SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted
by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Under Rule 14a-12
DIEDRICH COFFEE, INC.
--------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
N/A
--------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
--------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
--------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee
is calculated and state how it was determined):
--------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
--------------------------------------------------------------------------------
(5) Total fee paid:
--------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials:
--------------------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
--------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement no.:
--------------------------------------------------------------------------------
(3) Filing Party:
--------------------------------------------------------------------------------
(4) Date Filed:
--------------------------------------------------------------------------------
Diedrich LogoTM
DIEDRICH COFFEE, INC.
2144 MICHELSON DRIVE
IRVINE, CA 92612
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 4, 2001
Dear Diedrich Coffee Stockholder:
On Tuesday, December 4, 2001, Diedrich Coffee, Inc. will hold its annual
meeting of stockholders at the Irvine Marriott, 18000 Von Karman Avenue, Irvine,
California 92612. The meeting will begin at 10:00 a.m. local time. We will serve
our premium coffee.
Only stockholders of record at the close of business on October 26, 2001
can vote at this meeting or any adjournments that may take place. At the meeting
we will:
1. Elect a board of directors to serve until the next annual meeting of
stockholders.
2. Vote on a proposal to amend the Diedrich Coffee, Inc. 2000 Equity
Incentive Plan to increase by 250,000 the total number of shares of our
common stock that may be issued under the plan.
3. Ratify the selection of KPMG LLP as our independent auditors for the
current fiscal year ending June 26, 2002.
We will also attend to business properly presented at the meeting and any
adjournments or postponements of the meeting. The foregoing items of business,
including the nominees for directors, are more fully described in the proxy
statement that is attached and a part of this notice.
The board of directors unanimously recommends that you vote for all of the
proposals.
By order of the board of directors,
Paul C. Heeschen
Chairman of the Board
Irvine, California
October 25, 2001
YOUR VOTE IS IMPORTANT
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING IN PERSON, YOU ARE
REQUESTED TO COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD AS PROMPTLY
AS POSSIBLE IN ORDER TO ENSURE YOUR REPRESENTATION AT THE MEETING. A RETURN
ENVELOPE (POSTAGE PREPAID IF MAILED IN THE UNITED STATES) IS ENCLOSED FOR THAT
PURPOSE. IF YOU ATTEND THE ANNUAL MEETING, YOU MAY REVOKE YOUR PROXY AT ANY TIME
BEFORE IT IS VOTED AND VOTE IN PERSON IF YOU WISH, EVEN IF YOU HAVE PREVIOUSLY
RETURNED YOUR PROXY CARD. PLEASE NOTE, HOWEVER, THAT IF YOUR SHARES ARE HELD OF
RECORD BY A BROKER, BANK OR OTHER NOMINEE AND YOU WISH TO VOTE AT THE MEETING,
YOU MUST OBTAIN FROM THE RECORD HOLDER A PROXY ISSUED IN YOUR NAME.
DIEDRICH COFFEE, INC.
2144 MICHELSON DRIVE
IRVINE, CA 92612
------------------------
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
DECEMBER 4, 2001
------------------------
INTRODUCTION
This proxy statement is furnished in connection with the solicitation on
behalf of the board of directors of Diedrich Coffee, Inc., a Delaware
corporation, of proxies for use at the annual meeting of stockholders to be held
on December 4, 2001 at 10:00 a.m. local time, or at any adjournment of
postponement of the meeting. At the meeting we will vote on the matters
described in this proxy statement and in the accompanying notice. The annual
meeting will be held at the Irvine Marriott, 18000 Von Karman Avenue, Irvine,
California 92612. Diedrich Coffee intends to mail this proxy statement and
accompanying proxy card on or about November 2, 2001 to all stockholders
entitled to vote at the annual meeting.
INFORMATION REGARDING VOTING AT THE ANNUAL MEETING
PROXIES
Our stockholders should complete and return the accompanying form of proxy
regardless of whether they will attend the annual meeting in person. Our
stockholders may revoke their proxies at any time before they are exercised by:
- giving our Corporate Secretary written notice of revocation;
- giving our Corporate Secretary a properly executed proxy of a later date;
or
- attending our annual meeting and voting in person.
Written notices of revocation and other communications with respect to the
revocation of our proxies should be addressed to Diedrich Coffee, Inc., 2144
Michelson Drive, Irvine, California 92612, Attention: Corporate Secretary. All
shares represented by valid proxies received and not revoked before they are
exercised will be voted in the manner specified in the proxies. If nothing is
specified, the proxies will be voted in favor of each of the proposals. Diedrich
Coffee's board of directors is unaware of any other matters that may be
presented for action at our annual meeting. If other matters do properly come
before our annual meeting, however, it is intended that shares represented by
proxies will be voted in the discretion of the proxy holders.
SOLICITATION OF PROXIES
We will pay the entire cost of soliciting proxies. In addition to
soliciting the proxies by mail, we will request banks, brokers and other record
holders to send proxies and proxy materials to the beneficial owners of Diedrich
Coffee common stock and secure their voting instructions, if necessary. We will
reimburse such record holders for their reasonable expenses in performing these
tasks. If necessary, we may use several of our regular employees, who will not
be specially compensated, to solicit proxies from stockholders, either
personally or by telephone, letter or other means.
RECORD DATE AND VOTING RIGHTS
Our board of directors has fixed October 26, 2001 as the record date for
determining the Diedrich Coffee stockholders entitled to notice of, and to vote
at, our annual meeting. Therefore, only stockholders of record at the close of
business on the record date will receive notice of, and be able to vote at, the
Diedrich Coffee annual meeting. As of October 22, 2001, there were 5,161,276
shares of our common stock outstanding held
by 710 record holders in addition to approximately 4,600 holders who do not hold
shares in their own names. A majority of these shares must be present at the our
annual meeting, either in person or by proxy, in order for there to be a quorum
at the meeting. Each share of our outstanding common stock entitles its holder
to one vote.
Shares of our common stock with respect to which the holders are present in
person at our annual meeting but not voting, and shares for which we have
received proxies but with respect to which holders of the shares have abstained,
will be counted as present at our annual meeting for purpose of determining
whether or not a quorum exists. Broker non-votes will be counted for purposes of
determining whether a quorum exists.
The nominees for election as directors will be elected by a plurality of
the votes of the shares of our common stock present in person or represented by
proxy at the meeting. All other matters submitted to the stockholders will
require the affirmative vote of a majority of our outstanding shares of common
stock present in person or represented by proxy at the meeting. With regard to
proposals other than the election of directors, abstentions will be counted in
tabulations of the votes cast on a proposal presented to stockholders and will
have the same effect as a vote against the proposal, whereas broker non-votes
will not be counted for purposes of determining whether a proposal has been
approved. Our board of directors urges you to complete, date and sign the
accompanying proxy and return it promptly in the enclosed envelope.
PROPOSAL 1
ELECTION OF DIRECTORS
Our directors are elected once a year at our annual meeting of
stockholders. Our bylaws provide that our board of directors shall consist of
between three and seven directors with the precise number to be determined by
resolution of our board of directors. The authorized number of members of our
board of directors is presently set at four persons. If a quorum is present at
our annual meeting, the four nominees receiving the greatest number of votes
will be elected. The four directors will serve until the next annual meeting of
stockholders and until their respective successors are elected and qualified.
Shares represented by executed proxies will be voted, if authority to do so
is not withheld, for the election of the four nominees named below. All of the
nominees for election as directors at the annual meeting set forth in the table
below are incumbent directors. Each of the nominees has consented to serve as a
director if elected, and management has no reason to believe that any nominee
will be unable to serve. In the event that any nominee should be unavailable for
re-election as a result of an unexpected occurrence, such shares will be voted
for the election of such substitute nominee as management may propose.
<Table>
<Caption>
NAME AGE TITLE DIRECTOR SINCE
---- --- ----- --------------
Paul C. Heeschen(1)(2)............... 44 Chairman of the Board of Directors 1996
Martin R. Diedrich................... 43 Vice Chairman of the Board of Directors, 1985
Chief Coffee Officer and Secretary
Peter Churm(1)(2).................... 75 Director 1996
Lawrence Goelman(1)(2)............... 60 Director 1996
</Table>
---------------
(1) Member of the audit committee
(2) Member of the compensation committee
There are no family relationships among any of the directors or executive
officers of Diedrich Coffee. The principal occupation for the last five years of
each nominee for director of Diedrich Coffee, as well as other information, is
set forth below.
Paul C. Heeschen joined our board of directors in January 1996. In February
2001, the board of directors elected him as Chairman. For the past ten years,
Mr. Heeschen has been a Principal of Heeschen & Associates, a private investment
firm. He is also the sole general partner of Sequoia Enterprises, LP,
2
D.C.H., LP and Redwood Enterprises VII, LP, and a trustee of the Palm Trust,
each of which are stockholders of Diedrich Coffee.
Martin R. Diedrich joined us as an officer and director in 1985. In April
1997, he became Vice Chairman of the board of directors and Chief Coffee
Officer, and continued to serve as our Corporate Secretary. Before that time,
Mr. Diedrich served as our Director of Coffee. In addition, he served as the
Chairman of the board of directors from January 1996 to April 1997. Mr. Diedrich
is an internationally recognized specialty coffee expert who is a frequent
speaker at industry and trade association functions.
Peter Churm joined our board of directors in October 1996. He retired from
his position as Chairman Emeritus of Furon Company, a designer, developer and
manufacturer of products made primarily from specially formulated high
performance polymer materials, in November 1999 in connection with the
acquisition of Furon Company. He had held this position since 1992. He served as
Chairman of the board of directors of Furon Company from May 1980 through
February 1992 and was President for more than 16 years prior to that time. He
also serves on the board of directors of CKE Restaurants, Inc., a publicly
traded food service company.
Lawrence Goelman joined our board of directors in October 1996 and was the
Chairman of our board of directors and interim Chief Executive Officer from
March 1997 to November 1997. Mr. Goelman has served as the Managing Partner of
Tremont Partners, Inc., a privately owned consulting company, since 1995. Until
March 2001, Mr. Goelman was also the Managing Partner of GazelleLab LLC, a
private venture development firm. From May 1996 to December 1996, Mr. Goelman
was the interim President and Chief Executive Officer of Pinnacle Micro, Inc., a
publicly owned company that manufactures compact disc recording devices. Before
that, he served for 14 years as Chairman, President and Chief Executive Officer
of CostCare, Inc., a wholly owned subsidiary of John Hancock Life Insurance
Company.
BOARD COMMITTEES AND MEETINGS
Our board of directors has standing compensation and audit committees. We
do not have a standing nominating committee. The entire board of directors acts
as a committee with respect to nominations for membership on our board.
Audit Committee. Our audit committee is responsible for, among other
things, making recommendations to our board of directors regarding the
engagement of our independent certified public accountants, reviewing with our
independent certified public accountants the fees, scope, timing, plans and
results of the audit engagement and reviewing any significant changes in our
accounting policies and the adequacy of our internal accounting controls. It
also analyzes and discusses with our independent certified public accountants
any difficulties or disagreements with our management as well as legal
proceedings or contingent liabilities involving us that may be material to our
financial statements or the auditor's report. Our audit committee is composed of
outside directors who are not our officers or employees. The audit committee
consists of three independent directors: Messrs. Churm, Goelman and Heeschen,
each of whom have been a member of our audit committee since its formation. The
independence of these directors has been determined in accordance with Rule
4200(a)(15) of the National Association of Securities Dealers' listing
standards. Our board of directors and audit committee have adopted an audit
committee charter. The report of the audit committee is set forth below under
the caption "Report of the Audit Committee of the Board of Directors."
Compensation Committee. Our compensation committee determines salaries and
incentive compensation for our executive officers and administers our stock
option plans. The compensation committee consists of Messrs. Churm, Goelman and
Heeschen. The report of the compensation committee is set forth below under the
caption "Report of the Compensation Committee of the Board of Directors on
Executive Compensation."
During our fiscal year ended June 27, 2001, there were seven meetings of
the board of directors, one meeting of the audit committee and two meetings of
the compensation committee. Each of the current directors attended at least 75%
of the meetings of the board of directors and meetings of the committees on
which they served during the fiscal year ended June 27, 2001.
3
DIRECTORS' COMPENSATION
Directors who are also our employees receive no extra compensation for
their service on the board of directors. Effective as of January 1, 2001,
non-employee directors earned fees of $1,000 per board meeting attended in
person, $500 per board meeting attended telephonically and $500 per committee
meeting attended in person or telephonically. Non-employee directors also
received reimbursement for out-of-pocket expenses incurred in attending board
meetings. In the fiscal year ended June 27, 2001, each non-employee director
earned $3,500. In addition, the non-employee directors are eligible to receive
stock option grants under the Diedrich Coffee, Inc. 2000 Equity Incentive Plan.
In the fiscal year ended June 27, 2001, each non-employee director was granted
1,750 stock options under the 2000 Equity Incentive Plan and 2,000 stock options
under the Diedrich Coffee, Inc. Non-Employee Director Plan, which the 2000
Equity Incentive Plan has since replaced.
Under our 2000 Equity Incentive Plan, each non-employee director
automatically receives, upon becoming a director, a one-time grant of an option
to purchase up to 2,500 shares of our common stock. These initial options vest
and become exercisable with respect to 50% of the underlying shares upon the
earlier of (1) the first anniversary of the grant date or (2) immediately before
the first annual meeting of stockholders following the grant date, if the
recipient has remained a non-employee director for the entire period from the
grant date to such date. The remaining 50% of the underlying shares vest upon
the earlier of (1) the second anniversary of the grant date or (2) immediately
before the second annual meeting of stockholders following the grant date, if
the recipient has remained a non-employee director for the entire period from
the grant date to such date. In addition to an initial grant, under the 2000
Equity Incentive Plan, each non-employee director also receives, upon
re-election to our board of directors, an automatic grant of an option to
purchase up to 1,250 additional shares of our common stock. These additional
options vest and become exercisable upon the earlier of (1) the first
anniversary of the grant date or (2) immediately before the annual meeting of
stockholders following the grant date, if the recipient has remained a
non-employee director for the entire period from the grant date to such date. In
addition to the initial and additional options, under the 2000 Equity Incentive
Plan, each director, including each non-employee director, is eligible to
receive other awards under the 2000 Equity Incentive Plan at the discretion of
the administrator of the plan, as more fully described in the discussion of
Proposal 2 below.
All non-employee director options granted under the 2000 Equity Incentive
Plan have a term of ten years and an exercise price equal to the fair market
value of our common stock on the date of grant. The 2000 Equity Incentive Plan
provides that the exercise price may be paid by company loan or withholding of
underlying stock, or deferred until completion of broker-assisted exercise and
sale transactions. Vesting of non-employee director options granted under the
2000 Equity Incentive Plan accelerates in certain circumstances in connection
with a change-in-control. During the fiscal year ended June 27, 2001, an
aggregate of 5,250 options to purchase shares of our common stock were issued to
non-employee directors under the 2000 Equity Incentive Plan and an additional
aggregate of 6,000 options to purchase shares of our common stock were issued to
non-employee directors under the 2000 Non-Employee Director Plan. As of October
24, 2001, no options to purchase shares had been exercised under either plan.
VOTE REQUIRED AND BOARD RECOMMENDATION
The nominees for election as directors will be elected by a plurality of
the votes of the shares present in person or represented by proxy and entitled
to vote at the annual meeting.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE IN FAVOR OF EACH NAMED
NOMINEE IN PROPOSAL 1.
4
PROPOSAL 2
INCREASE IN NUMBER OF SHARES AVAILABLE UNDER THE
2000 EQUITY INCENTIVE PLAN
GENERAL
The maximum number of shares of the Diedrich Coffee common stock that may
be issued pursuant to awards under its 2000 Equity Incentive Plan is currently
187,500, and as of October 24, 2001, options covering a total of 184,250 shares
are outstanding or have been exercised under the 2000 Equity Incentive Plan.
Accordingly, only 3,250 shares remain available for new grants. We rely heavily
upon the 2000 Equity Incentive Plan to recruit, retain, and reward qualified
employees and directors, and our board of directors has unanimously approved,
subject to approval by our stockholders, an amendment of the 2000 Equity
Incentive Plan to make available an additional 250,000 shares of our common
stock for awards under the 2000 Equity Incentive Plan (subject to antidilution
adjustments).
SUMMARY OF THE 2000 EQUITY INCENTIVE PLAN
The following is a summary of the principal features of the 2000 Equity
Incentive Plan as in effect and as proposed to be amended by Proposal 2. The
summary is qualified in its entirety by the terms of the 2000 Equity Incentive
Plan, a copy of which, as amended, is attached as Appendix A.
Purpose. The 2000 Equity Incentive Plan's purpose is to promote our
interests and those of our stockholders by using investment interests in our
company to attract, retain and motivate our management and other persons, to
encourage and reward their contributions to our performance and to align their
interests with the interests of our stockholders.
Administration, Amendment and Termination. As long as we have a class of
equity securities registered under Section l2 of the Securities Exchange Act of
1934, the administrator of the 2000 Equity Incentive Plan will be the
compensation committee, composed solely of two or more "non-employee directors"
within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934 and
two or more "Outside Directors" as defined in the regulations adopted under
Section 162(m) of the Internal Revenue Code of 1986, as amended. The
administrator has the power to:
- select the eligible persons to whom, and the times at which, awards will
be granted, the nature of each award and the terms and conditions of each
award;
- interpret the 2000 Equity Incentive Plan and the rights of recipients of
awards granted under the 2000 Equity Incentive Plan;
- discontinue, suspend or amend the 2000 Equity Incentive Plan in any
manner, subject to stockholder approval only where such approval is
required by applicable law, rule or regulation;
- modify, extend, renew or exchange outstanding awards, including the power
to adjust or reduce the purchase or exercise price of an award either by
cancellation of the award and the granting of a new award at the modified
purchase or exercise price or by amending the terms of the award to
reflect the modified purchase or exercise price; and
- change the number of shares or vesting periods associated with
non-employee director options, and suspend and reactivate the plan
provisions regarding automatic grants of non-employee director options.
The 2000 Equity Incentive Plan, as amended from time to time, shall, in the
discretion of the administrator, apply to and govern awards granted under the
2000 Equity Incentive Plan prior to the date of such amendment, provided that
the consent of an award holder is required if such amendment would alter,
terminate, impair or adversely affect an award or cause the award to cease to
qualify as an incentive stock option. Awards may be granted under the 2000
Equity Incentive Plan until the tenth anniversary of the adoption of the 2000
Equity Incentive Plan by our board of directors.
5
Securities Subject to the 2000 Equity Incentive Plan. Currently, a total of
187,500 shares of our common stock may be issued under the 2000 Equity Incentive
Plan. If Proposal 2 is approved by the stockholders, a total of 437,500 shares
of our common stock may be issued under the 2000 Equity Incentive Plan. We may
issue common stock under the plan from:
- authorized but unissued shares of our common stock; or
- from previously issued shares of common stock reacquired by us, including
shares purchased on the open market.
The administrator may appropriately adjust the maximum number and kind of shares
subject to the 2000 Equity Incentive Plan, the number and kind of shares or
other securities subject to the then outstanding awards, the price for each
share or other unit of any other securities subject to the then outstanding
awards, and/or the number and kind of shares or other securities to be issued as
non-employee director options if our common stock is affected through any of the
following:
<Table>
- merger; - combination;
- consolidation; - stock dividend;
- sale or exchange of assets; - stock split;
- recapitalization; - reverse stock split; or
- reclassification; - spin-off.
</Table>
For purposes of calculating the aggregate number of shares issued under the
plan, we will count only the number of shares actually issued upon exercise,
purchase or settlement of an award and not returned to us upon expiration,
termination or cancellation of any awards. However, if an award holder pays the
exercise or purchase price, or withholding taxes relating to an award with
shares of our common stock, or if we withhold shares in satisfaction of the
exercise or purchase price, or withholding taxes payment, then we will reduce
the number of shares of common stock available for issuance under the 2000
Equity Incentive Plan by the gross number of shares for which the award is
exercised or purchased, or for which it vests, as applicable.
On October 24, 2001, the closing price of our common stock on the Nasdaq
National Market was $3.34 per share.
Awards Under the 2000 Equity Incentive Plan. We may grant the following
types of awards under the 2000 Equity Incentive Plan:
<Table>
- stock options; - stock bonuses;
- performance awards; - stock sales;
- restricted stock; - phantom stock
- stock appreciation rights; - dividend equivalents; and
- stock payments; - other stock-based benefits.
</Table>
Stock options granted under the 2000 Equity Incentive Plan may be incentive
stock options intended to qualify under the provisions of Section 422 of the
Internal Revenue Code or non-qualified stock options that do not so qualify.
However, the aggregate fair market value of stock with respect to which any
recipient's incentive stock options first become exercisable during any calendar
year under all of our plans and any plans of any parent or subsidiary of ours
may not exceed $100,000, and may be further limited by other requirements in the
Internal Revenue Code. If this limitation is exceeded, the excess incentive
stock options will be treated as non-qualified stock options.
Eligibility. Our directors, officers, employees, consultants, advisors and
our affiliated entities are eligible to receive awards under the 2000 Equity
Incentive Plan, except that only non-employee directors may receive
"non-employee director options," as described below. Currently, 26 persons are
eligible for selection to receive awards under the 2000 Equity Incentive Plan,
consisting of 12 employees, 11 executive officers and 3 non-employee directors.
Terms and Conditions of Non-Employee Director Options Under the 2000 Equity
Incentive Plan. The 2000 Equity Incentive Plan provides that non-employee
directors receive initial and annual grants of "non-
6
employee director options." Upon first becoming a non-employee director, a
non-employee director receives a one-time grant of an option to purchase up to
2,500 shares of our common stock. These initial options vest and become
exercisable with respect to 50% of the underlying shares upon the earlier of the
following dates, if the recipient has remained a non-employee director for the
entire period from the grant date to such date:
- the first anniversary of the grant date, or
- immediately before the first annual meeting of stockholders following the
grant date.
The remaining 50% of the shares underlying the initial options vest upon the
earlier of the following dates, if the recipient has remained a non-employee
director for the entire period from the grant date to such date:
- the second anniversary of the grant date, or
- immediately before the second annual meeting of stockholders following
the grant date.
In addition to an initial grant, each non-employee director also receives,
upon re-election to our board of directors, an automatic grant of an option to
purchase up to 1,250 additional shares of our common stock. These additional
options vest and become exercisable upon the earlier of the following dates, if
the recipient has remained a non-employee director for the entire period from
the grant date to such date:
- the first anniversary of the grant date, or
- immediately before the annual meeting of stockholders following the grant
date.
All non-employee director options have a term of ten years and an exercise
price equal to the fair market value of Diedrich Coffee common stock on the date
of grant. If a recipient of a non-employee director option ceases to be a
director of Diedrich Coffee, all initial options granted to the recipient are
exercisable, to the extent already exercisable at the date the director ceases
to be a director, for a period of 365 days after that date (or sooner if the
option expires according to its terms), and all additional options are
exercisable to the extent already exercisable at the date the director ceases to
be a director for a period of 365 days after that date (or sooner if the option
expires according to its terms) if the director ceases to be a director because
of death or permanent disability, or a period of 90 days after that date (or
sooner if the option expires according to its terms) if the director ceases to
be a director for any other reason. In addition to these non-employee director
options, non-employee directors are eligible to receive general grants of awards
under the plan, including stock options other than non-employee director
options, at the discretion of the administrator. To the extent not inconsistent
with the terms of the plan governing non-employee director options, the terms of
general awards under the 2000 Equity Incentive Plan apply to non-employee
director options.
Terms and Conditions of General Awards Under the 2000 Equity Incentive
Plan. The administrator selects the recipients of awards granted under the 2000
Equity Incentive Plan and determines the dates, amounts, exercise prices,
vesting periods and other relevant terms of the awards. However, only
non-employee directors are eligible to receive non-employee director options. In
addition, the 2000 Equity Incentive Plan specifies the dates, amounts, exercise
prices, vesting periods and other relevant terms of non-employee director
options, as summarized above.
Award Pricing. The administrator determines the exercise or purchase
price of awards granted under the 2000 Equity Incentive Plan except that
the provisions of the plan govern the exercise price of non-employee
director options. In addition, the exercise price for an incentive stock
option must comply with the provisions of Section 422 of the Internal
Revenue Code. Section 422 currently provides that the exercise price must
not be less than the fair market value of our common stock on the date of
grant, and not less than 110% of the fair market value of our common stock
as of the date of grant in the case of a grant to a person owning more than
ten percent of the total combined voting power of all classes of our stock.
Award Vesting and Term. The administrator determines the date or dates
on which awards granted under the 2000 Equity Incentive Plan vest and
become exercisable except that the provisions of the plan govern the
vesting and term of non-employee director options. In addition, the term
for an incentive stock option must comply with the provisions of Section
422 of the Internal Revenue Code. Section 422
7
currently provides that the incentive stock option may not be exercisable
after the expiration of ten years from the date of grant, or five years in
the case of an incentive stock option granted to a person owning more than
ten percent of the total combined voting power of all classes of our stock.
Awards granted under the 2000 Equity Incentive Plan may be exercised
at any time after they vest and before the expiration date determined by
the administrator, provided that an award is generally exercisable
following an award holder's termination of employment only to the extent
that the award had become exercisable on or before the date of termination
and to the extent that the award is not forfeited under the terms of the
plan. Furthermore, in the absence of a specific agreement to the contrary,
stock options will generally expire and become unexercisable immediately
upon termination of the recipient's employment with us for just cause; 30
days after termination of the recipient's employment with us for any reason
other than just cause, death, permanent disability or normal retirement; or
180 days after termination of the recipient's employment with us due to
death, permanent disability or normal retirement, unless the term of the
options provides for an earlier expiration. The administrator may
accelerate the vesting of any options and may also extend the period
following termination of employment with us during which options may vest
and/or be exercised.
Other Award Provisions. The administrator determines any applicable
performance criteria, restrictions or conditions of any award.
Award Payments. A holder of an award may pay cash or any other
consideration deemed acceptable by the administrator to pay the exercise or
purchase price for the award. We may extend or arrange for the extension of
credit to any award holder to finance the award holder's purchase of shares
upon exercise of the holder's award on terms approved by the administrator,
subject to restrictions under applicable laws and regulations, or allow
exercise in a broker's transaction in which the exercise or purchase price
will not be received until after exercise and subsequent sale of the
underlying common stock. The administrator may, in its discretion, allow an
award holder to pay the exercise or purchase price for an award by
delivering our common stock.
Limited Transferability of Awards. Awards are generally not
transferable by the recipient during the life of the recipient.
Awards Documentation. An agreement duly executed on behalf of us and
by the recipient or, a confirming memorandum issued by us to the recipient,
setting forth such terms and conditions applicable to the award, evidence
awards granted under the 2000 Equity Incentive Plan.
Rights With Respect to Common Stock. No recipient of an award under
the 2000 Equity Incentive Plan or other person will have any right, title
or interest in or to any shares of common stock subject to any award or any
rights as a stockholder unless the award is duly exercised pursuant to the
terms of the 2000 Equity Incentive Plan and the shares of common stock are
issued to the recipient upon exercise of the award.
Plan Provisions Regarding Changes in Control. As of the effective time
and date of any change in our control (as defined in the 2000 Equity
Incentive Plan), the 2000 Equity Incentive Plan and any of the then
outstanding awards (whether or not vested) will automatically terminate
unless:
- provision is made in writing in connection with such transaction for
the continuance of the 2000 Equity Incentive Plan and for the
assumption of such awards, or for the substitution for such awards of
new awards covering the securities of a successor entity or an
affiliate thereof with appropriate adjustments as to the number and
kind of securities, and exercise and purchase prices, in which event
the 2000 Equity Incentive Plan and such outstanding awards shall
continue or be replaced, as the case may be, in the manner and under
the terms so provided; or
- the board of directors otherwise provides in writing for such
adjustments as it deems appropriate in the terms and conditions of the
then outstanding awards (whether or not vested), including without
limitation accelerating the vesting of outstanding awards and/or
providing for the cancellation of awards and their automatic
conversion into the right to receive the securities, cash
8
or other consideration that a holder of the shares underlying such
awards would have been entitled to receive upon consummation of such
change in control had such shares been issued and outstanding
immediately prior to the effective date and time of the change in
control (net of the appropriate option exercise prices).
If, pursuant to these plan provisions, the 2000 Equity Incentive Plan
and the awards terminate by reason of the occurrence of a change in control
without provision for any of the actions described in the paragraph above,
then any recipient holding outstanding awards shall have the right, at such
time immediately prior to the consummation of the change in control as our
board of directors shall designate, to exercise the recipient's awards to
the full extent not theretofore exercised, including any installments which
have not yet become vested.
Plan Provisions Regarding Section 162(m) the Internal Revenue Code. In
general, Section 162(m) of the Internal Revenue Code imposes a $1,000,000
limit on the amount of compensation that may be deducted by us in any tax
year with respect to each of our Chief Executive Officer and our other four
most highly compensated officers, including any compensation relating to an
award under the 2000 Equity Incentive Plan. To prevent compensation
relating to an award under the 2000 Equity Incentive Plan from being
subject to the $1,000,000 limit of Internal Revenue Code Section 162(m),
the 2000 Equity Incentive Plan provides that no eligible person shall be
granted any awards with respect to more than 200,000 shares of common stock
in any one calendar year if such grant would otherwise be subject to
Section 162(m).
Furthermore, if Internal Revenue Code Section 162(m) would otherwise
apply and if the amount of compensation an eligible person would receive
under an award is not based solely on an increase in the value of our
underlying common stock after the date of grant or award, the administrator
can condition the grant, vesting, or exercisability of such an award on the
attainment of a preestablished objective performance goal. For this
purpose, a preestablished objective performance goal may include one or
more of the following performance criteria:
<Table>
- cash flow; - return on assets or net assets;
- earnings per share, including earnings - income or net income;
before interest, taxes and amortization;
- operating margin;
- return on equity;
- return on operating revenue; and/or
- total stockholder return;
- any similar performance criteria.
- return on capital;
</Table>
TAX INFORMATION
The following summary of certain federal income tax consequences of the
receipt and exercise of awards granted by us is based on the laws and
regulations in effect as of the date of this Proxy Statement and does not
purport to be a complete statement of the law in this area. Furthermore, the
discussion below does not address the tax consequences of the receipt and
exercise of awards under foreign, state and/or local tax laws, and such tax laws
may not correspond to the federal tax treatment described herein. The exact
federal income tax treatment of transactions under the 2000 Equity Incentive
Plan will vary depending upon the specific facts and circumstances involved.
Incentive Stock Options. Except as discussed below, a recipient of an
incentive stock option generally will not pay tax on the grant or the exercise
of the option if the recipient exercises the option while the recipient is our
employee or within three months following termination of the recipient's
employment (or one year, if termination was due to a permanent and total
disability).
9
If the recipient of the incentive stock option sells the shares acquired
upon the exercise of the option at any time within one year after the date we
transfer those shares to the recipient or two years after the date we grant the
incentive stock option to the recipient, then:
- if the recipient's sales price exceeds the purchase price paid for the
shares upon exercise of the incentive stock option, the recipient will
recognize capital gain equal to the excess, if any, of the sales price
over the fair market value of the shares on the date of exercise, and
will recognize ordinary income equal to the excess, if any, of the lesser
of the sales price or the fair market value of the shares on the date of
exercise over the purchase price paid for the shares upon exercise of the
incentive stock option; or
- if the recipient's sales price is less than the purchase price paid for
the shares upon exercise of the incentive stock option, the recipient
will recognize a capital loss equal to the excess of the purchase price
paid for the shares upon exercise of the incentive stock option over the
sales price of the shares.
If the recipient sells shares acquired upon exercise of an incentive stock
option at any time after the recipient has held the shares for at least one year
after the date we transfer the shares to the recipient pursuant to the
recipient's exercise of the incentive stock option and at least two years after
the date we grant the recipient the incentive stock option, then the recipient
will recognize capital gain or loss equal to the difference between the sales
price and the purchase price paid for the shares upon exercise of the incentive
stock option.
The amount by which the fair market value of shares the recipient acquires
upon exercise of an incentive stock option (determined as of the date of
exercise) exceeds the purchase price paid for the shares upon exercise of the
incentive stock option will be included as a positive adjustment in the
calculation of the recipient's "alternative minimum taxable income" in the year
of exercise. The "alternative minimum tax" will generally equal the amount by
which 26% or 28% (depending upon the amount of the recipient's alternative
minimum taxable income reduced by certain redemption amounts) of the recipient's
alternative minimum taxable income (reduced by certain exemption amounts)
exceeds the recipient's regular income tax liability for the year. Before
exercising an incentive stock option, a recipient should determine whether and
to what extent exercise of an incentive stock option will result in alternative
minimum tax in the year of exercise.
In the case of an early disposition of shares by a recipient that results
in the recognition of ordinary income, we will be entitled to a deduction equal
to the amount of such ordinary income. If the recipient holds the shares for the
requisite period described above and therefore solely recognizes capital gain
upon the sale of such shares, we will not be entitled to any deduction.
Non-qualified Stock Options. Our grant of a non-qualified stock option to a
recipient is generally not a taxable event for the recipient. Upon the exercise
of a non-qualified stock option, the recipient will generally recognize ordinary
income equal to the excess of the fair market value of the shares the recipient
acquires upon exercise (determined as of the date of exercise) over the purchase
price paid for the shares upon exercise of the non-qualified stock option. We
generally will be entitled to deduct as a compensation expense the amount of
such ordinary income. The recipient's subsequent sale of the shares generally
will give rise to capital gain or loss equal to the difference between the sale
price and the sum of the purchase price paid for the shares plus the ordinary
income recognized with respect to the shares, and such capital gain or loss will
be taxable as long term or short term capital gain or loss depending upon the
recipient's holding period after exercise. If the recipient is an "insider" (as
defined below), the recipient is advised to consult a tax advisor about the
possibility of making an election under Section 83(b) of the Internal Revenue
Code upon exercise of a non-qualified stock option.
Stock Appreciation Rights and Phantom Stock. Generally, the holder of a
stock appreciation right or phantom stock award will recognize ordinary income
equal to the amount paid by us under either arrangement on the date the holder
receives payment from us. If we place a limit on the amount that will be payable
under a stock appreciation right, the holder may recognize ordinary income equal
to the value of the holder's right under the stock appreciation right at the
time the value of such right equals such limit and the stock appreciation right
is exercisable. We will generally be entitled to a deduction in an amount equal
to the ordinary income recognized by the holder.
10
Stock Purchase Rights -- Restricted Stock. Under the 2000 Equity Incentive
Plan, we are authorized to grant rights to purchase our restricted common stock
subject to our right to repurchase such stock at the price paid by the
participant if the participant's employment relationship with us terminates
prior to the lapse of such repurchase right. In general, there will be no tax
consequences to a participant upon the grant of a right to purchase such
restricted stock. Instead, the participant will be taxed at ordinary income
rates at the time our repurchase rights expire or are removed on an amount equal
to the excess of the fair market value of the stock at that time over the amount
the participant paid to acquire such stock. A participant who acquires
restricted stock, however, may make an election under Section 83(b) of the
Internal Revenue Code with respect to such stock. If such an election is timely
made, the participant is taxed at ordinary income rates in the year in which the
participant acquires the restricted stock. The ordinary income the participant
must recognize is equal to the excess of the fair market value of the stock at
the time of the participant's acquisition of the stock (determined without
regard to the restrictions) over the amount that the participant paid to acquire
such stock. If a participant makes a timely election under Section 83(b) of the
Internal Revenue Code with respect to restricted stock, the participant
generally will not be required to report any additional income with respect to
such restricted stock until he disposes of such stock, at which time he will
generally recognize capital gain or loss equal to the difference between the
sales price and the sum of the purchase price paid, if any, for the shares plus
the ordinary income recognized pursuant to the election under Section 83(b) of
the Internal Revenue Code. In the event that a participant forfeits restricted
stock with respect to which an election under Section 83(b) of the Internal
Revenue Code has been made, the participant ordinarily will not be entitled to
recognize any loss for federal income tax purposes (except to the extent the
amount realized by the participant at the time of such forfeiture is less than
the participant's purchase price for such stock). We generally will be entitled
to a deduction equal to the amount of ordinary income (if any) recognized by a
participant with respect to restricted stock for our taxable year in which, or
with which, ends the taxable year of the participant in which such ordinary
income is recognized.
Other Awards. In addition to the types of awards described above, the 2000
Equity Incentive Plan authorizes certain other awards that may include payments
in cash, our common stock, or a combination of cash and common stock. The tax
consequences of such awards will depend upon the specific terms of such awards.
Generally, however, a participant who receives an award payable in cash will
recognize ordinary income, and we will be entitled to a deduction, with respect
to such award at the earliest time at which the participant has an unrestricted
right to receive the amount of the cash payment. In general, the sale or grant
of stock to a participant under the 2000 Equity Incentive Plan will be a taxable
event at the time of the sale or grant if such stock at that time is not subject
to a substantial risk of forfeiture or is transferable within the meaning of
Section 83 of the Internal Revenue Code in the hands of the participant. (For
such purposes, stock is ordinarily considered to be transferable if it can be
transferred to another person who takes the stock free of any substantial risk
of forfeiture.) In such case, the participant will recognize ordinary income,
and we will be entitled to a deduction, equal to the excess of the fair market
value of such stock on the date of the sale or grant over the amount, if any,
that the participant paid for such stock. Stock that at the time of receipt by a
participant is subject to restrictions that constitute a substantial risk of
forfeiture and that is not transferable within the meaning of Internal Revenue
Code Section 83, generally will be taxed under the rules applicable to
restricted stock as described above.
Withholding. In the event that an optionee or other recipient of an award
under the 2000 Equity Incentive Plan is our employee, we ordinarily will be
required to withhold applicable federal income taxes with respect to any
ordinary income recognized by such optionee or other award recipient in
connection with stock options or other awards under the 2000 Equity Incentive
Plan.
Special Rules Applicable to "Insiders." If a recipient of an award is an
"insider" (a director, officer or other individual subject to Section 16 of the
Exchange Act), the recipient may be required to defer determination of the
amount of income and the timing of income recognition in connection with an
award under the plan, and the beginning of the holding period for any shares the
recipient receives, until the expiration of any period during which the
recipient would be restricted from disposing of any shares the recipient
received. The recipient will not be required to defer these determinations if
the recipient makes a valid election under Section 83(b) of the Internal Revenue
Code. If a recipient is an insider, the recipient is
11
advised to consult a tax advisor to determine the tax consequences of exercising
options granted to the recipient under the plan.
Certain Additional Rules Applicable to Awards. The terms of awards granted
under the 2000 Equity Incentive Plan may provide for accelerated vesting in
connection with a change in control of Diedrich Coffee. In that event and
depending upon the individual circumstances of the recipient, certain amounts
with respect to such awards may constitute "excess parachute payments" under the
"golden parachute" provisions of the Internal Revenue Code. Under these
provisions, a participant will be subject to a 20% excise tax on any "excess
parachute payments" and Diedrich Coffee will be denied any deduction with
respect to such payment. Participants are advised to consult their tax advisors
as to whether accelerated vesting or payment of an award in connection with a
change in our control would give rise to an excess parachute payment.
We generally are entitled to a deduction equal to the ordinary income
recognized by a recipient in connection with an award. However, our deduction
(including the deduction related to ordinary income recognized by a recipient)
for compensation paid to the Chief Executive Officer and the other four most
highly compensated officers may be limited to $1 million per person annually.
Depending on the nature of the award, all or a portion of the ordinary income
attributable to certain awards granted under the 2000 Equity Incentive Plan may
be included in the compensation subject to such deduction limitation.
Special rules will apply in cases where a recipient pays the exercise price
of the award or applicable withholding tax obligations under the 2000 Equity
Incentive Plan by delivering any of our previously owned common stock or by
reducing the number of shares of common stock otherwise issuable pursuant to the
award. Participants who contemplate taking any such action are advised to
consult with their personal tax advisors regarding the tax consequences of such
action.
PARTICIPATION IN THE 2000 EQUITY INCENTIVE PLAN BY EXECUTIVE OFFICERS, DIRECTORS
AND OTHER EMPLOYEES; INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON
Participation in the 2000 Equity Incentive Plan is in the discretion of the
administrator, except that non-employee directors automatically receive
non-employee director options in accordance with the 2000 Equity Incentive Plan.
If Proposal 2 is approved, each of the three current non-employee directors
standing for re-election, Messrs. Churm, Goelman and Heeschen, would receive
upon re-election to our board of directors, an automatic grant of an option to
purchase up to 1,250 additional shares of our common stock. Each non-employee
director will also receive an automatic grant of an option to purchase up to
1,250 additional shares of our common stock immediately following each future
annual meeting of stockholders if the non-employee director has served as a
director since his or her election or appointment and has been re-elected at any
such future annual meeting. Finally, under the 2000 Equity Incentive Plan, each
non-employee director will be eligible to receive future awards of other stock
options or other types of awards as determined by the compensation committee in
its discretion. These awards, if granted, would be in addition to the
non-employee director options that non-employee directors automatically receive
under the 2000 Equity Incentive Plan.
12
The following table summarizes certain information with respect to benefits
that will be received by the directors standing for re-election as non-employee
directors and by our officers and employees:
PLAN BENEFITS
2000 EQUITY INCENTIVE PLAN
<Table>
<Caption>
NAME DOLLAR VALUE NUMBER OF SHARES
---- ------------ ----------------
J. Michael Jenkins.......................................... (1) (1)
President and Chief Executive Officer
Martin Diedrich............................................. (1) (1)
Vice Chairman of the Board of Directors, Chief Coffee
Officer
and Secretary
Matthew McGuinness.......................................... (1) (1)
Executive Vice President and Chief Financial Officer
Carl Mount.................................................. (1) (1)
Vice President -- Manufacturing and Purchasing
Michael Zorehkey............................................ (1) (1)
Vice President -- Real Estate, Gloria Jean's Franchising
All current executive officers as a group (11 persons)...... (1) (1)
All employees, including current officers who are not
executive officers, as a group (12 persons)............... (1) (1)
Non-employee directors(2)................................... (3) 3,750(4)
</Table>
---------------
(1) Not determinable.
(2) Includes all current non-employee directors and those standing for
re-election.
(3) The exercise price for each non-employee director option granted under the
2000 Equity Incentive Plan is the fair market value of our common stock on
the date of grant.
(4) Represents the number of shares underlying non-employee director options
that will be granted under the 2000 Equity Incentive Plan in the fiscal year
ending June 26, 2002 if each of the directors standing for re-election as a
non-employee director is re-elected at the 2001 annual meeting of
stockholders.
VOTE REQUIRED AND BOARD RECOMMENDATION
The affirmative vote of a majority of our shares present in person or
represented by proxy and entitled to vote at the annual meeting will be required
to approve the increase in the number of shares of common stock available for
issuance under the 2000 Equity Incentive Plan.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE IN FAVOR OF PROPOSAL 2.
13
PROPOSAL 3
RATIFICATION OF SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS
Our board of directors has again selected KPMG LLP to serve as our
independent accountants for the fiscal year ending June 26, 2002. KPMG LLP has
served as our auditor since January 17, 1997. Representatives of KPMG LLP are
expected to be at the meeting, will have an opportunity to make a statement if
they so desire and will be available to respond to appropriate questions.
REASONS FOR THE PROPOSAL
Selection of our independent accountants is not required to be submitted
for stockholder approval, but our board of directors is seeking ratification of
its selection of KPMG LLP from our stockholders as a matter of good corporate
practice. If the stockholders do not ratify this selection, the board of
directors will reconsider its selection of KPMG LLP and will either continue to
retain this firm or appoint new auditors upon recommendation of the audit
committee. Even if the selection is ratified, the audit committee and our board
of directors, in their discretion, may direct the appointment of different
independent auditors at any time during the year if they determine that such a
change would be in our best interests and those of our stockholders.
VOTE REQUIRED AND BOARD RECOMMENDATION
The affirmative vote of a majority of the shares present in person or
represented by proxy and entitled to vote at the annual meeting will be required
to ratify the selection of KPMG LLP as our independent accountants for the
current fiscal year.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE IN FAVOR OF PROPOSAL 3.
14
EXECUTIVE OFFICERS
The executive officers of Diedrich Coffee, and their ages as of October 24,
2001, are as follows:
<Table>
<Caption>
NAME AGE POSITION(S) HELD
---- --- ----------------
J. Michael Jenkins................... 55 President and Chief Executive Officer
Martin Diedrich...................... 43 Vice Chairman of the Board of Directors, Chief Coffee
Officer and Secretary
Matthew McGuinness................... 41 Executive Vice President and Chief Financial Officer
Carl Mount........................... 38 Vice President -- Manufacturing and Purchasing
Michael Zorehkey..................... 40 Vice President -- Real Estate
Matthew Kimble....................... 49 Vice President -- Human Resources
Joseph Caruso........................ 40 Vice President -- Franchise and Business Development
Edward Apffel........................ 44 Vice President -- Wholesale Sales
Catherine Saar....................... 42 Vice President -- Brand Development
Paul Marshall........................ 49 Vice President -- Information Systems
Pamela Britton....................... 48 Chief Operating Officer of Gloria Jean's Gourmet
Coffee
</Table>
The following is information regarding those persons currently serving as
executive officers of Diedrich Coffee:
J. Michael Jenkins joined Diedrich Coffee in September 2000 as our
President and Chief Executive Officer. From May 1998 until May 2000, Mr. Jenkins
was Chief Executive Officer of Boston Chicken, Inc., a publicly traded food
service company. Prior to that, from September 1994 to April 1998, Mr. Jenkins
was Chief Executive Officer of VICORP Restaurants, Inc., also a publicly traded
food service company.
Martin R. Diedrich. Biographical information about Martin Diedrich is
included above under Proposal 1.
Matthew C. McGuinness joined Diedrich Coffee in March 2000 as our Executive
Vice President and Chief Financial Officer. Mr. McGuinness was Senior Vice
President -- Finance and Chief Financial Officer at Denny's, Inc., a subsidiary
of Advantica Restaurant Group, Inc., a publicly traded food service company,
from May 1998 to February 2000. From 1991 until May 1998, Mr. McGuinness was
Vice President -- Finance and Chief Financial Officer at El Pollo Loco, Inc.,
also a subsidiary of Advantica Restaurant Group, Inc.
Carl Mount joined Diedrich Coffee in November 1999 as our Vice
President -- Manufacturing and Purchasing. Mr. Mount served as the interim
President of our Gloria Jean's division from October 2000 until January 2001.
From January 1999 to November 1999, Mr. Mount was a plant manager for the Pepsi
Bottling Group in Hayward, California. He served as a Senior Consultant,
Manufacturing Services for the Coca-Cola Company in Atlanta, Georgia from July
1998 to January 1999. Prior to this, he served as Group Operations Manager from
November 1996 to July 1998, and as Operations Manager from August 1995 to
November 1996 for the Coca-Cola Company in Istanbul, Turkey and Bursa, Turkey
respectively.
Michael Zorehkey joined Diedrich Coffee in March 2000 as our Director of
Mall Development. In January 2001, he was appointed Vice President -- Real
Estate. From June 1999 until March 2000, Mr. Zorehkey served as the Senior Vice
President of Zorehkey & Associates, a privately owned real estate consultation
firm. From July 1997 until June 1999, Mr. Zorehkey was Vice President -- Real
Estate for Edison Brothers Stores, a publicly owned company. From April 1996
until July 1997, Mr. Zorehkey was Vice President Real Estate and Construction
for Cinnabon World Famous Cinnamon Rolls, a division of the publicly traded food
service company AFC Enterprises. From April 1992 until April 1996, Mr. Zorehkey
was Director of Real Estate for Sweet Factory, a publicly owned company.
Matthew Kimble joined Diedrich Coffee in connection with our acquisition of
Coffee People, Inc. in July 1999 and has served as our Vice President -- Human
Resources since then. From January 1997 until the acquisition, Mr. Kimble served
as the Vice President, Human Resources of Coffee People. From 1991 to January
1997, he served as Employment Manager for Thrifty Payless Drug Stores N.W.
15
Joseph E. Caruso joined Diedrich Coffee in April 2000 as our Vice
President -- Franchise and Business Development. From March 1999 to April 2000,
Mr. Caruso was Director of Non-Traditional Development at Mrs. Fields Original
Cookie Co., a privately owned food service company. From August 1993 to October
1998, Mr. Caruso was National Director of Franchise Sales for Hardee's Food
Systems, Inc., a division of the publicly traded CKE Restaurants, Inc.
Edward Apffel joined Diedrich Coffee in June 1997. Since April 2000, he has
served as our Vice President -- Sales. From June 1997 to April 2000, Mr. Apffel
served as our Director of Wholesale Sales. From January 1996 to June 1997, Mr.
Apffel was Director National Wholesale Sales at F. Gavina & Sons, Inc., a
privately owned company that roasts and markets coffee to the grocery and food
service industry on a national basis. From October 1992 to December 1995, Mr.
Apffel was the owner of Red Apple Coffee Co., a privately owned coffee
consulting firm.
Catherine A. Saar joined Diedrich Coffee in July 1998 as our Vice
President -- Marketing and Wholesale Sales. From January 1998 to June 1998, Ms.
Saar was Vice President -- Marketing and Merchandising for Frame-N-Lens, Inc., a
privately owned company that manufactures and retails eye glasses. From May 1993
to December 1997, Ms. Saar was Director of Corporate Marketing for Smart and
Final, Inc., a publicly owned wholesale grocer. Prior to that, Ms. Saar held
various marketing positions at Taco Bell Corp.
Paul Marshall joined Diedrich Coffee in October 1998 as our Vice
President -- Management Information Services. From January 1997 to January 1998,
Mr. Marshall served as Vice President -- Management Information Services of Pic
n' Save, a publicly owned discount retail company. From September 1995 to
December 1996, Mr. Marshall was Vice President -- Management Information
Services of KidsMart, a privately held children's retail clothing company.
Pamela J. Britton joined Diedrich Coffee in February 2001 as our Executive
Vice President of Operations of our Gloria Jean's subsidiary. In June 2001, she
was appointed Chief Operating Officer of Gloria Jean's. From July 1999 to
February 2001, Ms. Britton was Vice President of Operations for Johnny Rockets
Group, Inc., a privately owned food service company. From June 1992 until June
1999, Ms. Britton served as Vice President of Operations of Cinnabon World
Famous Cinnamon Rolls, a division of the publicly traded food service company
AFC Enterprises.
16
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY OF COMPENSATION
In July 1999, we changed our fiscal year end from the Wednesday closest to
January 31 to the Wednesday closest to June 30 in connection with our
acquisition of Coffee People. The following table sets forth compensation earned
during the last three fiscal years, restated as if our fiscal year end occurred
on the Wednesday nearest to June 30 in each of 2001, 2000 and 1999, by those who
served as our Chief Executive Officer during the fiscal year ended June 27, 2001
and the next four most highly compensated persons who were serving as our
executive officers on June 27, 2001 and whose total annual salary and bonus for
that fiscal year exceeded $100,000. This includes Timothy J. Ryan, who retired
from his position as Chief Executive Officer and President in September 2000.
The table also discloses compensation earned during these periods for Lisa
Steere, who served as the Executive Vice President of Marketing and Sales for
Gloria Jean's Coffee until her resignation on August 24, 2001.
<Table>
<Caption>
LONG-TERM
COMPENSATION
AWARDS
------------
FISCAL YEAR SECURITIES
ENDED OTHER UNDERLYING
NAME AND PRINCIPAL POSITION JUNE SALARY($) BONUS($) COMPENSATION($) OPTIONS(#)
--------------------------- ----------- --------- -------- --------------- ------------
J. Michael Jenkins(1)................. 2001 $225,000 -- $4,876 125,000
President and Chief Executive
Officer 2000 -- -- -- --
1999 -- -- -- --
Matthew C. McGuinness(2).............. 2001 $238,649 $98,091 $8,400 50,000
Executive Vice President and 2000 61,980 -- 2,800 18,750
Chief Financial Officer 1999 -- -- -- --
Martin R. Diedrich(3)................. 2001 $160,000 $31,389 $4,800 25,000
Vice Chairman of the Board, 2000 139,385 -- 4,800 3,750
Secretary and Chief Coffee Officer 1999 119,385 25,000 4,800 1,000
Carl Mount............................ 2001 $165,980 $34,332 -- 15,000
Vice President -- Manufacturing and 2000 87,769 19,000 -- 5,000
Purchasing 1999 -- -- -- --
Michael Zorehkey(4)................... 2001 $125,387 $44,800 $4,800 3,000
Vice President -- Real Estate 2000 37,597 15,000 1,200 1,875
1999 -- -- -- --
Timothy J. Ryan(5).................... 2001 $ 74,038 -- $2,100 1,250
Former President and 2000 223,077 100,000 7,200 5,000
Chief Executive Officer 1999 200,000 -- 7,200 --
Lisa Steere(6)........................ 2001 $158,107 -- -- 2,000
Former Executive Vice President of 2000 119,689 17,905 -- 5,000
Marketing and Sales for Gloria
Jean's 1999 -- -- -- --
Coffee
</Table>
---------------
(1) Mr. Jenkins was appointed President and Chief Executive Officer effective
September 27, 2000. Accordingly, Mr. Jenkins did not earn or receive any
compensation from us in fiscal 2000 or 1999, and the compensation disclosed
in the table for fiscal 2001 reflects only a portion of the fiscal year. Mr.
Jenkins' other compensation is comprised of health insurance premiums and
health club membership dues paid on Mr. Jenkins' behalf.
(2) Mr. McGuinness entered into an at-will employment agreement effective as of
March 13, 2000. Accordingly, he did not earn or receive any compensation
from us in fiscal 1999 and the compensation disclosed in the table for
fiscal 2000 reflects only a portion of the fiscal year. Mr. McGuinness'
other compensation consists of a monthly car allowance of $700.
(3) Mr. Diedrich's other compensation consists of a monthly car allowance of
$400.
17
(4) Mr. Zorehkey joined Diedrich Coffee in March 2000. Accordingly, the
compensation disclosed in the table for fiscal 2000 reflects only a portion
of the year. Mr. Zorehkey's other compensation consists of a monthly car
allowance of $400.
(5) Mr. Ryan resigned as our Chief Executive Officer effective as of September
2000. Accordingly, the compensation disclosed in the table for fiscal 2001
reflects only a portion of the year. Mr. Ryan's other compensation consists
of a monthly car allowance of $700.
(6) Ms. Steere joined Diedrich Coffee in July 1999. Accordingly, she did not
receive any compensation from us during fiscal 1999. Ms. Steere resigned
from her position on August 24, 2001.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding stock options granted
to the following executive officers during the fiscal year ended June 27, 2001.
<Table>
<Caption>
PERCENT OF POTENTIAL REALIZABLE
TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM(1)
OPTIONS IN FISCAL PRICE EXPIRATION ---------------------------
NAME GRANTED(#) YEAR ($/SHARE) DATE 5%($) 10%($)
---- ---------- ---------- --------- ---------- ----------- -------------
J. Michael Jenkins.......... 125,000 40.2 $7.00 9/22/10 $550,282.80 $1,394,524.65
Matthew C. McGuinness....... 50,000 16.1 3.80 6/1/11 $119,489.98 $ 302,811.07
Martin R. Diedrich.......... 25,000 8.0 3.80 6/1/11 $ 59,744.99 $ 151,405.53
Carl Mount.................. 15,000 4.8 3.80 6/1/11 $ 35,846.99 $ 90,843.32
Michael Zorehkey............ 3,000 1.0 3.80 6/1/11 $ 7,169.40 $ 18,168.66
Timothy J. Ryan............. -- -- -- -- -- --
Lisa Steere................. 2,000(2) (3) 3.80 6/1/11 $ 4,779.60 $ 12,112.44
</Table>
---------------
(1) The potential realizable values listed are based on an assumption that the
market price of Diedrich Coffee's common stock appreciates at the stated
rate, compounded annually, from the date of grant to the expiration date.
The 5% and 10% assumed rates of appreciation are determined by the rules of
the Securities and Exchange Commission and do not represent our estimate of
the future market price of Diedrich Coffee common stock.
(2) The options granted to Ms. Steere during our fiscal year are no longer
outstanding since she is no longer employed by us.
(3) Less than 1%.
18
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information concerning the number and value
of unexercisable options held by the following executive officers on June 27,
2001. None of these executive officers exercised options to purchase common
stock during fiscal year ended June 27, 2001.
<Table>
<Caption>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
AT FISCAL YEAR END(#) FISCAL YEAR END($)(1)
------------------------------- -------------------------------
NAME EXERCISABLE UNEXERCISABLE(2) EXERCISABLE UNEXERCISABLE(2)
---- ----------- ---------------- ----------- ----------------
J. Michael Jenkins.................... 31,250 93,750 -- --
Martin R. Diedrich.................... 2,000 27,750 -- --
Matthew C. McGuinness................. 9,375 59,375 -- --
Carl Mount............................ 1,666 18,334 -- --
Michael Zorehkey...................... 625 4,250 -- --
Timothy J. Ryan(3).................... 64,166 90,834 -- --
Lisa Steere........................... 1,666 5,334 -- --
</Table>
---------------
(1) These amounts represent the difference between the exercise price of the
in-the-money options and the market price of our common stock on June 27,
2001. The closing price of our common stock on that day on the Nasdaq
National Market was $3.63. Options are in-the-money if the market value of
the shares covered thereby is greater than the option exercise price. On
June 27, 2001, none of the options were in-the-money.
(2) Future exercisability is subject to a number of factors, including, but not
limited to, the optionee remaining employed by us.
(3) All of Mr. Ryan's options, both exercisable and unexercisable, expired on
September 27, 2001.
EMPLOYMENT AGREEMENTS AND COMPENSATORY ARRANGEMENTS
The following section describes certain employment agreements and
compensatory arrangements between us or our affiliated entities and those who
currently serve as our executive officers or as executive officers of our
affiliated entities. In addition, it describes certain employment agreements and
compensatory arrangements between us or our affiliates and those who served as
our executive officers or as executive officers of our affiliates in fiscal year
ended June 27, 2001, but are no longer employed with us or our affiliates.
Employment Agreements and Compensatory Arrangements with Current Executive
Officers
J. Michael Jenkins. On September 22, 2000, we entered into an at-will
employment letter agreement with Mr. Jenkins which provides that either we or
Mr. Jenkins may terminate his employment with us at any time, with or without
cause or notice. The employment letter provides that Mr. Jenkins will:
- serve as our President and Chief Executive Officer;
- receive a base salary of $300,000 per year, subject to annual
adjustments;
- receive a guaranteed bonus of $100,000 on the first anniversary date of
his employment with us, which bonus was earned on September 27, 2001, and
receive additional bonuses in successive years based on specific
objectives and targets established for him by our compensation committee;
and
- participate in our executive benefit plans and 401(k) plan based on plan
eligibility criteria.
If we terminate Mr. Jenkins' employment with us for any reason other than
those which constitute cause as described in the letter agreement, we will be
obligated to make bi-weekly payments to Mr. Jenkins of his then current salary
until the earlier of (1) such time as he accepts other employment or work as an
independent contractor or (2) the first anniversary date of the termination of
his employment. We will not be obligated to make any payments to Mr. Jenkins or
his estate if his employment with us is terminated for disability or by his
death.
19
We also entered into a stock option plan and agreement, effective as of
September 22, 2000, which was approved by the stockholders at the 2000 annual
meeting of stockholders. Under this plan, Mr. Jenkins was granted options to
purchase an aggregate of up to 125,000 shares of our common stock for the
purpose of encouraging and rewarding his contributions to our performance and
aligning his interests with the interests of our stockholders. The options
granted to Mr. Jenkins will be exercisable at an exercise price of $7.00 per
share, and vest in four equal installments on each of the first four anniversary
dates of September 22, 2000. On September 22, 2001, 31,250 of these options
vested. The options granted to Mr. Jenkins will become immediately vested and
fully exercisable if we undergo a change of control, except that Mr. Jenkins'
options will terminate and become unexercisable on the earlier of the tenth
anniversary of September 22, 2000 or the first anniversary of the change of
control. If Mr. Jenkins' employment with Diedrich Coffee is terminated for cause
prior to the tenth anniversary of the date of the Jenkins Option Plan or if Mr.
Jenkins terminates his employment with us for any reason, then (1) all options
that have not otherwise become exercisable as of the termination date will
immediately terminate and become unexercisable, and (2) all options that have
become exercisable as of the termination date will terminate and become
unexercisable on and after the date that is sixty days after the date of the
termination. If we terminate Mr. Jenkins' employment without cause, then (1) all
options that have not otherwise become exercisable as of the termination date
will continue to become exercisable, except that the options will terminate and
become unexercisable on the earlier of the tenth anniversary of September 22,
2000 or the first anniversary of the date of Mr. Jenkins' termination date, and
(2) all options that have become exercisable as of the termination date will
terminate and become unexercisable on the earlier of the tenth anniversary of
September 22, 2000 or the first anniversary of the date of Mr. Jenkins'
termination date. Otherwise, all of Mr. Jenkins' unexercised options will
terminate on September 22, 2010.
Martin R. Diedrich. In June 2001, Mr. Diedrich entered into an employment
agreement with us. Under the agreement, Mr. Diedrich agreed to continue to serve
as our Chief Coffee Officer. The term of the agreement is three years. The
agreement provides for a base salary of $160,000 per annum, subject to annual
adjustments, and an annual incentive bonus of up to 25% of base salary based on
our performance and Mr. Diedrich's performance against objectives approved by
our board of directors. Mr. Diedrich is also entitled to the payment of a
monthly car allowance of $400. Mr. Diedrich receives employee benefits
consistent with our policies for other senior executives.
Matthew C. McGuinness. In August 2000, Mr. McGuinness entered into an
employment agreement with us appointing him Senior Vice President and Chief
Financial Officer. The agreement provides for a base salary of $206,000 per
annum and an annual incentive bonus of up to 50% of base salary based on our
performance and Mr. McGuinness' performance against objectives approved by our
board of directors. If terminated without cause, Mr. McGuinness is entitled to
twelve months' salary as severance compensation. Mr. McGuinness also received
options to purchase up to 18,750 shares of our common stock at an exercise price
equaling the trailing five day average of the price of the common stock from the
day of board approval. Such options vest over three years at a rate of 33% per
year. In October of 2000, Mr. McGuinness was elected to serve as our Executive
Vice President and Chief Financial Officer. As a result, his employment
agreement was amended to provide for a base salary of $250,000. Mr. McGuinness
receives employee benefits consistent with our policies for other senior
executives.
Michael Zorehkey. In February 2000, Mr. Zorehkey entered into an at-will
employment agreement with us. Under the agreement, Mr. Zorehkey agreed to serve
as our Director of Mall Development. The agreement provides for a base salary of
$115,000 per annum and an annual incentive bonus based in part on store openings
and in part on his performance against objectives approved by our board of
directors. Mr. Zorehkey also received options to purchase up to 1,875 shares of
our common stock at an exercise price equaling the trailing five day average of
the price of the common stock from the day of board approval. Such options vest
over three years at a rate of 33% per year. In April 2001, Mr. Zorehkey was
elected to serve as our Vice President of Real Estate and Gloria Jean's
Franchising. As a result, his employment agreement was amended to provide for a
base salary of $150,000 and incentive bonuses based on the opening of Gloria
Jean's coffee stores. Mr. Zorehkey receives employee benefits consistent with
our policies for other senior executives.
20
Carl Mount. In October 1999, Mr. Mount entered into an employment agreement
with us appointing him Vice President of Manufacturing and Purchasing. The
agreement provides for a base salary of $140,000 per annum, a signing bonus of
$19,000, and an annual incentive bonus of up to 25% of base salary based on the
company's performance and Mr. Mount's performance against objectives approved by
our board of directors. If terminated without cause, Mr. Mount is entitled to
six months' salary as severance compensation. Mr. Mount also received options to
purchase up to 5,000 shares of our common stock at an exercise price of $22.00.
Such options vest over three years at a rate of 33% per year. In October 2000,
Mr. Mount was elected to serve as Interim President of Gloria Jean's in addition
to his duties as Vice President of Manufacturing and Purchasing. As a result,
his employment agreement was amended to provide for a base salary of $175,000.
Mr. Mount receives employee benefits consistent with our policies for other
executive officers.
Employment Agreements and Compensatory Arrangements with Executive Officers No
Longer Employed by Diedrich Coffee
Timothy J. Ryan. Effective as of September 27, 2000, Timothy J. Ryan
retired as our President and Chief Executive Officer. Prior to his retirement,
Mr. Ryan's employment relationship with us was governed by a two-year employment
agreement with us dated November 17, 1997. The agreement provided for an annual
salary of $200,000 per year, a discretionary performance bonus which could be
awarded by the compensation committee after twelve months of employment (not to
initially exceed 25% of Mr. Ryan's base salary), and employee benefits that
included three weeks of annual vacation leave, reimbursement for all reasonable
and necessary travel and other business expenses incurred in connection with the
performance of services under the agreement, and the payment of a monthly car
allowance of $600. The employment agreement could be terminated before the
completion of two years in the event of Mr. Ryan's sustained incapacity as
defined in the agreement or by us for cause as defined in the agreement. We also
were entitled to terminate Mr. Ryan for any other reason, however, in such
event, Mr. Ryan would be entitled to receive a severance payment equal to fifty
percent of his base salary.
On November 17, 1997, Mr. Ryan also entered into a stock option plan and
agreement with us. Our stockholders approved Mr. Ryan's option agreement at a
special meeting held on January 22, 1998. We granted Mr. Ryan options to
purchase an aggregate of 150,000 shares of our common stock for the purpose of
encouraging and rewarding Mr. Ryan's contributions to our performance and to
align Mr. Ryan's interests with the interests of our stockholders. We granted an
additional 5,000 options to Mr. Ryan on November 3, 1999, at an exercise price
of $22.00, under our 1996 Stock Incentive Option Plan. Of the 155,500 options
granted to Mr. Ryan, 62,500 options became immediately exercisable. Now that Mr.
Ryan has retired, pursuant to the terms of Mr. Ryan's option agreement, the
92,500 options that had not become exercisable as of his retirement date
immediately terminated on September 27, 2000. The remaining 62,500 options that
had become exercisable as of his retirement date, terminated on September 27,
2001.
Lisa Steere. Ms. Steere resigned in August 2001. In June 2000, Ms. Steere
entered into an employment agreement with Gloria Jean's Gourmet Coffee
appointing her Executive Vice President of Marketing. The agreement provided for
a base salary of $150,000 per annum and an annual incentive bonus of up to 25%
of base salary based on our performance and Ms. Steere's performance against
objectives approved by our board of directors. If terminated without cause, Ms.
Steere was entitled to six months' salary as severance compensation. Ms. Steere
was also entitled to participate in an executive vice president stock option
plan. Ms. Steere received employee benefits consistent with Gloria Jean's
Gourmet Coffee's policies for other executive officers.
21
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
ON EXECUTIVE COMPENSATION
The compensation committee is composed of Messrs. Churm, Goelman and
Heeschen, none of whom are currently our officers or employees. The compensation
committee administers our stock option plans and sets compensation levels for
our executive officers. Our executive compensation policies and programs are
designed to:
- provide competitive levels of overall compensation that will attract and
retain the best executive talent in the industry
- motivate executive officers to perform at their highest level
- align executive officer and stockholder interests to create stockholder
value
- reward executive officers for achievement of corporate and individual
objectives
To achieve these goals, our compensation committee and board of directors
have established an executive compensation program consisting primarily of three
integrated components: base salary, annual bonus and stock options.
Base Salary. Base salaries for executive officers are set by our
compensation committee after considering factors such as competitive
environment, experience level, position, responsibility and overall contribution
of the executive. Base salaries for the executive officers were established in
their respective employment and letter agreements.
Annual Bonus. All executive officers, including the Chief Executive
Officer, are eligible to receive an annual bonus. The employment and letter
agreements for the executive officers provide for discretionary performance
bonuses based upon our performance and the respective executive officer's
contribution to this performance, except that Mr. Jenkins' letter agreement
provided for a guaranteed $100,000 bonus to be paid on September 27, 2001, the
first anniversary of his employment with us.
Stock Options. The third component of the compensation program for
executive officers is in the form of stock option awards. Our 2000 Equity
Incentive Plan provides for long-term incentive compensation for our employees,
including executive officers. Stock option awards align the interests of
executive officers with those of stockholders by providing them with an equity
interest in Diedrich Coffee, thereby providing incentive for the executive
officers to maximize stockholder value. Option awards directly tie executive
compensation to the value of our stock. Our compensation committee is
responsible for determining, subject to the terms of the 2000 Equity Incentive
Plan, the individuals to whom grants are made, the timing of grants and the
number of shares per grant. The number of shares are determined based upon the
individual's position in our company, competitive company practices and the
number of unvested shares already held by the individual. Stock options are
generally granted with an exercise price equal to the fair market value of our
common stock on the date of grant. During the fiscal year ended June 27, 2001,
our compensation committee granted stock options to approximately 24 employees.
The goal of the compensation committee was to ensure that employees were focused
on increasing stockholder value. The group included the majority of corporate
office employees at the level of manager and above, as well as general managers
at the coffeehouse level.
Chief Executive Officer. In September 2000, we hired Mr. Jenkins as our
President and Chief Executive Officer. We entered into an at-will employment
letter agreement as well as a stock option plan and agreement with Mr. Jenkins.
The terms of Mr. Jenkins' letter agreement and the stock option plan and
agreement are described above under the caption "Employment Agreements and
Compensatory Arrangements -- Employment Agreements and Compensatory Arrangements
with Current Executive Officers." The process of establishing the Chief
Executive Officer's compensation parallels the process and criteria used in
establishing compensation levels for other executive officers.
22
Policy with Respect to Internal Revenue Code Section 162(m). In 1993, the
Internal Revenue Code was amended to add Section 162(m). Section 162(m) and the
regulations thereunder place a limit of $1 million on the amount of compensation
that may be deducted by us in any year with respect to certain of our most
highly compensated officers. Section 162(m) does not, however, disallow a
deduction for qualified "performance-based compensation," the material terms of
which are disclosed to and approved by stockholders. At the present time, our
executive officer compensation levels, other than "performance-based
compensation," do not exceed $1 million. Our compensation committee and board of
directors plan to take such actions in the future to minimize the loss of tax
deductions related to compensation as they deem necessary and appropriate in
light of specific compensation objectives.
Respectfully submitted,
Peter Churm
Paul C. Heeschen
Lawrence Goelman
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended June 27, 2001, our compensation committee
consisted of Messrs. Churm, Goelman and Heeschen. No member of the compensation
committee was, during the fiscal year ended June 27, 2001 or at any other time,
an officer or employee of Diedrich Coffee. There are no compensation committee
interlocks between us and other entities involving our executive officers and
board members who serve as executive officers or board members of these other
entities.
REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
The audit committee reviews our financial reporting process on behalf of
the board of directors. Our management has the primary responsibility for the
financial statements and the reporting process. Our independent auditors are
responsible for expressing an opinion on the conformity of our audited financial
statements to generally accepted accounting principles.
In this context, the audit committee has reviewed and discussed with
management and KPMG LLP, our independent auditors, the audited financial
statements. The audit committee has discussed with the independent auditors the
matters required to be discussed by Statement on Auditing Standards No. 61
(Communication with Audit Committees). In addition, the audit committee has
received from the independent auditors the written disclosures required by
Independence Standards Board No. 1 (Independence Discussions with Audit
Committees) and discussed with them their independence from Diedrich Coffee and
its management. Furthermore, the audit committee has considered whether the
independent auditors provision of other non-audit services to us is compatible
with the auditor's independence.
In reliance on the reviews and discussions referred to above, the audit
committee recommended to our board of directors, and the board has approved,
that the audited financial statements included in our Annual Report on the
Securities and Exchange Commission Form 10-K for the year ended June 27, 2001,
for filing with the Securities and Exchange Commission.
Respectfully submitted,
Peter Churm
Paul C. Heeschen
Lawrence Goelman
23
INDEPENDENT AUDITOR FEES FOR FISCAL YEAR 2001
Audit Fees. Our independent auditor during the year ended June 27, 2001 was
KPMG LLP. The aggregate fees billed by KPMG LLP in connection with the audit of
our annual financial statements for the most recent fiscal year and for the
review of the financial information included in our quarterly reports on Form
10-Q during the year 2001 was $157,000.
All Other Fees. The aggregate fees billed for all other services rendered
to us by KPMG LLP during the year 2001 was $118,459. These fees relate to tax
services performed for us and for the review of financial statements contained
in our fiscal year 2001 registration statements.
24
STOCK PERFORMANCE MEASUREMENT COMPARISON
The following graph shows a comparison of the cumulative total returns for
the period beginning on September 12, 1996, the date our common stock was first
publicly traded, and ending on June 27, 2001 for:
- our common stock;
- the Total Return Index for the Nasdaq National Market (U.S. companies);
and
- the Total Return Index for Nasdaq Retail Trade Stocks.
Each of the below returns assumes an initial value of $100 and reinvestment
of dividends. The comparisons in the graph are required by the Securities and
Exchange Commission and are not intended to forecast or be indicative of
possible future performance of our common stock.
[PERFORMANCE GRAPH]
<Table>
<Caption>
INVESTMENT VALUE
---------------------------------------------------------------
09/12/96 07/02/97 07/01/98 06/30/99 06/28/00 06/27/01
-------- -------- -------- -------- -------- --------
Diedrich Coffee, Inc. ................... $100.00 $ 25.15 $ 66.07 $ 66.67 $ 27.38 $ 8.64
Nasdaq Stock Market...................... $100.00 $124.82 $164.53 $234.21 $343.62 $180.10
Nasdaq Retail Trade Stocks............... $100.00 $117.09 $157.51 $150.64 $ 98.01 $ 97.40
</Table>
CERTAIN TRANSACTIONS REGARDING DIEDRICH COFFEE
On April 6, 1999, we entered into a $1,000,000 loan agreement and security
agreement with Amre A. Youness, one of our former directors and a stockholder.
Under the loan agreement, all outstanding principal and interest was due and
payable on April 6, 2000. The loan was secured by our assets with interest
accruing and paid monthly at the prime rate plus 3%. We repaid the loan on July
8, 1999. In connection with the loan agreement, we issued warrants to Mr.
Youness to purchase 17,550 shares of our common stock at a price of $22.50 per
share. Mr. Youness' warrants will not expire until April 6, 2004.
In connection with the acquisition of Coffee People in July 1999, we and
certain of our affiliates entered into a voting agreement with Second Cup
pursuant to which all parties agreed to nominate and vote for a director nominee
identified by Second Cup in any subsequent stockholder meeting where directors
were to be
25
elected. On October 6, 2000, Second Cup notified us that it was irrevocably
waiving its right to designate a director as provided in this voting agreement.
On May 8, 2001, we sold and issued 2,000,000 shares of our common stock at
a purchase price of $3.00 per share to a number of entities for which Westcliff
Capital Management, LLC is either the general partner and/or the investment
manager, Peninsula Capital, LP, Common Sense Partners, LP and Sequoia
Enterprises, LP. In addition, we issued to the investors warrants to purchase an
additional 500,000 shares of our common stock at an initial exercise price of
$4.80 per share. Our Chairman, Paul C. Heeschen, is the sole general partner of
Sequoia Enterprises, LP.
26
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of our common stock as of October 24, 2001, by:
- each person or group of affiliated persons who we know owns beneficially
5% or more of our common stock
- each of our directors and nominees
- each of our executive officers or former executive officers listed in the
summary compensation table
- all of our directors and executive officers as a group
Percentage of ownership is calculated as required by Rule 13d-3(d)(1) under
the Securities Exchange Act of 1934. Except as indicated in the footnotes to
this table, the persons named in the table have sole voting and investment power
with respect to all shares of common stock shown as beneficially owned by them,
subject to community property laws. The table below includes the number of
shares underlying options and warrants that are exercisable within 60 days from
October 24, 2001.
<Table>
<Caption>
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNERSHIP(2) OF CLASS(%)
--------------------------------------- ------------ -----------
Sequoia Enterprises, LP..................................... 1,298,375(3) 24.0
450 Newport Center Drive
Suite 450
Newport Beach, CA 92660
Westcliff Capital Management, LLC........................... 913,433(4) 16.9
200 Seventh Avenue, Suite 105
Santa Cruz, California 95062
D.C.H., L.P. ............................................... 357,690(5) 7.0
450 Newport Center Drive
Suite 450
Newport Beach, CA 92660
Paul C. Heeschen............................................ 1,737,861(6) 32.0
Martin R. Diedrich.......................................... 167,026(7) 3.2
Lawrence Goelman............................................ 32,550(8) *
Peter Churm................................................. 15,625(9) *
J. Michael Jenkins.......................................... 31,250(10) *
Matthew C. McGuinness....................................... 11,875(11) *
Carl Mount.................................................. 1,666(12) *
Michael Zorehkey............................................ 625(13) *
Timothy Ryan................................................ 7,341(14) *
Lisa Steere................................................. 1,666(15) *
All directors and executive officers as a
group (14 persons)........................................ 2,026,173(16) 37.6
</Table>
---------------
* Less than 1%
(1) Unless otherwise indicated, the address of each person in this table is c/o
Diedrich Coffee, Inc., 2144 Michelson Drive, Irvine, California 92612.
(2) Calculated pursuant to Rule 13d-3(d) under the Securities Exchange Act of
1934. Shares not outstanding that are subject to options or warrants
exercisable by the holder thereof within 60 days of October 24, 2001 are
deemed outstanding for the purposes of calculating the number and
percentage owned by such stockholder, but not deemed outstanding for the
purpose of calculating the percentage owned by each other stockholder
listed. Unless otherwise noted, all shares listed as beneficially owned by
a stockholder are actually outstanding.
27
(3) Paul C. Heeschen, the chairman of our board of directors, is the sole
general partner of this limited partnership with voting and investment
power as to all shares beneficially owned by the limited partnership.
Includes 250,000 shares subject to warrants that are exercisable with 60
days.
(4) According to the Statement of Changes of Beneficial Ownership filed on
October 2, 2001 with the Securities and Exchange Commission. The statement
reports the beneficial ownership of Westcliff Capital Management, LLC and
Richard S. Spencer III, a manager and the majority member of Westcliff
Capital Management, LLC. The statement reports the beneficial ownership of
entities for which Westcliff Capital Management, LLC is (i) the general
partner and investment adviser and (ii) the investment adviser only.
Includes 208,333 shares subject to warrants that are exercisable within 60
days.
(5) Paul C. Heeschen, the chairman of our board of directors, is the sole
general partner of this limited partnership with voting and investment
power as to all shares beneficially owned by the limited partnership.
(6) Includes (i) 1,298,375 shares beneficially owned by Sequoia Enterprises, LP
(250,000 shares of which are subject to warrants exercisable with 60 days),
(ii) 357,690 shares beneficially owned by D.C.H., LP and (iii) 61,579
shares beneficially owned by Redwood Enterprises VI, LP. Mr. Heeschen is
the sole general partner of each of these partnership with voting and
investment power as to all of such shares. Includes 12,467 shares owned
personally by Mr. Heeschen (10,625 shares of which are subject to options
that are exercisable within 60 days) and 7,750 shares held by the Palm
Trust, of which Mr. Heeschen is a trustee with shared voting and investment
power as to all of such shares.
(7) Includes 3,250 shares subject to options that are exercisable within 60
days.
(8) Includes 29,375 shares subject to options that are exercisable within 60
days. This number does not include the 21,250 shares subject to warrants
held by the Virginia R. Cirica Trust. Ms. Cirica is Mr. Goelman's wife. Mr.
Goelman disclaims any beneficial interest in the Virginia R. Cirica Trust,
except to the extent to which Mr. Goelman is a contingent beneficiary under
the terms of that trust.
(9) Includes 10,625 shares subject to options that are exercisable within 60
days.
(10) Includes 31,250 shares subject to options that are exercisable within 60
days.
(11) Includes 9,375 shares subject to options that are exercisable within 60
days.
(12) Includes 1,666 shares subject to options that are exercisable within 60
days.
(13) Includes 625 shares subject to options that are exercisable within 60 days.
(14) Resigned as Chief Executive Officer effective as of September 27, 2000.
(15) Includes 1,666 shares subject to options that are exercisable within 60
days.
(16) Includes 374,486 shares subject to options and warrants that are
exercisable within 60 days.
OTHER INFORMATION
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our directors
and executive officers and persons who own more than ten percent of a registered
class of our equity securities, to file with the Securities and Exchange
Commission initial reports of ownership and reports of changes in ownership of
our common stock and other equity securities. These Section 16(a) reporting
persons are required by Securities and Exchange Commission regulations to
furnish us with copies of all Section 16(a) forms they file.
28
To our knowledge, based solely on a review of the copies of such reports
furnished to us and written representations from Section 16(a) reporting
persons, we believe that during our fiscal year ended June 27, 2001, all Section
16(a) reporting persons complied with all applicable filing requirements except
as follows:
- Options to purchase common stock of Diedrich Coffee that were granted to
Matthew McGuinness, Martin Diedrich, Edward Appfel, Joseph Caruso,
Michael Zorehkey, Katherine Saar and Carl Mount in June 2001 were
reported in October 2001.
- In April 2001, Paul Heeschen filed an amendment to his February 2001 Form
4. The amendment reported a number of open market acquisitions of common
stock that were unintentionally omitted from the Form 4 when originally
filed.
- Options to purchase common stock of Diedrich Coffee granted to Carl Mount
in November 2000 were reported in December 2000.
- Options to purchase common stock of Diedrich Coffee granted to Lisa
Steere in November 2000 were reported in December 2000.
- In August 2000, D.C.H., LP acquired Diedrich Coffee common stock on the
open market. The acquisitions were reported in September 2000.
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
The firm of independent accountants recommended by the audit committee and
selected by our board of directors for the fiscal year ending June 26, 2002 is
KPMG LLP. The board of directors expects that the representatives of KPMG LLP
will be present at the meeting, will be given an opportunity to make a statement
at such meeting if they desire to do so and will be available to respond to
appropriate questions.
INCORPORATION BY REFERENCE
In our filings with the Securities and Exchange Commission, information is
sometimes "incorporated by reference." This means that we are referring you to
information that has previously been filed with the Securities and Exchange
Commission, so that information should be considered as part of the filing that
you are reading. Our 2001 Annual Report is incorporated by reference. Based on
Securities and Exchange Commission regulations, the Compensation Committee and
Audit Committee Reports on beginning on pages 21 and 22, respectively, and the
stock performance graph on page 24 of this proxy statement, specifically are not
incorporated by reference into any other filings with the Securities and
Exchange Commission.
This proxy statement is sent to you as part of the proxy materials for the
2001 annual meeting of stockholders. You may not consider this proxy statement
as material for soliciting the purchase or sale of our common stock.
AVAILABILITY OF ADDITIONAL INFORMATION
Copies of our 2001 Annual Report (which includes the Annual Report on Form
10-K filed with the Securities and Exchange Commission) have been distributed to
stockholders. Additional copies and additional information are available without
charge from Investor Relations, Diedrich Coffee, Inc., 2144 Michelson Drive,
Irvine, California 92612.
STOCKHOLDER PROPOSALS FOR 2002 ANNUAL STOCKHOLDERS' MEETING
Stockholders who wish to have proposals for action at our 2002 Annual
Meeting of Stockholders considered for inclusion in next year's proxy statement
and form of proxy must cause their proposals to be received in writing by us at
our address set forth on the first page of this Proxy Statement no later than
July 1, 2002. Such proposals should be addressed to our Corporate Secretary, and
may be included in next year's proxy materials if they comply with the rules and
regulations promulgated by the Securities and Exchange Commission. No business
shall be conducted at any annual meeting except in accordance with the
procedures set forth in our bylaws.
29
OTHER MATTERS
Our board of directors knows of no other matters that will be presented for
consideration at the annual meeting. If any other matters are properly brought
before the annual meeting, it is the intention of the persons named in the
accompanying proxy to vote on such matters in accordance with their best
judgment. It is important that the proxies be returned promptly and that your
shares be represented. Stockholders are urged to mark, date, execute and
promptly return the accompanying proxy card in the enclosed envelope.
By order of the board of directors,
Paul C. Heeschen
Chairman of the Board
Irvine, California
October 25, 2001
30
APPENDIX A
DIEDRICH COFFEE, INC.
2000 EQUITY INCENTIVE PLAN
(AS PROPOSED TO BE AMENDED)
ARTICLE I
PURPOSE OF PLAN
The Company has adopted this Plan to promote the interests of the Company
and its stockholders by using investment interests in the Company to attract,
retain and motivate its management and other persons, to encourage and reward
their contributions to the performance of the Company, and to align their
interests with the interests of the Company's stockholders. Capitalized terms
not otherwise defined herein have the meanings ascribed to them in Article IX.
ARTICLE II
EFFECTIVE DATE AND TERM OF PLAN
2.1 Term of Plan.
This Plan became effective as of the Effective Date and will continue in
effect until the Expiration Date, at which time this Plan will automatically
terminate.
2.2 Effect on Awards.
Awards may be granted only during the Plan Term, but each Award properly
granted during the Plan Term will remain in effect after the Expiration Date
until such Award has been exercised, terminated or expired in accordance with
its terms and the terms of this Plan.
ARTICLE III
SHARES SUBJECT TO PLAN
3.1 Number of Shares.
The maximum number of shares of Common Stock that may be issued pursuant to
Awards under this Plan is 437,500, subject to adjustment as set forth in Section
3.4.
3.2 Source of Shares.
The Common Stock to be issued under this Plan will be made available, at
the discretion of the Administrator, either from authorized but unissued shares
of Common Stock or from previously issued shares of Common Stock reacquired by
the Company, including without limitation shares purchased on the open market.
3.3 Availability of Unused Shares.
Shares of Common Stock subject to unexercised portions of any Award that
expire, terminate or are canceled, and shares of Common Stock issued pursuant to
an Award that are reacquired by the Company pursuant to this Plan or the terms
of the Award under which such shares were issued, will again become available
for the grant of further Awards under this Plan as part of the shares available
under Section 3.1. However, if the exercise price of, or withholding taxes
incurred in connection with, an Award is paid with shares of Common Stock, or if
shares of Common Stock otherwise issuable pursuant to Awards are withheld by the
Company in satisfaction of an exercise price or the withholding taxes incurred
in connection with any exercise or vesting of an Award, then the number of
shares of Common Stock available for issuance under the
A-1
Plan will be reduced by the gross number of shares for which the Award is
exercised or for which it vests, as applicable, and not by the net number of
shares of Common Stock issued to the holder of such Award.
3.4 Adjustment Provisions.
(a) Adjustments. If the Company consummates any Reorganization in which
holders of shares of Common Stock are entitled to receive in respect of such
shares any additional shares or new or different shares or securities, cash or
other consideration (including, without limitation, a different number of shares
of Common Stock), or if the outstanding shares of Common Stock are increased,
decreased or exchanged for a different number or kind of shares or other
securities through merger, consolidation, sale or exchange of assets of the
Company, reorganization, recapitalization, reclassification, combination, stock
dividend, stock split, reverse stock split, spin-off, or similar transaction
then, subject to Section 8.1, an appropriate and proportionate adjustment shall
be made by the Administrator in its discretion in: (i) the maximum number and
kind of shares subject to this Plan as provided in Section 3.1; (ii) the number
and kind of shares or other securities subject to then outstanding Awards; (iii)
the price for each share or other unit of any other securities subject to, or
measurement criteria applicable to, then outstanding Awards; and/or (iv) the
number and kind of shares or other securities to be issued as Non-Employee
Director Options.
(b) No Fractional Interests. No fractional interests will be issued under
the Plan resulting from any adjustments.
(c) Adjustments Related to Company Stock. To the extent any adjustments
relate to stock or securities of the Company, such adjustments will be made by
the Administrator, whose determination in that respect will be final, binding
and conclusive.
(d) Right to Make Adjustment. The grant of an Award will not affect in any
way the right or power of the Company to make adjustments, reclassifications,
reorganizations or changes of its capital or business structure or to merge or
to consolidate or to dissolve, liquidate or sell, or transfer all or any part of
its business or assets.
(e) Limitations. No adjustment to the terms of an Incentive Stock Option
may be made unless such adjustment either: (i) would not cause the Option to
lose its status as an Incentive Stock Option; or (ii) is agreed to in writing by
the Administrator and the Recipient.
3.5 Reservation of Shares.
The Company will at all times reserve and keep available shares of Common
Stock equaling at least the total number of shares of Common Stock issuable
pursuant to all outstanding Awards.
ARTICLE IV
ADMINISTRATION OF PLAN
4.1 Administrator.
(a) Plan Administration. Subject to the provisions of Section 4.1(b), this
Plan will be administered by the Board and may also be administered by a
Committee of the Board appointed pursuant to Section 4.1(b).
(b) Administration by Committee. The Board in its sole discretion may from
time to time appoint a Committee of not less than two (2) Board members with
authority to administer this Plan in whole or part and, subject to applicable
law, to exercise any or all of the powers, authority and discretion of the Board
under this Plan. As long as the Company has a class of equity securities
registered under Section 12 of the Exchange Act, this Plan will be administered
by a Committee of not less than two (2) Board members appointed by the Board in
its sole discretion from time to time, each of whom is (i) a Non-Employee
Director, and (ii) an "Outside Director" as defined in the regulations adopted
under Section 162(m) of the IRC. The Board may from time to time increase or
decrease (but not below two (2)) the number of members of the Committee, remove
from membership on the Committee all or any portion of its members, and/or
appoint such person or persons as it desires to fill any vacancy existing on the
Committee, whether caused by removal, resignation or
A-2
otherwise. Unless otherwise required by this Section 4.1(b), the Board may
disband the Committee at any time.
4.2 Authority of Administrator.
(a) Authority to Interpret Plan. Subject to the express provisions of this
Plan, the Administrator will have the power to implement, interpret and construe
this Plan and any Awards and Award Documents or other documents defining the
rights and obligations of the Company and Recipients hereunder and thereunder,
to determine all questions arising hereunder and thereunder, and to adopt and
amend such rules and regulations for the administration hereof and thereof as it
may deem desirable. The interpretation and construction by the Administrator of
any provisions of this Plan or of any Award or Award Document, and any action
taken by, or inaction of, the Administrator relating to this Plan or any Award
or Award Document, will be within the discretion of the Administrator and will
be conclusive and binding upon all persons. Subject only to compliance with the
express provisions hereof, the Administrator may act in its discretion in
matters related to this Plan and any and all Awards and Award Documents.
(b) Authority to Grant Awards. Subject to the express provisions of this
Plan, the Administrator may from time to time in its discretion select the
Eligible Persons to whom, and the time or times at which, Awards will be granted
or sold, the nature of each Award, the number of shares of Common Stock or the
number of rights that make up or underlie each Award, the exercise price and
period (if applicable) for the exercise of each Award, and such other terms and
conditions applicable to each individual Award as the Administrator may
determine. Any and all terms and conditions of Awards may be established by the
Administrator without regard to existing Awards or other grants and without
incurring any obligation of the Company in respect of subsequent Awards. The
Administrator may grant at any time new Awards to an Eligible Person who has
previously received Awards or other grants (including other stock options)
regardless of the status of such other Awards or grants. The Administrator may
grant Awards singly or in combination or in tandem with other Awards as it
determines in its discretion.
(c) Procedures. Subject to the Company's charter or bylaws or any Board
resolution conferring authority on the Committee, any action of the
Administrator with respect to the administration of this Plan must be taken
pursuant to a majority vote of the authorized number of members of the
Administrator or by the unanimous written consent of its members; provided,
however, that (i) if the Administrator is the Committee and consists of two (2)
members, then actions of the Administrator must be unanimous, and (ii) actions
taken by the Board will be valid if approved in accordance with applicable law.
4.3 No Liability.
No member of the Board or the Committee or any designee thereof will be
liable for any action or inaction with respect to this Plan or any Award or any
transaction arising under this Plan or any Award except in circumstances
constituting bad faith of such member.
4.4 Amendments.
(a) Plan Amendments. The Administrator may at any time and from time to
time in its discretion, insofar as permitted by applicable law, rule or
regulation and subject to Section 4.4(c), suspend or discontinue this Plan or
revise or amend it in any respect whatsoever, and this Plan as so revised or
amended will govern all Awards, including those granted before such revision or
amendment. Without limiting the generality of the foregoing, the Administrator
is authorized to amend this Plan to comply with or take advantage of amendments
to applicable laws, rules or regulations, including the Securities Act, the
Exchange Act, the IRC, or the rules of any exchange or market system upon which
the Common Stock is listed or trades, or any rules or regulations promulgated
thereunder. No stockholder approval of any amendment or revision will be
required unless such approval is required by applicable law, rule or regulation.
(b) Award Amendments. The Administrator may at any time and from time to
time in its discretion, but subject to Section 4.4(c) and compliance with
applicable statutory or administrative requirements, accelerate or extend the
vesting or exercise period of any Award as a whole or in part, adjust or reduce
the purchase or exercise price of an Award either by cancellation of such Award
and the granting of a new Award
A-3
at such modified purchase or exercise price or by amending the terms of the
Award to reflect such a modified purchase or exercise price, and make such other
modifications in the terms and conditions of an Award as it deems advisable.
(c) Limitation. Except as otherwise provided in this Plan or in the
applicable Award Document, no amendment, revision, suspension or termination of
this Plan or an outstanding Award that would cause an Incentive Stock Option to
cease to qualify as such or that would alter, impair or diminish in any material
respect any rights or obligations under any Award theretofore granted under this
Plan may be effected without the written consent of the Recipient to whom such
Award was granted.
4.5 Other Compensation Plans.
This Plan supersedes and replaces the Company's Amended and Restated 1996
Stock Incentive Plan and the Company's 1996 Non-Employee Directors Stock Option
Plan, but the adoption of this Plan will not affect any other stock option,
incentive or other compensation plans in effect from time to time for the
Company, and this Plan will not preclude the Company from establishing any other
forms of incentive or other compensation for employees, directors, advisors or
consultants of the Company, whether or not approved by stockholders.
Notwithstanding the fact that this Plan supersedes and replaces the Company's
Amended and Restated 1996 Stock Incentive Plan and the Company's 1996
Non-Employee Directors Stock Option Plan, this plan does not affect in any way,
any outstanding award grants made under such other plans prior to the Effective
Date.
4.6 Plan Binding on Successors.
This Plan will be binding upon the successors and assigns of the Company.
4.7 References to Successor Statutes, Regulations and Rules.
Any reference in this Plan to a particular statute, regulation or rule will
also refer to any successor provision of such statute, regulation or rule.
4.8 Invalid Provisions.
In the event that any provision of this Plan is found to be invalid or
otherwise unenforceable under any applicable law, such invalidity or
unenforceability is not to be construed as rendering any other provisions
contained herein invalid or unenforceable, and all such other provisions are to
be given full force and effect to the same extent as though the invalid and
unenforceable provision were not contained herein.
4.9 Governing Law.
This Plan will be governed by and interpreted in accordance with the
internal laws of the State of Delaware, without giving effect to the principles
of the conflicts of laws thereof.
4.10 Interpretation.
Headings herein are for convenience of reference only, do not constitute a
part of this Plan, and will not affect the meaning or interpretation of this
Plan. References herein to Sections or Articles are references to the referenced
Section or Article hereof, unless otherwise specified.
ARTICLE V
GENERAL AWARD PROVISIONS
5.1 Participation in Plan.
(a) Eligibility to Receive Awards. A person is eligible to receive grants
of Awards if, at the time of the grant of the Award, such person is an Eligible
Person or has received an offer of employment from the Company, provided,
however, that only Non-Employee Directors are eligible to receive Non-Employee
Director Options, and provided further, that Awards granted to a person who has
received an offer of employment will terminate and be forfeited without
consideration if the employment offer is not accepted
A-4
within such time as may be specified by the Company. Status as an Eligible
Person will not be construed as a commitment that any Award will be granted
under this Plan to an Eligible Person or to Eligible Persons generally.
(b) Eligibility to Receive Incentive Stock Options. Incentive Stock Options
may be granted only to Eligible Persons meeting the employment requirements of
Section 422 of the IRC.
(c) Awards to Foreign Nationals. Notwithstanding anything to the contrary
herein, the Administrator may, in order to fulfill the purposes of this Plan,
modify grants of Awards to Recipients who are foreign nationals or employed
outside of the United States to recognize differences in applicable law, tax
policy or local custom.
5.2 Award Documents.
Each Award must be evidenced by an agreement duly executed on behalf of the
Company and by the Recipient or, in the Administrator's discretion, a confirming
memorandum issued by the Company to the Recipient, setting forth such terms and
conditions applicable to the Award as the Administrator may in its discretion
determine. Awards will not be deemed made or binding upon the Company, and
Recipients will have no rights thereto, until such an agreement is entered into
between the Company and the Recipient or such a memorandum is delivered by the
Company to the Recipient, but an Award may have an effective date prior to the
date of such an agreement or memorandum. Award Documents may be (but need not
be) identical and must comply with and be subject to the terms and conditions of
this Plan, a copy of which will be provided to each Recipient and incorporated
by reference into each Award Document. Any Award Document may contain such other
terms, provisions and conditions not inconsistent with this Plan as may be
determined by the Administrator. In case of any conflict between this Plan and
any Award Document, this Plan shall control.
5.3 Payment for Awards.
(a) Payment of Exercise Price. The exercise price or other payment for an
Award is payable upon the exercise of a Stock Option or upon other purchase of
shares pursuant to an Award granted hereunder by delivery of legal tender of the
United States or payment of such other consideration as the Administrator may
from time to time deem acceptable in any particular instance; provided, however,
that the Administrator may, in the exercise of its discretion, allow exercise of
an Award in a broker-assisted or similar transaction in which the exercise price
is not received by the Company until promptly after exercise.
(b) Company Assistance. The Company may assist any person to whom an Award
is granted (including, without limitation, any officer or director of the
Company) in the payment of the purchase price or other amounts payable in
connection with the receipt or exercise of that Award, by lending such amounts
to such person on such terms and at such rates of interest and upon such
security (if any) as may be consistent with applicable law and approved by the
Administrator. In case of such a loan, the Administrator may require that the
exercise be followed by a prompt sale of some or all of the underlying shares
and that a portion of the sale proceeds be dedicated to full payment of the
exercise price and amounts required pursuant to Section 5.10.
(c) Cashless Exercise. If permitted in any case by the Administrator in its
discretion, the exercise price for Awards may be paid by capital stock of the
Company delivered in transfer to the Company by or on behalf of the person
exercising the Award and duly endorsed in blank or accompanied by stock powers
duly endorsed in blank, with signatures guaranteed in accordance with the
Exchange Act if required by the Administrator; or retained by the Company from
the stock otherwise issuable upon exercise or surrender of vested and/or
exercisable Awards or other equity awards previously granted to the Recipient
and being exercised (if applicable) (in either case valued at Fair Market Value
as of the exercise date); or such other consideration as the Administrator may
from time to time in the exercise of its discretion deem acceptable in any
particular instance.
(d) No Precedent. Recipients will have no rights to the assistance
described in Section 5.3(b) or the exercise techniques described in Section
5.3(c), and the Company may offer or permit such assistance or
A-5
techniques on an ad hoc basis to any Recipient without incurring any obligation
to offer or permit such assistance or techniques on other occasions or to other
Recipients.
5.4 No Employment Rights.
Nothing contained in this Plan (or in Award Documents or in any other
documents related to this Plan or to Awards) will confer upon any Eligible
Person or Recipient any right to continue in the employ of or engagement by the
Company or any Affiliated Entity or constitute any contract or agreement of
employment or engagement, or interfere in any way with the right of the Company
or any Affiliated Entity to reduce such person's compensation or other benefits
or to terminate the employment or engagement of such Eligible Person or
Recipient, with or without cause. Except as expressly provided in this Plan or
in any statement evidencing the grant of an Award, the Company has the right to
deal with each Recipient in the same manner as if this Plan and any such
statement evidencing the grant of an Award did not exist, including, without
limitation, with respect to all matters related to the hiring, discharge,
compensation and conditions of the employment or engagement of the Recipient.
Unless otherwise set forth in a written agreement binding upon the Company or an
Affiliated Entity, all employees of the Company or an Affiliated Entity are "at
will" employees whose employment may be terminated by the Company or the
Affiliated Entity at any time for any reason or no reason, without payment or
penalty of any kind. Any question(s) as to whether and when there has been a
termination of a Recipient's employment or engagement, the reason (if any) for
such termination, and/or the consequences thereof under the terms of this Plan
or any statement evidencing the grant of an Award pursuant to this Plan will be
determined by the Administrator and the Administrator's determination thereof
will be final and binding.
5.5 Restrictions Under Applicable Laws and Regulations.
(a) Government Approvals. All Awards will be subject to the requirement
that, if at any time the Company determines, in its discretion, that the
listing, registration or qualification of the securities subject to Awards
granted under this Plan upon any securities exchange or interdealer quotation
system or under any federal, state or foreign law, or the consent or approval of
any government or regulatory body, is necessary or desirable as a condition of,
or in connection with, the granting of such an Award or the issuance, if any, or
purchase of shares in connection therewith, such Award may not be exercised as a
whole or in part unless and until such listing, registration, qualification,
consent or approval has been effected or obtained free of any conditions not
acceptable to the Company. During the term of this Plan, the Company will use
its reasonable efforts to seek to obtain from the appropriate governmental and
regulatory agencies any requisite qualifications, consents, approvals or
authorizations in order to issue and sell such number of shares of its Common
Stock as is sufficient to satisfy the requirements of this Plan. The inability
of the Company to obtain any such qualifications, consents, approvals or
authorizations will relieve the Company of any liability in respect of the
nonissuance or sale of such stock as to which such qualifications, consents,
approvals or authorizations pertain.
(b) No Registration Obligation; Recipient Representations. The Company will
be under no obligation to register or qualify the issuance of Awards or
underlying securities under the Securities Act or applicable state securities
laws. Unless the issuance of Awards and underlying securities have been
registered under the Securities Act and qualified or registered under applicable
state securities laws, the Company shall be under no obligation to issue any
Awards or underlying securities unless the Awards and underlying securities may
be issued pursuant to applicable exemptions from such registration or
qualification requirements. In connection with any such exempt issuance, the
Administrator may require the Recipient to provide a written representation and
undertaking to the Company, satisfactory in form and scope to the Company, that
such Recipient is acquiring such Awards and underlying securities for such
Recipient's own account as an investment and not with a view to, or for sale in
connection with, the distribution of any such securities, and that such person
will make no transfer of the same except in compliance with any rules and
regulations in force at the time of such transfer under the Securities Act and
other applicable law, and that if securities are issued without registration, a
legend to this effect (together with any other legends deemed appropriate by the
Administrator) may be endorsed upon the securities so issued, and to the effect
of any additional representations that are appropriate in light of applicable
securities laws and rules. The Company may also order its transfer agent to stop
transfers of such shares. The Administrator may also require the Recipient to
provide the Company such information
A-6
and other documents as the Administrator may request in order to satisfy the
Administrator as to the investment sophistication and experience of the
Recipient and as to any other conditions for compliance with any such exemptions
from registration or qualification.
5.6 Additional Conditions.
Any Award may be subject to such provisions (whether or not applicable to
any other Award or Recipient) as the Administrator deems appropriate, including
without limitation provisions for the forfeiture of or restrictions on resale or
other disposition of securities of the Company acquired under this Plan,
provisions giving the Company the right to repurchase securities of the Company
acquired under this Plan in the event the Recipient leaves the Company for any
reason or elects to effect any disposition thereof, and provisions to comply
with federal and state securities laws.
5.7 No Privileges Re Stock Ownership or Specific Assets.
Except as otherwise set forth herein, a Recipient or a permitted transferee
of an Award will have no rights as a stockholder with respect to any shares
issuable or issued in connection with the Award until the Recipient has
delivered to the Company all amounts payable and performed all obligations
required to be performed in connection with exercise of the Award and the
Company has issued such shares. No person will have any right, title or interest
in any fund or in any specific asset (including shares of capital stock) of the
Company by reason of any Award granted hereunder. Neither this Plan (or any
documents related hereto) nor any action taken pursuant hereto is to be
construed to create a trust of any kind or a fiduciary relationship between the
Company and any person. To the extent that any person acquires a right to
receive an Award hereunder, such right shall be no greater than the right of any
unsecured general creditor of the Company.
5.8 Nonassignability.
No Award is assignable or transferable except: (a) by will or by the laws
of descent and distribution; or (b) subject to the final sentence of this
Section 5.8, upon dissolution of marriage pursuant to a qualified domestic
relations order or, in the discretion of the Administrator and under
circumstances that would not adversely affect the interests of the Company,
transfers for estate planning purposes or pursuant to a nominal transfer that
does not result in a change in beneficial ownership. During the lifetime of a
Recipient, an Award granted to such person will be exercisable only by the
Recipient (or the Recipient's permitted transferee) or such person's guardian or
legal representative. Notwithstanding the foregoing, Stock Options intended to
be treated as Incentive Stock Options (or other Awards subject to transfer
restrictions under the IRC) may not be assigned or transferred in violation of
Section 422(b)(5) of the IRC or the regulations thereunder, and nothing herein
is intended to allow such assignment or transfer.
5.9 Information to Recipients.
(a) Provision of Information. The Administrator in its sole discretion may
determine what, if any, financial and other information is to be provided to
Recipients and when such financial and other information is to be provided after
giving consideration to applicable federal and state laws, rules and
regulations, including, without limitation, applicable federal and state
securities laws, rules and regulations.
(b) Confidentiality. The furnishing of financial and other information that
is confidential to the Company is subject to the Recipient's agreement to
maintain the confidentiality of such financial and other information, and not to
use the information for any purpose other than evaluating the Recipient's
position under this Plan. The Administrator may impose other restrictions on the
access to and use of such confidential information and may require a Recipient
to acknowledge the Recipient's obligations under this Section 5.9(b) (which
acknowledgment is not to be a condition to Recipient's obligations under this
Section 5.9(b)).
5.10 Withholding Taxes.
Whenever the granting, vesting or exercise of any Award, or the issuance of
any securities upon exercise of any Award or transfer thereof, gives rise to tax
or tax withholding liabilities or obligations, the Administrator will have the
right as a condition thereto to require the Recipient to remit to the Company an
amount sufficient to satisfy any federal, state and local withholding tax
requirements arising in connection
A-7
therewith. The Administrator may, in the exercise of its discretion, allow
satisfaction of tax withholding requirements by accepting delivery of stock of
the Company or by withholding a portion of the stock otherwise issuable in
connection with an Award, in each case valued at Fair Market Value as of the
date of such delivery or withholding, as the case may be, is determined.
5.11 Legends on Awards and Stock Certificates.
Each Award Document and each certificate representing securities acquired
upon vesting or exercise of an Award must be endorsed with all legends, if any,
required by applicable federal and state securities and other laws to be placed
on the Award Document and/or the certificate. The determination of which
legends, if any, will be placed upon Award Documents or the certificates will be
made by the Administrator in its discretion and such decision will be final and
binding.
5.12 Effect of Termination of Employment on Awards.
(a) Termination of Vesting. Notwithstanding anything to the contrary
herein, but subject to Section 5.12(b) Awards will be exercisable by a Recipient
(or the Recipient's successor in interest) following such Recipient's
termination of employment or service only to the extent that installments
thereof had become exercisable on or prior to the date of such termination and
are not forfeited pursuant to Section 5.15.
(b) Alteration of Vesting and Exercise Periods. Notwithstanding anything to
the contrary herein, the Administrator may in its discretion (i) designate
shorter or longer periods following a Recipient's termination of employment or
service during which Awards may vest or be exercised; provided, however, that
any shorter periods determined by the Administrator will be effective only if
provided for in this Plan or the instrument that evidences the grant to the
Recipient of the affected Award or if such shorter period is agreed to in
writing by the Recipient, and (ii) accelerate the vesting of all or any portion
of any Awards by increasing the number of shares purchasable at any time.
(c) Leave of Absence. In the case of any employee on an approved leave of
absence, the Administrator may make such provision respecting continuance of
Awards granted to such employee as the Administrator in its discretion deems
appropriate, except that in no event will an Award be exercisable after the date
such Award would expire in accordance with its terms had the Recipient remained
continuously employed.
(d) General Cessation. Except as otherwise set forth in this Plan or an
Award Document or as determined by the Administrator in its discretion, all
Awards granted to a Recipient, and all of such Recipient's rights thereunder,
will terminate upon termination for any reason of such Recipient's employment or
service with the Company or any Affiliated Entity (or cessation of any other
service relationship between the Recipient and the Company or any Affiliated
Entity in place as of the date the Award was granted).
5.13 Lock-Up Agreements.
Each Recipient agrees as a condition to receipt of an Award that, in
connection with any public offering by the Company of its equity securities and
upon the request of the Company and the principal underwriter (if any) in such
public offering, any shares of Common Stock acquired or that may be acquired
upon exercise or vesting of an Award may not be sold, offered for sale,
encumbered, or otherwise disposed of or subjected to any transaction that will
involve any sales of securities of the Company, without the prior written
consent of the Company or such underwriter, as the case may be, for a period of
not more than 365 days after the effective date of the registration statement
for such public offering. Each Recipient will, if requested by the Company or
the principal underwriter, enter into a separate agreement to the effect of this
Section 5.13.
5.14 Restrictions on Common Stock and Other Securities.
Common Stock or other securities of the Company issued or issuable in
connection with any Award will be subject to all of the restrictions imposed
under this Plan upon Common Stock issuable or issued upon exercise of Stock
Options, except as otherwise determined by the Administrator.
A-8
5.15 Cancellation and Rescission of Awards.
Unless an Award Document or other separate written agreement binding upon
the Company provides otherwise, the Administrator may cancel any unexpired,
unpaid or deferred Award (whether or not vested) at any time if the Recipient
thereof fails at any time to comply with all applicable provisions of the Award
Document or this Plan, or does any of the following:
(a) During employment or engagement with the Company or any Affiliated
Entity and without the prior written authorization of the Chief Executive
Officer of the Company, renders services for any organization or engages
directly or indirectly in any business that, in the judgment of the Chief
Executive Officer of the Company or other senior officer designated by the
Administrator, is competitive with the Company or any Affiliated Entity, or
which organization or business, or the rendering of services to such
organization or business, is otherwise prejudicial to or in conflict with
the business or interests of the Company or any Affiliated Entity.
(b) During employment with the Company or any Affiliated Entity or at
any time thereafter, fails to comply with any confidentiality agreement
with the Company or any Affiliated Entity to which the Recipient is party,
or with the policies of the Company or Affiliated Entity regarding
nondisclosure of confidential information, or without prior written
authorization from the Company or any Affiliated Entity, discloses to
anyone outside the Company or any Affiliated Entity, or uses for any
purpose or in any context other than in performance of the Recipient's
duties to the Company or any Affiliated Entity, any confidential or trade
secret information of the Company or any Affiliated Entity.
(c) During employment with the Company or any Affiliated Entity or at
any time thereafter, breaches any agreement with or duty to the Company or
any Affiliated Entity.
Upon and as a condition to exercise of any Award, a Recipient shall certify
on a form acceptable to the Company that he or she is in compliance with the
terms and conditions of this Plan and any applicable Award Document and has not
done any of the things described in this Section 5.15. Furthermore, if a
Recipient does any of the things described in this Section 5.15 within 180 days
after any exercise, payment or delivery pursuant to an Award, the Company may
rescind such exercise, payment or delivery. The Company shall notify the
Recipient in writing of any such rescission within two years after such
exercise, payment or delivery. Within ten days after receiving such notice from
the Company, a Recipient shall pay to the Company the amount of any gain
realized or payment received as a result of the rescinded exercise, payment or
delivery pursuant to an Award. Such payment shall be made by returning to the
Company all shares of capital stock that the Recipient received in connection
with the rescinded exercise, payment or delivery, or if such shares have been
transferred by the Recipient, then by paying the equivalent value thereof at the
time of their transfer to the Company in cash. To assist in enforcement of the
Company's rescission right described above, the Company may, in its discretion,
retain any Common Stock or other consideration otherwise deliverable to a
Recipient in connection with an Award until the rescission period described
above has lapsed.
5.16 Limits on Awards to Eligible Persons.
Notwithstanding any other provision of this Plan, no one Eligible Person
shall be granted awards with respect to more than 200,000 shares of Common Stock
in any one calendar year, provided, however, that this limitation shall not
apply if it is not required in order for the compensation attributable to Awards
hereunder to qualify as Performance-Based Compensation. The limitation set forth
in this Section 5.16 will be subject to adjustment as provided in Section 3.4 or
under Article VIII, but only to the extent such adjustment would not affect the
status of compensation attributable to Awards as Performance-Based Compensation.
A-9
ARTICLE VI
AWARDS
6.1 Stock Options.
(a) Nature of Stock Options. Stock Options may be Incentive Stock Options
or Nonqualified Stock Options.
(b) Option Exercise Price. The exercise price for each Stock Option will be
determined by the Administrator as of the date such Stock Option is granted.
(c) Option Period and Vesting. Stock Options granted hereunder will vest
and may be exercised as determined by the Administrator, except that exercise of
Stock Options after termination of the Recipient's employment or service shall
be subject to Section 5.12 and Section 6.1(e). Each Stock Option granted
hereunder and all rights or obligations thereunder shall expire on such date as
may be determined by the Administrator, but not later than ten (10) years after
the date the Stock Option is granted and may be subject to earlier termination
as provided herein or in the Award Document. Except as otherwise provided
herein, a Stock Option will become exercisable, as a whole or in part, on the
date or dates specified by the Administrator and thereafter will remain
exercisable until the exercise, expiration or earlier termination of the Stock
Option.
(d) Exercise of Stock Options. The exercise price for Stock Options will be
paid as set forth in Section 5.3. No Stock Option will be exercisable except in
respect of whole shares, and fractional share interests shall be disregarded.
Not fewer than 100 shares of Common Stock (or such other amount as may be set
forth in the applicable Award Document) may be purchased at one time and Stock
Options must be exercised in multiples of 100 unless the number purchased is the
total number of shares for which the Stock Option is exercisable at the time of
exercise. A Stock Option will be deemed to be exercised when the Secretary or
other designated official of the Company receives written notice of such
exercise from the Recipient in the form of Exhibit A hereto or such other form
as the Company may specify from time to time, together with payment of the
exercise price in accordance with Section 5.3 and any amounts required under
Section 5.10 or, with permission of the Administrator, arrangement for such
payment. Notwithstanding any other provision of this Plan, the Administrator may
impose, by rule and/or in Award Documents, such conditions upon the exercise of
Stock Options (including, without limitation, conditions limiting the time of
exercise to specified periods) as may be required to satisfy applicable
regulatory requirements, including, without limitation, Rule 16b-3 and Rule
10b-5 under the Exchange Act, and any amounts required under Section 5.10, or
any applicable section of or regulation under the IRC.
(e) Termination of Employment.
(i) Termination for Just Cause. Subject to Section 5.12 and except as
otherwise provided in a written agreement between the Company or an
Affiliated Entity and the Recipient, which may be entered into at any time
before or after termination of employment or service, in the event of a
Just Cause Dismissal of a Recipient all of the Recipient's unexercised
Stock Options, whether or not vested, will expire and become unexercisable
as of the date of such Just Cause Dismissal.
(ii) Termination Other Than for Just Cause. Subject to Section 5.12
and except as otherwise provided in a written agreement between the Company
or an Affiliated Entity and the Recipient, which may be entered into at any
time before or after termination of employment or service, if a Recipient's
employment or service with the Company or any Affiliated Entity terminates
for:
(A) any reason other than for Just Cause Dismissal, death,
Permanent Disability or Retirement, the Recipient's Stock Options,
whether or not vested, will expire and become unexercisable as of the
earlier of: (1) the date such Stock Options would expire in accordance
with their terms had the Recipient remained employed; and (2) 30 days
after the date of termination of employment or service.
A-10
(B) death or Permanent Disability or Retirement, the Recipient's
unexercised Stock Options will, whether or not vested, expire and become
unexercisable as of the earlier of: (1) the date such Stock Options
would expire in accordance with their terms had the Recipient remained
employed; and (2) 180 days after the date of termination of employment
or service.
(f) Special Provisions Regarding Incentive Stock Options. Notwithstanding
anything herein to the contrary,
(i) The exercise price and vesting period of any Stock Option intended
to be treated as an Incentive Stock Option must comply with the provisions
of Section 422 of the IRC and the regulations thereunder. As of the
Effective Date, such provisions require, among other matters, that: (A) the
exercise price must not be less than the Fair Market Value of the
underlying stock as of the date the Incentive Stock Option is granted, and
not less than 110% of the Fair Market Value as of such date in the case of
a grant to a Significant Stockholder; and (B) that the Incentive Stock
Option not be exercisable after the expiration of ten (10) years from the
date of grant or the expiration of five (5) years from the date of grant in
the case of an Incentive Stock Option granted to a Significant Stockholder.
(ii) The aggregate Fair Market Value (determined as of the respective
date or dates of grant) of the Common Stock for which one or more Stock
Options granted to any Recipient under this Plan (or any other option plan
of the Company or any of its subsidiaries or affiliates) may for the first
time become exercisable as Incentive Stock Options under the federal tax
laws during any one calendar year may not exceed $100,000.
(iii) Any Stock Options granted as Incentive Stock Options pursuant to
this Plan that for any reason fail or cease to qualify as such will be
treated as Nonqualified Stock Options. If the limit described in Section
6.1(f)(ii) is exceeded, the earliest granted Stock Options will be treated
as Incentive Stock Options, up to such limit.
(g) Non-Employee Director Options. Article VII will govern Non-Employee
Director Options to the extent inconsistent with this Section 6.1.
6.2 Performance Awards.
(a) Grant of Performance Award. The Administrator will determine in its
discretion the performance criteria (which need not be identical and may be
established on an individual or group basis) governing Performance Awards, the
terms thereof, and the form and time of payment of Performance Awards.
(b) Payment of Award. Upon satisfaction of the conditions applicable to a
Performance Award, payment will be made to the Recipient in cash, in shares of
Common Stock valued at Fair Market Value as of the date payment is due, or in a
combination of Common Stock and cash, as the Administrator in its discretion may
determine.
6.3 Restricted Stock.
(a) Award of Restricted Stock. The Administrator will determine the
Purchase Price (if any), the terms of payment of the Purchase Price, the
restrictions upon the Restricted Stock, and when such restrictions will lapse.
(b) Requirements of Restricted Stock. All shares of Restricted Stock
granted or sold pursuant to this Plan will be subject to the following
conditions:
(i) No Transfer. The shares may not be sold, assigned, transferred,
pledged, hypothecated or otherwise disposed of, alienated or encumbered
until the restrictions are removed or expire;
(ii) Certificates. The Administrator may require that the certificates
representing Restricted Stock granted or sold to a Recipient remain in the
physical custody of an escrow holder or the Company until all restrictions
are removed or expire;
(iii) Restrictive Legends. Each certificate representing Restricted
Stock granted or sold to a Recipient pursuant to this Plan will bear such
legend or legends making reference to the restrictions
A-11
imposed upon such Restricted Stock as the Administrator in its discretion
deems necessary or appropriate to enforce such restrictions; and
(iv) Other Restrictions. The Administrator may impose such other
conditions on Restricted Stock as the Administrator may deem advisable,
including, without limitation, restrictions under the Securities Act, under
the Exchange Act, under the requirements of any stock exchange or
interdealer quotation system upon which such Restricted Stock or other
securities of the Company are then listed or traded and under any blue sky
or other securities laws applicable to such shares.
(c) Lapse of Restrictions. The restrictions imposed upon Restricted Stock
will lapse in accordance with such terms or other conditions as are determined
by the Administrator.
(d) Rights of Recipient. Subject to the provisions of Section 6.3(b) and
any restrictions imposed upon the Restricted Stock, the Recipient will have all
rights of a stockholder with respect to the Restricted Stock granted or sold to
such Recipient under this Plan, including, without limitation, the right to vote
the shares and receive all dividends and other distributions paid or made with
respect thereto.
(e) Termination of Employment. Unless the Administrator in its discretion
determines otherwise, if a Recipient's employment or service with the Company or
any Affiliated Entity terminates for any reason, all of the Recipient's
Restricted Stock remaining subject to restrictions on the date of such
termination of employment or service will be repurchased by the Company at the
Purchase Price (if any) paid by the Recipient to the Company, without interest
or premium, and otherwise returned to the Company without consideration.
6.4 Stock Appreciation Rights.
(a) Granting of Stock Appreciation Rights. The Administrator may at any
time and from time to time approve the grant to Eligible Persons of Stock
Appreciation Rights, related or unrelated to Stock Options.
(b) SARs Related to Options.
(i) A Stock Appreciation Right related to a Stock Option will entitle
the holder of the related Stock Option, upon exercise of the Stock
Appreciation Right, to surrender such Stock Option, or any portion thereof
to the extent previously vested but unexercised, with respect to the number
of shares as to which such Stock Appreciation Right is exercised, and to
receive payment of an amount computed pursuant to Section 6.4(b)(iii). Such
Stock Option will, to the extent surrendered, then cease to be exercisable.
(ii) A Stock Appreciation Right related to a Stock Option hereunder
will be exercisable at such time or times, and only to the extent that, the
related Stock Option is exercisable, and will not be transferable except to
the extent that such related Stock Option may be transferable (and under
the same conditions), will expire no later than the expiration of the
related Stock Option, and may be exercised only when the market price of
the Common Stock subject to the related Stock Option exceeds the exercise
price of the Stock Option.
(iii) Upon the exercise of a Stock Appreciation Right related to a
Stock Option, the Recipient will be entitled to receive payment of an
amount determined by multiplying: (A) the difference obtained by
subtracting the exercise price of a share of Common Stock specified in the
related Stock Option from the Fair Market Value of a share of Common Stock
on the date of exercise of such Stock Appreciation Right (or as of such
other date or as of the occurrence of such event as may have been specified
in the instrument evidencing the grant of the Stock Appreciation Right), by
(B) the number of shares as to which such Stock Appreciation Right is
exercised.
(c) SARs Unrelated to Options. The Administrator may grant Stock
Appreciation Rights unrelated to Stock Options. Section 6.4(b)(iii) will govern
the amount payable at exercise under such Stock Appreciation Right, except that
in lieu of an option exercise price the initial base amount specified in the
Award shall be used.
(d) Limits. Notwithstanding the foregoing, the Administrator, in its
discretion, may place a dollar limitation on the maximum amount that will be
payable upon the exercise of a Stock Appreciation Right.
A-12
(e) Payments. Payment of the amount determined under the foregoing
provisions may be made solely in whole shares of Common Stock valued at their
Fair Market Value on the date of exercise of the Stock Appreciation Right or,
alternatively, at the discretion of the Administrator, in cash or in a
combination of cash and shares of Common Stock as the Administrator deems
advisable. The Administrator has full discretion to determine the form in which
payment of a Stock Appreciation Right will be made and to consent to or
disapprove the election of a Recipient to receive cash in full or partial
settlement of a Stock Appreciation Right. If the Administrator decides to make
full payment in shares of Common Stock, and the amount payable results in a
fractional share, payment for the fractional share will be made in cash.
6.5 Stock Payments.
The Administrator may approve Stock Payments to any Eligible Person on such
terms and conditions as the Administrator may determine. Stock Payments will
replace cash compensation at the Fair Market Value of the Common Stock on the
date payment is due.
6.6 Dividend Equivalents.
The Administrator may grant Dividend Equivalents to any Recipient who has
received a Stock Option, SAR or other Award denominated in shares of Common
Stock. Dividend Equivalents may be paid in cash, Common Stock or other Awards;
the amount of Dividend Equivalents paid other than in cash will be determined by
the Administrator by application of such formula as the Administrator may deem
appropriate to translate the cash value of dividends paid to the alternative
form of payment of the Dividend Equivalent. Dividend Equivalents will be
computed as of each dividend record date and will be payable to recipients
thereof at such time as the Administrator may determine. However, if it is
intended that an Award qualify as Performance-Based Compensation, and the amount
of compensation the Eligible Person could receive under the Award is based
solely on an increase in value of the underlying stock after the date of the
grant or Award, then the payment of any Dividend Equivalents related to the
Award shall not be made contingent on the exercise of the Award.
6.7 Stock Bonuses.
The Administrator may issue Stock Bonuses to Eligible Persons on such terms
and conditions as the Administrator may determine.
6.8 Stock Sales.
The Administrator may sell to Eligible Persons shares of Common Stock on
such terms and conditions as the Administrator may determine.
6.9 Phantom Stock.
The Administrator may grant Awards of Phantom Stock to Eligible Persons.
Phantom Stock is a cash payment measured by the Fair Market Value of a specified
number of shares of Common Stock on a specified date, or measured by the excess
of such Fair Market Value over a specified minimum, which may but need not
include a Dividend Equivalent.
6.10 Other Stock-Based Benefits.
The Administrator is authorized to grant Other Stock-Based Benefits. Other
Stock-Based Benefits are any arrangements granted under this Plan not otherwise
described above that: (a) by their terms might involve the issuance or sale of
Common Stock or other securities of the Company; or (b) involve a benefit that
is measured, as a whole or in part, by the value, appreciation, dividend yield
or other features attributable to a specified number of shares of Common Stock
or other securities of the Company.
A-13
ARTICLE VII
NON-EMPLOYEE DIRECTOR OPTIONS
7.1 Initial Grant of Stock Options
Each Non-Employee Director shall, upon first becoming a Non-Employee
Director, receive a one-time grant of an option to purchase up to 2,500 shares
of the Company's Common Stock (an "INITIAL OPTION") at an exercise price per
share equal to the Fair Market Value of the Company's Common Stock on the date
of grant, subject to: (a) vesting as set forth in Section 7.3, and (b)
adjustment as set forth in this Plan.
7.2 Annual Grants of Stock Options.
Immediately following the annual meeting of stockholders of the Company
next following a Non-Employee Director's becoming a Non-Employee Director, and
immediately following each subsequent annual meeting of stockholders of the
Company, in each case if the Non-Employee Director has served as a director
since his or her election or appointment and has been re-elected as a director
at such annual meeting, such Non-Employee Director shall automatically receive
an option to purchase up to 1,250 shares of the Company's Common Stock (an
"ADDITIONAL OPTION"). In addition to the Additional Options described above, an
individual who was previously a Non-Employee Director and received an initial
grant of stock options under this Plan or pursuant to a prior option plan for
the Company's directors, who then ceased to be a director for any reason, and
who then again becomes a Non-Employee Director, shall upon again becoming a
Non-Employee Director automatically receive an Additional Option. The exercise
price per share for all Additional Options shall be equal to the Fair Market
Value of the Company's Common Stock on the date of grant, subject to: (a)
vesting as set forth in Section 7.3, and (b) adjustment as set forth in this
Plan.
7.3 Vesting.
Initial Options shall vest and become exercisable (a) 50% upon the earlier
of (i) the first anniversary of the grant date or (ii) immediately prior to the
first annual meeting of stockholders of the Company following the grant date, if
the Recipient has remained a Non-Employee Director for the entire period from
the date of grant to such earlier date; and (b) 50% upon the earlier of (i) the
second anniversary of the grant date or (ii) immediately prior to the second
annual meeting of stockholders of the Company following the date of grant to
such earlier date. Additional Options shall vest and become exercisable with
respect to all underlying shares upon the earlier of (y) the first anniversary
of the grant date or (z) immediately prior to the annual meeting of stockholders
of the Company next following the grant date, if the Recipient has remained a
Non-Employee Director for the entire period from the date of grant to such
earlier date. Notwithstanding the foregoing, however, Initial Options and
Additional Options that have not vested and become exercisable at the time the
Recipient ceases to be a director shall terminate.
7.4 Exercise.
Non-Employee Director Options will be exercisable, and the exercise price
therefor shall be paid, in the same manner as provided herein for other Stock
Options.
7.5 Term of Options and Effect of Termination.
Notwithstanding any other provision of the Plan, no Non-Employee Director
Option granted under the Plan shall be exercisable after the expiration of ten
years from the effective date of its grant. In the event that the recipient of
any Non-Employee Director Options granted under the Plan shall cease to be a
director of the Company, (a) all Initial Options granted under this plan to such
recipient shall be exercisable, to the extent already exercisable at the date
such recipient ceases to be a director and regardless of the reason the
recipient ceases to be a director, for a period of 365 days after that date (or,
if sooner, until the expiration of the option according to its terms), and shall
then terminate; and (b) all Additional Options granted under this Plan to such
recipient shall be exercisable, to the extent already exercisable at the date
such recipient ceases to be a director, for a period of 365 days after that date
(or, if sooner, until the expiration of the option according to its terms) if he
or she ceases to be a director because of death or permanent disability, or for
a period of 90 days
A-14
after that date (or, if sooner, until the expiration of the option according to
its terms) if he or she ceases to be a director for any other reason, and shall
then terminate. In the event of the death of a Recipient while such Recipient is
a director of the Company or within the period after termination of such status
during which he or she is permitted to exercise an option, such option may be
exercised by any person or persons designated by the Recipient on a beneficiary
designation form adopted by the Plan administrator for such purpose or, if there
is no effective beneficiary designation form on file with the Company, by the
executors or administrators of the Recipient's estate or by any person or
persons who shall have acquired the option directly from the Recipient by his or
her will or the applicable laws of descent and distribution.
7.6 Amendment; Suspension.
The Administrator may at any time and from time to time in its discretion
(a) change the number of shares or vesting periods associated with the
Non-Employee Director Options, and (b) suspend and reactivate this Article VII.
ARTICLE VIII
CHANGE IN CONTROL
8.1 Provision for Awards Upon Change in Control.
As of the effective time and date of any Change in Control, this Plan and
any then outstanding Awards (whether or not vested) will automatically terminate
unless: (a) provision is made in writing in connection with such transaction for
the continuance of this Plan and for the assumption of such Awards, or for the
substitution for such Awards of new awards covering the securities of a
successor entity or an affiliate thereof, with appropriate adjustments as to the
number and kind of securities and exercise prices or other measurement criteria,
in which event this Plan and such outstanding Awards will continue or be
replaced, as the case may be, in the manner and under the terms so provided; or
(b) the Board otherwise provides in writing for such adjustments as it deems
appropriate in the terms and conditions of the then-outstanding Awards (whether
or not vested), including, without limitation, (i) accelerating the vesting of
outstanding Awards, and/or (ii) providing for the cancellation of Awards and
their automatic conversion into the right to receive the securities, cash or
other consideration that a holder of the shares underlying such Awards would
have been entitled to receive upon consummation of such Change in Control had
such shares been issued and outstanding immediately prior to the effective date
and time of the Change in Control (net of the appropriate option exercise
prices). If, pursuant to the foregoing provisions of this Section 8.1, this Plan
and the Awards terminate by reason of the occurrence of a Change in Control
without provision for any of the action(s) described in clause (a) or (b)
hereof, then subject to Sections 5.12 and 5.15, any Recipient holding
outstanding Awards will have the right, at such time prior to the consummation
of the Change in Control as the Board designates, to exercise or receive the
full benefit of the Recipient's Awards to the full extent not theretofore
exercised, including any installments which have not yet become vested.
8.2 Termination of Employment in Connection With a Change in Control.
(a) Acceleration of Awards. If a Change in Control occurs and provision for
Awards is made as described in part (a) or (b) of Section 8.1 such that a
Recipient continues to own Awards or replacement awards, but in connection with
such Change in Control the Recipient's employment with the Company or an
Affiliated Entity is terminated by the Company or an Affiliated Entity as
described in Section 8.2(b), then, subject to Sections 5.12 and 5.15 and the
terms of any written employment agreement between the Company or any Affiliated
Entity and the Recipient and the specific terms of any Award, such Recipient
will have the right to exercise or receive the full benefit of the Recipient's
Awards during the applicable time period provided in Section 5.12, without
regard to any vesting or performance requirements or other milestones.
(b) Employment Termination. For purposes of this Section, and subject to
any separate written agreement binding upon the Company, a Recipient's
employment with the Company or any Affiliated Entity will be deemed to have been
terminated in connection with a Change in Control if: (i) the Recipient is
removed from the Recipient's employment by, or resigns the Recipient's
employment upon the request of, a
A-15
Person exercising practical voting control over the Company following the Change
in Control or a person acting upon authority or at the instruction of such
Person; or (ii) the Recipient's position is eliminated as a result of a
reduction in force made to reduce over-capacity or unnecessary duplication of
personnel within 180 days after the consummation of the Change in Control and
the Recipient is not offered a replacement position with compensation
substantially similar to the compensation in effect immediately before the
Change in Control. Unless otherwise provided in a written agreement with the
Company or any Affiliated Entity, assignment of a Recipient to different duties
or reporting will not be deemed to constitute or justify termination of
Recipient's employment in connection with the Change in Control.
ARTICLE IX
DEFINITIONS
Capitalized terms used in this Plan and not otherwise defined have the
meanings set forth below:
"Additional Option" means a right to purchase stock of the Company granted
under Section 7.2 of the Plan.
"Administrator" means the Board as long as no Committee has been appointed
and is in effect and also means the Committee to the extent that the Board has
delegated authority thereto.
"Affiliated Entity" means any Parent Corporation of the Company or
Subsidiary Corporation of the Company or any other entity controlling,
controlled by, or under common control with the Company.
"Applicable Dividend Period" means (i) the period between the date a
Dividend Equivalent is granted and the date the related Stock Option, SAR, or
other Award is exercised, terminates, or is converted to Common Stock, or (ii)
such other time as the Administrator may specify in the written instrument
evidencing the grant of the Dividend Equivalent.
"Award" means any Stock Option, Performance Award, Restricted Stock, Stock
Appreciation Right, Stock Payment, Stock Bonus, Stock Sale, Phantom Stock,
Dividend Equivalent, or Other Stock-Based Benefit granted or sold to an Eligible
Person under this Plan, or any similar award granted by the Company prior to the
Effective Date and outstanding as of the Effective Date that is governed by this
Plan.
"Award Document" means the agreement or confirming memorandum setting forth
the terms and conditions of an Award.
"Board" means the Board of Directors of the Company.
"Change in Control" means the following and shall be deemed to occur if any
of the following events occurs:
(i) Any Person becomes the beneficial owner (within the meaning of
Rule 13d-3 promulgated under the Exchange Act) of fifty percent (50%) or
more of either the then outstanding shares of Common Stock or the combined
voting power of the Company's then outstanding securities entitled to vote
generally in the election of directors; or
(ii) Individuals who, as of the effective date hereof, constitute the
Board (the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board, provided, however, that any individual who becomes a
director after the effective date hereof whose election, or nomination for
election by the Company's stockholders, is approved by a vote of at least a
majority of the directors then comprising the Incumbent Board shall be
considered to be a member of the Incumbent Board unless that individual was
nominated or elected by any person, entity or group (as defined above)
having the power to exercise, through beneficial ownership, voting
agreement and/or proxy, twenty percent (20%) or more of either the
outstanding shares of Common Stock or the combined voting power of the
Company's then outstanding voting securities entitled to vote generally in
the election of directors, in which case that individual shall not be
considered to be a member of the Incumbent Board unless such individual's
election or nomination for election by the Company's stockholders is
approved by a vote of at least two-thirds of the directors then comprising
the Incumbent Board; or
A-16
(iii) Consummation by the Company of the sale or other disposition by
the Company of all or substantially all of the Company's assets or a
Reorganization of the Company with any other person, corporation or other
entity, other than
(A) a Reorganization that would result in the voting securities of
the Company outstanding immediately prior thereto (or, in the case of a
Reorganization that is preceded or accomplished by an acquisition or
series of related acquisitions by any Person, by tender or exchange
offer or otherwise, of voting securities representing 5% or more of the
combined voting power of all securities of the Company, immediately
prior to such acquisition or the first acquisition in such series of
acquisitions) continuing to represent, either by remaining outstanding
or by being converted into voting securities of another entity, more
than 50% of the combined voting power of the voting securities of the
Company or such other entity outstanding immediately after such
Reorganization (or series of related transactions involving such a
Reorganization), or
(B) a Reorganization effected to implement a recapitalization or
reincorporation of the Company (or similar transaction) that does not
result in a material change in beneficial ownership of the voting
securities of the Company or its successor; or
(iv) Approval by the stockholders of the Company or an order by a
court of competent jurisdiction of a plan of liquidation of the Company.
"Committee" means any committee appointed by the Board to administer this
Plan pursuant to Section 4.1.
"Common Stock" means the common stock of the Company, $0.01 par value per
share, as constituted on the Effective Date, and as thereafter adjusted under
Section 3.4.
"Company" means Diedrich Coffee, Inc., a Delaware corporation.
"Dividend Equivalent" means a right granted by the Company under Section
6.6 to a holder of a Stock Option, Stock Appreciation Right or other Award
denominated in shares of Common Stock to receive from the Company during the
Applicable Dividend Period payments equivalent to the amount of dividends
payable to holders of the number of shares of Common Stock underlying such Stock
Option, Stock Appreciation Right, or other Award.
"Effective Date" means the date this Plan is approved and adopted by the
Company's stockholders.
"Eligible Person" includes directors, including Non-Employee Directors,
officers, employees, consultants and advisors of the Company or of any
Affiliated Entity.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Expiration Date" means the tenth (10th) anniversary of the Effective Date.
"Fair Market Value" of a share of the Company's capital stock as of a
particular date means: (i) if the stock is listed on an established stock
exchange or exchanges (including for this purpose, the Nasdaq National Market),
the arithmetic mean of the highest and lowest sale prices of the stock for the
trading day immediately preceding such date on the primary exchange upon which
the stock trades, as measured by volume, as published in The Wall Street
Journal, or, if no sale price was quoted for such date, then as of the next
preceding date on which such a sale price was quoted; or (ii) if the stock is
not then listed on an exchange or the Nasdaq National Market, the average of the
closing bid and asked prices per share for the stock in the over-the-counter
market on such date (in the case of (i) or (ii), subject to adjustment as and if
necessary and appropriate to set an exercise price not less than 100% of the
fair market value of the stock on the date an Award is granted); or (iii) if the
stock is not then listed on an exchange or quoted in the over-the-counter
market, an amount determined in good faith by the Administrator, provided,
however, that (A) when appropriate, the Administrator in determining Fair Market
Value of capital stock of the Company may take into account such other factors
as it may deem appropriate under the circumstances, and (B) if the stock is
traded on the Nasdaq SmallCap Market and both sales prices and bid and asked
prices are quoted or available, the Administrator may elect to determine Fair
Market Value under either clause (i) or (ii) above.
A-17
Notwithstanding the foregoing, the Fair Market Value of capital stock for
purposes of grants of Incentive Stock Options must be determined in compliance
with applicable provisions of the IRC. The Fair Market Value of rights or
property other than capital stock of the Company means the fair market value
thereof as determined by the Administrator on the basis of such factors as it
may deem appropriate.
"Incentive Stock Option" means a Stock Option that qualifies as an
incentive stock option under Section 422 of the IRC.
"Initial Option" means a right to purchase stock of the Company granted
under Section 7.1 of the Plan.
"IRC" means the Internal Revenue Code of 1986, as amended.
"Just Cause Dismissal" means a termination of a Recipient's employment for
any of the following reasons: (i) the Recipient violates any reasonable rule or
regulation of the Board, the Company's President or Chief Executive Officer or
the Recipient's superiors that results in damage to the Company or any
Affiliated Entity or which, after written notice to do so, the Recipient fails
to correct within a reasonable time not exceeding 15 days; (ii) any willful
misconduct or gross negligence by the Recipient in the responsibilities assigned
to the Recipient; (iii) any willful failure to perform the Recipient's job as
required to meet the objectives of the Company or any Affiliated Entity; (iv)
any wrongful conduct of a Recipient which has an adverse impact on the Company
or any Affiliated Entity or which constitutes a misappropriation of assets of
the Company or any Affiliated Entity; (v) the Recipient does any of the things
described in Section 5.15; or (vi) any other conduct that the Administrator
reasonably determines constitutes Just Cause for Dismissal; provided, however,
that if a Recipient is party to an employment agreement with the Company or any
Affiliated Entity providing for just cause dismissal (or some comparable
concept) of Recipient from Recipient's employment with the Company or any
Affiliated Entity, "Just Cause Dismissal" for purposes of this Plan will have
the same meaning as ascribed thereto or to such comparable concept in such
employment agreement.
"Non-Employee Director" means a director of the Company who qualifies as a
"Non-Employee Director" under Rule 16b-3 under the Exchange Act.
"Non-Employee Director Option" means an Initial Option or an Additional
Option granted pursuant to Article VII of this Plan.
"Nonqualified Stock Option" means a Stock Option that is not an Incentive
Stock Option.
"Other Stock-Based Benefits" means an Award granted under Section 6.10.
"Parent Corporation" means any Parent Corporation as defined in Section
424(e) of the IRC.
"Performance Award" means an Award under Section 6.2, payable in cash,
Common Stock or a combination thereof, that vests and becomes payable over a
period of time upon attainment of performance criteria established in connection
with the grant of the Award.
"Performance-Based Compensation" means performance-based compensation as
described in Section 162(m) of the IRC. If the amount of compensation an
Eligible Person will receive under any Award is not based solely on an increase
in the value of Common Stock after the date of grant or award, the
Administrator, in order to qualify an Award as performance-based compensation
under Section 162(m) of the IRC, can condition the grant, award, vesting, or
exercisability of such an Award on the attainment of a preestablished, objective
performance goal. For this purpose, a preestablished, objective performance goal
may include one or more of the following performance criteria: (a) cash flow,
(b) earnings per share (including earnings before interest, taxes, and
amortization), (c) return on equity, (d) total Shareholder return, (e) return on
capital, (f) return on assets or net assets, (g) income or net income, (h)
operating income or net operating income, (i) operating margin, (j) return on
operating revenue, and (k) any other similar performance criteria.
"Permanent Disability" means that the Recipient becomes physically or
mentally incapacitated or disabled so that the Recipient is unable to perform
substantially the same services as the Recipient performed prior to incurring
such incapacity or disability (the Company, at its option and expense, being
entitled to retain
A-18
a physician to confirm the existence of such incapacity or disability, and the
determination of such physician to be binding upon the Company and the
Recipient), and such incapacity or disability continues for a period of three
consecutive months or six months in any 12-month period or such other period(s)
as may be determined by the Administrator with respect to any Award, provided,
however, that for purposes of determining the period during which an Incentive
Stock Option may be exercised pursuant to Section 6.1(e), Permanent Disability
shall mean "permanent and total disability" as defined in Section 22(e) of the
IRC.
"Person" means any person, entity or group, within the meaning of Section
13(d) or 14(d) of the Exchange Act, but excluding (i) the Company and its
subsidiaries, (ii) any employee stock ownership or other employee benefit plan
maintained by the Company and (iii) an underwriter or underwriting syndicate
that has acquired the Company's securities solely in connection with a public
offering thereof.
"Phantom Stock" means an Award granted under Section 6.9.
"Plan" means this 2000 Equity Incentive Plan of the Company.
"Plan Term" means the period during which this Plan remains in effect
(commencing the Effective Date and ending on the Expiration Date).
"Purchase Price" means the purchase price (if any) to be paid by a
Recipient for Restricted Stock as determined by the Administrator (which price
shall be at least equal to the minimum price required under applicable laws and
regulations for the issuance of Common Stock which is nontransferable and
subject to a substantial risk of forfeiture until specific conditions are met).
"Recipient" means a person who has received an Award.
"Reorganization" means any merger, consolidation or other reorganization.
"Restricted Stock" means Common Stock that is the subject of an Award made
under Section 6.3 and that is nontransferable and subject to a substantial risk
of forfeiture until specific conditions are met, as set forth in this Plan and
in any statement evidencing the grant of such Award.
"Retirement" of a Recipient means the Recipient's resignation from the
Company or any Affiliated Entity after reaching age 60 and at least five years
of full-time employment by the Company or any Affiliated Entity, without any
circumstances that would justify a Just Cause Dismissal of the Recipient.
"Securities Act" means the Securities Act of 1933, as amended.
"Significant Stockholder" is an individual who, at the time a Stock Option
is granted to such individual under this Plan, owns more than ten percent (10%)
of the combined voting power of all classes of stock of the Company or of any
Parent Corporation or Subsidiary Corporation (after application of the
attribution rules set forth in Section 424(d) of the IRC).
"Stock Appreciation Right" or "SAR" means a right granted under Section 6.4
to receive a payment that is measured with reference to the amount by which the
Fair Market Value of a specified number of shares of Common Stock appreciates
from a specified date, such as the date of grant of the SAR, to the date of
exercise.
"Stock Bonus" means an issuance or delivery of unrestricted or restricted
shares of Common Stock under Section 6.7 as a bonus for services rendered or for
any other valid consideration under applicable law.
"Stock Payment" means a payment in shares of the Company's Common Stock
under Section 6.5 to replace all or any portion of the compensation or other
payment (other than base salary) that would otherwise become payable to the
Recipient in cash.
"Stock Option" means a right to purchase stock of the Company granted under
Section 6.1 or Article VII of this Plan.
"Stock Sale" means a sale of Common Stock to an Eligible Person under
Section 6.8.
"Subsidiary Corporation" means any Subsidiary Corporation as defined in
Section 424(f) of the IRC.
A-19
DIEDRICH COFFEE, INC.
PROXY FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD December 4, 2001
Solicited on Behalf of the Board of Directors
The undersigned hereby appoints J. Michael Jenkins and Matthew C.
McGuinness, and each of them individually, as proxies, each with power of
substitution, to vote and otherwise represent all of the shares of common stock
of Diedrich Coffee, Inc., held of record by the undersigned, at the annual
meeting of stockholders of Diedrich Coffee to be held on Tuesday, December 4,
2001 at 10:00 a.m. local time, and any adjournment(s) thereof, as indicated on
the reverse side hereof.
The undersigned acknowledges receipt of the Notice of Annual Meeting and
Proxy Statement, dated in each case October 25, 2001. All other proxies
heretofore given by the undersigned to vote shares of Diedrich Coffee's common
stock are expressly revoked.
The shares represented by this proxy will be voted as described on the
reverse hereof by the stockholder. If not otherwise directed, this proxy will be
voted FOR the election as directors of all nominees nominated in Item 1 for
which the stockholder is entitled to vote and FOR the proposals in Items 2 and
3.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE FOLLOWING PROPOSALS:
<Table>
1. ELECTION OF FOUR (4) MEMBERS TO THE [ ] FOR all nominees listed below [ ] WITHHOLD AUTHORITY to vote for
BOARD OF DIRECTORS OF DIEDRICH for whom stockholder is entitled to all nominees listed below for
COFFEE: vote+ whom stockholder is entitled to
vote
1. ELECTION OF FOUR (4) MEMBERS TO THE [ ] EXCEPTIONS
BOARD OF DIRECTORS OF DIEDRICH
COFFEE:
</Table>
NOMINEES: Peter Churm Martin Diedrich Lawrence Goelman Paul Heeschen
+ INSTRUCTIONS. To withhold authority to vote for any individual nominee, also
mark the "Exceptions" box and write that nominee's name in the space provided
below.
Exceptions
(Continued, and to be signed and dated on the reverse side.)
2. APPROVAL OF AN INCREASE BY 250,000 SHARES THE NUMBER OF SHARES OF DIEDRICH
COFFEE COMMON STOCK AVAILABLE FOR ISSUANCE UNDER THE 2000 EQUITY INCENTIVE
PLAN:
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. RATIFICATION OF THE SELECTION OF KPMG LLP AS DIEDRICH COFFEE'S INDEPENDENT
AUDITORS FOR THE FISCAL YEAR ENDING JUNE 26, 2002:
FOR [ ] AGAINST [ ] ABSTAIN [ ]
4. AT THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO CONSIDER AND VOTE UPON
SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING OR ANY
ADJOURNMENT THEREOF.
I plan to attend the
annual meeting [ ]
Change of address or
comments mark here [ ]
Please sign exactly as
your name appears hereon.
When signing in a
representative capacity,
please give full title.
Date: , 2001
Signature
Sign, Date and Return the Proxy Card Promptly Using the Enclosed Envelope. Votes
MUST be indicated (x) in BLACK or BLUE ink.