offering included in the financial statements are net of offering costs.

13. RELATED PARTY TRANSACTIONS:
As of December 31, 1995, the Company had two different leases with two
stockholders, one of whom is an officer and director and one of whom is an
officer of the Company. One of the leases includes a provision for landlord
participation based on store profit.

14. SUBSEQUENT EVENTS:
In January 1996, the Company completed a private placement of equity
securities in which it raised $3,975,000 through the issuance of 596,250 shares
of Common Stock at $6.67 per share. As part of the private placement, the
Company also issued a warrant which entitles the holder to purchase 135,000
shares of the Company's Common Stock at $8 per share any time within 10 years;
however, the warrant will lapse if not exercised within one year of the closing
date of an underwritten public offering of the Company's Common Stock.

In addition, the Company issued performance warrants which entitle the
holder to purchase 131,250 shares of the Company's Common Stock at $0.0067 per
share if certain earnings thresholds are not achieved in 1997 and 1998. These
warrants are subject to cancellation in the event the

F-15
<PAGE>
COFFEE PEOPLE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

14. SUBSEQUENT EVENTS: (CONTINUED)
Company closes an underwritten public offering of its Common Stock prior to
December 31, 1998, which generates at least $6 million of gross proceeds and
which results in a 35% or greater compound annual return to the purchasers who
acquired Common Stock in the private placement, or in the event the Company
achieves earnings before interest, taxes, depreciation and amortization for 1997
and 1998 of $1.25 and $1.91 per share, respectively.

In May 1996, the Board of Directors of the Company approved the 1996 stock
option plan (the 1996 Plan) which provides for the issuance of options for an
additional 112,500 shares of Common Stock. No options have been granted under
the 1996 Plan. These shares have been included as shares reserved for issuance
at June 30, 1996.

On July 26, 1996, the Board of Directors approved a 3-for-2 stock split. The
effect of this stock split has been retroactively reflected in these financial
statements and notes for all periods presented.

F-16