-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DN+ZndfxeUxcdCCNhIEAZ16fk/PWPV1G6Ra3Au9NDzZ8SGCjE85OCsQWmNybsTwL ZUlw1c26RWBFiy/torW77g== 0001095811-01-000481.txt : 20010130 0001095811-01-000481.hdr.sgml : 20010130 ACCESSION NUMBER: 0001095811-01-000481 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20001213 FILED AS OF DATE: 20010129 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIEDRICH COFFEE INC CENTRAL INDEX KEY: 0000947661 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-FOOD STORES [5400] IRS NUMBER: 330086628 STATE OF INCORPORATION: CA FISCAL YEAR END: 0127 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21203 FILM NUMBER: 1518055 BUSINESS ADDRESS: STREET 1: 2144 MICHELSON DRIVE STREET 2: STE A CITY: IRVINE STATE: CA ZIP: 9262682612 BUSINESS PHONE: 9492601600 MAIL ADDRESS: STREET 1: 2144 MICHELSON DRIVE CITY: IRVINE STATE: CA ZIP: 92612 10-Q 1 a68925e10-q.txt FORM 10-Q FOR PERIOD ENDED DECEMBER 13, 2000 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 13, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ____________ COMMISSION FILE NUMBER 0-21203 DIEDRICH COFFEE, INC. (Exact name of registrant as specified in its charter) DELAWARE 33-0086628 (State or Other Jurisdiction of (IRS Employer Identification No.) Incorporation or Organization) 2144 MICHELSON DRIVE IRVINE, CALIFORNIA 92612 (Address of Principal Executive Offices including Zip Code) (949) 260-1600 (Registrant's Telephone Number including Area Code) ---------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] As of January 29, 2001, there were 12,645,356 shares of common stock of the registrant outstanding. ================================================================================ 2 DIEDRICH COFFEE, INC. INDEX
PART I - FINANCIAL INFORMATION PAGE NO. -------- Item 1 Financial Statements Condensed Consolidated Balance Sheets............................ 3 Condensed Consolidated Statements of Operations.................. 4 Condensed Consolidated Statements of Cash Flows.................. 5 Notes to Condensed Consolidated Financial Statements............. 6 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................. 11 Item 3 Quantitative and Qualitative Disclosures About Market Risk......... 16 PART II - OTHER INFORMATION Item 1 Legal Proceedings.................................................. 17 Item 5 Other Information.................................................. 17 Item 6 Exhibits and Reports on Form 8-K................................... 18 Signatures......................................................... 22
2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DIEDRICH COFFEE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 13, 2000 JUNE 28, 2000 ----------------- ------------- (UNAUDITED) ASSETS Current Assets: Cash $ 1,094,275 $ 2,943,554 Accounts receivable 4,503,685 2,359,015 Inventories (Note 2) 3,796,081 4,327,011 Prepaid expenses 776,635 382,193 Income taxes receivable 16,233 16,232 ------------ ------------ Total current assets 10,186,909 10,028,005 Property and equipment, net 14,276,582 15,455,807 Costs in excess of net assets acquired, net 13,810,812 14,184,306 Other assets 699,546 661,736 ------------ ------------ Total assets $ 38,973,849 $ 40,329,854 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current installments of obligations under capital lease $ 263,177 $ 390,699 Current installments of long-term debt (Note 3) 2,344,900 1,075,000 Accounts payable 5,579,261 6,393,029 Accrued compensation 2,726,071 1,612,572 Accrued expenses (Note 4) 2,079,034 2,065,078 Franchisee deposits 698,892 662,974 Deferred franchise fee income 958,353 796,500 Provision for store closure (Note 5) 1,068,392 1,247,856 ------------ ------------ Total current liabilities 15,718,080 14,243,708 Obligations under capital lease, excluding current installments 683,863 659,865 Long-term debt, excluding current installments (Note 3) 7,655,101 9,591,667 Deferred rent 744,103 713,025 ------------ ------------ Total liabilities 24,801,147 25,208,265 ------------ ------------ Stockholders' Equity: Common stock 126,169 126,169 Additional paid-in capital 52,552,412 52,552,412 Accumulated deficit (38,505,879) (37,556,992) ------------ ------------ Total stockholders' equity 14,172,702 15,121,589 ------------ ------------ Commitments and contingencies Total liabilities and stockholders' equity $ 38,973,849 $ 40,329,854 ============ ============
See accompanying notes to condensed consolidated financial statements. 3 4 DIEDRICH COFFEE, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
TWELVE WEEKS TWELVE WEEKS TWENTY-FOUR WEEKS TWENTY-FOUR WEEKS ENDED DECEMBER 13, ENDED DECEMBER 15, ENDED DECEMBER 13, ENDED DECEMBER 15, 2000 1999 2000 1999 ------------------ ------------------ ------------------ ------------------ Revenues: Retail $ 11,572,777 $ 10,971,709 $ 22,239,026 $ 21,434,847 Wholesale and other 6,074,264 6,106,783 10,802,793 10,741,352 Franchise revenue 1,753,424 2,054,512 3,230,596 3,229,330 ------------ ------------ ------------ ------------ Total 19,400,465 19,133,004 36,272,415 35,405,529 ------------ ------------ ------------ ------------ Cost and Expenses: Cost of sales and related occupancy costs 9,479,402 9,635,694 17,926,930 17,597,084 Store operating expenses 4,638,169 4,422,725 9,260,197 8,601,647 Operations management 1,288,441 1,458,802 2,587,548 2,694,391 Depreciation and amortization 1,065,465 832,197 2,104,402 1,639,076 General and administrative expenses 2,365,393 1,897,111 4,592,526 4,148,939 ------------ ------------ ------------ ------------ Total 18,836,870 18,246,529 36,471,603 34,681,137 ------------ ------------ ------------ ------------ Operating income (loss) 563,595 886,475 (199,188) 724,392 Interest expense (357,456) (327,265) (715,659) (614,154) Interest and other income (loss) (25,527) 50,153 (13,745) 116,834 ------------ ------------ ------------ ------------ Income (loss) before income tax provision 180,612 609,363 (928,592) 227,072 Income tax provision 17,035 10,335 20,295 17,535 ------------ ------------ ------------ ------------ Net income (loss) $ 163,577 $ 599,028 $ (948,887) $ 209,537 ============ ============ ============ ============ Basic net income (loss) per share: $ 0.01 $ 0.05 $ (0.08) $ 0.02 ============ ============ ============ ============ Diluted net income (loss) per share: $ 0.01 $ 0.05 $ (0.08) $ 0.02 ============ ============ ============ ============ Weighted average shares outstanding: Basic 12,645,356 12,615,601 12,645,356 12,319,034 Diluted 12,645,356 13,266,565 12,645,356 13,052,131
See accompanying notes to condensed consolidated financial statements. 4 5 DIEDRICH COFFEE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
TWENTY-FOUR WEEKS TWENTY-FOUR WEEKS ENDED DECEMBER 13, ENDED DECEMBER 15, 2000 1999 ------------------ ------------------ Cash flows from operating activities: Net income (loss) $ (948,887) $ 209,537 Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation and amortization 2,104,402 1,849,817 Amortization of loan fees 130,360 20,271 Changes in assets and liabilities: Accounts receivable (2,144,670) (3,085,858) Inventories 530,930 (115,132) Prepaid expenses (394,442) (92,260) Income taxes receivable -- -- Other assets (149,319) (91,502) Accounts payable (813,768) 2,817,274 Accrued compensation 1,113,499 62,374 Accrued expenses and provision for store closings and restructuring costs 32,263 (637,452) Deferred rent 31,078 11,927 ----------- ------------ Net cash (used in) provided by operating activities (508,553) 948,996 ----------- ------------ Cash flows from investing activities: Capital expenditures for property and equipment (570,536) (859,302) Cash paid for acquisition, net -- (22,937,362) Decrease in reserve for disposal of stores -- (273,099) ----------- ------------ Net cash used in investing activities (570,536) (24,069,763) ----------- ------------ Cash flows from financing activities: Proceeds from issuance of common stock -- 25,350,799 Proceeds from the issuance of note payable, net of fees paid -- 11,603,181 Repayment of long-term debt (666,666) (7,808,357) Repayment of capital lease obligations (103,524) (290,509) ----------- ------------ Net cash (used in) provided by financing activities (770,190) 28,855,114 ----------- ------------ Net increase (decrease) in cash (1,849,279) 5,734,347 Cash at beginning of period 2,943,554 552,124 ----------- ------------ Cash at end of period $ 1,094,275 $ 6,286,471 =========== ============ Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 579,264 $ 325,300 =========== ============ Income taxes $ 20,295 $ 21,141 =========== ============ Non-cash transactions: Issuance of common stock to acquire Coffee People $ -- $ 8,415,000 =========== ============
See accompanying notes to condensed consolidated financial statements. 5 6 DIEDRICH COFFEE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 13, 2000 (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The unaudited condensed consolidated financial statements of Diedrich Coffee, Inc. (the "Company") and subsidiaries have been prepared in accordance with generally accepted accounting principles, the instructions to Form 10-Q and Article 10 of Regulation S-X. Information relating to the periods ending prior to July 7, 1999 included in this report relates to the historical operations of Diedrich Coffee, Inc. and, except as otherwise indicated, does not reflect the operations of Coffee People, Inc., which the Company acquired on July 7, 1999. These statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended June 28, 2000. In the opinion of management, all adjustments (consisting of normal, recurring adjustments and accruals) considered necessary for a fair presentation have been included. Operating results for interim periods are not necessarily indicative of the results expected for a full year. Costs in Excess of Net Assets Acquired In connection with the fourth quarter of fiscal year 2000 a $14.8 million impairment charge was taken against costs in excess of net assets acquired, and management changed the related amortization period from 40 years to 30 years for the Gloria Jean's division and from 40 years to 10 years for both the Coffee People and Coffee Plantation divisions. Such revised amortization periods, which became effective in the first quarter of fiscal year 2001, reflect management's best estimate of the underlying periods of recoverability of the costs in excess of net assets acquired. The change in amortization periods resulted in additional amortization of $89,000 for the twelve weeks ended December 13, 2000 and $202,000 for the twenty four weeks ended December 13, 2000. Reclassifications Certain reclassifications have been made to the December 15, 1999 consolidated financial statements to conform to the December 13, 2000 presentation. 2. INVENTORIES Inventories consist of the following:
DECEMBER 13, 2000 JUNE 28, 2000 ----------------- ------------- Green coffee (raw materials) $ 852,636 $1,371,009 Roasted coffee (finished goods) 1,071,526 789,816 Accessory and specialty items 700,190 750,667 Other food, beverage and supplies 1,171,729 1,415,519 ---------- ---------- $3,796,081 $4,327,011 ========== ==========
6 7 DIEDRICH COFFEE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 13, 2000 (UNAUDITED) 3. LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 13, 2000 JUNE 28, 2000 ----------------- ------------- BANKBOSTON, N.A. (FLEET NATIONAL BANK) Note payable bearing interest at a rate of 9.88% on $9.333 million and 9.66% on $.667 million as of December 13, 2000 Due September 1, 2002. Note is secured by the assets of the Company and its subsidiaries' stock $10,000,001 $10,666,667 ----------- ----------- Less: current installments 2,344,900 1,075,000 ----------- ----------- Long-term debt, excluding current installments $ 7,655,101 $ 9,591,667 =========== ===========
On July 7, 1999, the Company entered into a Credit Agreement with BankBoston, N.A. (subsequently merged into Fleet National Bank) secured by pledges of all of the Company's assets and its subsidiaries' stock and which provided for a $12 million term loan and a $3 million revolving credit facility. The Company used the proceeds of the term loan to repay existing indebtedness and to pay expenses related to the acquisition of Coffee People. The term loan provided for principal repayment based upon a five year amortization, with quarterly principal payments of $666,667 and quarterly interest payments based upon a formula described below. The Company established the revolving credit facility for future flexibility to remodel existing company-owned coffeehouses, develop new company coffeehouses, and for general corporate purposes. The Company did not draw down any borrowings under the revolving credit facility since it was established, although it presently has $293,000 of outstanding Letters of Credit backed by the revolving credit facility. Amounts outstanding under the Credit Agreement bear interest, at the Company's option, at Fleet's base rate plus 1.25% or an adjusted Eurodollar rate plus 3.0%. At December 13, 2000, the applicable index was 6.88%. Due to various problems encountered in the year subsequent to the acquisition of Coffee People, Inc., including the closure of 39 Gloria Jean's locations, six of which were company operated, we announced on June 29, 2000 that we expected to be in default under our Credit Agreement because of our inability to meet certain financial covenants. We simultaneously announced that on June 27, 2000, we had entered into a Letter Agreement with Fleet National Bank under which the bank agreed to extend the due date of the June 30, 2000 quarterly principal payment until July 31, 2000, and to forbear until July 31, 2000 from exercising any of its rights and remedies arising from financial covenant defaults. We subsequently made the July 31, 2000 principal payment as required on the extended due date, and on August 17, 2000 we entered into an extension of the June 27, 2000 Letter Agreement which extended through September 30, 2000 the bank's forbearance from exercising any of its default remedies. On September 26, 2000, we entered into a First Amendment to Credit Agreement with Fleet National Bank to amend certain terms of the original Credit Agreement. The First Amendment to Credit Agreement provides, among other things, for a significant reduction in required minimum principal amortization payments going forward, an acceleration in the maturity date of all amounts owed under the Credit Agreement, an agreement between the parties as to certain assets intended to be sold as well as the allocation of future net asset sale proceeds between the Company and the bank, the introduction of an additional event of default under the Agreement, a reduction in the overall amount of the revolving credit facility and certain new restrictions governing use of the facility, and a modification of the financial covenants and the Company's ability to obtain new third party debt going forward. 7 8 DIEDRICH COFFEE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 13, 2000 (UNAUDITED) Specifically, under the terms of the First Amendment to Credit Agreement, no further scheduled principal payments on the term loan are required from August 1, 2000 until January 31, 2001. The Company must then pay scheduled principal payments of $25,000 per month beginning February 1, 2001, which increase to $100,000 per month beginning July 1, 2001 until all amounts owed under the Credit Agreement are repaid. The First Amendment to Credit Agreement accelerates the maturity date of all remaining amounts owed under the credit Agreement to September 1, 2002. In addition, the Company and the bank identified certain assets that could be sold without interfering with the Company's growth strategy, including two pieces of owned real property under existing company retail locations, which are expected to be leased back from the buyer, a third parcel of owned real property, presently undeveloped, and certain company operated coffeehouses outside of its core southern California market that could be refranchised. Under the terms of the First Amendment to Credit Agreement, the bank is to receive 50% of the net proceeds from any such asset sales. A sale of one of the two owned properties referred to above was completed in late December 2000. The net proceeds received totaled $415,000, of which 50% was paid to the bank, resulting in a $208,000 principal repayment to the bank in early January 2001. The other two properties are presently listed for sale. The computation of the interest rate and the timing of quarterly interest payments under the original Credit Agreement remain unchanged under the First Amendment to Credit Agreement. The Company made its scheduled quarterly interest payment in late December 2000. The amendment also introduces an additional event of default under the Agreement. The amendment specifies that a materially adverse change in the financial condition of the Company (or any of its subsidiaries), as determined by the bank in its sole and exclusive discretion, is defined as an event of default. Under any event of default, the bank may declare all amounts owed immediately due and payable. Additional changes under the terms of the First Amendment to Credit Agreement include a reduction in the revolving credit facility, which the Company had previously been unable to access because of the covenant defaults, from a $3,000,000 limit to $1,293,000, and a restriction that the reduced facility be used only to back up existing and future standby Letters of Credit. The First Amendment to Credit Agreement preserves the Company's ability to obtain third party financing for capital projects and maintenance capital, and increases its flexibility to obtain subordinated debt as a source of additional working capital. Under the First Amendment to Credit Agreement the bank waived the previous financial covenant defaults, and agreed to new financial covenant ratios going forward based upon updated financial information and projections prepared by the Company. In addition to resetting such ratios in the financial covenants as contained in the original Credit Agreement, the parties agreed to a new covenant under the First Amendment to Credit Agreement which commits the Company to achieving certain predetermined minimum levels of cumulative principal repayments in addition to amounts already paid to date in fiscal 2001 or reflected in the new go forward minimum monthly principal payment obligations discussed above: $283,000 by March 31, 2001; $708,000 by June 30, 2001; and $1,619,900 by September 30, 2001. Such incremental principal repayments (above the scheduled minimum monthly amounts described above) are anticipated to be generated primarily from the net proceeds to be paid to the bank from future asset sales, the issuance of new debt or equity, or a combination of these sources. Of the $283,000 due by March 2001, $208,000 has already been paid as a result of the asset sale described above. 4. ACCRUED EXPENSES Accrued expenses represents accrued severance costs, amounts due to franchisee trust accounts, accrued interest, accrued professional fees, accrued legal settlements, and other miscellaneous accruals. During the twelve weeks ended December 13, 2000 the company recorded a charge of $220,000 to accrue for its estimated liability associated with its guarantee of an equipment lease for a former franchise area developer. During this same period the company reversed $169,000 of accrued expenses pertaining to accrued legal settlements and other miscellaneous accruals. 8 9 DIEDRICH COFFEE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 13, 2000 (UNAUDITED) 5. PROVISION FOR STORE CLOSURE Activity in the provision for store closure for the twenty-four weeks ended December 13, 2000 is summarized as follows: Balance at June 28, 2000 $1,247,856 Charges to operations 197,493 Disbursements as costs incurred (178,638) Adjustments (198,319) ---------- Balance at December 13, 2000 $1,068,392 During the twelve weeks ended December 13, 2000 the Company recorded a charge of $197,493 for the anticipated costs associated with the termination of six coffeehouse leases that were never developed. During this same period the Company reversed $101,000 of reserves previously provided based upon more favorable than expected lease settlements, and made certain other reclassifications. 6. EARNINGS PER SHARE The Company computed basic net income (loss) per share based on the weighted average number of common shares outstanding during the period presented. Diluted net income (loss) per share was computed based on the weighted average number of common and dilutive potential common shares outstanding during the periods presented. The Company has granted certain stock options which have been treated as dilutive potential common shares. The following table sets forth the computations of basic and diluted net income (loss) per share:
TWELVE TWELVE TWENTY-FOUR TWENTY-FOUR WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED DECEMBER 13, 2000 DECEMBER 15, 1999 DECEMBER 13, 2000 DECEMBER 15, 1999 ----------------- ----------------- ----------------- ----------------- NUMERATOR: Net income (loss) $ 163,577 $ 599,028 $ (948,887) $ 209,537 DENOMINATOR: Denominator for basic net income (loss) per share - weighted average shares 12,645,356 12,615,601 12,645,356 12,319,034 Dilutive potential common shares using treasury stock method 650,964 733,097 ----------- ----------- ------------ ----------- Denominator for diluted net income (loss) per share 12,645,356 13,266,565 12,645,356 13,052,131 =========== =========== ============ =========== BASIC NET INCOME (LOSS) PER SHARE: $ 0.01 $ 0.05 $ (0.08) $ 0.02 =========== =========== ============ =========== DILUTED NET INCOME (LOSS) PER SHARE: $ 0.01 $ 0.05 $ (0.08) $ 0.02 =========== =========== ============ ===========
9 10 DIEDRICH COFFEE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 13, 2000 (UNAUDITED) All 2,353,969 outstanding options plus 920,000 warrants to purchase shares of common stock during the twelve weeks and twenty-four weeks ended December 13, 2000 were excluded from the calculation of diluted net income (loss) per share as their inclusion would have been anti-dilutive. Options and warrants to purchase 1,111,725 and 1,386,725 shares of common stock with exercise prices that exceed the weighted average market price of $5.57 and $4.83 during the twelve weeks and twenty-four weeks ended December 15, 1999, respectively, were excluded from the calculation of diluted net income per share as their inclusion would have been anti-dilutive. 7. SEGMENT AND RELATED INFORMATION The Company has three reportable segments which include retail operations, wholesale operations and franchise operations. The Company evaluates performance of its operating segments based on income before provision for asset impairment and restructuring costs, income taxes, interest expense, depreciation and amortization, and general and administrative expenses. Summarized financial information concerning the Company's reportable segments is shown in the following tables. The other total assets consist of corporate cash, costs in excess of net assets acquired and corporate property, plant and equipment. The other component of segment profit before tax includes corporate general and administrative expenses, provision for asset impairment and restructuring costs, depreciation and amortization expense and interest expense.
RETAIL WHOLESALE FRANCHISE OPERATIONS OPERATIONS OPERATIONS OTHER TOTAL ------------ ----------- ---------- ---------- ------------ Twelve Weeks Ended December 13, 2000 Revenue $ 11,572,777 $ 6,074,264 $1,753,424 $ -- $ 19,400,465 Interest expense -- -- -- 357,456 357,456 Depreciation & amortization 453,503 199,763 -- 412,199 1,065,465 Segment profit (loss) before tax 939,979 1,273,400 1,074,789 (3,107,556) 180,612 Total assets as of December 13, 2000 $ 14,062,236 $ 3,794,274 $1,084,703 $ 20,032,636 $ 38,973,849 RETAIL WHOLESALE FRANCHISE OPERATIONS OPERATIONS OPERATIONS OTHER TOTAL ------------ ----------- ---------- ---------- ------------ Twelve Weeks Ended December 15, 1999 Revenue $ 10,971,709 $ 6,106,783 $2,054,512 $ -- $ 19,133,004 Interest expense -- -- -- 327,265 327,265 Depreciation & amortization 497,344 33,716 -- 301,137 832,197 Segment profit (loss) before tax (127,729) 1,266,965 1,168,586 (1,698,459) 609,363 Total assets as of June 28, 2000 $ 13,679,086 $ 2,139,241 $ 549,713 $ 23,961,814 $ 40,329,854 RETAIL WHOLESALE FRANCHISE OPERATIONS OPERATIONS OPERATIONS OTHER TOTAL ------------ ----------- ---------- ---------- ------------ Twenty-Four Weeks ended December 13, 2000 Revenues $ 22,239,026 $10,802,793 $3,230,596 $ 36,272,415 Interest expense -- -- -- 715,659 $ 715,659 Depreciation & amortization 930,060 371,460 -- 802,883 2,104,402 Segment profit (loss) before tax 998,091 2,048,060 1,706,366 (5,681,109) (928,592) Total assets as of December 13, 2000 $ 14,062,236 $ 3,794,274 $1,084,703 $ 20,032,636 $ 38,973,849
10 11 DIEDRICH COFFEE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 13, 2000 (UNAUDITED)
RETAIL WHOLESALE FRANCHISE OPERATIONS OPERATIONS OPERATIONS OTHER TOTAL ----------- ----------- ---------- ---------- ----------- Twenty-Four Weeks ended December 15, 1999 Revenues $21,434,847 $10,741,352 $3,229,330 $ -- $35,405,529 Interest expense -- -- -- 614,154 $ 614,154 Depreciation & amortization 983,806 67,432 -- 587,838 1,639,076 Segment profit (loss) before tax 246,519 2,268,674 1,860,818 (4,148,939) 227,072 Total assets as of June 28, 2000 $13,679,086 $ 2,139,241 $ 549,713 $ 23,961,814 $40,329,854
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS A WARNING ABOUT FORWARD-LOOKING STATEMENTS We make forward-looking statements in this quarterly report that are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of Diedrich Coffee's financial condition, operations, plans, objectives and performance. Additionally, when we use the words "believe," "expect," "anticipate," "estimate" or similar expressions, we are making forward-looking statements. Many possible events or factors could affect our future financial results and performance. This could cause our results or performance to differ materially from those expressed in our forward-looking statements. You should consider these risks when you review this document, along with the following possible events or factors: o the financial and operating performance of our retail operations; o our ability to maintain profitability over time; o our ability to perform within the terms of our amended credit agreement; o the successful execution of our new growth strategies; o the impact of competition; and o the availability of working capital. Foreseeable risks and uncertainties are described elsewhere in this report and in detail under "Risk Factors and Trends Affecting Diedrich Coffee and Its Business" in our Annual Report on Form 10-K for the fiscal year ended June 28, 2000 and in other reports that we file with the Securities and Exchange Commission. GENERAL The first retail store operating under the name of Diedrich Coffee commenced operations in 1972. We are now the second largest specialty coffee retailer in the United States with annual system-wide sales of more than $150 million. At December 13, 2000, Diedrich Coffee owned and operated 98 retail locations and had 285 franchised retail locations in 37 states and ten foreign countries. Our primary brands are Diedrich Coffee coffeehouses and Gloria Jean's, the nation's largest chain of mall-based coffee stores. We also own and operate Coffee People and Coffee Plantation coffeehouses. We sell brewed specialty coffee and espresso-based beverages 11 12 such as cappuccinos, lattes, mochas and espressos and various blended drinks as well as a wide variety of whole bean coffees through these company-owned and franchised locations. To complement beverage sales, we also sell light food items and other merchandise at our retail locations. In addition, we have a wholesale division that markets our products directly to businesses through office coffee systems as well as to food service establishments. Our products are also sold directly to customers through our website and through mail order. In an effort to align our fiscal year with that of Coffee People, Inc., which we acquired on July 7, 1999, we changed our fiscal year end from a fiscal year ending on the Wednesday nearest January 31 to a fiscal year ending on the Wednesday nearest June 30. References to fiscal 2000 refer to the fiscal year ended June 28, 2000, and references to fiscal 2001 refer to the fiscal year ending June 27, 2001. In connection with the change in fiscal year end, our quarterly periods were changed to include 12 weeks, except for the fourth quarter, which has approximately 16 weeks. Franchise Area Development Agreements and Franchising Activities Management's franchising strategy for the Diedrich Coffee brand has changed. Diedrich Coffee will no longer pursue large Area Development Agreements covering major US markets, but rather will seek multi-unit franchisees interested in developing a limited geographic area for the sale of Diedrich Coffee brand coffee products through a variety of non-mall retail venues. Franchising at Diedrich Coffee had been temporarily suspended from time to time since June 28, 2000 in order for us to comply with applicable federal and state franchise disclosure requirements and to update our Diedrich Coffee Uniform Franchise Offering Circular ("UFOC"). We have now resumed offering Diedrich Coffee franchises for sale based upon our updated UFOC. We currently have four franchise area development agreements in effect to develop 214 Diedrich Coffee brand coffeehouses. We anticipate the termination of two of these franchise area development agreements in the current fiscal year, which would reduce the number of franchised coffeehouses to be developed pursuant to existing area development agreements to 84. Since July 2000, the company has periodically suspended sale of new, domestic franchises at Gloria Jean's in order to update the Gloria Jean's UFOC and to reevaluate our franchising criteria. That review is now complete. Management intends to begin selling Gloria Jeans franchises again on or about February 1, 2001. The franchising strategy for the brand is to seek franchise candidates interested in either single or multi-unit development of Gloria Jean's coffee stores, kiosks and carts in mall locations. We will also continue to grow the Gloria Jean's brand internationally through franchising. Other Recent Developments On January 9, 2001, we announced our plan to relocate Gloria Jeans' administrative support center from Castroville, California to our Irvine, California headquarters to more efficiently provide support to franchisees of our Gloria Jean's subsidiary. Sourcing, roasting and distribution of coffee for all Diedrich Coffee subsidiaries will continue to be conducted at the Castroville roasting facility. Simultaneously, we restructured certain functions in our Irvine headquarters, including the elimination of a number of positions. On a cumulative basis, a total of 31 positions at the Company have been eliminated during the current fiscal year, including the position of President at Gloria Jean's. Projected annualized savings of approximately $3.1 million are expected as a result of these actions and other discretionary cost saving measures taken since the beginning of the fiscal year. At the same time, we also reserved for the cost of closing certain underperforming company operated locations in each of our four brands. There will be a third quarter charge of approximately $1.8 to $2.0 million resulting from these actions. The Company is in discussion with one or more potential equity investors. While there is no assurance that a capital raising transaction will be completed, the Company has retained the services of a national investment banking firm, Houlihan Lokey Howard & Zukin, to assist the company and to render a fairness opinion in connection with any equity investment. On January 18, 2001, we received a formal notice of deficiency from Nasdaq indicating that within the next 90 days, our stock price must maintain a $1.00 minimum bid price for ten consecutive days. If this condition is not met, Nasdaq will commence the delisting process from the Nasdaq National Market. On January 26, 2001, we received a Nasdaq Staff Determination indicating that Diedrich Coffee fails to comply with the minimum net 12 13 tangible assets requirement for continued listing set forth in Marketplace Rule 4450(a)(3), and that its securities are, therefore, subject to delisting from the Nasdaq National Market. In light of the discussions with potential equity investors, we intend to request a hearing before a Nasdaq Listing Qualifications Panel to review the Staff Determination and our plan to achieve compliance with the listing requirements. The hearing request will stay any delisting of our securities pending the Panel's decision. However, there can be no assurance that the Nasdaq Listing Qualifications Panel will grant our request for continued listing. Seasonality and Quarterly Results Our business is subject to seasonal fluctuations as well as economic trends that affect retailers in general. Historically, our net revenues have not been realized proportionately in each quarter, with net revenues being the highest during the second fiscal quarter which includes the December holiday season. Hot weather tends to reduce revenues. Quarterly results are affected by the timing of the opening of new stores, which may not occur as anticipated due to events outside our control. As a result of these factors, and of the other contingencies and risk factors described elsewhere in this report and our Annual Report on Form 10-K, the financial results for any individual quarter may not be indicative of the results that may be achieved in a full fiscal year. RESULTS OF OPERATIONS Twelve and Twenty-Four Weeks Ended December 13, 2000 Compared with the Twelve and Twenty-Four Weeks Ended December 15, 1999 Total revenues. Total revenues for the twelve weeks ended December 13, 2000 increased 1.4% to $19,400,465 from $19,133,004 for the twelve weeks ended December 15, 1999. Total revenues for the twenty-four weeks ended December 13, 2000 increased 2.4% to $36,272,415 from $35,405,529 for the twenty-four weeks ended December 15, 1999. During this most recent quarter, we derived 59.7% of total revenues from our retail coffeehouse operations. Wholesale and mail order revenue accounted for 31.3% of total revenues and franchise revenues accounted for 9.0% of total revenues. Retail revenues, which includes company operated locations under the Diedrich Coffee, Coffee People, Coffee Plantation and Gloria Jean's brands, for the twelve weeks ended December 13, 2000 increased 5.5% to $11,572,777 from $10,971,709 for the twelve weeks ended December 15, 1999. This increase was due to the opening of new coffeehouses (net of the impact of closed locations), comparable store sales increases in our California and Texas coffeehouses as well as our Gloria Jean's company stores and the transfer of the highest volume Gloria Jean's unit from franchise to corporate operations. The Company also increased menu prices by 2% in its California and Texas Diedrich Coffee locations on June 29, 2000. As of December 13, 2000, we operated 98 retail locations whereas on December 15, 1999, we operated 99 retail locations. The percentage increase (decrease) in system-wide comparable store sales for the fiscal quarter was 1.0% for the Diedrich Coffee coffeehouses, (3.8%) for the Gloria Jean's coffee stores, (9.0%) for the Coffee People coffeehouses (Oregon) and (11.3%) for the Coffee Plantation coffeehouses (Arizona). Retail revenues for the twenty-four weeks ended December 13, 2000 increased 3.8% to $22,239,026 from $21,434,847 for the twenty-four weeks ended December 15, 1999. This increase resulted primarily from the same factors cited above. The percentage increase (decrease) in system-wide comparable store sales was 0.3% for the Diedrich Coffee coffeehouses, (0.8%) for the Gloria Jean's coffee stores, (8.1%) for the Coffee People coffeehouses (Oregon), and (9.9%) for the Coffee Plantation coffeehouses (Arizona) during the twenty-four weeks ended December 13, 2000. Wholesale and other revenues of $6,074,264 for the most recent quarter did not materially change from $6,106,783 for the twelve weeks ended December 15, 1999. Wholesale and other revenues increased 0.6% to $10,802,793 in the twenty-four weeks ended December 13, 2000 from $10,741,352 for the twenty-four weeks ended December 15, 1999. For both periods increased sales from expanded wholesale office coffee service were offset by a decrease versus the applicable prior year period in the number of Gloria Jean's franchisee units, which purchase roasted coffee from Diedrich Coffee. Franchise revenue decreased to $1,753,424 for the twelve weeks ended December 13, 2000, from $2,054,512 for the twelve weeks ended December 15, 1999. Franchise revenue remained flat at $3,230,596 for the 13 14 twenty-four weeks ended December 13, 2000, compared to $3,229,330 for the twenty-four weeks ended December 15, 1999. Franchise revenue consists of initial franchise fees and royalties received on sales from each franchise location. As of December 13, 2000, we had 12 franchised Diedrich Coffee coffeehouses and 273 Gloria Jean's franchised mall coffee stores. The decrease in second quarter franchise revenue is principally due to the receipt of fewer initial franchise fees, and area development fees, as well as reduced royalties resulting from a 3.5% decrease in franchised Gloria Jean's comparable store sales versus the prior year period. Cost of Sales and Related Occupancy Costs. Cost of roasted coffee, dairy, food, paper and bar supplies and accessories (cost of sales) and rent (related occupancy costs) for the twelve weeks ended December 13, 2000 decreased to $9,479,402 from $9,635,694 for the twelve weeks ended December 15, 1999. As a percentage of total revenue, cost of sales and related occupancy costs decreased to 48.9% in the twelve weeks ended December 13, 2000 from 50.4% for the twelve weeks ended December 15, 1999. Cost of sales and related occupancy costs for the twenty-four weeks ended December 13, 2000 increased to $17,926,930 from $17,597,084 for the twenty-four weeks ended December 15, 1999. As a percentage of total revenue, cost of sales and related occupancy costs decreased to 49.4% in the twenty-four weeks ended December 13, 2000 from 49.7% for the twenty-four weeks ended December 15, 1999. The percentage decreases primarily resulted from favorable green coffee purchases and greater manufacturing efficiencies in our Castroville roasting facility, as well as the June 29, 2000 menu price increase in our company operated Diedrich Coffee coffeehouses. Store Operating Expenses. Store operating expenses increased to $4,638,169 for the twelve weeks ended December 13, 2000 from $4,422,725 for the twelve weeks ended December 15, 1999. As a percentage of total revenues, store operating expenses increased to 23.9% in the twelve weeks ended December 13, 2000 from 23.1% in the twelve weeks ended December 15, 1999. For the twenty-four weeks ended December 13, 2000, store operating expenses increased to $9,260,197 from $8,601,647 for the twenty-four weeks ended December 15, 1999. As a percentage of total revenues, store operating expenses increased to 25.5% in the twenty-four weeks ended December 13, 2000 from 24.3% in the twenty-four weeks ended December 15, 1999. These increases are primarily attributed to higher labor costs, including higher wage rates, increased staffing levels and the cost of providing a more competitive benefit package to our store level employees. Operations Management. Operations management decreased to $1,288,441 for the twelve weeks ended December 13, 2000 from $1,458,802 for the twelve weeks ended December 15, 1999. As a percentage of total revenues, operations management decreased to 6.6% for the twelve weeks ended December 13, 2000 from 7.6% for the twelve weeks ended December 15, 1999. For the twenty-four weeks ended December 13, 2000, operations management decreased to $2,587,548 from $2,694,391 for the twenty-four weeks ended December 15, 1999. As a percentage of total revenues, operations management decreased to 7.1% for the twenty-four weeks ended December 13, 2000 from 7.6% for the twenty-four weeks ended December 15, 1999. The decrease primarily results from a re-organization in operations management resulting in fewer employees versus prior year. Depreciation and Amortization. Depreciation and amortization increased to $1,065,465 for the twelve weeks ended December 13, 2000 from $832,197 for the twelve weeks ended December 15, 1999. As a percentage of total revenue, depreciation and amortization increased to 5.5% in comparison to 4.3% for the twelve weeks ended December 15, 1999. Depreciation and amortization increased to $2,104,402 for the twenty-four weeks ended December 13, 2000 from $1,639,076 for the twenty-four weeks ended December 15, 1999. As a percentage of total revenue, depreciation and amortization increased to 5.8% for the twenty-four weeks ended December 13, 2000 in comparison to 4.6% for the twenty-four weeks ended December 15, 1999. The increase is primarily attributable to the depreciation expense of six new coffeehouses that opened during the later part of fiscal year 2000 and newly acquired equipment in our roasting facility. General and Administrative Expenses. General and administrative expenses increased to $2,365,393 for the twelve weeks ended December 13, 2000 from $1,897,111 for the twelve weeks ended December 15, 1999. As a percentage of total revenue, general and administrative expenses increased to 12.2% from 9.9%. For the twenty-four weeks ended December 13, 2000, general and administrative expenses increased to $4,592,526 from $4,148,939 for the twenty-four weeks ended December 15, 2000. As a percentage of net revenues, general and administrative expenses increased to 12.7% for the twenty-four weeks ended December 13, 2000 from 11.7% for the twenty-four weeks ended December 15, 1999. In both periods versus prior year, the increase in general and administrative expense resulted primarily from the increased infrastructure that was put in place to support our previous franchising strategy. 14 15 Interest Expense. Interest expense increased to $357,456 for the twelve weeks ended December 13, 2000 from $327,265 for the twelve weeks ended December 15, 1999. For the twenty-four weeks ended December 13, 2000, interest expense increased to $715,659 from $614,154 for the twenty-four weeks ended December 15, 1999. This increase is primarily attributable to an 85 basis point increase on our term loan interest rate. As of December 13, 2000 the company was paying 9.88% on its term loan compared to 9.03% on December 15, 1999. LIQUIDITY AND CAPITAL RESOURCES We have funded our capital requirements in recent years principally through public and private placements of our common stock and long-term debt. We had a working capital deficit of $5,531,171 as of December 13, 2000 compared to working capital deficit of $4,216,000 as of June 28, 2000. Cash (used in) or provided from operating activities for the twenty-four weeks ended December 13, 2000 totaled $(508,553) as compared to $948,996 for the twenty-four weeks ended December 15, 1999. Net cash used in investing activities for the twenty-four weeks ended December 13, 2000 totaled $570,536, which was used for property and equipment expenditures. Net cash used in financing activities for the twenty-four weeks ended December 13, 2000 totaled $770,190 which consisted of repayment of long-term debt and capital leases. Net cash used in investing activities for the twenty-four weeks ended December 15, 1999 totaled $24,069,763 which was primarily used for the acquisition of Coffee People. Net cash provided by financing activities for the twenty-four weeks ended December 15, 1999 totaled $28,855,114 which consisted of proceeds from the issuance of common stock and long-term debt, reduced by the $8,099,000 repayment of long-term debt and capital lease obligations. On July 7, 1999, we completed a public offering of 4,930,000 shares (including an over-allotment option). All of the shares of common stock were sold on behalf of Diedrich Coffee, of which 330,000 shares of common stock were sold pursuant to the exercise of the underwriters' over-allotment option. The net proceeds of the offering to Diedrich Coffee, after deducting approximately $4.1 million in underwriters' commissions and related expenses, were approximately $25.4 million. On July 7, 1999, we entered into a Credit Agreement with BankBoston, N.A. (subsequently merged into Fleet National Bank) secured by pledges of all of Diedrich Coffee's assets and its subsidiaries' stock and which provided for a $12 million term loan and a $3 million revolving credit facility. We used the proceeds of the term loan to repay existing indebtedness and to pay expenses related to the acquisition of Coffee People. The term loan provided for principal repayment based upon a five year amortization, with quarterly principal payments of $666,667 and quarterly interest payments based upon a formula described below. We established the revolving credit facility for future flexibility to remodel existing company-owned coffeehouses, develop new company coffeehouses, and for general corporate purposes. We have not drawn down any borrowings under the revolving credit facility since it was established, although it presently has $293,000 of outstanding Letters of Credit backed by the revolving credit facility. Amounts outstanding under the Credit Agreement bear interest, at the Company's option, at Fleet's base rate plus 1.25% or an adjusted Eurodollar rate plus 3.0%. On September 26, 2000, we entered into a First Amendment to Credit Agreement with Fleet National Bank to amend certain terms of the original Credit Agreement. The First Amendment to Credit Agreement provides, among other things, for a significant reduction in required minimum principal amortization payments going forward, an acceleration in the maturity date of all amounts owed under the Credit Agreement, an agreement between the parties as to certain assets intended to be sold as well as the allocation of future net asset sale proceeds between the Company and the bank, the introduction of an additional event of default under the Agreement, a reduction in the overall amount of the revolving credit facility and certain new restrictions governing use of the facility, and a modification of the financial covenants and the Company's ability to obtain new third party debt going forward. Specifically, under the terms of the First Amendment to Credit Agreement, no further scheduled principal payments on the term loan are required from August 1, 2000 until January 31, 2001. The Company must then pay scheduled principal payments of $25,000 per month beginning February 1, 2001, which increase to $100,000 per month beginning July 1, 2001 until all amounts owed under the Credit Agreement are repaid. The First Amendment to Credit Agreement accelerates the maturity date of all remaining amounts owed under the credit Agreement to 15 16 September 1, 2002. In addition, the Company and the bank identified certain assets that could be sold without interfering with the Company's growth strategy, including two pieces of owned real property under existing company retail locations, which are expected to be leased back from the buyer, a third parcel of owned real property, presently undeveloped, and certain company operated coffeehouses outside of its core southern California market that could be refranchised. Under the terms of the First Amendment to Credit Agreement, the bank is to receive 50% of the net proceeds from any such asset sales. A sale of one of the two owned properties referred to above was completed in late December 2000. The net proceeds received totaled $415,000, of which 50% was paid to the bank, resulting in a $208,000 principal repayment to the bank in early January 2001. The interest payments under the original Credit Agreement remain unchanged under the First Amendment to Credit Agreement. The Company made its scheduled quarterly interest payment in late December 2000. The amendment also introduces an additional event of default under the Agreement. The amendment specifies that a materially adverse change in the financial condition of the Company (or any of our subsidiaries), as determined by the bank in its sole and exclusive discretion, is defined as an event of default. Under any event of default, the bank may declare all amounts owed immediately due and payable. Additional changes under the terms of the First Amendment to Credit Agreement include a reduction in the revolving credit facility, which the Company had previously been unable to access because of the covenant defaults, from a $3,000,000 limit to $1,293,000, and a restriction that the reduced facility be used only to back up existing and future standby Letters of Credit. The First Amendment to Credit Agreement preserves the Company's ability to obtain third party financing for capital projects and maintenance capital, and increases its flexibility to obtain subordinated debt as a source of additional working capital. Under the First Amendment to Credit Agreement the bank waived the previous financial covenant defaults, and agreed to new financial covenant ratios going forward based upon updated financial information and projections prepared by the Company. In addition to resetting such ratios in the financial covenants as contained in the original Credit Agreement, the parties agreed to a new covenant under the First Amendment to Credit Agreement which commits the Company to achieving certain minimum levels of cumulative principal repayments in addition to amounts already paid to date in fiscal 2001 or reflected in the new go forward minimum monthly principal payment obligations discussed above: $283,000 by March 31, 2001; $708,000 by June 30, 2001; and $1,619,900 by September 30, 2001. Such incremental principal repayments (above the scheduled minimum monthly amounts described above) are anticipated to be generated primarily from the net proceeds to be paid to the bank from future asset sales, the issuance of new debt or equity, or a combination of these sources. Of the $283,000 due by March 2001, $208,000 has already been paid as a result of the asset sale described above. Management believes that cash from operations and asset sales will be sufficient to satisfy our working capital needs at the anticipated operating levels, including its obligations under its Credit Agreement modified as described above, for the next twelve months. New Accounting Pronouncements. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin 101 ("SAB101") "Revenue Recognition in Financial Statements." This Staff Accounting Bulletin summarizes certain of the staff views in applying generally accepted accounting principles to revenue recognition in financial statements. SAB101, as amended, is effective for the fourth fiscal quarter of the fiscal years beginning after December 15, 1999. We do not expect the adoption of SAB101 to have a material impact on our consolidated results of operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK DERIVATIVE INSTRUMENTS We have not used derivative financial instruments for any purpose, including hedging or mitigating interest rate risk. MARKET RISK We did not invest in market risk sensitive instruments in the twelve weeks ended December 13, 2000. From time to time, however, we enter into agreements to purchase green coffee in the future at prices to be 16 17 determined within two to twelve months of the time of actual purchase. At December 13, 2000 these commitments totaled $2,054,000. These agreements are tied to specific market prices (defined by both the origin of the coffee and the month of delivery) but we have significant flexibility in selecting the date of the market price to be used in each contract. Our market risk exposure with regard to financial instruments outstanding as of December 13, 2000 was to changes in an adjusted Eurodollar rate. We borrowed $12 million on July 7, 1999 in connection with our acquisition of Coffee People, which amount bears interest at our option at Fleet's base rate plus 1.25%, or an adjusted Eurodollar rate plus 3.0%. We may convert the interest rate from the Fleet base rate to the adjusted Eurodollar rate at anytime with 3 day's notice. We may convert the interest rate from the adjusted Eurodollar rate to the Fleet base rate at the end of each calendar quarter. At December 13, 2000 the effective interest rate was 9.88%. At December 13, 2000, a hypothetical 100 basis point increase in the rate would result in additional interest expense of $100,000 on an annualized basis. The estimated increase is based upon the outstanding balance of long term debt at December 13, 2000. Substantially all of our business is transacted in U.S. dollars. Accordingly, foreign exchange fluctuations have never had a significant impact on us and are not expected to in the foreseeable future. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In the ordinary course of its business, we may become involved in legal proceedings from time to time. During the twenty-four week period ending December 13, 2000, we were not a party to any material legal proceedings. ITEM 5. OTHER INFORMATION MINIMUM ADVANCE NOTICE OF STOCKHOLDER PROPOSALS Diedrich Coffee stockholders are advised that we must be notified by June 27, 2001 (120 days prior to the month and day of mailing the last year's proxy statement) of any proposal or solicitation that any stockholder intends to present at the next annual meeting of stockholders and which the stockholder has not sought to have included in our proxy statement for the meeting in accordance with Rule 14a-8 under the Securities Exchange Act of 1934. If a proponent fails to notify us before the required deadline, management proxies will be allowed to use their discretionary voting authority when the proposal is raised at the annual meeting, without any discussion of the matter in the proxy statement. 17 18 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS Set forth below is a list of the exhibits included as part of this Quarterly Report.
EXHIBIT NO. DESCRIPTION ----------- ----------- 2.1 Agreement and Plan of Merger dated as of March 16, 1999, by and among Diedrich Coffee, CP Acquisition Corp., a wholly owned subsidiary of Diedrich Coffee, and Coffee People(1) 3.1 Certificate of Incorporation of the Company(2) 3.2 Bylaws of the Company(2) 4.1 Purchase Agreement for Series A Preferred Stock dated as of December 11, 1992 by and among Diedrich Coffee, Martin R. Diedrich, Donald M. Holly, SNV Enterprises and D.C.H., L.P.(2) 4.2 Purchase Agreement for Series B Preferred Stock dated as of June 29, 1995 by and among Diedrich Coffee, Martin R. Diedrich, Steven A. Lupinacci, Redwood Enterprises VII, L.P. and Diedrich Partners I, L.P.(2) 4.3 Specimen Stock Certificate(2) 4.4 Form of Conversion Agreement in the connection with the conversion of Series A and Series B Preferred Stock into Common Stock(2) 4.5 Form of Lock-up Letter Agreement among The Second Cup, Ltd. and Diedrich Coffee, Inc.(3) 4.6 Voting Agreement and Irrevocable Proxy dated as of March 16, 1999 by and among Diedrich Coffee, Inc., D.C.H., L.P., Peter Churm, Martin R. Diedrich, Lawrence Goelman, Paul C. Heeschen, John E. Martin, Timothy J. Ryan, and Second Cup USA Holdings Ltd.(3) 10.1 Form of Indemnification Agreement(2) 10.2 Amended and Restated Diedrich Coffee 1996 Stock Incentive Plan(4) 10.3 Diedrich Coffee 1996 Non-Employee Directors Stock Option Plan(2) 10.4 Agreement of Sale dated as of February 23, 1996 by and among Diedrich Coffee (as purchaser) and Brothers Coffee Bars, Inc. and Brothers Gourmet Coffees, Inc. (as sellers)(2)
18 19
EXHIBIT NO. DESCRIPTION ----------- ----------- 10.5 Letter agreement by and between the Company and John E. Martin appointing Mr. Martin Chairman of the Board, dated as of November 17, 1997(5) 10.6 Stock Option Plan and Agreement by and between the company and John E. Martin granting Mr. Martin the option to purchase up to 850,000 shares of the Common Stock of the Company, dated as of November 17, 1997(5) 10.7 Common Stock Purchase Agreement by and between the company and John E. Martin under which Mr. Martin agrees to purchase 333,333 shares of the Common Stock of the Company, dated as of November 17, 1997(5) 10.8 Employment Agreement by and between the Company and Timothy J. Ryan retaining Mr. Ryan as Chief Executive Officer, dated as of November 17, 1997(5) 10.9 Stock Option Plan and Agreement by and between the company and Timothy J. Ryan granting Mr. Ryan up to 600,000 shares of the Common Stock of the Company, dated as of November 17, 1997(5) 10.10 Common Stock Purchase Agreement by and between the Company and Timothy J. Ryan under which Mr. Ryan agrees to purchase 16,667 shares of the Common Stock of the Company, dated as of November 17, 1997(5) 10.11 Form of Warrant Agreement made in favor of Nuvrty, Inc., the Ocean Trust and the Grandview Trust(6) 10.12 Form of Common Stock and Option Purchase Agreement with Franchise Mortgage Acceptance Company dated as of April 3, 1998(7) 10.13 Employment Agreement with Catherine Saar dated June 11, 1998(8) 10.14 Form of Franchise Agreement(9) 10.15 Form of Area Development Agreement(9) 10.16 Employment Agreement with Martin R. Diedrich dated June 29, 1998(3) 10.17 Credit Agreement, dated as of July 7, 1999, by and among BankBoston, N.A., Diedrich Coffee and its subsidiaries(10)
19 20
EXHIBIT NO. DESCRIPTION ----------- ----------- 10.18 Security Agreement, dated as of July 7, 1999, by and among BankBoston, N.A., Diedrich Coffee and its subsidiaries(10) 10.19 Securities Pledge Agreement, dated as of July 7, 1999, by and among BankBoston, N.A., Diedrich Coffee and its subsidiaries(10) 10.20 Trademark Security Agreement, dated as of July 7, 1999, by and among BankBoston, N.A., Diedrich Coffee and its subsidiaries(10) 10.21 Form of Term Note made in favor of BankBoston, N.A.(10) 10.22 Form of Revolving Note made in favor of BankBoston, N.A.(10) 10.23 Employment Agreement with Matt McGuinness dated effective March 13, 2000(11) 10.24 Letter Agreement re: employment with Greg MacIsaac dated February 25, 2000(11) 10.25 First Amendment to Credit Agreement dated as of September 26, 2000(11) 10.26 Letter Agreement re: employment with J. Michael Jenkins dated September 22, 2000(11) 10.27 Letter Agreement re: employment with Carl Mount dated October 29, 1999(12) 10.28 Letter Agreement re: employment with Edward A. Apffel dated May 25, 2000(12) 10.29 Letter Agreement re: employment with Lisa Steere dated June 12, 2000(12) 10.30 Diedrich Coffee, Inc. 2000 Non-Employee Directors Stock Option Plan(13) 10.31 Stock Option Plan and Agreement with J. Michael Jenkins, dated September 22, 2000* 10.32 Diedrich Coffee, Inc. 2000 Equity Incentive Plan* 11.1 Statement regarding computation of per share earnings* 21.1 List of Subsidiaries (11)
- ------------ * Filed with this Form 10-Q (1) Previously filed as Appendix A to Diedrich Coffee's Registration Statement on Form S-4, filed with the Securities and Exchange Commission on April 23, 1999. 20 21 (2) Previously filed as an exhibit to Diedrich Coffee's Registration Statement on Form S-1 (No. 333-08633), as amended, as declared effective by the Securities and Exchange Commission on September 11, 1996. (3) Previously filed as an exhibit to Diedrich Coffee's Registration Statement on Form S-4, filed with the Securities and Exchange Commission on April 23, 1999. (4) Previously filed as an exhibit to Diedrich Coffee's Quarterly Report on Form 10-Q for the period ended September 22, 1999, filed with the Securities and Exchange Commission on November 5, 1999. (5) Previously filed as an exhibit to Diedrich Coffee's Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 25, 1997. (6) Previously filed as an exhibit to Diedrich Coffee's Quarterly Report on Form 10-Q for the period ended October 29, 1997, filed with the Securities and Exchange Commission on December 11, 1997. (7) Previously filed as an exhibit to Diedrich Coffee's Annual Report on Form 10-K for the fiscal year ended January 28, 1998. (8) Previously filed as an exhibit to Diedrich Coffee's Quarterly Report on Form 10-Q for the period ended July 29, 1998, filed with the Securities and Exchange Commission on September 10, 1998. (9) Previously filed as an exhibit to Diedrich Coffee's Quarterly Report on Form 10-Q for the period ended April 28, 1999, filed with the Securities and Exchange Commission on December 11, 1998. (10) Incorporated by reference to Diedrich Coffee's Transition Report on Form 10-Q for the period from January 28, 1999 to June 30, 1999, filed with the Securities and Exchange Commission on August 16, 1999. (11) Previously filed as an exhibit to Diedrich Coffee's annual report on Form 10-K for the fiscal year ended June 28, 2000. (12) Previously filed as an exhibit to Diedrich Coffee's Report on Form 10-Q for the period ended September 20, 2000, filed with the Securities and Exchange Commission on November 6, 2000. (13) Previously filed as an exhibit to Diedrich Coffee's Registration Statement on Form S-8, filed with the Securities and Exchange Commission on November 21, 2000. (b) REPORTS ON FORM 8-K. None. 21 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: January 29, 2001 DIEDRICH COFFEE, INC. /s/ J. Michael Jenkins ------------------------------------- J. Michael Jenkins President and Chief Executive Officer (Principal Executive Officer) /s/ Matthew C. McGuinness ------------------------------------- Matthew C. McGuinness Executive Vice President and Chief Financial Officer (Principal Financial Officer) 22 23 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION ----------- ----------- 2.1 Agreement and Plan of Merger dated as of March 16, 1999, by and among Diedrich Coffee, CP Acquisition Corp., a wholly owned subsidiary of Diedrich Coffee, and Coffee People(1) 3.1 Certificate of Incorporation of the Company(2) 3.2 Bylaws of the Company(2) 4.1 Purchase Agreement for Series A Preferred Stock dated as of December 11, 1992 by and among Diedrich Coffee, Martin R. Diedrich, Donald M. Holly, SNV Enterprises and D.C.H., L.P.(2) 4.2 Purchase Agreement for Series B Preferred Stock dated as of June 29, 1995 by and among Diedrich Coffee, Martin R. Diedrich, Steven A. Lupinacci, Redwood Enterprises VII, L.P. and Diedrich Partners I, L.P.(2) 4.3 Specimen Stock Certificate(2) 4.4 Form of Conversion Agreement in the connection with the conversion of Series A and Series B Preferred Stock into Common Stock(2) 4.5 Form of Lock-up Letter Agreement among The Second Cup, Ltd. and Diedrich Coffee, Inc.(3) 4.6 Voting Agreement and Irrevocable Proxy dated as of March 16, 1999 by and among Diedrich Coffee, Inc., D.C.H., L.P., Peter Churm, Martin R. Diedrich, Lawrence Goelman, Paul C. Heeschen, John E. Martin, Timothy J. Ryan, and Second Cup USA Holdings Ltd.(3) 10.1 Form of Indemnification Agreement(2) 10.2 Amended and Restated Diedrich Coffee 1996 Stock Incentive Plan(4) 10.3 Diedrich Coffee 1996 Non-Employee Directors Stock Option Plan(2) 10.4 Agreement of Sale dated as of February 23, 1996 by and among Diedrich Coffee (as purchaser) and Brothers Coffee Bars, Inc. and Brothers Gourmet Coffees, Inc. (as sellers)(2)
24
EXHIBIT NO. DESCRIPTION ----------- ----------- 10.5 Letter agreement by and between the Company and John E. Martin appointing Mr. Martin Chairman of the Board, dated as of November 17, 1997(5) 10.6 Stock Option Plan and Agreement by and between the company and John E. Martin granting Mr. Martin the option to purchase up to 850,000 shares of the Common Stock of the Company, dated as of November 17, 1997(5) 10.7 Common Stock Purchase Agreement by and between the company and John E. Martin under which Mr. Martin agrees to purchase 333,333 shares of the Common Stock of the Company, dated as of November 17, 1997(5) 10.8 Employment Agreement by and between the Company and Timothy J. Ryan retaining Mr. Ryan as Chief Executive Officer, dated as of November 17, 1997(5) 10.9 Stock Option Plan and Agreement by and between the company and Timothy J. Ryan granting Mr. Ryan up to 600,000 shares of the Common Stock of the Company, dated as of November 17, 1997(5) 10.10 Common Stock Purchase Agreement by and between the Company and Timothy J. Ryan under which Mr. Ryan agrees to purchase 16,667 shares of the Common Stock of the Company, dated as of November 17, 1997(5) 10.11 Form of Warrant Agreement made in favor of Nuvrty, Inc., the Ocean Trust and the Grandview Trust(6) 10.12 Form of Common Stock and Option Purchase Agreement with Franchise Mortgage Acceptance Company dated as of April 3, 1998(7) 10.13 Employment Agreement with Catherine Saar dated June 11, 1998(8) 10.14 Form of Franchise Agreement(9) 10.15 Form of Area Development Agreement(9) 10.16 Employment Agreement with Martin R. Diedrich dated June 29, 1998(3) 10.17 Credit Agreement, dated as of July 7, 1999, by and among BankBoston, N.A., Diedrich Coffee and its subsidiaries(10)
25
EXHIBIT NO. DESCRIPTION ----------- ----------- 10.18 Security Agreement, dated as of July 7, 1999, by and among BankBoston, N.A., Diedrich Coffee and its subsidiaries(10) 10.19 Securities Pledge Agreement, dated as of July 7, 1999, by and among BankBoston, N.A., Diedrich Coffee and its subsidiaries(10) 10.20 Trademark Security Agreement, dated as of July 7, 1999, by and among BankBoston, N.A., Diedrich Coffee and its subsidiaries(10) 10.21 Form of Term Note made in favor of BankBoston, N.A.(10) 10.22 Form of Revolving Note made in favor of BankBoston, N.A.(10) 10.23 Employment Agreement with Matt McGuinness dated effective March 13, 2000(11) 10.24 Letter Agreement re: employment with Greg MacIsaac dated February 25, 2000(11) 10.25 First Amendment to Credit Agreement dated as of September 26, 2000(11) 10.26 Letter Agreement re: employment with J. Michael Jenkins dated September 22, 2000(11) 10.27 Letter Agreement re: employment with Carl Mount dated October 29, 1999(12) 10.28 Letter Agreement re: employment with Edward A. Apffel dated May 25, 2000(12) 10.29 Letter Agreement re: employment with Lisa Steere dated June 12, 2000(12) 10.30 Diedrich Coffee, Inc. 2000 Non-Employee Directors Stock Option Plan(13) 10.31 Stock Option Plan and Agreement with J. Michael Jenkins, dated September 22, 2000* 10.32 Diedrich Coffee, Inc. 2000 Equity Incentive Plan* 11.1 Statement regarding computation of per share earnings* 21.1 List of Subsidiaries (11)
- ------------ * Filed with this Form 10-Q (1) Previously filed as Appendix A to Diedrich Coffee's Registration Statement on Form S-4, filed with the Securities and Exchange Commission on April 23, 1999. 26 (2) Previously filed as an exhibit to Diedrich Coffee's Registration Statement on Form S-1 (No. 333-08633), as amended, as declared effective by the Securities and Exchange Commission on September 11, 1996. (3) Previously filed as an exhibit to Diedrich Coffee's Registration Statement on Form S-4, filed with the Securities and Exchange Commission on April 23, 1999. (4) Previously filed as an exhibit to Diedrich Coffee's Quarterly Report on Form 10-Q for the period ended September 22, 1999, filed with the Securities and Exchange Commission on November 5, 1999. (5) Previously filed as an exhibit to Diedrich Coffee's Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 25, 1997. (6) Previously filed as an exhibit to Diedrich Coffee's Quarterly Report on Form 10-Q for the period ended October 29, 1997, filed with the Securities and Exchange Commission on December 11, 1997. (7) Previously filed as an exhibit to Diedrich Coffee's Annual Report on Form 10-K for the fiscal year ended January 28, 1998. (8) Previously filed as an exhibit to Diedrich Coffee's Quarterly Report on Form 10-Q for the period ended July 29, 1998, filed with the Securities and Exchange Commission on September 10, 1998. (9) Previously filed as an exhibit to Diedrich Coffee's Quarterly Report on Form 10-Q for the period ended April 28, 1999, filed with the Securities and Exchange Commission on December 11, 1998. (10) Incorporated by reference to Diedrich Coffee's Transition Report on Form 10-Q for the period from January 28, 1999 to June 30, 1999, filed with the Securities and Exchange Commission on August 16, 1999. (11) Previously filed as an exhibit to Diedrich Coffee's annual report on Form 10-K for the fiscal year ended June 28, 2000. (12) Previously filed as an exhibit to Diedrich Coffee's Report on Form 10-Q for the period ended September 20, 2000, filed with the Securities and Exchange Commission on November 6, 2000. (13) Previously filed as an exhibit to Diedrich Coffee's Registration Statement on Form S-8, filed with the Securities and Exchange Commission on November 21, 2000. EX-10.31 2 a68925ex10-31.txt EXHIBIT 10.31 1 EXHIBIT 10.31 STOCK OPTION PLAN AND AGREEMENT WITH J. MICHAEL JENKINS This Stock Option Plan and Agreement (this "AGREEMENT"), is made effective as of September 22, 2000 (the "EFFECTIVE DATE"), by and between Diedrich Coffee, Inc., a Delaware corporation (the "COMPANY") and J. Michael Jenkins (the "GRANTEE"). RECITALS A. The Company has agreed to employ Grantee under terms and conditions set forth in that certain letter agreement dated September 22, 2000 (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 500,000 shares of Company common stock, $0.01 par value per share (the "COMMON STOCK"), as of the Effective Date, 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) "CHANGE OF CONTROL" means (i) any merger or consolidation in which the Company is not the surviving entity (or survives only as a subsidiary of another entity whose shareholders did not own all or substantially all of the Company's Common Stock immediately prior to such transaction); (ii) the sale of all or substantially all of the Company's assets to any other person or entity (other than a wholly-owned subsidiary); (iii) the acquisition of beneficial ownership or control of (including, without limitation, power to vote) more than 50% of the outstanding shares of Common Stock by any person or entity (including a "group" as defined by or under Section 13(d)(3) of the Exchange Act); (iv) the dissolution or liquidation of the Company; or (v) a contested election of directors, as a result of which or in connection with which the persons who were directors of the Company before such election or their nominees cease to constitute a majority of the Board. (c) "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. A-1 2 (d) "COMPENSATION COMMITTEE" means the Compensation Committee of the Board. (e) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (f) "EXERCISE DATE" means any date on which Grantee exercises Options. (g) "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. (h) "EXERCISE SHARES" means those shares of Common Stock with respect to which Options are being exercised. (i) "OPTIONS" means non-qualified 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 September 22, 2000, Options to purchase up to 500,000 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 seek approval of the terms of this Agreement and the grant of the Options hereunder from the Company's stockholders at the Company's next annual meeting. 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) The Options will become exercisable in four equal installments on each of the first four anniversary dates of the Effective Date, at an option exercise price of $1.75 per share. (c) Notwithstanding the foregoing, the Options will fully vest and become immediately exercisable upon a Change of Control; provided, however, that such Options will terminate and become unexercisable on the earlier of the Expiration Date or the first (1st) anniversary of the date of the Change of Control. 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 tenth (10th) anniversary of the Effective Date (the "EXPIRATION DATE"). (b) If Grantee's employment with the Company is terminated by the Company for Cause (as such term is defined in the Employment Agreement) prior to the Expiration Date or by A-2 3 the Grantee for any reason prior to the Expiration Date: (i) all Options that have not otherwise become exercisable as of the date of the termination of Grantee's 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 the termination of Grantee's employment. (c) If Grantee's 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 the termination of Grantee's employment will continue to become exercisable pursuant to Section 3; provided, however, that such Options will terminate and become unexercisable on the earlier of the Expiration Date or the first (1st) anniversary of the date of the termination of Grantee's employment; and (ii) all Options that have become exercisable as of the date of the termination of Grantee's employment will terminate and become unexercisable on the earlier of the Expiration Date or the first (1st) anniversary of the date of the termination of Grantee's employment. 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 this 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 A-3 4 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. A-4 5 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. IN WITNESS WHEREOF, the Company and Grantee have executed this Agreement as of the date first above written. DIEDRICH COFFEE, INC., a Delaware corporation /s/ Matthew C. McGuinness ------------------------------------------------- MATTHEW C. MCGUINNESS Senior Vice President and Chief Financial Officer THE GRANTEE /s/ J. Michael Jenkins ------------------------------------------------- J. MICHAEL JENKINS A-5 EX-10.32 3 a68925ex10-32.txt EXHIBIT 10.32 1 EXHIBIT 10.32 DIEDRICH COFFEE, INC. 2000 EQUITY INCENTIVE PLAN 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 750,000, 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 B-1 2 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 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. B-2 3 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 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 B-3 4 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 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. B-4 5 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 B-5 6 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 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 B-6 7 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 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. B-7 8 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 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 B-8 9 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 B-9 10 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 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. B-10 11 (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. 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 B-11 12 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. 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 B-12 13 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. B-13 14 (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. B-14 15 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 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. B-15 16 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. (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. B-16 17 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, B-17 18 appreciation, dividend yield or other features attributable to a specified number of shares of Common Stock or other securities of the Company. 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 10,000 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 5,000 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. B-18 19 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 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 B-19 20 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 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. B-20 21 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 B-21 22 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 (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. B-22 23 "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. 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 B-23 24 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 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 B-24 25 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. B-25 26 "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. B-26 EX-11.1 4 a68925ex11-1.txt EXHIBIT 11.1 1 EXHIBIT 11.1 DIEDRICH COFFEE, INC. COMPUTATION OF PER SHARE EARNINGS
Twelve Weeks Twelve Weeks Twenty-Four Weeks Twenty Four Weeks Ended Ended Ended Ended December 13, 2000 December 15, 1999 December 13, 2000 December 15, 1999 ----------------- ----------------- ----------------- ----------------- BASIC EARNINGS PER SHARE Net income (loss) .................. $ 163,577 $ 599,028 $ (948,887) $ 209,537 ============ ============ ============ =========== Weighted average number of shares outstanding during the period ...... 12,645,356 12,615,601 12,645,356 12,319,034 ============ ============ ============ =========== Basic net income (loss) per share .. $ 0.01 $ 0.05 $ (0.08) $ 0.02 ============ ============ ============ =========== DILUTED EARNINGS PER SHARE Diluted net income (loss) .......... $ 163,577 $ 599,028 $ (948,887) $ 209,537 ============ ============ ============ =========== Weighted average number of shares outstanding during the period ...... 12,645,356 13,266,565 12,645,356 13,052,131 Incremental shares attributable to the exercise of outstanding options -- -- -- -- ------------ ------------ ------------ ----------- Total shares ................. 12,645,356 13,266,565 12,645,356 13,052,131 ============ ============ ============ =========== Diluted net income (loss) per share $ 0.01 $ 0.05 $ (0.08) $ 0.02 ============ ============ ============ ===========
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