<PAGE> 1
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 Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
[X] Definitive Proxy Statement Commission Only (as permitted by
[ ] Definitive Additional Materials Rule 14a-6(e)(2))
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
DIEDRICH COFFEE, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
DIEDRICH COFFEE, INC.
- --------------------------------------------------------------------------------
(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)(4) and 0-11.
(1) Title of each class of securities to which transactions applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transactions 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:
<PAGE> 2
DIEDRICH COFFEE, INC.
2144 MICHELSON DRIVE
IRVINE, CALIFORNIA 92612
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JANUARY 22, 1998
To the Stockholders of
Diedrich Coffee, Inc.
A Special Meeting of Stockholders of Diedrich Coffee, Inc., a Delaware
corporation (the "Company"), will be held at the Company's principal executive
office at 2144 Michelson Drive, Irvine, California 92612, on Thursday, January
22, 1998, at 10:00 a.m., local time, for the following purposes:
1. To approve the Stock Option Plan and Agreement by and between the
Company and John E. Martin, dated as of November 17, 1997, granting Mr. Martin
options to purchase up to 850,000 shares of common stock, $ 0.01 par value per
share, (the "Common Stock") of the Company; and
2. To approve the Stock Option Plan and Agreement by and between the
Company and Timothy J. Ryan, dated as of November 17, 1997, granting Mr. Ryan
options to purchase up to 600,000 shares of the Common Stock of the Company.
The Company's Board of Directors fixed the close of business on December
16, 1997 as the record date for the determination of stockholders entitled to
notice of and to vote at this Special Meeting.
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING. YOU ARE
URGED TO SIGN, DATE AND COMPLETE THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY
IN THE ENCLOSED ENVELOPE WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING. IF YOU
ATTEND THE MEETING AND WISH TO DO SO, YOU MAY VOTE YOUR SHARES IN PERSON EVEN IF
YOU HAVE SIGNED AND RETURNED YOUR PROXY CARD.
By Order of the Board of Directors,
Martin R. Diedrich
Vice Chairman of the Board and Secretary
Irvine, California
December 22, 1997
<PAGE> 3
DIEDRICH COFFEE, INC.
2144 MICHELSON DRIVE
IRVINE, CALIFORNIA 92612
---------------
PROXY STATEMENT
---------------
SPECIAL MEETING OF STOCKHOLDERS
JANUARY 22, 1998
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Diedrich Coffee, Inc., a Delaware
corporation (the "Company"), for use at the Special Meeting of the Company's
Stockholders to be held on January 22, 1998 at 10:00 a.m. (the "Meeting") and at
any and all postponements and adjournments of the Meeting. The Meeting will be
held at the Company's principal executive office at 2144 Michelson Drive,
Irvine, California 92612. This Proxy Statement and the accompanying form of
proxy will be first mailed to stockholders on or about December 22, 1997.
The cost of preparing, assembling and mailing the Notice of Special
Meeting of Stockholders, Proxy Statement and form of proxy and the cost of
soliciting proxies will be paid by the Company. The Company will pay brokers or
other persons holding stock in their names or the names of their nominees for
the reasonable expenses of forwarding soliciting material to their principals.
Proxies may be solicited in person or by telephone, telefax or other electronic
means by directors, officers or employees of the Company who will not receive
any additional compensation for such solicitation.
VOTING
The close of business on December 16, 1997 has been fixed as the record
date for the determination of stockholders entitled to notice of and to vote at
the Meeting. On that date there were 5,391,650 shares of the Company's Common
Stock outstanding. Each share is entitled to one vote on any matter that may be
presented for consideration and action by the stockholders at the Meeting. The
holders of a majority of the shares of Common Stock outstanding on the record
date and entitled to be voted at the Meeting, present in person or by proxy,
will constitute a quorum for the transaction of business at the Meeting and any
adjournments and postponements thereof.
Shares abstained or subject to a broker non-vote are counted as present
for the purpose of determining the presence or absence of a quorum for the
transaction of business. Abstentions are counted in tabulations of the votes
cast on a proposal presented to stockholders and generally have the same effect
as a vote against the proposal, whereas broker non-votes are not counted for
purposes of determining whether a proposal has been approved.
Each proxy submitted by a stockholder will, unless otherwise directed by
the stockholder in the proxy, be voted FOR approval of the terms of (i) the
Stock Option Plan and Agreement by and between the Company and John E. Martin,
dated as of November 17, 1997, granting Mr. Martin options to purchase up to
850,000 shares of Common Stock of the Company (the "Martin Option Agreement")
and (ii) the Stock Option Plan and Agreement by and between the Company and
Timothy J. Ryan, dated as of November 17, 1997, granting Mr. Ryan options to
purchase up to 600,000 shares of the Common Stock of the Company (the "Ryan
Option Agreement"). If a stockholder has submitted a proxy appropriately
directing how the shares represented thereby are to be voted, such shares will
be voted according to the stockholder's direction. Any stockholder has the power
to revoke his or her proxy at any time before it is voted at the Meeting by
submitting a written notice of revocation to the Secretary of the Company or by
filing a duly executed proxy bearing a later date. A proxy will not be voted if
the stockholder who executed it is present at the Meeting and elects to vote the
shares represented thereby in person.
<PAGE> 4
Pursuant to a Voting Agreement and Irrevocable Proxy by and among
D.C.H., L.P., a California limited partnership, Martin R. Diedrich and John E.
Martin, dated as of November 17, 1997, D.C.H., L.P. and Mr. Diedrich have agreed
to vote their shares in favor of Proposal 1 and further have granted Mr. Martin
an irrevocable proxy to vote their shares in favor of Proposal 1. In the
aggregate, the shares of stock held by D.C.H., L.P. and Mr. Diedrich represent
approximately 39.1% of the voting stock of the Company.
PROPOSAL 1
Proposal No. 1 seeks stockholder approval of the Martin Option Agreement
as described more fully below and is set forth in its entirety as Exhibit A
attached hereto. The Company has entered into this agreement pursuant to the
Board's determination that it is in the best interests of the Company to retain
Mr. Martin as Chairman of the Board. The summary set forth below is qualified in
its entirety by reference to the Martin Option Agreement attached hereto as
Exhibit A.
On November 17, 1997, the Company and John E. Martin entered into the
Martin Option Agreement. Mr. Martin was granted options to purchase an aggregate
of 850,000 shares of common stock, $.01 par value per share (the "Common Stock")
of the Company for the purpose of encouraging and rewarding Mr. Martin's
contributions to the performance of the Company and to align Mr. Martin's
interests with the interests of the Stockholders. The options granted to Mr.
Martin are exercisable, subject to stockholder approval, at the following
exercise prices: 450,000 shares of Common Stock at an exercise price of $4.00
per share; 100,000 shares of Common Stock at an exercise price of $5.00 per
share; 150,000 shares of Common Stock at an exercise price of $8.00 per share
and 150,000 shares of Common Stock at an exercise price of $10.00 per share. All
of the options granted to Mr. Martin become exercisable on the earlier of May
15, 2002 or as soon as the closing price of the Company's Common Stock on the
Nasdaq National Market exceeds the respective exercise price for at least seven
trading days in any period of ten consecutive trading days. All options are to
terminate if unexercised on November 17, 2002 or, if Mr. Martin resigns from the
Company or Mr. Martin's employment is terminated by the Company for cause (as
defined in the Martin Option Agreement), the options will become unexercisable
within sixty days. The Company has agreed to file a registration statement on
Form S-8 with the Securities and Exchange Commission to register the issuance
and exercise of options under this agreement. Any exercise of options is
contingent upon the receipt of all requisite governmental approvals and consents
as well as upon applicable federal, state and local tax withholding
requirements. Only Mr. Martin is eligible to receive options under the Martin
Option Agreement and the options are not transferable or assignable. Subject to
the discretion of the Compensation Committee of the Board of Directors, Mr.
Martin may pay the exercise price for his options with cash or by delivery of
shares of the Company's Common Stock with a value equal to the exercise price or
through a combination of cash and shares.
On November 17, 1997, John E. Martin also entered into a letter
agreement with the Company appointing him as a director of the Company and as
Chairman of the Board. The agreement provides for a base salary of $8,333.33 per
month for so long as Mr. Martin continues as Chairman of the Board. Mr. Martin
is not to receive employee benefits nor any other compensation to which he would
otherwise be entitled for serving on the Board and he may be terminated at the
discretion of the Board at any time with or without reason. The Company has
agreed to employ a full-time executive assistant on his behalf with an annual
salary not to exceed $72,000 per year. The Company has also agreed to reimburse
Mr. Martin for all reasonable and necessary travel and other business expenses
incurred in connection with the performance of services under the agreement; to
enter into an indemnification agreement with Mr. Martin in the form provided to
each of the other directors and executive officers of the Company; and to
reimburse Mr. Martin for reasonable legal and accounting fees incurred in
connection with the negotiation and execution of the agreement in an amount not
to exceed $10,000. Finally, the agreement recognizes that Mr. Martin's other
business interests relate to restaurants and provides that the Company waives
any rights or claims to other business opportunities involving the restaurant
business which may become available to Mr. Martin, other than opportunities
involving the coffeehouse business or other businesses in which the principal
activity involves the sale of coffee and coffee beverages.
Along with the two agreements described above, the Company also entered
into a Common Stock purchase agreement with Mr. Martin under which it has agreed
to issue and sell 333,333 restricted shares of Common Stock of the Company to
Mr. Martin at $3.00 per share, such price representing the fair market value of
2
<PAGE> 5
the Common Stock as of November 17, 1997. Such sale represents an investment of
approximately $1,000,000 in the Company by Mr. Martin.
REASONS FOR THE PROPOSAL; VOTE REQUIRED AND BOARD OF DIRECTORS' RECOMMENDATION
The Board of Directors of the Company authorized the Martin Option
Agreement and entered into the related letter agreement and Common Stock
purchase agreement with Mr. Martin as three elements of an organized effort to
attract and motivate an individual whom the Board has determined possesses the
characteristics necessary to substantially improve the performance of the
Company. The letter agreement with Mr. Martin appoints him as Chairman of the
Board, giving him the necessary authority to make the changes he determines are
in the best interest of the Company. The Martin Option Agreement rewards Mr.
Martin as the value of the shares of the Company's Common Stock increase to, and
maintain, the target levels as described in the agreement. Finally, the Common
Stock purchase agreement requires Mr. Martin to commit approximately $1,000,000
of his personal funds to the Company, thereby more closely aligning his
interests with those of the currently existing stockholders. Taken as a whole,
these three agreements give Mr. Martin the authority and the motivation to
direct his best efforts to improving the fiscal health of the Company.
The affirmative vote of a majority of the shares present or represented
by proxy and entitled to vote at the Meeting, at which a quorum representing a
majority of all outstanding shares of Common Stock of the Company is present and
entitled to vote, is required to approve Proposal 1.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" PROPOSAL
1.
PROPOSAL 2
Proposal No. 2 seeks stockholder approval of the Ryan Option Agreement
as described more fully below and is set forth in its entirety as Exhibit B
attached hereto. The Company has entered into this agreement pursuant to the
Board's determination that it is in the best interests of the Company to retain
Mr. Ryan as the President and Chief Executive Officer of the Company. The
summary set forth below is qualified in its entirety by reference to the Ryan
Option Agreement attached hereto as Exhibit B.
On November 17, 1997, the Company and Timothy J. Ryan entered into the
Ryan Option Agreement. Mr. Ryan was granted options to purchase an aggregate of
600,000 shares of the Common Stock of the Company for the purpose of encouraging
and rewarding Mr. Ryan's contributions to the performance of the Company and to
align Mr. Ryan's interests with the interests of the stockholders. The options
granted to Mr. Ryan are exercisable, subject to stockholder approval, at the
following exercise prices: 50,000 shares of Common Stock at an exercise price of
$3.50 per share; 75,000 shares of Common Stock at an exercise price of $4.50 per
share; 125,000 shares of Common Stock at an exercise price of $5.00 per share;
175,000 shares of Common Stock at an exercise price of $8.00 per share and
175,000 shares of Common Stock at an exercise price of $10.00 per share. The
options become exercisable on the earlier of (i) May 15, 2002 or (ii) upon the
satisfaction of two conditions: (x) the options having vested pursuant to a
vesting schedule set forth in the agreement, and (y) after the date of the
agreement, the closing price of the Common Stock on the Nasdaq National Market
shall have exceeded the option price per share for at least seven trading days
in any period of ten consecutive trading days. All options are to terminate if
unexercised on November 17, 2002 or, if Mr. Ryan resigns from the Company
without good cause (as defined in Mr. Ryan's employment agreement) or Mr. Ryan's
employment is terminated by the Company for cause (as defined in Mr. Ryan's
employment agreement), the options will become unexercisable within sixty days.
The Company has agreed to file a registration statement on Form S-8 with the
Securities and Exchange Commission to register the issuance and exercise of
options under this agreement. Any exercise of options is contingent upon the
receipt of all requisite governmental approvals and consents as well as upon
applicable federal, state and local tax withholding requirements. Only Mr. Ryan
is eligible to receive options under the Ryan Option Agreement and the options
are not transferable or assignable. Subject to the discretion of the
Compensation Committee of the Board of Directors, Mr. Ryan may pay the exercise
price for his options with cash or by delivery of shares of the Company's Common
Stock with a value equal to the exercise price or through a combination of cash
and shares.
3
<PAGE> 6
On November 17, 1997, Timothy J. Ryan also entered into a two year
employment agreement with the Company regarding his role as President and Chief
Executive Officer. The agreement provides for an annual salary of $200,000 per
year, a discretionary performance bonus which may 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 include three weeks 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 $600.00. The
employment agreement may be terminated before the completion of two years in the
event of Mr. Ryan's sustained incapacity as defined in the agreement or by the
Company for cause as defined in the agreement. Mr. Ryan may also be terminated
for any other reason, however, in such event, Mr. Ryan will be entitled to
receive a severance payment equal to fifty percent of his base salary.
Along with the two agreements described above, the company also entered
into a Common Stock purchase agreement with Mr. Ryan under which it has agreed
to issue and sell 16,667 restricted shares of Common Stock of the Company to Mr.
Ryan at $3.00 per share, such price representing the fair market value of the
Common Stock as of November 17, 1997. Such sale represents an investment of
approximately $50,000 in the Company by Mr. Ryan.
REASONS FOR THE PROPOSAL; VOTE REQUIRED AND BOARD OF DIRECTORS' RECOMMENDATION
The Board of Directors of the Company authorized the Ryan Option
Agreement and entered into the related employment agreement and Common Stock
purchase agreement with Mr. Ryan as three elements of an organized effort to
attract and motivate an individual whom the Board has determined possesses the
characteristics necessary to substantially improve the performance of the
Company. The employment agreement with Mr. Ryan appoints him as President and
Chief Executive Officer of the Company, giving him the necessary authority to
make the changes he determines are in the best interest of the Company. The Ryan
Option Agreement rewards Mr. Ryan as the value of the shares of the Company's
Common Stock increase to, and maintain, the target levels as described in the
agreement. Finally, the Common Stock purchase agreement requires Mr. Martin to
commit $50,000 of his personal funds to the Company, thereby more closely
aligning his interests with those of the currently existing stockholders. Taken
as a whole, these three agreements give Mr. Ryan the authority and the
motivation to direct his best efforts to improving the fiscal health of the
Company.
The affirmative vote of a majority of the shares present or represented
by proxy and entitled to vote at the Meeting, at which a quorum representing a
majority of all outstanding shares of Common Stock of the Company is present and
entitled to vote, is required to approve Proposal 2.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" PROPOSAL
2.
4
<PAGE> 7
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of the Company's
Common Stock beneficially owned as of December 1, 1997 by those known by the
Company to be beneficial owners of more than five percent of the outstanding
shares of the Company's Common Stock, by each of the present directors, by each
of the executive officers named in the Summary Compensation Table found
elsewhere in this Proxy Statement, and by all directors and executive officers
of the Company as a group. On December 1, 1997, there were 5,391,650 shares of
Common Stock outstanding. The number of shares beneficially owned is deemed to
include shares of the Company's Common Stock as to which the beneficial owner
has or shares either investment or voting power. Unless otherwise stated, and
except for voting and investment powers held jointly with a person's spouse, the
persons and entities named in the table have sole voting and investment power
with respect to all shares of Common Stock shown as beneficially owned by them.
All information with respect to beneficial ownership is based on filings made by
the respective beneficial owners with the U.S. Securities and Exchange
Commission or information provided to the Company by such beneficial owners.
<TABLE>
<CAPTION>
Name and Address Amount and Nature Percent of
of Beneficial Owner of Beneficial Ownership(1) Class
------------------- -------------------------- -----
<S> <C> <C>
D.C.H., L.P. (2) 1,453,197 27.0%
450 Newport Center Drive
Suite 450
Newport Beach, CA 92660
Nuvrty, Inc. 340,000 (3) 5.9%
3 Civic Plaza
Suite 170
Newport Beach, CA 92660
Amre A. Youness 430,958 (4) 7.5%
3 Civic Plaza
Suite 170
Newport Beach, CA 92660
Peter Churm 5,000 (5) *
Martin R. Diedrich 655,107 12.2%
Lawrence Goelman 100,000 (6) 1.8%
Paul C. Heeschen 1,721,480 (7) 31.9%
Steven A. Lupinacci 309,061 (8) 5.6%
John E. Martin 1,233,333 (9) 18.8%
Timothy J. Ryan 91,667 (10) 1.7%
All directors and executive 3,879,087 (11) 56.6%
officers as a group (7 persons)
</TABLE>
- ----------------------
* Less than 1%
(1) Calculated pursuant to Rule 13d-3(d) under the Securities Exchange Act
of 1934, as amended. Shares not outstanding that are subject to options
or warrants exercisable by the holder thereof within 60 days of December
1, 1997 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.
(2) Paul C. Heeschen, a director of the Company, is the sole general partner
of this limited partnership with voting and investment power as to all
shares beneficially owned by the limited partnership.
(3) Pursuant to Schedule 13D as filed with the SEC and dated as of October
15, 1997. Nuvrty, Inc. and Amre A. Youness, who is the sole shareholder
of Nuvrty, Inc., have shared voting and dispositive power of the 340,000
shares that are subject to warrants exercisable within 60 days.
(4) Pursuant to Schedule 13D filed with the SEC and dated as of October 15,
1997, includes 340,000 shares that are subject to warrants exercisable
within 60 days of which he has shared voting and dispositive power with
Nuvrty, Inc.
5
<PAGE> 8
(5) Includes 5,000 shares subject to options that are exercisable within 60
days.
(6) Includes 100,000 shares subject to options that are exercisable within
60 days.
(7) Includes 1,453,197 shares beneficially owned by D.C.H., L.P. and 255,914
shares beneficially owned by Redwood Enterprises VII, L.P. Mr. Heeschen
is the sole general partner of each of these partnerships with voting
and investment power as to all of such shares. Also includes 5,000
shares subject to options that are exercisable within 60 days.
(8) Includes 79,183 shares subject to options that are exercisable within 60
days. Mr. Lupinacci resigned as Chief Executive Officer, President and
Chief Financial Officer effective March 12, 1997.
(9) Includes 850,000 shares subject to options that are exercisable within
60 days and 333,333 shares that may be purchased pursuant to a stock
purchase agreement within 60 days.
(10) Includes 75,000 shares subject to options that are exercisable within 60
days and 16,667 shares that may be purchased pursuant to a stock
purchase agreement within 60 days.
(11) Includes 1,107,500 shares subject to options or warrants exercisable
within 60 days and 350,000 shares that may be purchased pursuant to
stock purchase agreements within 60 days.
DIRECTORS' COMPENSATION
Directors who are also employees of the Company receive no extra
compensation for their service on the Board. Non-employee directors receive
reimbursement for out-of-pocket expenses incurred in attending Board meetings
and receive certain stock option grants under the Company's 1996 Non-Employee
Directors Stock Option Plan (the "Non-Employee Directors Plan").
Pursuant to the Company's Non-Employee Directors Plan, each non-employee
director of the Company automatically receives, upon becoming a director, a
one-time grant of an option to purchase up to 10,000 shares of the Company's
Common Stock. These initial options will vest and become exercisable with
respect to 50% of the underlying shares 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
grant date to such earlier date, and with respect to the remaining 50% of the
underlying shares 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 grant date, if the recipient has remained a
non-employee director for the entire period from the grant date to such earlier
date. In addition to an initial grant, each non-employee director will also
receive, upon re-election to the Board, an automatic grant of an option to
purchase up to 5,000 additional shares of the Company's Common Stock. These
additional options will vest and become exercisable upon the earlier of (i) the
first anniversary of the grant date or (ii) immediately prior to the 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
grant date to such earlier date.
All non-employee director options have a term of ten years and an
exercise price equal to the fair market value of the Company's Common Stock on
the date of grant. The Non-Employee Directors 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 accelerates if the recipient of the
option ceases to be a director of the Company in connection with a change in
control.
During the fiscal year ended January 29, 1997, 30,000 options were
issued to the Company's non-employee directors.
6
<PAGE> 9
EXECUTIVE COMPENSATION AND OTHER INFORMATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information with respect to
compensation paid by the Company in fiscal years 1996 and 1997 to the Company's
Chief Executive Officer and the Company's next most highly compensated persons
who were serving as executive officers of the Company at the end of the fiscal
year ended January 29, 1997 and whose total annual salary and bonus for that
fiscal year exceeded $100,000 (the "Named Executive Officers").
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation Awards
------------ ------------
Securities
Underlying
Name and Principal Position Year Salary ($) Options (#)
- --------------------------- ---- ---------- -----------
<S> <C> <C> <C>
Steven A. Lupinacci(1) 1997 130,000 --
Former Chief Executive Officer, 1996 116,638 131,350
President and Chief Financial
Officer
Martin R. Diedrich 1997 100,000 --
Vice Chairman of the Board, 1996 87,500 --
Secretary and Chief Coffee
Officer
</TABLE>
- ----------------------
(1) Mr. Lupinacci resigned as Chief Executive Officer, President and Chief
Financial Officer effective March 12, 1997 and Lawrence Goelman assumed the
position of interim Chief Executive Officer on the same date. Effective
November 17, 1997, Timothy J. Ryan was appointed to the position of
President and Chief Executive Officer, replacing Mr.
Goelman.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth the number of shares covered by
exercisable and unexercisable options held by the Named Executive Officers on
January 29, 1997, and the aggregate gains that would have been realized had
these options been exercised on January 29, 1997, even though these options were
not exercised, and the unexercisable options could not have been exercised, on
that date. The Named Executive Officers did not exercise any stock options
during the 1997 fiscal year.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Name Options at Fiscal Year End (#) At Fiscal Year End ($)(1)
---- ----------------------------- -------------------------------
Exercisable Unexercisable(2) Exercisable Unexercisable(2)
----------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Steven A. Lupinacci 32,993 98,357 232,601 693,417
Martin R. Diedrich -- -- -- --
</TABLE>
- ----------------------
(1) These amounts represent the difference between the exercise price of the
in-the-money options and the market price of the Company's Common Stock on
January 29, 1997. The closing price of the Company's Common Stock on that
day on the Nasdaq National Market was $8.50. Options are in-the-money if
the market value of the shares covered thereby is greater than the option
exercise price.
(2) Future exercisability is subject to a number of factors, including, but not
limited to, the optionee remaining employed by the Company.
7
<PAGE> 10
EMPLOYMENT AGREEMENTS AND COMPENSATION ARRANGEMENTS
See Proposal 1 above for a discussion of John E. Martin's letter
agreement with the Company appointing him Chairman of the Board of the Company.
See Proposal 2 above for a discussion of Timothy J. Ryan's employment
agreement with the Company regarding his role as President and Chief Executive
Officer.
In April 1997, Lawrence Goelman, a director of the Company, entered into
a letter agreement with the Company regarding his role as interim President and
Chief Executive Officer (subsequently, Mr. Goelman assumed the role of Chairman
and interim Chief Executive Officer and Mr. Kerry W. Coin was promoted to
President and Chief Operating Officer). The agreement provided for a salary of
$10,000 per month for so long as Mr. Goelman remained in the role of interim
Chief Executive Officer and/or Chairman. In addition, he received options
pursuant to the Company's 1996 Stock Incentive Plan to purchase 100,000 shares
of the Company's Common Stock at an exercise price of $2.75 per share, which
represented the closing price for the stock on the Nasdaq National Market on the
date of the agreement. All of these options became exercisable at the end of the
vesting schedule on September 23, 1997. The agreement terminated upon the
appointments of Messrs. Martin and Ryan on November 17, 1997.
In August 1996, Kerry W. Coin joined the Company as its Executive Vice
President and Chief Operating Officer and entered into a three year employment
agreement with the Company. The agreement presently provides for an annual base
salary of $160,000 per year, subject to periodic adjustment by the Board of
Directors. Mr. Coin is also entitled to receive employee benefits consistent
with the Company's policies for other senior executives and may be eligible for
a performance bonus in an amount up to thirty percent of his base salary. The
agreement also provides for the grant of options pursuant to the Company's 1996
Stock Incentive Plan to purchase 90,000 shares of the Company's Common Stock at
an exercise price of $3.00 per share and 30,000 shares of the Company's Common
Stock at an exercise price of $4.50 per share.
In June 1995, Martin R. Diedrich entered into a three-year employment
agreement with the Company. The agreement provides for an annual base salary of
$100,000 per year, subject to periodic adjustment by the Board of Directors. The
Board of Directors may also grant Mr. Diedrich performance bonuses based upon
the Company's performance and Mr. Diedrich's contributions thereto. Mr. Diedrich
is also entitled to receive employee benefits consistent with the Company's
policies for other senior executives. The agreement further provides that Mr.
Diedrich shall not be required to relocate outside of Orange County, California
as a condition to his employment.
In June 1995, Steven A. Lupinacci, the Company's then President, Chief
Executive Officer and Chief Financial Officer, entered into a three-year
employment agreement with the Company. The agreement provided for an annual base
salary of $125,000 per year, subject to periodic adjustment by the Board of
Directors. The Board of Directors could also grant Mr. Lupinacci performance
bonuses based upon the Company's performance and Mr. Lupinacci's contributions
thereto. Mr. Lupinacci was also entitled to receive employee benefits consistent
with the Company's policies for other senior executives. Mr. Lupinacci resigned
from the Company effective March 12, 1997. Pursuant to an agreement between the
Company and Mr. Lupinacci dated May 13, 1997 which terminated his employment
agreement, the Company paid Mr. Lupinacci $75,000 and agreed to pay him an
additional amount of approximately $88,000 in the fiscal year ending January 27,
1999 in full satisfaction of the Company's obligations under Mr. Lupinacci's
employment agreement.
Also in June 1995, the Company entered into a stock option plan and
agreement with Mr. Lupinacci. The expiration date of the agreement was June 29,
2005. The agreement provided for a maximum grant of options to purchase 131,350
shares of the Company's Common Stock at an exercise price of $1.45 per share
upon the occurrence of certain events. As a result of the Company's initial
public offering in September 1996, options to purchase 79,183 shares began to
vest in twelve equal installments at the end of each month after the closing of
the initial public offering and are now fully vested. These options to purchase
the 79,183 shares shall terminate on March 12, 1999. The remainder of the
options granted under this agreement terminated on the effective date of Mr.
Lupinacci's resignation from the Company.
8
<PAGE> 11
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Company's Board of Directors was
formed upon consummation of the Company's initial public offering in September
1996. The Compensation Committee consisted of Mr. Churm, Mr. Goelman and Mr.
Heeschen from the formation of the Committee through the remainder of the fiscal
year ended January 29, 1997 and for the subsequent interim period until March
11, 1997. Since March 11, 1997, the Compensation Committee has consisted of Mr.
Churm and Mr. Heeschen. Except for Mr. Goelman, who served as a member of the
Compensation Committee prior to his appointment as interim President and Chief
Executive Officer of the Company on March 12, 1997, no member of the
Compensation Committee was, at any time during the fiscal year ended January 29,
1997 or at any other time, an officer or employee of the Company. There are no
Compensation Committee interlocks between the Company and other entities
involving the Company's executive officers and Board members who serve as
executive officers or Board members of such other entities.
STOCKHOLDER PROPOSALS
Stockholders who wish to have proposals for action at the Company's 1998
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 the Company at its address set forth on the first page of this Proxy
Statement no later than January 21, 1998. Such proposals should be addressed to
the Company's Secretary, and may be included in next year's proxy materials if
they comply with certain rules and regulations promulgated by the Securities and
Exchange Commission.
OTHER MATTERS
The Board of Directors of the Company does not know of any other matters
that are to be presented for action at the Meeting. Should any other matters
come before the Meeting or any adjournments and postponements thereof, the
persons named in the enclosed proxy will have the discretionary authority to
vote all proxies received with respect to such matters in accordance with their
judgment.
Irvine, California
December 22, 1997
STOCKHOLDERS ARE URGED TO SPECIFY THEIR CHOICES ON, DATE, SIGN AND RETURN THE
ENCLOSED PROXY CARD IN THE ENCLOSED ENVELOPE. PROMPT RESPONSE IS HELPFUL AND
YOUR COOPERATION WILL BE APPRECIATED.
9
<PAGE> 12
EXHIBIT A
STOCK OPTION PLAN AND AGREEMENT WITH JOHN E. MARTIN
Stock Option Plan and Agreement, dated as of November 17, 1997 (this
"AGREEMENT"), by and between Diedrich Coffee, Inc., a Delaware corporation (the
"COMPANY") and John E. Martin (the "GRANTEE").
RECITALS
A. The Company has agreed to employ Grantee under terms and conditions
set forth in that certain agreement dated November 17, 1997 (the "EMPLOYMENT
AGREEMENT"), by and between the Company and Grantee.
B. Under the Employment Agreement, the Company has agreed to grant to
Grantee options to purchase 850,000 shares of common stock, $0.01 par value per
share (the "COMMON STOCK"), of the Company for the purpose of encouraging and
rewarding Grantee's contributions to the performance of the Company and aligning
Grantee's interests with the interests of the Company's stockholders.
AGREEMENT
NOW, THEREFORE, to evidence the grant of options by the Company and to
set forth the terms and conditions of the grant of options, the Company and
Grantee hereby agree as follows:
1. DEFINITIONS. The following terms, as used in this Agreement, have the
meanings ascribed to them in this Section 1.
(a) "BOARD" means the Board of Directors of the Company.
(b) "CLOSING PRICE" means the closing price on any given trading day
of the Common Stock on the Nasdaq National Market (or any subsequent exchange or
market system upon which the Company's Common Stock is principally traded) as
reported in the Transaction Index of the Wall Street Journal.
(c) "COMPENSATION COMMITTEE" means the Compensation Committee of the
Board.
(d) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(e) "EXERCISE DATE" means any date on which Grantee exercises
Options.
(f) "EXERCISE DATE VALUE" means the product of: (i) the number of
shares of Common Stock delivered to the Company and (ii) the Closing Price of
the Common Stock on the Exercise Date.
(g) "EXERCISE SHARES" means those shares of Common Stock with respect
to which Options are being exercised.
(h) "FOR CAUSE" means: (i) the willful failure by Grantee to follow
the instructions of the Board or to perform substantially any of Grantee's
obligations to the Company or a breach by Grantee of any of his duties to the
Company and the continuance of such failure or breach for more than twenty (20)
days after written notice of such failure or breach by the Board; (ii) the
engaging by Grantee in serious misconduct that is injurious to the Company or
any subsidiary of the Company; (iii) the conviction of Grantee of, or the
entering by Grantee of a plea of nolo contendere to, a crime that constitutes a
felony; and (iv) the failure, prior to the second anniversary of the date
hereof, of the Common Stock, for a period of seven trading days in any ten
consecutive trading days, to have a Closing Price in excess of $5.00.
A-1
<PAGE> 13
(i) "OPTIONS" means options to purchase shares of Common Stock
granted under this Agreement.
(j) "SECURITIES ACT" means the Securities Act of 1933, as amended.
2. GRANT OF OPTIONS. The Company hereby grants to Grantee, effective as
of the date hereof, Options to purchase up to 850,000 shares of Common Stock on
the terms and subject to the conditions set forth herein.
3. EXERCISABILITY AND EXERCISE PRICES. The Options will become
exercisable as follows:
(a) The Company shall promptly call a special meeting of the
Company's stockholders for the purpose of requesting that the stockholders
approve the terms of this Agreement and the grant of the Options hereunder.
Notwithstanding any provision contained in this Agreement or the Employment
Agreement to the contrary, none of the Options granted hereunder will become
exercisable until stockholders of the Company approve the terms of this
Agreement and the grant of the Options hereunder.
(b) Options to purchase up to 450,000 shares of Common Stock will
become exercisable at an option exercise price of $4.00 per share of Common
Stock on the earlier of (i) May 15, 2002 or (ii) the day immediately following
the first period after the date hereof of ten consecutive trading days in which
the Closing Price of the Common Stock for at least seven trading days in that
period exceeded $4.00;
(c) Options to purchase up to 100,000 shares of Common Stock will
become exercisable at an option exercise price of $5.00 per share of Common
Stock on the earlier of (i) May 15, 2002 or (ii) the day immediately following
the first period after the date hereof of ten consecutive trading days in which
the Closing Price of the Common Stock for at least seven trading days in that
period exceeded $5.00;
(d) Options to purchase up to 150,000 shares of Common Stock will
become exercisable at an option exercise price of $8.00 per share of Common
Stock on the earlier of (i) May 15, 2002 or (ii) the day immediately following
the first period after the date hereof of ten consecutive trading days in which
the Closing Price of the Common Stock for at least seven trading days in that
period exceeded $8.00; and
(e) Options to purchase up to 150,000 shares of Common Stock will
become exercisable at an option exercise price of $10.00 per share of Common
Stock on the earlier of (i) May 15, 2002 or (ii) the day immediately following
the first period after the date hereof of ten consecutive trading days in which
the Closing Price of the Common Stock for at least seven trading days in that
period exceeded $10.00.
For purposes of this Section 3, a "trading day" shall be any day on which the
Nasdaq Stock Market (or any subsequent exchange or market system where the
Company's shares are principally traded) is reporting sale prices for the
Company's Common Stock.
4. TERMINATION OF OPTIONS.
(a) Unless an earlier termination date occurs as specified in Section
4(b), the Options will expire and become unexercisable (whether or not then
exercisable) on the fifth (5th) anniversary of the date hereof ("EXPIRATION
DATE").
(b) If Grantee's employment with the Company is terminated by the
Company For Cause prior to the Expiration Date or by the Grantee for any reason
prior to the Expiration Date: (i) all Options that have not otherwise become
exercisable, as of the date of Grantee's termination of employment, will
immediately terminate and become unexercisable; and (ii) all Options that have
become exercisable will terminate and become unexercisable on and after the date
sixty (60) days following the date of Grantee's termination of employment.
A-2
<PAGE> 14
(c) If Grantee's active employment with the Company is terminated for
any reason other than as set forth in Section 4(b): (i) all Options that have
not otherwise become exercisable, as of the date of Grantee's termination of
employment, will continue to become exercisable pursuant to Section 3 until such
Options are terminated on the earlier of (x) the Expiration Date or (y) the
latter of the first (1st) anniversary of the date of Grantee's termination of
employment or the third (3rd) anniversary of the date hereof; and (ii) all
Options that have become exercisable, as of the date of Grantee's termination of
employment, will terminate and become unexercisable on the earlier of (x) the
Expiration Date or (y) the latter of the first (1st) anniversary of the date of
Grantee's termination of employment or the third (3rd) anniversary of the date
hereof.
5. REGISTRATION OF OPTIONS. Promptly after execution of this Agreement,
the Company, at its expense, shall file a registration statement on Form S-8 to
register the issuance and exercise of the Options.
6. RESTRICTIONS ON EXERCISE. Notwithstanding anything to the contrary in
this Agreement, the Options may not be exercised, and no Exercise Shares shall
be issued: (a) unless all requisite approvals and consents of any governmental
authority of any kind having jurisdiction over the exercise of options shall
have been secured and (b) unless all applicable federal, state and local tax
withholding requirements shall have been satisfied. The Company shall use
commercially reasonable efforts to obtain the consents and approvals referred to
in Section 6(a) so as to permit the Options to be exercised.
7. NON-TRANSFERABILITY OF OPTIONS. None of the Options are assignable or
transferable, in whole or in part, and may not, directly or indirectly, be
offered, transferred, sold, pledged, assigned, alienated, hypothecated or
otherwise disposed of or encumbered (including without limitation by gift,
operation of law or otherwise) other than by will or by the laws of descent and
distribution to the estate of Grantee upon his death, provided that the deceased
Grantee's beneficiary or the representative of his estate acknowledge and agree
in writing, in a form reasonably acceptable to the Compensation Committee to be
bound by this Agreement as if such beneficiary or the estate were Grantee.
8. WITHHOLDING. Whenever shares of Common Stock are to be issued
pursuant to the exercise of Options, the Compensation Committee may require the
recipient of the shares of Common Stock to remit to the Company an amount
sufficient to satisfy any applicable federal, state and local tax withholding
requirements. Upon request by Grantee, the Company may also withhold shares of
Common Stock to satisfy applicable withholding requirements, subject to any
rules adopted by the Compensation Committee regarding compliance with applicable
law, including, but not limited to, Section 16(b) of the Exchange Act.
9. MANNER OF EXERCISE.
(a) To the extent that the Options have become and remain exercisable
as provided in Sections 3 and 4, and subject to such reasonable administrative
regulations as the Compensation Committee may adopt, the Options may be
exercised, by written notice to the Compensation Committee, specifying the
number of Exercise Shares and the Exercise Date. On or before the Exercise Date,
Grantee shall deliver to the Company full payment for the Options being
exercised in cash, or cash equivalent satisfactory to the Compensation
Committee, and in an amount equal to the aggregate purchase price for the
Exercise Shares.
(b) Subject to the discretion of the Compensation Committee, Grantee
may, in lieu of cash, either: (i) deliver shares of Common Stock having an
Exercise Date Value equal to the purchase price of the Exercise Shares; or (ii)
deliver a combination of cash and shares of Common Stock with an aggregate value
and Exercise Date Value equal to the purchase price of the Exercise Shares,
subject to such rules and regulations as may be adopted by the Compensation
Committee to provide for the compliance of such payment procedure with
applicable law, including Section 16(b) of the Exchange Act.
(c) The Compensation Committee may require Grantee to furnish or
execute such other documents as the Compensation Committee reasonably deems
necessary: (i) to evidence such exercise and (ii) to comply with or satisfy the
requirements of the Securities Act, applicable state securities laws or any
other law.
A-3
<PAGE> 15
10. NO RIGHTS AS STOCKHOLDER. Grantee will have no voting or other
rights as a stockholder of the Company with respect to any shares of Common
Stock covered by the Options until the exercise of such Options and the issuance
of a certificate or certificates to him for such shares of Common Stock. No
adjustment will be made for dividends or other rights for which the record date
is prior to the issuance of such certificate or certificates.
11. CAPITAL ADJUSTMENTS. The number and any applicable option price of
the shares of Common Stock covered by the Options will be proportionately and
appropriately adjusted by the Compensation Committee to reflect any stock
dividend, stock split or share combination of the Common Stock or any
recapitalization of the Company. Subject to any required action by the
stockholders of the Company, in any merger, consolidation, reorganization,
exchange of shares, liquidation or dissolution, the Options will pertain to the
securities and other property, if any, that a holder of the number of shares of
Common Stock covered by the Options would have been entitled to receive in
connection with such event.
12. NOTICES. All notices and other communications required or permitted
to be given under this Agreement shall be in writing and shall be deemed to have
been given if delivered personally or sent by certified or express mail, return
receipt requested, postage prepaid, or by any recognized international
equivalent of such delivery, to the Company, or Grantee, as the case may be, at
the address of the Company's principal executive office. All such notices and
communications shall be deemed to have been received on the date of delivery or
on the third business day after the mailing thereof.
13. BINDING EFFECT; BENEFITS. This Agreement shall be binding upon and
inure to the benefit of the parties to this Agreement and their respective
successors and assigns. Nothing in this Agreement, express or implied, is
intended or shall be construed to give any person other than the parties to this
Agreement or their respective successors or assigns any legal or equitable
right, remedy or claim under or in respect of any agreement or any provision
contained herein.
14. AMENDMENT. This Agreement may be amended, modified or supplemented
only by a written instrument executed by Grantee and the Company.
15. APPLICABLE LAW. This Agreement shall be governed by and construed in
accordance with the law of the State of Delaware, regardless of the law that
might be applied under principles of conflict of laws.
16. SECTION AND OTHER HEADINGS. The section and other headings contained
in this Agreement are for reference purposes only and shall not affect the
meaning or interpretation of this Agreement.
17. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original and all of which
together shall constitute one and the same instrument.
A-4
<PAGE> 16
IN WITNESS WHEREOF, the Company and Grantee have executed this Agreement
as of the date first above written.
DIEDRICH COFFEE, INC.,
a Delaware corporation
By: /s/ Lawrence Goelman
-------------------------------
Lawrence Goelman
Chairman of the Board and
Interim Chief Executive Officer
THE GRANTEE
/s/ John E. Martin
-----------------------------------
John E. Martin
A-5
<PAGE> 17
EXHIBIT B
STOCK OPTION PLAN AND AGREEMENT WITH TIMOTHY J. RYAN
Stock Option Plan and Agreement, dated as of November 17, 1997 (this
"AGREEMENT"), by and between Diedrich Coffee, Inc., a Delaware corporation (the
"COMPANY") and Timothy J.
Ryan (the "GRANTEE").
RECITALS
A. The Company has agreed to employ Grantee under terms and conditions
set forth in that certain agreement dated November 17, 1997 (the "EMPLOYMENT
AGREEMENT"), by and between the Company and Grantee.
B. Under the Employment Agreement, the Company has agreed to grant to
Grantee options to purchase 600,000 shares of common stock, $0.01 par value per
share (the "COMMON STOCK"), of the Company for the purpose of encouraging and
rewarding Grantee's contributions to the performance of the Company and aligning
Grantee's interests with the interests of the Company's stockholders.
AGREEMENT
NOW, THEREFORE, to evidence the grant of options by the Company and to
set forth the terms and conditions of the grant of options, the Company and
Grantee hereby agree as follows:
1. DEFINITIONS. The following terms, as used in this Agreement, have the
meanings ascribed to them in this Section 1.
(a) "BOARD" means the Board of Directors of the Company.
(b) "CLOSING PRICE" means the closing price on any given trading day
of the Common Stock on the Nasdaq National Market (or any subsequent exchange or
market system upon which the Company's Common Stock is principally traded) as
reported in the Transaction Index of the Wall Street Journal.
(c) "COMPENSATION COMMITTEE" means the Compensation Committee of the
Board.
(d) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(e) "EXERCISE DATE" means any date on which Grantee exercises
Options.
(f) "EXERCISE DATE VALUE" means the product of: (i) the number of
shares of Common Stock delivered to the Company and (ii) the Closing Price of
the Common Stock on the Exercise Date.
(g) "EXERCISE SHARES" means those shares of Common Stock with respect
to which Options are being exercised.
(h) "OPTIONS" means options to purchase shares of Common Stock
granted under this Agreement.
(i) "SECURITIES ACT" means the Securities Act of 1933, as amended.
2. GRANT OF OPTIONS. The Company hereby grants to Grantee, effective as
of the date hereof, Options to purchase up to 600,000 shares of Common Stock on
the terms and subject to the conditions set forth herein.
B-1
<PAGE> 18
3. EXERCISABILITY AND EXERCISE PRICES. The Options will become
exercisable as follows:
(a) The Company shall promptly call a special meeting of the
Company's stockholders for the purpose of requesting that the stockholders
approve the terms of this Agreement and the grant of the Options hereunder.
Notwithstanding any provision contained in this Agreement or the Employment
Agreement to the contrary, none of the Options granted hereunder will become
exercisable until stockholders of the Company approve the terms of this
Agreement and the grant of the Options hereunder.
(b) Options to purchase up to 50,000 shares of Common Stock will
become exercisable at an option exercise price of $3.50 per share of Common
Stock on the earlier of (i) May 15, 2002 or (ii) upon the satisfaction of both
of the following conditions: (x) such Options shall have vested in accordance
with Section 3(g) hereof and (y) after the date hereof, the Closing Price of the
Common Stock shall have exceeded $3.50 per share for at least seven trading days
in any period of ten consecutive trading days.
(c) Options to purchase up to 75,000 shares of Common Stock will
become exercisable at an option exercise price of $4.50 per share of Common
Stock on the earlier of (i) May 15, 2002 or (ii) upon the satisfaction of both
of the following conditions: (x) such Options shall have vested in accordance
with Section 3(g) hereof and (y) after the date hereof, the Closing Price of the
Common Stock shall have exceeded $4.50 per share for at least seven trading days
in any period of ten consecutive trading days.
(d) Options to purchase up to 125,000 shares of Common Stock will
become exercisable at an option exercise price of $5.00 per share of Common
Stock on the earlier of (i) May 15, 2002 or (ii) upon the satisfaction of both
of the following conditions: (x) such Options shall have vested in accordance
with Section 3(g) hereof and (y) after the date hereof, the Closing Price of the
Common Stock shall have exceeded $5.00 per share for at least seven trading days
in any period of ten consecutive trading days.
(e) Options to purchase up to 175,000 shares of Common Stock will
become exercisable at an option exercise price of $8.00 per share of Common
Stock on the earlier of (i) May 15, 2002 or (ii) upon the satisfaction of both
of the following conditions: (x) such Options shall have vested in accordance
with Section 3(g) hereof and (y) after the date hereof, the Closing Price of the
Common Stock shall have exceeded $8.00 per share for at least seven trading days
in any period of ten consecutive trading days.
(f) Options to purchase up to 175,000 shares of Common Stock will
become exercisable at an option exercise price of $10.00 per share of Common
Stock on the earlier of (i) May 15, 2002 or (ii) upon the satisfaction of both
of the following conditions: (x) such Options shall have vested in accordance
with Section 3(g) hereof and (y) after the date hereof, the Closing Price of the
Common Stock shall have exceeded $10.00 per share for at least seven trading
days in any period of ten consecutive trading days.
(g) The Options described in Sections 3(b) - (f) shall vest and
become exercisable upon satisfaction of the conditions specified in such
Sections in eight equal installments over a two year period as described in the
next sentence. On each of March 1, 1998, June 1, 1998, September 1, 1998,
December 1, 1998, March 1, 1999, June 1, 1999, September 1, 1999 and December 1,
1999, Options to purchase the following number of shares at the following option
exercise prices shall vest:
- 6,250 shares of Common Stock at $3.50 per share;
- 9,375 shares of Common Stock at $4.50 per share;
- 15,625 shares of Common Stock at $5.00 per share;
- 21,875 shares of Common Stock at $8.00 per share; and
- 21,875 shares of Common Stock at $10.00 per share.
B-2
<PAGE> 19
For purposes of this Section 3, a "trading day" shall be any day on
which the Nasdaq Stock Market (or any subsequent exchange or market system where
the Company's shares are principally traded) is reporting sale prices for the
Company's Common Stock.
4. TERMINATION OF OPTIONS.
(a) Unless an earlier termination date occurs as specified in Section
4(b), the Options will expire and become unexercisable (whether or not then
exercisable) on the fifth (5th) anniversary of the date hereof ("EXPIRATION
DATE").
(b) If Grantee's employment with the Company is terminated by the
Company for Cause (as such term is defined in Section 4(b) of the Employment
Agreement) prior to the Expiration Date or by the Grantee without Good Cause
prior to the Expiration Date: (i) all Options that have not otherwise become
exercisable, as of the date of Grantee's termination of employment, will
immediately terminate and become unexercisable; and (ii) all Options that have
become exercisable will terminate and become unexercisable on and after the date
sixty (60) days following the date of Grantee's termination of employment.
(c) If Grantee's active employment with the Company is terminated for
any reason other than as set forth in Section 4(b) hereof: (i) all Options that
have not otherwise become exercisable, as of the date of Grantee's termination
of employment, will continue to become exercisable pursuant to Section 3 until
such Options are terminated on the earlier of (x) the Expiration Date or (y) the
latter of the first (1st) anniversary of the date of Grantee's termination of
employment or the second (2nd) anniversary of the date hereof; and (ii) all
Options that have become exercisable, as of the date of Grantee's termination of
employment, will terminate and become unexercisable on the earlier of (x) the
Expiration Date or (y) the latter of the first (1st) anniversary of the date of
Grantee's termination of employment or the second (2nd) anniversary of the date
hereof.
5. REGISTRATION OF OPTIONS. Promptly after execution of this Agreement,
the Company, at its expense, shall file a registration statement on Form S-8 to
register the issuance and exercise of the Options.
6. RESTRICTIONS ON EXERCISE. Notwithstanding anything to the contrary in
this Agreement, the Options may not be exercised, and no Exercise Shares shall
be issued: (a) unless all requisite approvals and consents of any governmental
authority of any kind having jurisdiction over the exercise of options shall
have been secured and (b) unless all applicable federal, state and local tax
withholding requirements shall have been satisfied. The Company shall use
commercially reasonable efforts to obtain the consents and approvals referred to
in Section 6(a) so as to permit the Options to be exercised.
7. NON-TRANSFERABILITY OF OPTIONS. None of the Options are assignable or
transferable, in whole or in part, and may not, directly or indirectly, be
offered, transferred, sold, pledged, assigned, alienated, hypothecated or
otherwise disposed of or encumbered (including without limitation by gift,
operation of law or otherwise) other than by will or by the laws of descent and
distribution to the estate of Grantee upon his death, provided that the deceased
Grantee's beneficiary or the representative of his estate acknowledge and agree
in writing, in a form reasonably acceptable to the Compensation Committee to be
bound by this Agreement as if such beneficiary or the estate were Grantee.
8. WITHHOLDING. Whenever shares of Common Stock are to be issued
pursuant to the exercise of Options, the Compensation Committee may require the
recipient of the shares of Common Stock to remit to the Company an amount
sufficient to satisfy any applicable federal, state and local tax withholding
requirements. Upon request by Grantee, the Company may also withhold shares of
Common Stock to satisfy applicable withholding requirements, subject to any
rules adopted by the Compensation Committee regarding compliance with applicable
law, including, but not limited to, Section 16(b) of the Exchange Act.
B-3
<PAGE> 20
9. MANNER OF EXERCISE.
(a) To the extent that the Options have become and remain exercisable
as provided in Sections 3 and 4, and subject to such reasonable administrative
regulations as the Compensation Committee may adopt, the Options may be
exercised, by written notice to the Compensation Committee, specifying the
number of Exercise Shares and the Exercise Date. On or before the Exercise Date,
Grantee shall deliver to the Company full payment for the Options being
exercised in cash, or cash equivalent satisfactory to the Compensation
Committee, and in an amount equal to the aggregate purchase price for the
Exercise Shares.
(b) Subject to the discretion of the Compensation Committee, Grantee
may, in lieu of cash, either: (i) deliver shares of Common Stock having an
Exercise Date Value equal to the purchase price of the Exercise Shares; or (ii)
deliver a combination of cash and shares of Common Stock with an aggregate value
and Exercise Date Value equal to the purchase price of the Exercise Shares,
subject to such rules and regulations as may be adopted by the Compensation
Committee to provide for the compliance of such payment procedure with
applicable law, including Section 16(b) of the Exchange Act.
(c) The Compensation Committee may require Grantee to furnish or
execute such other documents as the Compensation Committee reasonably deems
necessary: (i) to evidence such exercise and (ii) to comply with or satisfy the
requirements of the Securities Act, applicable state securities laws or any
other law.
10. NO RIGHTS AS STOCKHOLDER. Grantee will have no voting or other
rights as a stockholder of the Company with respect to any shares of Common
Stock covered by the Options until the exercise of such Options and the issuance
of a certificate or certificates to him for such shares of Common Stock. No
adjustment will be made for dividends or other rights for which the record date
is prior to the issuance of such certificate or certificates.
11. CAPITAL ADJUSTMENTS. The number and any applicable option price of
the shares of Common Stock covered by the Options will be proportionately and
appropriately adjusted by the Compensation Committee to reflect any stock
dividend, stock split or share combination of the Common Stock or any
recapitalization of the Company. Subject to any required action by the
stockholders of the Company, in any merger, consolidation, reorganization,
exchange of shares, liquidation or dissolution, the Options will pertain to the
securities and other property, if any, that a holder of the number of shares of
Common Stock covered by the Options would have been entitled to receive in
connection with such event.
12. NOTICES. All notices and other communications required or permitted
to be given under this Agreement shall be in writing and shall be deemed to have
been given if delivered personally or sent by certified or express mail, return
receipt requested, postage prepaid, or by any recognized international
equivalent of such delivery, to the Company, or Grantee, as the case may be, at
the address of the Company's principal executive office. All such notices and
communications shall be deemed to have been received on the date of delivery or
on the third business day after the mailing thereof.
13. BINDING EFFECT; BENEFITS. This Agreement shall be binding upon and
inure to the benefit of the parties to this Agreement and their respective
successors and assigns. Nothing in this Agreement, express or implied, is
intended or shall be construed to give any person other than the parties to this
Agreement or their respective successors or assigns any legal or equitable
right, remedy or claim under or in respect of any agreement or any provision
contained herein.
14. AMENDMENT. This Agreement may be amended, modified or supplemented
only by a written instrument executed by Grantee and the Company.
15. APPLICABLE LAW. This Agreement shall be governed by and construed in
accordance with the law of the State of Delaware, regardless of the law that
might be applied under principles of conflict of laws.
B-4
<PAGE> 21
16. SECTION AND OTHER HEADINGS. The section and other headings contained
in this Agreement are for reference purposes only and shall not affect the
meaning or interpretation of this Agreement.
17. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original and all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the Company and Grantee have executed this Agreement
as of the date first above written.
DIEDRICH COFFEE, INC.,
a Delaware corporation
By: /s/ Lawrence Goelman
-----------------------------------
Lawrence Goelman
Chairman of the Board and
Interim Chief Executive Officer
THE GRANTEE
/s/ Timothy J. Ryan
-------------------------------------
Timothy J. Ryan
B-5
<PAGE> 22
PROXY
DIEDRICH COFFEE, INC.
2144 MICHELSON DRIVE
IRVINE, CA 92612
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Martin R. Diedrich and Lawrence Goelman, and
each of them, as Proxies, each with the power to appoint his substitute, and
hereby authorizes them to represent and to vote as designated below all the
shares of Common Stock of Diedrich Coffee, Inc. held of record by the
undersigned on December 16, 1997, at the Special Meeting of Stockholders to be
held on January 22, 1998, and at any postponements or adjournments thereof. The
proposals referred to below are described in the Proxy Statement for the Special
Meeting of Stockholders dated December 22, 1997.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE FOLLOWING PROPOSALS:
1. APPROVAL OF THE STOCK OPTION PLAN AND AGREEMENT BETWEEN THE COMPANY AND JOHN
E. MARTIN GRANTING MR. MARTIN OPTIONS TO PURCHASE UP TO 850,000 SHARES OF THE
COMPANY'S COMMON STOCK.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. APPROVAL OF THE STOCK OPTION PLAN AND AGREEMENT BETWEEN THE COMPANY AND
TIMOTHY J. RYAN GRANTING MR. RYAN OPTIONS TO PURCHASE UP TO 600,000 SHARES OF
THE COMPANY'S COMMON STOCK.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(IMPORTANT -- PLEASE SIGN ON OTHER SIDE)
<PAGE> 23
(CONTINUED FROM OTHER SIDE)
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR PROPOSALS 1 AND 2.
Dated:
-------------------------
(Signature)
-------------------------
(Signature)
Please sign your name
exactly as it appears
hereon. When shares are
held by joint tenants,
both should sign. When
signing as attorney,
executor, administrator,
trustee or guardian,
please give full title as
such. If a corporation,
please sign in full
corporate name by
President or other
authorized officer. If a
partnership, please sign
in full partnership name
by authorized person.
PLEASE MARK, SIGN, DATE
AND RETURN THIS PROXY
CARD PROMPTLY USING THE
ENCLOSED ENVELOPE.
