0001095811-01-505824.txt : 20011030 0001095811-01-505824.hdr.sgml : 20011030 ACCESSION NUMBER: 0001095811-01-505824 CONFORMED SUBMISSION TYPE: DEF 14A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20011204 FILED AS OF DATE: 20011025 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: DEF 14A SEC ACT: 1934 Act SEC FILE NUMBER: 000-21203 FILM NUMBER: 1766739 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 DEF 14A 1 a76319ddef14a.txt DEFINITIVE PROXY STATEMENT SCHEDULE 14A (RULE 14a-101) INFORMATION REQUIRED IN PROXY STATEMENT SCHEDULE 14A INFORMATION PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934 Filed by the Registrant [X] Filed by a Party other than the Registrant [ ] Check the appropriate box: [ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) [X] Definitive Proxy Statement [ ] Definitive Additional Materials [ ] Soliciting Material Under Rule 14a-12 DIEDRICH COFFEE, INC. -------------------------------------------------------------------------------- (Name of Registrant as Specified in Its Charter) N/A -------------------------------------------------------------------------------- (Name of Person(s) Filing Proxy Statement, if Other Than the Registrant) Payment of Filing Fee (Check the appropriate box): [X] No fee required. [ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. (1) Title of each class of securities to which transaction applies: -------------------------------------------------------------------------------- (2) Aggregate number of securities to which transaction applies: -------------------------------------------------------------------------------- (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): -------------------------------------------------------------------------------- (4) Proposed maximum aggregate value of transaction: -------------------------------------------------------------------------------- (5) Total fee paid: -------------------------------------------------------------------------------- [ ] Fee paid previously with preliminary materials: -------------------------------------------------------------------------------- [ ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing. (1) Amount previously paid: -------------------------------------------------------------------------------- (2) Form, Schedule or Registration Statement no.: -------------------------------------------------------------------------------- (3) Filing Party: -------------------------------------------------------------------------------- (4) Date Filed: -------------------------------------------------------------------------------- Diedrich LogoTM DIEDRICH COFFEE, INC. 2144 MICHELSON DRIVE IRVINE, CA 92612 ------------------------ NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON DECEMBER 4, 2001 Dear Diedrich Coffee Stockholder: On Tuesday, December 4, 2001, Diedrich Coffee, Inc. will hold its annual meeting of stockholders at the Irvine Marriott, 18000 Von Karman Avenue, Irvine, California 92612. The meeting will begin at 10:00 a.m. local time. We will serve our premium coffee. Only stockholders of record at the close of business on October 26, 2001 can vote at this meeting or any adjournments that may take place. At the meeting we will: 1. Elect a board of directors to serve until the next annual meeting of stockholders. 2. Vote on a proposal to amend the Diedrich Coffee, Inc. 2000 Equity Incentive Plan to increase by 250,000 the total number of shares of our common stock that may be issued under the plan. 3. Ratify the selection of KPMG LLP as our independent auditors for the current fiscal year ending June 26, 2002. We will also attend to business properly presented at the meeting and any adjournments or postponements of the meeting. The foregoing items of business, including the nominees for directors, are more fully described in the proxy statement that is attached and a part of this notice. The board of directors unanimously recommends that you vote for all of the proposals. By order of the board of directors, Paul C. Heeschen Chairman of the Board Irvine, California October 25, 2001 YOUR VOTE IS IMPORTANT WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING IN PERSON, YOU ARE REQUESTED TO COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE IN ORDER TO ENSURE YOUR REPRESENTATION AT THE MEETING. A RETURN ENVELOPE (POSTAGE PREPAID IF MAILED IN THE UNITED STATES) IS ENCLOSED FOR THAT PURPOSE. IF YOU ATTEND THE ANNUAL MEETING, YOU MAY REVOKE YOUR PROXY AT ANY TIME BEFORE IT IS VOTED AND VOTE IN PERSON IF YOU WISH, EVEN IF YOU HAVE PREVIOUSLY RETURNED YOUR PROXY CARD. PLEASE NOTE, HOWEVER, THAT IF YOUR SHARES ARE HELD OF RECORD BY A BROKER, BANK OR OTHER NOMINEE AND YOU WISH TO VOTE AT THE MEETING, YOU MUST OBTAIN FROM THE RECORD HOLDER A PROXY ISSUED IN YOUR NAME. DIEDRICH COFFEE, INC. 2144 MICHELSON DRIVE IRVINE, CA 92612 ------------------------ PROXY STATEMENT ANNUAL MEETING OF STOCKHOLDERS DECEMBER 4, 2001 ------------------------ INTRODUCTION This proxy statement is furnished in connection with the solicitation on behalf of the board of directors of Diedrich Coffee, Inc., a Delaware corporation, of proxies for use at the annual meeting of stockholders to be held on December 4, 2001 at 10:00 a.m. local time, or at any adjournment of postponement of the meeting. At the meeting we will vote on the matters described in this proxy statement and in the accompanying notice. The annual meeting will be held at the Irvine Marriott, 18000 Von Karman Avenue, Irvine, California 92612. Diedrich Coffee intends to mail this proxy statement and accompanying proxy card on or about November 2, 2001 to all stockholders entitled to vote at the annual meeting. INFORMATION REGARDING VOTING AT THE ANNUAL MEETING PROXIES Our stockholders should complete and return the accompanying form of proxy regardless of whether they will attend the annual meeting in person. Our stockholders may revoke their proxies at any time before they are exercised by: - giving our Corporate Secretary written notice of revocation; - giving our Corporate Secretary a properly executed proxy of a later date; or - attending our annual meeting and voting in person. Written notices of revocation and other communications with respect to the revocation of our proxies should be addressed to Diedrich Coffee, Inc., 2144 Michelson Drive, Irvine, California 92612, Attention: Corporate Secretary. All shares represented by valid proxies received and not revoked before they are exercised will be voted in the manner specified in the proxies. If nothing is specified, the proxies will be voted in favor of each of the proposals. Diedrich Coffee's board of directors is unaware of any other matters that may be presented for action at our annual meeting. If other matters do properly come before our annual meeting, however, it is intended that shares represented by proxies will be voted in the discretion of the proxy holders. SOLICITATION OF PROXIES We will pay the entire cost of soliciting proxies. In addition to soliciting the proxies by mail, we will request banks, brokers and other record holders to send proxies and proxy materials to the beneficial owners of Diedrich Coffee common stock and secure their voting instructions, if necessary. We will reimburse such record holders for their reasonable expenses in performing these tasks. If necessary, we may use several of our regular employees, who will not be specially compensated, to solicit proxies from stockholders, either personally or by telephone, letter or other means. RECORD DATE AND VOTING RIGHTS Our board of directors has fixed October 26, 2001 as the record date for determining the Diedrich Coffee stockholders entitled to notice of, and to vote at, our annual meeting. Therefore, only stockholders of record at the close of business on the record date will receive notice of, and be able to vote at, the Diedrich Coffee annual meeting. As of October 22, 2001, there were 5,161,276 shares of our common stock outstanding held by 710 record holders in addition to approximately 4,600 holders who do not hold shares in their own names. A majority of these shares must be present at the our annual meeting, either in person or by proxy, in order for there to be a quorum at the meeting. Each share of our outstanding common stock entitles its holder to one vote. Shares of our common stock with respect to which the holders are present in person at our annual meeting but not voting, and shares for which we have received proxies but with respect to which holders of the shares have abstained, will be counted as present at our annual meeting for purpose of determining whether or not a quorum exists. Broker non-votes will be counted for purposes of determining whether a quorum exists. The nominees for election as directors will be elected by a plurality of the votes of the shares of our common stock present in person or represented by proxy at the meeting. All other matters submitted to the stockholders will require the affirmative vote of a majority of our outstanding shares of common stock present in person or represented by proxy at the meeting. With regard to proposals other than the election of directors, abstentions will be counted in tabulations of the votes cast on a proposal presented to stockholders and will have the same effect as a vote against the proposal, whereas broker non-votes will not be counted for purposes of determining whether a proposal has been approved. Our board of directors urges you to complete, date and sign the accompanying proxy and return it promptly in the enclosed envelope. PROPOSAL 1 ELECTION OF DIRECTORS Our directors are elected once a year at our annual meeting of stockholders. Our bylaws provide that our board of directors shall consist of between three and seven directors with the precise number to be determined by resolution of our board of directors. The authorized number of members of our board of directors is presently set at four persons. If a quorum is present at our annual meeting, the four nominees receiving the greatest number of votes will be elected. The four directors will serve until the next annual meeting of stockholders and until their respective successors are elected and qualified. Shares represented by executed proxies will be voted, if authority to do so is not withheld, for the election of the four nominees named below. All of the nominees for election as directors at the annual meeting set forth in the table below are incumbent directors. Each of the nominees has consented to serve as a director if elected, and management has no reason to believe that any nominee will be unable to serve. In the event that any nominee should be unavailable for re-election as a result of an unexpected occurrence, such shares will be voted for the election of such substitute nominee as management may propose.
NAME AGE TITLE DIRECTOR SINCE ---- --- ----- -------------- Paul C. Heeschen(1)(2)............... 44 Chairman of the Board of Directors 1996 Martin R. Diedrich................... 43 Vice Chairman of the Board of Directors, 1985 Chief Coffee Officer and Secretary Peter Churm(1)(2).................... 75 Director 1996 Lawrence Goelman(1)(2)............... 60 Director 1996
--------------- (1) Member of the audit committee (2) Member of the compensation committee There are no family relationships among any of the directors or executive officers of Diedrich Coffee. The principal occupation for the last five years of each nominee for director of Diedrich Coffee, as well as other information, is set forth below. Paul C. Heeschen joined our board of directors in January 1996. In February 2001, the board of directors elected him as Chairman. For the past ten years, Mr. Heeschen has been a Principal of Heeschen & Associates, a private investment firm. He is also the sole general partner of Sequoia Enterprises, LP, 2 D.C.H., LP and Redwood Enterprises VII, LP, and a trustee of the Palm Trust, each of which are stockholders of Diedrich Coffee. Martin R. Diedrich joined us as an officer and director in 1985. In April 1997, he became Vice Chairman of the board of directors and Chief Coffee Officer, and continued to serve as our Corporate Secretary. Before that time, Mr. Diedrich served as our Director of Coffee. In addition, he served as the Chairman of the board of directors from January 1996 to April 1997. Mr. Diedrich is an internationally recognized specialty coffee expert who is a frequent speaker at industry and trade association functions. Peter Churm joined our board of directors in October 1996. He retired from his position as Chairman Emeritus of Furon Company, a designer, developer and manufacturer of products made primarily from specially formulated high performance polymer materials, in November 1999 in connection with the acquisition of Furon Company. He had held this position since 1992. He served as Chairman of the board of directors of Furon Company from May 1980 through February 1992 and was President for more than 16 years prior to that time. He also serves on the board of directors of CKE Restaurants, Inc., a publicly traded food service company. Lawrence Goelman joined our board of directors in October 1996 and was the Chairman of our board of directors and interim Chief Executive Officer from March 1997 to November 1997. Mr. Goelman has served as the Managing Partner of Tremont Partners, Inc., a privately owned consulting company, since 1995. Until March 2001, Mr. Goelman was also the Managing Partner of GazelleLab LLC, a private venture development firm. From May 1996 to December 1996, Mr. Goelman was the interim President and Chief Executive Officer of Pinnacle Micro, Inc., a publicly owned company that manufactures compact disc recording devices. Before that, he served for 14 years as Chairman, President and Chief Executive Officer of CostCare, Inc., a wholly owned subsidiary of John Hancock Life Insurance Company. BOARD COMMITTEES AND MEETINGS Our board of directors has standing compensation and audit committees. We do not have a standing nominating committee. The entire board of directors acts as a committee with respect to nominations for membership on our board. Audit Committee. Our audit committee is responsible for, among other things, making recommendations to our board of directors regarding the engagement of our independent certified public accountants, reviewing with our independent certified public accountants the fees, scope, timing, plans and results of the audit engagement and reviewing any significant changes in our accounting policies and the adequacy of our internal accounting controls. It also analyzes and discusses with our independent certified public accountants any difficulties or disagreements with our management as well as legal proceedings or contingent liabilities involving us that may be material to our financial statements or the auditor's report. Our audit committee is composed of outside directors who are not our officers or employees. The audit committee consists of three independent directors: Messrs. Churm, Goelman and Heeschen, each of whom have been a member of our audit committee since its formation. The independence of these directors has been determined in accordance with Rule 4200(a)(15) of the National Association of Securities Dealers' listing standards. Our board of directors and audit committee have adopted an audit committee charter. The report of the audit committee is set forth below under the caption "Report of the Audit Committee of the Board of Directors." Compensation Committee. Our compensation committee determines salaries and incentive compensation for our executive officers and administers our stock option plans. The compensation committee consists of Messrs. Churm, Goelman and Heeschen. The report of the compensation committee is set forth below under the caption "Report of the Compensation Committee of the Board of Directors on Executive Compensation." During our fiscal year ended June 27, 2001, there were seven meetings of the board of directors, one meeting of the audit committee and two meetings of the compensation committee. Each of the current directors attended at least 75% of the meetings of the board of directors and meetings of the committees on which they served during the fiscal year ended June 27, 2001. 3 DIRECTORS' COMPENSATION Directors who are also our employees receive no extra compensation for their service on the board of directors. Effective as of January 1, 2001, non-employee directors earned fees of $1,000 per board meeting attended in person, $500 per board meeting attended telephonically and $500 per committee meeting attended in person or telephonically. Non-employee directors also received reimbursement for out-of-pocket expenses incurred in attending board meetings. In the fiscal year ended June 27, 2001, each non-employee director earned $3,500. In addition, the non-employee directors are eligible to receive stock option grants under the Diedrich Coffee, Inc. 2000 Equity Incentive Plan. In the fiscal year ended June 27, 2001, each non-employee director was granted 1,750 stock options under the 2000 Equity Incentive Plan and 2,000 stock options under the Diedrich Coffee, Inc. Non-Employee Director Plan, which the 2000 Equity Incentive Plan has since replaced. Under our 2000 Equity Incentive Plan, each non-employee director automatically receives, upon becoming a director, a one-time grant of an option to purchase up to 2,500 shares of our common stock. These initial options vest and become exercisable with respect to 50% of the underlying shares upon the earlier of (1) the first anniversary of the grant date or (2) immediately before the first annual meeting of stockholders following the grant date, if the recipient has remained a non-employee director for the entire period from the grant date to such date. The remaining 50% of the underlying shares vest upon the earlier of (1) the second anniversary of the grant date or (2) immediately before the second annual meeting of stockholders following the grant date, if the recipient has remained a non-employee director for the entire period from the grant date to such date. In addition to an initial grant, under the 2000 Equity Incentive Plan, each non-employee director also receives, upon re-election to our board of directors, an automatic grant of an option to purchase up to 1,250 additional shares of our common stock. These additional options vest and become exercisable upon the earlier of (1) the first anniversary of the grant date or (2) immediately before the annual meeting of stockholders following the grant date, if the recipient has remained a non-employee director for the entire period from the grant date to such date. In addition to the initial and additional options, under the 2000 Equity Incentive Plan, each director, including each non-employee director, is eligible to receive other awards under the 2000 Equity Incentive Plan at the discretion of the administrator of the plan, as more fully described in the discussion of Proposal 2 below. All non-employee director options granted under the 2000 Equity Incentive Plan have a term of ten years and an exercise price equal to the fair market value of our common stock on the date of grant. The 2000 Equity Incentive Plan provides that the exercise price may be paid by company loan or withholding of underlying stock, or deferred until completion of broker-assisted exercise and sale transactions. Vesting of non-employee director options granted under the 2000 Equity Incentive Plan accelerates in certain circumstances in connection with a change-in-control. During the fiscal year ended June 27, 2001, an aggregate of 5,250 options to purchase shares of our common stock were issued to non-employee directors under the 2000 Equity Incentive Plan and an additional aggregate of 6,000 options to purchase shares of our common stock were issued to non-employee directors under the 2000 Non-Employee Director Plan. As of October 24, 2001, no options to purchase shares had been exercised under either plan. VOTE REQUIRED AND BOARD RECOMMENDATION The nominees for election as directors will be elected by a plurality of the votes of the shares present in person or represented by proxy and entitled to vote at the annual meeting. THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE IN FAVOR OF EACH NAMED NOMINEE IN PROPOSAL 1. 4 PROPOSAL 2 INCREASE IN NUMBER OF SHARES AVAILABLE UNDER THE 2000 EQUITY INCENTIVE PLAN GENERAL The maximum number of shares of the Diedrich Coffee common stock that may be issued pursuant to awards under its 2000 Equity Incentive Plan is currently 187,500, and as of October 24, 2001, options covering a total of 184,250 shares are outstanding or have been exercised under the 2000 Equity Incentive Plan. Accordingly, only 3,250 shares remain available for new grants. We rely heavily upon the 2000 Equity Incentive Plan to recruit, retain, and reward qualified employees and directors, and our board of directors has unanimously approved, subject to approval by our stockholders, an amendment of the 2000 Equity Incentive Plan to make available an additional 250,000 shares of our common stock for awards under the 2000 Equity Incentive Plan (subject to antidilution adjustments). SUMMARY OF THE 2000 EQUITY INCENTIVE PLAN The following is a summary of the principal features of the 2000 Equity Incentive Plan as in effect and as proposed to be amended by Proposal 2. The summary is qualified in its entirety by the terms of the 2000 Equity Incentive Plan, a copy of which, as amended, is attached as Appendix A. Purpose. The 2000 Equity Incentive Plan's purpose is to promote our interests and those of our stockholders by using investment interests in our company to attract, retain and motivate our management and other persons, to encourage and reward their contributions to our performance and to align their interests with the interests of our stockholders. Administration, Amendment and Termination. As long as we have a class of equity securities registered under Section l2 of the Securities Exchange Act of 1934, the administrator of the 2000 Equity Incentive Plan will be the compensation committee, composed solely of two or more "non-employee directors" within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934 and two or more "Outside Directors" as defined in the regulations adopted under Section 162(m) of the Internal Revenue Code of 1986, as amended. The administrator has the power to: - select the eligible persons to whom, and the times at which, awards will be granted, the nature of each award and the terms and conditions of each award; - interpret the 2000 Equity Incentive Plan and the rights of recipients of awards granted under the 2000 Equity Incentive Plan; - discontinue, suspend or amend the 2000 Equity Incentive Plan in any manner, subject to stockholder approval only where such approval is required by applicable law, rule or regulation; - modify, extend, renew or exchange outstanding awards, including the power to adjust or reduce the purchase or exercise price of an award either by cancellation of the award and the granting of a new award at the modified purchase or exercise price or by amending the terms of the award to reflect the modified purchase or exercise price; and - change the number of shares or vesting periods associated with non-employee director options, and suspend and reactivate the plan provisions regarding automatic grants of non-employee director options. The 2000 Equity Incentive Plan, as amended from time to time, shall, in the discretion of the administrator, apply to and govern awards granted under the 2000 Equity Incentive Plan prior to the date of such amendment, provided that the consent of an award holder is required if such amendment would alter, terminate, impair or adversely affect an award or cause the award to cease to qualify as an incentive stock option. Awards may be granted under the 2000 Equity Incentive Plan until the tenth anniversary of the adoption of the 2000 Equity Incentive Plan by our board of directors. 5 Securities Subject to the 2000 Equity Incentive Plan. Currently, a total of 187,500 shares of our common stock may be issued under the 2000 Equity Incentive Plan. If Proposal 2 is approved by the stockholders, a total of 437,500 shares of our common stock may be issued under the 2000 Equity Incentive Plan. We may issue common stock under the plan from: - authorized but unissued shares of our common stock; or - from previously issued shares of common stock reacquired by us, including shares purchased on the open market. The administrator may appropriately adjust the maximum number and kind of shares subject to the 2000 Equity Incentive Plan, the number and kind of shares or other securities subject to the then outstanding awards, the price for each share or other unit of any other securities subject to the then outstanding awards, and/or the number and kind of shares or other securities to be issued as non-employee director options if our common stock is affected through any of the following: - merger; - combination; - consolidation; - stock dividend; - sale or exchange of assets; - stock split; - recapitalization; - reverse stock split; or - reclassification; - spin-off.
For purposes of calculating the aggregate number of shares issued under the plan, we will count only the number of shares actually issued upon exercise, purchase or settlement of an award and not returned to us upon expiration, termination or cancellation of any awards. However, if an award holder pays the exercise or purchase price, or withholding taxes relating to an award with shares of our common stock, or if we withhold shares in satisfaction of the exercise or purchase price, or withholding taxes payment, then we will reduce the number of shares of common stock available for issuance under the 2000 Equity Incentive Plan by the gross number of shares for which the award is exercised or purchased, or for which it vests, as applicable. On October 24, 2001, the closing price of our common stock on the Nasdaq National Market was $3.34 per share. Awards Under the 2000 Equity Incentive Plan. We may grant the following types of awards under the 2000 Equity Incentive Plan: - stock options; - stock bonuses; - performance awards; - stock sales; - restricted stock; - phantom stock - stock appreciation rights; - dividend equivalents; and - stock payments; - other stock-based benefits.
Stock options granted under the 2000 Equity Incentive Plan may be incentive stock options intended to qualify under the provisions of Section 422 of the Internal Revenue Code or non-qualified stock options that do not so qualify. However, the aggregate fair market value of stock with respect to which any recipient's incentive stock options first become exercisable during any calendar year under all of our plans and any plans of any parent or subsidiary of ours may not exceed $100,000, and may be further limited by other requirements in the Internal Revenue Code. If this limitation is exceeded, the excess incentive stock options will be treated as non-qualified stock options. Eligibility. Our directors, officers, employees, consultants, advisors and our affiliated entities are eligible to receive awards under the 2000 Equity Incentive Plan, except that only non-employee directors may receive "non-employee director options," as described below. Currently, 26 persons are eligible for selection to receive awards under the 2000 Equity Incentive Plan, consisting of 12 employees, 11 executive officers and 3 non-employee directors. Terms and Conditions of Non-Employee Director Options Under the 2000 Equity Incentive Plan. The 2000 Equity Incentive Plan provides that non-employee directors receive initial and annual grants of "non- 6 employee director options." Upon first becoming a non-employee director, a non-employee director receives a one-time grant of an option to purchase up to 2,500 shares of our common stock. These initial options vest and become exercisable with respect to 50% of the underlying shares upon the earlier of the following dates, if the recipient has remained a non-employee director for the entire period from the grant date to such date: - the first anniversary of the grant date, or - immediately before the first annual meeting of stockholders following the grant date. The remaining 50% of the shares underlying the initial options vest upon the earlier of the following dates, if the recipient has remained a non-employee director for the entire period from the grant date to such date: - the second anniversary of the grant date, or - immediately before the second annual meeting of stockholders following the grant date. In addition to an initial grant, each non-employee director also receives, upon re-election to our board of directors, an automatic grant of an option to purchase up to 1,250 additional shares of our common stock. These additional options vest and become exercisable upon the earlier of the following dates, if the recipient has remained a non-employee director for the entire period from the grant date to such date: - the first anniversary of the grant date, or - immediately before the annual meeting of stockholders following the grant date. All non-employee director options have a term of ten years and an exercise price equal to the fair market value of Diedrich Coffee common stock on the date of grant. If a recipient of a non-employee director option ceases to be a director of Diedrich Coffee, all initial options granted to the recipient are exercisable, to the extent already exercisable at the date the director ceases to be a director, for a period of 365 days after that date (or sooner if the option expires according to its terms), and all additional options are exercisable to the extent already exercisable at the date the director ceases to be a director for a period of 365 days after that date (or sooner if the option expires according to its terms) if the director ceases to be a director because of death or permanent disability, or a period of 90 days after that date (or sooner if the option expires according to its terms) if the director ceases to be a director for any other reason. In addition to these non-employee director options, non-employee directors are eligible to receive general grants of awards under the plan, including stock options other than non-employee director options, at the discretion of the administrator. To the extent not inconsistent with the terms of the plan governing non-employee director options, the terms of general awards under the 2000 Equity Incentive Plan apply to non-employee director options. Terms and Conditions of General Awards Under the 2000 Equity Incentive Plan. The administrator selects the recipients of awards granted under the 2000 Equity Incentive Plan and determines the dates, amounts, exercise prices, vesting periods and other relevant terms of the awards. However, only non-employee directors are eligible to receive non-employee director options. In addition, the 2000 Equity Incentive Plan specifies the dates, amounts, exercise prices, vesting periods and other relevant terms of non-employee director options, as summarized above. Award Pricing. The administrator determines the exercise or purchase price of awards granted under the 2000 Equity Incentive Plan except that the provisions of the plan govern the exercise price of non-employee director options. In addition, the exercise price for an incentive stock option must comply with the provisions of Section 422 of the Internal Revenue Code. Section 422 currently provides that the exercise price must not be less than the fair market value of our common stock on the date of grant, and not less than 110% of the fair market value of our common stock as of the date of grant in the case of a grant to a person owning more than ten percent of the total combined voting power of all classes of our stock. Award Vesting and Term. The administrator determines the date or dates on which awards granted under the 2000 Equity Incentive Plan vest and become exercisable except that the provisions of the plan govern the vesting and term of non-employee director options. In addition, the term for an incentive stock option must comply with the provisions of Section 422 of the Internal Revenue Code. Section 422 7 currently provides that the incentive stock option may not be exercisable after the expiration of ten years from the date of grant, or five years in the case of an incentive stock option granted to a person owning more than ten percent of the total combined voting power of all classes of our stock. Awards granted under the 2000 Equity Incentive Plan may be exercised at any time after they vest and before the expiration date determined by the administrator, provided that an award is generally exercisable following an award holder's termination of employment only to the extent that the award had become exercisable on or before the date of termination and to the extent that the award is not forfeited under the terms of the plan. Furthermore, in the absence of a specific agreement to the contrary, stock options will generally expire and become unexercisable immediately upon termination of the recipient's employment with us for just cause; 30 days after termination of the recipient's employment with us for any reason other than just cause, death, permanent disability or normal retirement; or 180 days after termination of the recipient's employment with us due to death, permanent disability or normal retirement, unless the term of the options provides for an earlier expiration. The administrator may accelerate the vesting of any options and may also extend the period following termination of employment with us during which options may vest and/or be exercised. Other Award Provisions. The administrator determines any applicable performance criteria, restrictions or conditions of any award. Award Payments. A holder of an award may pay cash or any other consideration deemed acceptable by the administrator to pay the exercise or purchase price for the award. We may extend or arrange for the extension of credit to any award holder to finance the award holder's purchase of shares upon exercise of the holder's award on terms approved by the administrator, subject to restrictions under applicable laws and regulations, or allow exercise in a broker's transaction in which the exercise or purchase price will not be received until after exercise and subsequent sale of the underlying common stock. The administrator may, in its discretion, allow an award holder to pay the exercise or purchase price for an award by delivering our common stock. Limited Transferability of Awards. Awards are generally not transferable by the recipient during the life of the recipient. Awards Documentation. An agreement duly executed on behalf of us and by the recipient or, a confirming memorandum issued by us to the recipient, setting forth such terms and conditions applicable to the award, evidence awards granted under the 2000 Equity Incentive Plan. Rights With Respect to Common Stock. No recipient of an award under the 2000 Equity Incentive Plan or other person will have any right, title or interest in or to any shares of common stock subject to any award or any rights as a stockholder unless the award is duly exercised pursuant to the terms of the 2000 Equity Incentive Plan and the shares of common stock are issued to the recipient upon exercise of the award. Plan Provisions Regarding Changes in Control. As of the effective time and date of any change in our control (as defined in the 2000 Equity Incentive Plan), the 2000 Equity Incentive Plan and any of the then outstanding awards (whether or not vested) will automatically terminate unless: - provision is made in writing in connection with such transaction for the continuance of the 2000 Equity Incentive Plan and for the assumption of such awards, or for the substitution for such awards of new awards covering the securities of a successor entity or an affiliate thereof with appropriate adjustments as to the number and kind of securities, and exercise and purchase prices, in which event the 2000 Equity Incentive Plan and such outstanding awards shall continue or be replaced, as the case may be, in the manner and under the terms so provided; or - the board of directors otherwise provides in writing for such adjustments as it deems appropriate in the terms and conditions of the then outstanding awards (whether or not vested), including without limitation accelerating the vesting of outstanding awards and/or providing for the cancellation of awards and their automatic conversion into the right to receive the securities, cash 8 or other consideration that a holder of the shares underlying such awards would have been entitled to receive upon consummation of such change in control had such shares been issued and outstanding immediately prior to the effective date and time of the change in control (net of the appropriate option exercise prices). If, pursuant to these plan provisions, the 2000 Equity Incentive Plan and the awards terminate by reason of the occurrence of a change in control without provision for any of the actions described in the paragraph above, then any recipient holding outstanding awards shall have the right, at such time immediately prior to the consummation of the change in control as our board of directors shall designate, to exercise the recipient's awards to the full extent not theretofore exercised, including any installments which have not yet become vested. Plan Provisions Regarding Section 162(m) the Internal Revenue Code. In general, Section 162(m) of the Internal Revenue Code imposes a $1,000,000 limit on the amount of compensation that may be deducted by us in any tax year with respect to each of our Chief Executive Officer and our other four most highly compensated officers, including any compensation relating to an award under the 2000 Equity Incentive Plan. To prevent compensation relating to an award under the 2000 Equity Incentive Plan from being subject to the $1,000,000 limit of Internal Revenue Code Section 162(m), the 2000 Equity Incentive Plan provides that no eligible person shall be granted any awards with respect to more than 200,000 shares of common stock in any one calendar year if such grant would otherwise be subject to Section 162(m). Furthermore, if Internal Revenue Code Section 162(m) would otherwise apply and if the amount of compensation an eligible person would receive under an award is not based solely on an increase in the value of our underlying common stock after the date of grant or award, the administrator can condition the grant, vesting, or exercisability of such an award on the attainment of a preestablished objective performance goal. For this purpose, a preestablished objective performance goal may include one or more of the following performance criteria: - cash flow; - return on assets or net assets; - earnings per share, including earnings - income or net income; before interest, taxes and amortization; - operating margin; - return on equity; - return on operating revenue; and/or - total stockholder return; - any similar performance criteria. - return on capital;
TAX INFORMATION The following summary of certain federal income tax consequences of the receipt and exercise of awards granted by us is based on the laws and regulations in effect as of the date of this Proxy Statement and does not purport to be a complete statement of the law in this area. Furthermore, the discussion below does not address the tax consequences of the receipt and exercise of awards under foreign, state and/or local tax laws, and such tax laws may not correspond to the federal tax treatment described herein. The exact federal income tax treatment of transactions under the 2000 Equity Incentive Plan will vary depending upon the specific facts and circumstances involved. Incentive Stock Options. Except as discussed below, a recipient of an incentive stock option generally will not pay tax on the grant or the exercise of the option if the recipient exercises the option while the recipient is our employee or within three months following termination of the recipient's employment (or one year, if termination was due to a permanent and total disability). 9 If the recipient of the incentive stock option sells the shares acquired upon the exercise of the option at any time within one year after the date we transfer those shares to the recipient or two years after the date we grant the incentive stock option to the recipient, then: - if the recipient's sales price exceeds the purchase price paid for the shares upon exercise of the incentive stock option, the recipient will recognize capital gain equal to the excess, if any, of the sales price over the fair market value of the shares on the date of exercise, and will recognize ordinary income equal to the excess, if any, of the lesser of the sales price or the fair market value of the shares on the date of exercise over the purchase price paid for the shares upon exercise of the incentive stock option; or - if the recipient's sales price is less than the purchase price paid for the shares upon exercise of the incentive stock option, the recipient will recognize a capital loss equal to the excess of the purchase price paid for the shares upon exercise of the incentive stock option over the sales price of the shares. If the recipient sells shares acquired upon exercise of an incentive stock option at any time after the recipient has held the shares for at least one year after the date we transfer the shares to the recipient pursuant to the recipient's exercise of the incentive stock option and at least two years after the date we grant the recipient the incentive stock option, then the recipient will recognize capital gain or loss equal to the difference between the sales price and the purchase price paid for the shares upon exercise of the incentive stock option. The amount by which the fair market value of shares the recipient acquires upon exercise of an incentive stock option (determined as of the date of exercise) exceeds the purchase price paid for the shares upon exercise of the incentive stock option will be included as a positive adjustment in the calculation of the recipient's "alternative minimum taxable income" in the year of exercise. The "alternative minimum tax" will generally equal the amount by which 26% or 28% (depending upon the amount of the recipient's alternative minimum taxable income reduced by certain redemption amounts) of the recipient's alternative minimum taxable income (reduced by certain exemption amounts) exceeds the recipient's regular income tax liability for the year. Before exercising an incentive stock option, a recipient should determine whether and to what extent exercise of an incentive stock option will result in alternative minimum tax in the year of exercise. In the case of an early disposition of shares by a recipient that results in the recognition of ordinary income, we will be entitled to a deduction equal to the amount of such ordinary income. If the recipient holds the shares for the requisite period described above and therefore solely recognizes capital gain upon the sale of such shares, we will not be entitled to any deduction. Non-qualified Stock Options. Our grant of a non-qualified stock option to a recipient is generally not a taxable event for the recipient. Upon the exercise of a non-qualified stock option, the recipient will generally recognize ordinary income equal to the excess of the fair market value of the shares the recipient acquires upon exercise (determined as of the date of exercise) over the purchase price paid for the shares upon exercise of the non-qualified stock option. We generally will be entitled to deduct as a compensation expense the amount of such ordinary income. The recipient's subsequent sale of the shares generally will give rise to capital gain or loss equal to the difference between the sale price and the sum of the purchase price paid for the shares plus the ordinary income recognized with respect to the shares, and such capital gain or loss will be taxable as long term or short term capital gain or loss depending upon the recipient's holding period after exercise. If the recipient is an "insider" (as defined below), the recipient is advised to consult a tax advisor about the possibility of making an election under Section 83(b) of the Internal Revenue Code upon exercise of a non-qualified stock option. Stock Appreciation Rights and Phantom Stock. Generally, the holder of a stock appreciation right or phantom stock award will recognize ordinary income equal to the amount paid by us under either arrangement on the date the holder receives payment from us. If we place a limit on the amount that will be payable under a stock appreciation right, the holder may recognize ordinary income equal to the value of the holder's right under the stock appreciation right at the time the value of such right equals such limit and the stock appreciation right is exercisable. We will generally be entitled to a deduction in an amount equal to the ordinary income recognized by the holder. 10 Stock Purchase Rights -- Restricted Stock. Under the 2000 Equity Incentive Plan, we are authorized to grant rights to purchase our restricted common stock subject to our right to repurchase such stock at the price paid by the participant if the participant's employment relationship with us terminates prior to the lapse of such repurchase right. In general, there will be no tax consequences to a participant upon the grant of a right to purchase such restricted stock. Instead, the participant will be taxed at ordinary income rates at the time our repurchase rights expire or are removed on an amount equal to the excess of the fair market value of the stock at that time over the amount the participant paid to acquire such stock. A participant who acquires restricted stock, however, may make an election under Section 83(b) of the Internal Revenue Code with respect to such stock. If such an election is timely made, the participant is taxed at ordinary income rates in the year in which the participant acquires the restricted stock. The ordinary income the participant must recognize is equal to the excess of the fair market value of the stock at the time of the participant's acquisition of the stock (determined without regard to the restrictions) over the amount that the participant paid to acquire such stock. If a participant makes a timely election under Section 83(b) of the Internal Revenue Code with respect to restricted stock, the participant generally will not be required to report any additional income with respect to such restricted stock until he disposes of such stock, at which time he will generally recognize capital gain or loss equal to the difference between the sales price and the sum of the purchase price paid, if any, for the shares plus the ordinary income recognized pursuant to the election under Section 83(b) of the Internal Revenue Code. In the event that a participant forfeits restricted stock with respect to which an election under Section 83(b) of the Internal Revenue Code has been made, the participant ordinarily will not be entitled to recognize any loss for federal income tax purposes (except to the extent the amount realized by the participant at the time of such forfeiture is less than the participant's purchase price for such stock). We generally will be entitled to a deduction equal to the amount of ordinary income (if any) recognized by a participant with respect to restricted stock for our taxable year in which, or with which, ends the taxable year of the participant in which such ordinary income is recognized. Other Awards. In addition to the types of awards described above, the 2000 Equity Incentive Plan authorizes certain other awards that may include payments in cash, our common stock, or a combination of cash and common stock. The tax consequences of such awards will depend upon the specific terms of such awards. Generally, however, a participant who receives an award payable in cash will recognize ordinary income, and we will be entitled to a deduction, with respect to such award at the earliest time at which the participant has an unrestricted right to receive the amount of the cash payment. In general, the sale or grant of stock to a participant under the 2000 Equity Incentive Plan will be a taxable event at the time of the sale or grant if such stock at that time is not subject to a substantial risk of forfeiture or is transferable within the meaning of Section 83 of the Internal Revenue Code in the hands of the participant. (For such purposes, stock is ordinarily considered to be transferable if it can be transferred to another person who takes the stock free of any substantial risk of forfeiture.) In such case, the participant will recognize ordinary income, and we will be entitled to a deduction, equal to the excess of the fair market value of such stock on the date of the sale or grant over the amount, if any, that the participant paid for such stock. Stock that at the time of receipt by a participant is subject to restrictions that constitute a substantial risk of forfeiture and that is not transferable within the meaning of Internal Revenue Code Section 83, generally will be taxed under the rules applicable to restricted stock as described above. Withholding. In the event that an optionee or other recipient of an award under the 2000 Equity Incentive Plan is our employee, we ordinarily will be required to withhold applicable federal income taxes with respect to any ordinary income recognized by such optionee or other award recipient in connection with stock options or other awards under the 2000 Equity Incentive Plan. Special Rules Applicable to "Insiders." If a recipient of an award is an "insider" (a director, officer or other individual subject to Section 16 of the Exchange Act), the recipient may be required to defer determination of the amount of income and the timing of income recognition in connection with an award under the plan, and the beginning of the holding period for any shares the recipient receives, until the expiration of any period during which the recipient would be restricted from disposing of any shares the recipient received. The recipient will not be required to defer these determinations if the recipient makes a valid election under Section 83(b) of the Internal Revenue Code. If a recipient is an insider, the recipient is 11 advised to consult a tax advisor to determine the tax consequences of exercising options granted to the recipient under the plan. Certain Additional Rules Applicable to Awards. The terms of awards granted under the 2000 Equity Incentive Plan may provide for accelerated vesting in connection with a change in control of Diedrich Coffee. In that event and depending upon the individual circumstances of the recipient, certain amounts with respect to such awards may constitute "excess parachute payments" under the "golden parachute" provisions of the Internal Revenue Code. Under these provisions, a participant will be subject to a 20% excise tax on any "excess parachute payments" and Diedrich Coffee will be denied any deduction with respect to such payment. Participants are advised to consult their tax advisors as to whether accelerated vesting or payment of an award in connection with a change in our control would give rise to an excess parachute payment. We generally are entitled to a deduction equal to the ordinary income recognized by a recipient in connection with an award. However, our deduction (including the deduction related to ordinary income recognized by a recipient) for compensation paid to the Chief Executive Officer and the other four most highly compensated officers may be limited to $1 million per person annually. Depending on the nature of the award, all or a portion of the ordinary income attributable to certain awards granted under the 2000 Equity Incentive Plan may be included in the compensation subject to such deduction limitation. Special rules will apply in cases where a recipient pays the exercise price of the award or applicable withholding tax obligations under the 2000 Equity Incentive Plan by delivering any of our previously owned common stock or by reducing the number of shares of common stock otherwise issuable pursuant to the award. Participants who contemplate taking any such action are advised to consult with their personal tax advisors regarding the tax consequences of such action. PARTICIPATION IN THE 2000 EQUITY INCENTIVE PLAN BY EXECUTIVE OFFICERS, DIRECTORS AND OTHER EMPLOYEES; INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON Participation in the 2000 Equity Incentive Plan is in the discretion of the administrator, except that non-employee directors automatically receive non-employee director options in accordance with the 2000 Equity Incentive Plan. If Proposal 2 is approved, each of the three current non-employee directors standing for re-election, Messrs. Churm, Goelman and Heeschen, would receive upon re-election to our board of directors, an automatic grant of an option to purchase up to 1,250 additional shares of our common stock. Each non-employee director will also receive an automatic grant of an option to purchase up to 1,250 additional shares of our common stock immediately following each future annual meeting of stockholders if the non-employee director has served as a director since his or her election or appointment and has been re-elected at any such future annual meeting. Finally, under the 2000 Equity Incentive Plan, each non-employee director will be eligible to receive future awards of other stock options or other types of awards as determined by the compensation committee in its discretion. These awards, if granted, would be in addition to the non-employee director options that non-employee directors automatically receive under the 2000 Equity Incentive Plan. 12 The following table summarizes certain information with respect to benefits that will be received by the directors standing for re-election as non-employee directors and by our officers and employees: PLAN BENEFITS 2000 EQUITY INCENTIVE PLAN
NAME DOLLAR VALUE NUMBER OF SHARES ---- ------------ ---------------- J. Michael Jenkins.......................................... (1) (1) President and Chief Executive Officer Martin Diedrich............................................. (1) (1) Vice Chairman of the Board of Directors, Chief Coffee Officer and Secretary Matthew McGuinness.......................................... (1) (1) Executive Vice President and Chief Financial Officer Carl Mount.................................................. (1) (1) Vice President -- Manufacturing and Purchasing Michael Zorehkey............................................ (1) (1) Vice President -- Real Estate, Gloria Jean's Franchising All current executive officers as a group (11 persons)...... (1) (1) All employees, including current officers who are not executive officers, as a group (12 persons)............... (1) (1) Non-employee directors(2)................................... (3) 3,750(4)
--------------- (1) Not determinable. (2) Includes all current non-employee directors and those standing for re-election. (3) The exercise price for each non-employee director option granted under the 2000 Equity Incentive Plan is the fair market value of our common stock on the date of grant. (4) Represents the number of shares underlying non-employee director options that will be granted under the 2000 Equity Incentive Plan in the fiscal year ending June 26, 2002 if each of the directors standing for re-election as a non-employee director is re-elected at the 2001 annual meeting of stockholders. VOTE REQUIRED AND BOARD RECOMMENDATION The affirmative vote of a majority of our shares present in person or represented by proxy and entitled to vote at the annual meeting will be required to approve the increase in the number of shares of common stock available for issuance under the 2000 Equity Incentive Plan. THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE IN FAVOR OF PROPOSAL 2. 13 PROPOSAL 3 RATIFICATION OF SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS Our board of directors has again selected KPMG LLP to serve as our independent accountants for the fiscal year ending June 26, 2002. KPMG LLP has served as our auditor since January 17, 1997. Representatives of KPMG LLP are expected to be at the meeting, will have an opportunity to make a statement if they so desire and will be available to respond to appropriate questions. REASONS FOR THE PROPOSAL Selection of our independent accountants is not required to be submitted for stockholder approval, but our board of directors is seeking ratification of its selection of KPMG LLP from our stockholders as a matter of good corporate practice. If the stockholders do not ratify this selection, the board of directors will reconsider its selection of KPMG LLP and will either continue to retain this firm or appoint new auditors upon recommendation of the audit committee. Even if the selection is ratified, the audit committee and our board of directors, in their discretion, may direct the appointment of different independent auditors at any time during the year if they determine that such a change would be in our best interests and those of our stockholders. VOTE REQUIRED AND BOARD RECOMMENDATION The affirmative vote of a majority of the shares present in person or represented by proxy and entitled to vote at the annual meeting will be required to ratify the selection of KPMG LLP as our independent accountants for the current fiscal year. THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE IN FAVOR OF PROPOSAL 3. 14 EXECUTIVE OFFICERS The executive officers of Diedrich Coffee, and their ages as of October 24, 2001, are as follows:
NAME AGE POSITION(S) HELD ---- --- ---------------- J. Michael Jenkins................... 55 President and Chief Executive Officer Martin Diedrich...................... 43 Vice Chairman of the Board of Directors, Chief Coffee Officer and Secretary Matthew McGuinness................... 41 Executive Vice President and Chief Financial Officer Carl Mount........................... 38 Vice President -- Manufacturing and Purchasing Michael Zorehkey..................... 40 Vice President -- Real Estate Matthew Kimble....................... 49 Vice President -- Human Resources Joseph Caruso........................ 40 Vice President -- Franchise and Business Development Edward Apffel........................ 44 Vice President -- Wholesale Sales Catherine Saar....................... 42 Vice President -- Brand Development Paul Marshall........................ 49 Vice President -- Information Systems Pamela Britton....................... 48 Chief Operating Officer of Gloria Jean's Gourmet Coffee
The following is information regarding those persons currently serving as executive officers of Diedrich Coffee: J. Michael Jenkins joined Diedrich Coffee in September 2000 as our President and Chief Executive Officer. From May 1998 until May 2000, Mr. Jenkins was Chief Executive Officer of Boston Chicken, Inc., a publicly traded food service company. Prior to that, from September 1994 to April 1998, Mr. Jenkins was Chief Executive Officer of VICORP Restaurants, Inc., also a publicly traded food service company. Martin R. Diedrich. Biographical information about Martin Diedrich is included above under Proposal 1. Matthew C. McGuinness joined Diedrich Coffee in March 2000 as our Executive Vice President and Chief Financial Officer. Mr. McGuinness was Senior Vice President -- Finance and Chief Financial Officer at Denny's, Inc., a subsidiary of Advantica Restaurant Group, Inc., a publicly traded food service company, from May 1998 to February 2000. From 1991 until May 1998, Mr. McGuinness was Vice President -- Finance and Chief Financial Officer at El Pollo Loco, Inc., also a subsidiary of Advantica Restaurant Group, Inc. Carl Mount joined Diedrich Coffee in November 1999 as our Vice President -- Manufacturing and Purchasing. Mr. Mount served as the interim President of our Gloria Jean's division from October 2000 until January 2001. From January 1999 to November 1999, Mr. Mount was a plant manager for the Pepsi Bottling Group in Hayward, California. He served as a Senior Consultant, Manufacturing Services for the Coca-Cola Company in Atlanta, Georgia from July 1998 to January 1999. Prior to this, he served as Group Operations Manager from November 1996 to July 1998, and as Operations Manager from August 1995 to November 1996 for the Coca-Cola Company in Istanbul, Turkey and Bursa, Turkey respectively. Michael Zorehkey joined Diedrich Coffee in March 2000 as our Director of Mall Development. In January 2001, he was appointed Vice President -- Real Estate. From June 1999 until March 2000, Mr. Zorehkey served as the Senior Vice President of Zorehkey & Associates, a privately owned real estate consultation firm. From July 1997 until June 1999, Mr. Zorehkey was Vice President -- Real Estate for Edison Brothers Stores, a publicly owned company. From April 1996 until July 1997, Mr. Zorehkey was Vice President Real Estate and Construction for Cinnabon World Famous Cinnamon Rolls, a division of the publicly traded food service company AFC Enterprises. From April 1992 until April 1996, Mr. Zorehkey was Director of Real Estate for Sweet Factory, a publicly owned company. Matthew Kimble joined Diedrich Coffee in connection with our acquisition of Coffee People, Inc. in July 1999 and has served as our Vice President -- Human Resources since then. From January 1997 until the acquisition, Mr. Kimble served as the Vice President, Human Resources of Coffee People. From 1991 to January 1997, he served as Employment Manager for Thrifty Payless Drug Stores N.W. 15 Joseph E. Caruso joined Diedrich Coffee in April 2000 as our Vice President -- Franchise and Business Development. From March 1999 to April 2000, Mr. Caruso was Director of Non-Traditional Development at Mrs. Fields Original Cookie Co., a privately owned food service company. From August 1993 to October 1998, Mr. Caruso was National Director of Franchise Sales for Hardee's Food Systems, Inc., a division of the publicly traded CKE Restaurants, Inc. Edward Apffel joined Diedrich Coffee in June 1997. Since April 2000, he has served as our Vice President -- Sales. From June 1997 to April 2000, Mr. Apffel served as our Director of Wholesale Sales. From January 1996 to June 1997, Mr. Apffel was Director National Wholesale Sales at F. Gavina & Sons, Inc., a privately owned company that roasts and markets coffee to the grocery and food service industry on a national basis. From October 1992 to December 1995, Mr. Apffel was the owner of Red Apple Coffee Co., a privately owned coffee consulting firm. Catherine A. Saar joined Diedrich Coffee in July 1998 as our Vice President -- Marketing and Wholesale Sales. From January 1998 to June 1998, Ms. Saar was Vice President -- Marketing and Merchandising for Frame-N-Lens, Inc., a privately owned company that manufactures and retails eye glasses. From May 1993 to December 1997, Ms. Saar was Director of Corporate Marketing for Smart and Final, Inc., a publicly owned wholesale grocer. Prior to that, Ms. Saar held various marketing positions at Taco Bell Corp. Paul Marshall joined Diedrich Coffee in October 1998 as our Vice President -- Management Information Services. From January 1997 to January 1998, Mr. Marshall served as Vice President -- Management Information Services of Pic n' Save, a publicly owned discount retail company. From September 1995 to December 1996, Mr. Marshall was Vice President -- Management Information Services of KidsMart, a privately held children's retail clothing company. Pamela J. Britton joined Diedrich Coffee in February 2001 as our Executive Vice President of Operations of our Gloria Jean's subsidiary. In June 2001, she was appointed Chief Operating Officer of Gloria Jean's. From July 1999 to February 2001, Ms. Britton was Vice President of Operations for Johnny Rockets Group, Inc., a privately owned food service company. From June 1992 until June 1999, Ms. Britton served as Vice President of Operations of Cinnabon World Famous Cinnamon Rolls, a division of the publicly traded food service company AFC Enterprises. 16 COMPENSATION OF EXECUTIVE OFFICERS SUMMARY OF COMPENSATION In July 1999, we changed our fiscal year end from the Wednesday closest to January 31 to the Wednesday closest to June 30 in connection with our acquisition of Coffee People. The following table sets forth compensation earned during the last three fiscal years, restated as if our fiscal year end occurred on the Wednesday nearest to June 30 in each of 2001, 2000 and 1999, by those who served as our Chief Executive Officer during the fiscal year ended June 27, 2001 and the next four most highly compensated persons who were serving as our executive officers on June 27, 2001 and whose total annual salary and bonus for that fiscal year exceeded $100,000. This includes Timothy J. Ryan, who retired from his position as Chief Executive Officer and President in September 2000. The table also discloses compensation earned during these periods for Lisa Steere, who served as the Executive Vice President of Marketing and Sales for Gloria Jean's Coffee until her resignation on August 24, 2001.
LONG-TERM COMPENSATION AWARDS ------------ FISCAL YEAR SECURITIES ENDED OTHER UNDERLYING NAME AND PRINCIPAL POSITION JUNE SALARY($) BONUS($) COMPENSATION($) OPTIONS(#) --------------------------- ----------- --------- -------- --------------- ------------ J. Michael Jenkins(1)................. 2001 $225,000 -- $4,876 125,000 President and Chief Executive Officer 2000 -- -- -- -- 1999 -- -- -- -- Matthew C. McGuinness(2).............. 2001 $238,649 $98,091 $8,400 50,000 Executive Vice President and 2000 61,980 -- 2,800 18,750 Chief Financial Officer 1999 -- -- -- -- Martin R. Diedrich(3)................. 2001 $160,000 $31,389 $4,800 25,000 Vice Chairman of the Board, 2000 139,385 -- 4,800 3,750 Secretary and Chief Coffee Officer 1999 119,385 25,000 4,800 1,000 Carl Mount............................ 2001 $165,980 $34,332 -- 15,000 Vice President -- Manufacturing and 2000 87,769 19,000 -- 5,000 Purchasing 1999 -- -- -- -- Michael Zorehkey(4)................... 2001 $125,387 $44,800 $4,800 3,000 Vice President -- Real Estate 2000 37,597 15,000 1,200 1,875 1999 -- -- -- -- Timothy J. Ryan(5).................... 2001 $ 74,038 -- $2,100 1,250 Former President and 2000 223,077 100,000 7,200 5,000 Chief Executive Officer 1999 200,000 -- 7,200 -- Lisa Steere(6)........................ 2001 $158,107 -- -- 2,000 Former Executive Vice President of 2000 119,689 17,905 -- 5,000 Marketing and Sales for Gloria Jean's 1999 -- -- -- -- Coffee
--------------- (1) Mr. Jenkins was appointed President and Chief Executive Officer effective September 27, 2000. Accordingly, Mr. Jenkins did not earn or receive any compensation from us in fiscal 2000 or 1999, and the compensation disclosed in the table for fiscal 2001 reflects only a portion of the fiscal year. Mr. Jenkins' other compensation is comprised of health insurance premiums and health club membership dues paid on Mr. Jenkins' behalf. (2) Mr. McGuinness entered into an at-will employment agreement effective as of March 13, 2000. Accordingly, he did not earn or receive any compensation from us in fiscal 1999 and the compensation disclosed in the table for fiscal 2000 reflects only a portion of the fiscal year. Mr. McGuinness' other compensation consists of a monthly car allowance of $700. (3) Mr. Diedrich's other compensation consists of a monthly car allowance of $400. 17 (4) Mr. Zorehkey joined Diedrich Coffee in March 2000. Accordingly, the compensation disclosed in the table for fiscal 2000 reflects only a portion of the year. Mr. Zorehkey's other compensation consists of a monthly car allowance of $400. (5) Mr. Ryan resigned as our Chief Executive Officer effective as of September 2000. Accordingly, the compensation disclosed in the table for fiscal 2001 reflects only a portion of the year. Mr. Ryan's other compensation consists of a monthly car allowance of $700. (6) Ms. Steere joined Diedrich Coffee in July 1999. Accordingly, she did not receive any compensation from us during fiscal 1999. Ms. Steere resigned from her position on August 24, 2001. STOCK OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth information regarding stock options granted to the following executive officers during the fiscal year ended June 27, 2001.
PERCENT OF POTENTIAL REALIZABLE TOTAL VALUE AT ASSUMED NUMBER OF OPTIONS ANNUAL RATES OF STOCK SECURITIES GRANTED TO PRICE APPRECIATION FOR UNDERLYING EMPLOYEES EXERCISE OPTION TERM(1) OPTIONS IN FISCAL PRICE EXPIRATION --------------------------- NAME GRANTED(#) YEAR ($/SHARE) DATE 5%($) 10%($) ---- ---------- ---------- --------- ---------- ----------- ------------- J. Michael Jenkins.......... 125,000 40.2 $7.00 9/22/10 $550,282.80 $1,394,524.65 Matthew C. McGuinness....... 50,000 16.1 3.80 6/1/11 $119,489.98 $ 302,811.07 Martin R. Diedrich.......... 25,000 8.0 3.80 6/1/11 $ 59,744.99 $ 151,405.53 Carl Mount.................. 15,000 4.8 3.80 6/1/11 $ 35,846.99 $ 90,843.32 Michael Zorehkey............ 3,000 1.0 3.80 6/1/11 $ 7,169.40 $ 18,168.66 Timothy J. Ryan............. -- -- -- -- -- -- Lisa Steere................. 2,000(2) (3) 3.80 6/1/11 $ 4,779.60 $ 12,112.44
--------------- (1) The potential realizable values listed are based on an assumption that the market price of Diedrich Coffee's common stock appreciates at the stated rate, compounded annually, from the date of grant to the expiration date. The 5% and 10% assumed rates of appreciation are determined by the rules of the Securities and Exchange Commission and do not represent our estimate of the future market price of Diedrich Coffee common stock. (2) The options granted to Ms. Steere during our fiscal year are no longer outstanding since she is no longer employed by us. (3) Less than 1%. 18 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table sets forth information concerning the number and value of unexercisable options held by the following executive officers on June 27, 2001. None of these executive officers exercised options to purchase common stock during fiscal year ended June 27, 2001.
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT AT FISCAL YEAR END(#) FISCAL YEAR END($)(1) ------------------------------- ------------------------------- NAME EXERCISABLE UNEXERCISABLE(2) EXERCISABLE UNEXERCISABLE(2) ---- ----------- ---------------- ----------- ---------------- J. Michael Jenkins.................... 31,250 93,750 -- -- Martin R. Diedrich.................... 2,000 27,750 -- -- Matthew C. McGuinness................. 9,375 59,375 -- -- Carl Mount............................ 1,666 18,334 -- -- Michael Zorehkey...................... 625 4,250 -- -- Timothy J. Ryan(3).................... 64,166 90,834 -- -- Lisa Steere........................... 1,666 5,334 -- --
--------------- (1) These amounts represent the difference between the exercise price of the in-the-money options and the market price of our common stock on June 27, 2001. The closing price of our common stock on that day on the Nasdaq National Market was $3.63. Options are in-the-money if the market value of the shares covered thereby is greater than the option exercise price. On June 27, 2001, none of the options were in-the-money. (2) Future exercisability is subject to a number of factors, including, but not limited to, the optionee remaining employed by us. (3) All of Mr. Ryan's options, both exercisable and unexercisable, expired on September 27, 2001. EMPLOYMENT AGREEMENTS AND COMPENSATORY ARRANGEMENTS The following section describes certain employment agreements and compensatory arrangements between us or our affiliated entities and those who currently serve as our executive officers or as executive officers of our affiliated entities. In addition, it describes certain employment agreements and compensatory arrangements between us or our affiliates and those who served as our executive officers or as executive officers of our affiliates in fiscal year ended June 27, 2001, but are no longer employed with us or our affiliates. Employment Agreements and Compensatory Arrangements with Current Executive Officers J. Michael Jenkins. On September 22, 2000, we entered into an at-will employment letter agreement with Mr. Jenkins which provides that either we or Mr. Jenkins may terminate his employment with us at any time, with or without cause or notice. The employment letter provides that Mr. Jenkins will: - serve as our President and Chief Executive Officer; - receive a base salary of $300,000 per year, subject to annual adjustments; - receive a guaranteed bonus of $100,000 on the first anniversary date of his employment with us, which bonus was earned on September 27, 2001, and receive additional bonuses in successive years based on specific objectives and targets established for him by our compensation committee; and - participate in our executive benefit plans and 401(k) plan based on plan eligibility criteria. If we terminate Mr. Jenkins' employment with us for any reason other than those which constitute cause as described in the letter agreement, we will be obligated to make bi-weekly payments to Mr. Jenkins of his then current salary until the earlier of (1) such time as he accepts other employment or work as an independent contractor or (2) the first anniversary date of the termination of his employment. We will not be obligated to make any payments to Mr. Jenkins or his estate if his employment with us is terminated for disability or by his death. 19 We also entered into a stock option plan and agreement, effective as of September 22, 2000, which was approved by the stockholders at the 2000 annual meeting of stockholders. Under this plan, Mr. Jenkins was granted options to purchase an aggregate of up to 125,000 shares of our common stock for the purpose of encouraging and rewarding his contributions to our performance and aligning his interests with the interests of our stockholders. The options granted to Mr. Jenkins will be exercisable at an exercise price of $7.00 per share, and vest in four equal installments on each of the first four anniversary dates of September 22, 2000. On September 22, 2001, 31,250 of these options vested. The options granted to Mr. Jenkins will become immediately vested and fully exercisable if we undergo a change of control, except that Mr. Jenkins' options will terminate and become unexercisable on the earlier of the tenth anniversary of September 22, 2000 or the first anniversary of the change of control. If Mr. Jenkins' employment with Diedrich Coffee is terminated for cause prior to the tenth anniversary of the date of the Jenkins Option Plan or if Mr. Jenkins terminates his employment with us for any reason, then (1) all options that have not otherwise become exercisable as of the termination date will immediately terminate and become unexercisable, and (2) all options that have become exercisable as of the termination date will terminate and become unexercisable on and after the date that is sixty days after the date of the termination. If we terminate Mr. Jenkins' employment without cause, then (1) all options that have not otherwise become exercisable as of the termination date will continue to become exercisable, except that the options will terminate and become unexercisable on the earlier of the tenth anniversary of September 22, 2000 or the first anniversary of the date of Mr. Jenkins' termination date, and (2) all options that have become exercisable as of the termination date will terminate and become unexercisable on the earlier of the tenth anniversary of September 22, 2000 or the first anniversary of the date of Mr. Jenkins' termination date. Otherwise, all of Mr. Jenkins' unexercised options will terminate on September 22, 2010. Martin R. Diedrich. In June 2001, Mr. Diedrich entered into an employment agreement with us. Under the agreement, Mr. Diedrich agreed to continue to serve as our Chief Coffee Officer. The term of the agreement is three years. The agreement provides for a base salary of $160,000 per annum, subject to annual adjustments, and an annual incentive bonus of up to 25% of base salary based on our performance and Mr. Diedrich's performance against objectives approved by our board of directors. Mr. Diedrich is also entitled to the payment of a monthly car allowance of $400. Mr. Diedrich receives employee benefits consistent with our policies for other senior executives. Matthew C. McGuinness. In August 2000, Mr. McGuinness entered into an employment agreement with us appointing him Senior Vice President and Chief Financial Officer. The agreement provides for a base salary of $206,000 per annum and an annual incentive bonus of up to 50% of base salary based on our performance and Mr. McGuinness' performance against objectives approved by our board of directors. If terminated without cause, Mr. McGuinness is entitled to twelve months' salary as severance compensation. Mr. McGuinness also received options to purchase up to 18,750 shares of our common stock at an exercise price equaling the trailing five day average of the price of the common stock from the day of board approval. Such options vest over three years at a rate of 33% per year. In October of 2000, Mr. McGuinness was elected to serve as our Executive Vice President and Chief Financial Officer. As a result, his employment agreement was amended to provide for a base salary of $250,000. Mr. McGuinness receives employee benefits consistent with our policies for other senior executives. Michael Zorehkey. In February 2000, Mr. Zorehkey entered into an at-will employment agreement with us. Under the agreement, Mr. Zorehkey agreed to serve as our Director of Mall Development. The agreement provides for a base salary of $115,000 per annum and an annual incentive bonus based in part on store openings and in part on his performance against objectives approved by our board of directors. Mr. Zorehkey also received options to purchase up to 1,875 shares of our common stock at an exercise price equaling the trailing five day average of the price of the common stock from the day of board approval. Such options vest over three years at a rate of 33% per year. In April 2001, Mr. Zorehkey was elected to serve as our Vice President of Real Estate and Gloria Jean's Franchising. As a result, his employment agreement was amended to provide for a base salary of $150,000 and incentive bonuses based on the opening of Gloria Jean's coffee stores. Mr. Zorehkey receives employee benefits consistent with our policies for other senior executives. 20 Carl Mount. In October 1999, Mr. Mount entered into an employment agreement with us appointing him Vice President of Manufacturing and Purchasing. The agreement provides for a base salary of $140,000 per annum, a signing bonus of $19,000, and an annual incentive bonus of up to 25% of base salary based on the company's performance and Mr. Mount's performance against objectives approved by our board of directors. If terminated without cause, Mr. Mount is entitled to six months' salary as severance compensation. Mr. Mount also received options to purchase up to 5,000 shares of our common stock at an exercise price of $22.00. Such options vest over three years at a rate of 33% per year. In October 2000, Mr. Mount was elected to serve as Interim President of Gloria Jean's in addition to his duties as Vice President of Manufacturing and Purchasing. As a result, his employment agreement was amended to provide for a base salary of $175,000. Mr. Mount receives employee benefits consistent with our policies for other executive officers. Employment Agreements and Compensatory Arrangements with Executive Officers No Longer Employed by Diedrich Coffee Timothy J. Ryan. Effective as of September 27, 2000, Timothy J. Ryan retired as our President and Chief Executive Officer. Prior to his retirement, Mr. Ryan's employment relationship with us was governed by a two-year employment agreement with us dated November 17, 1997. The agreement provided for an annual salary of $200,000 per year, a discretionary performance bonus which could be awarded by the compensation committee after twelve months of employment (not to initially exceed 25% of Mr. Ryan's base salary), and employee benefits that included three weeks of annual vacation leave, reimbursement for all reasonable and necessary travel and other business expenses incurred in connection with the performance of services under the agreement, and the payment of a monthly car allowance of $600. The employment agreement could be terminated before the completion of two years in the event of Mr. Ryan's sustained incapacity as defined in the agreement or by us for cause as defined in the agreement. We also were entitled to terminate Mr. Ryan for any other reason, however, in such event, Mr. Ryan would be entitled to receive a severance payment equal to fifty percent of his base salary. On November 17, 1997, Mr. Ryan also entered into a stock option plan and agreement with us. Our stockholders approved Mr. Ryan's option agreement at a special meeting held on January 22, 1998. We granted Mr. Ryan options to purchase an aggregate of 150,000 shares of our common stock for the purpose of encouraging and rewarding Mr. Ryan's contributions to our performance and to align Mr. Ryan's interests with the interests of our stockholders. We granted an additional 5,000 options to Mr. Ryan on November 3, 1999, at an exercise price of $22.00, under our 1996 Stock Incentive Option Plan. Of the 155,500 options granted to Mr. Ryan, 62,500 options became immediately exercisable. Now that Mr. Ryan has retired, pursuant to the terms of Mr. Ryan's option agreement, the 92,500 options that had not become exercisable as of his retirement date immediately terminated on September 27, 2000. The remaining 62,500 options that had become exercisable as of his retirement date, terminated on September 27, 2001. Lisa Steere. Ms. Steere resigned in August 2001. In June 2000, Ms. Steere entered into an employment agreement with Gloria Jean's Gourmet Coffee appointing her Executive Vice President of Marketing. The agreement provided for a base salary of $150,000 per annum and an annual incentive bonus of up to 25% of base salary based on our performance and Ms. Steere's performance against objectives approved by our board of directors. If terminated without cause, Ms. Steere was entitled to six months' salary as severance compensation. Ms. Steere was also entitled to participate in an executive vice president stock option plan. Ms. Steere received employee benefits consistent with Gloria Jean's Gourmet Coffee's policies for other executive officers. 21 REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION The compensation committee is composed of Messrs. Churm, Goelman and Heeschen, none of whom are currently our officers or employees. The compensation committee administers our stock option plans and sets compensation levels for our executive officers. Our executive compensation policies and programs are designed to: - provide competitive levels of overall compensation that will attract and retain the best executive talent in the industry - motivate executive officers to perform at their highest level - align executive officer and stockholder interests to create stockholder value - reward executive officers for achievement of corporate and individual objectives To achieve these goals, our compensation committee and board of directors have established an executive compensation program consisting primarily of three integrated components: base salary, annual bonus and stock options. Base Salary. Base salaries for executive officers are set by our compensation committee after considering factors such as competitive environment, experience level, position, responsibility and overall contribution of the executive. Base salaries for the executive officers were established in their respective employment and letter agreements. Annual Bonus. All executive officers, including the Chief Executive Officer, are eligible to receive an annual bonus. The employment and letter agreements for the executive officers provide for discretionary performance bonuses based upon our performance and the respective executive officer's contribution to this performance, except that Mr. Jenkins' letter agreement provided for a guaranteed $100,000 bonus to be paid on September 27, 2001, the first anniversary of his employment with us. Stock Options. The third component of the compensation program for executive officers is in the form of stock option awards. Our 2000 Equity Incentive Plan provides for long-term incentive compensation for our employees, including executive officers. Stock option awards align the interests of executive officers with those of stockholders by providing them with an equity interest in Diedrich Coffee, thereby providing incentive for the executive officers to maximize stockholder value. Option awards directly tie executive compensation to the value of our stock. Our compensation committee is responsible for determining, subject to the terms of the 2000 Equity Incentive Plan, the individuals to whom grants are made, the timing of grants and the number of shares per grant. The number of shares are determined based upon the individual's position in our company, competitive company practices and the number of unvested shares already held by the individual. Stock options are generally granted with an exercise price equal to the fair market value of our common stock on the date of grant. During the fiscal year ended June 27, 2001, our compensation committee granted stock options to approximately 24 employees. The goal of the compensation committee was to ensure that employees were focused on increasing stockholder value. The group included the majority of corporate office employees at the level of manager and above, as well as general managers at the coffeehouse level. Chief Executive Officer. In September 2000, we hired Mr. Jenkins as our President and Chief Executive Officer. We entered into an at-will employment letter agreement as well as a stock option plan and agreement with Mr. Jenkins. The terms of Mr. Jenkins' letter agreement and the stock option plan and agreement are described above under the caption "Employment Agreements and Compensatory Arrangements -- Employment Agreements and Compensatory Arrangements with Current Executive Officers." The process of establishing the Chief Executive Officer's compensation parallels the process and criteria used in establishing compensation levels for other executive officers. 22 Policy with Respect to Internal Revenue Code Section 162(m). In 1993, the Internal Revenue Code was amended to add Section 162(m). Section 162(m) and the regulations thereunder place a limit of $1 million on the amount of compensation that may be deducted by us in any year with respect to certain of our most highly compensated officers. Section 162(m) does not, however, disallow a deduction for qualified "performance-based compensation," the material terms of which are disclosed to and approved by stockholders. At the present time, our executive officer compensation levels, other than "performance-based compensation," do not exceed $1 million. Our compensation committee and board of directors plan to take such actions in the future to minimize the loss of tax deductions related to compensation as they deem necessary and appropriate in light of specific compensation objectives. Respectfully submitted, Peter Churm Paul C. Heeschen Lawrence Goelman COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During the fiscal year ended June 27, 2001, our compensation committee consisted of Messrs. Churm, Goelman and Heeschen. No member of the compensation committee was, during the fiscal year ended June 27, 2001 or at any other time, an officer or employee of Diedrich Coffee. There are no compensation committee interlocks between us and other entities involving our executive officers and board members who serve as executive officers or board members of these other entities. REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS The audit committee reviews our financial reporting process on behalf of the board of directors. Our management has the primary responsibility for the financial statements and the reporting process. Our independent auditors are responsible for expressing an opinion on the conformity of our audited financial statements to generally accepted accounting principles. In this context, the audit committee has reviewed and discussed with management and KPMG LLP, our independent auditors, the audited financial statements. The audit committee has discussed with the independent auditors the matters required to be discussed by Statement on Auditing Standards No. 61 (Communication with Audit Committees). In addition, the audit committee has received from the independent auditors the written disclosures required by Independence Standards Board No. 1 (Independence Discussions with Audit Committees) and discussed with them their independence from Diedrich Coffee and its management. Furthermore, the audit committee has considered whether the independent auditors provision of other non-audit services to us is compatible with the auditor's independence. In reliance on the reviews and discussions referred to above, the audit committee recommended to our board of directors, and the board has approved, that the audited financial statements included in our Annual Report on the Securities and Exchange Commission Form 10-K for the year ended June 27, 2001, for filing with the Securities and Exchange Commission. Respectfully submitted, Peter Churm Paul C. Heeschen Lawrence Goelman 23 INDEPENDENT AUDITOR FEES FOR FISCAL YEAR 2001 Audit Fees. Our independent auditor during the year ended June 27, 2001 was KPMG LLP. The aggregate fees billed by KPMG LLP in connection with the audit of our annual financial statements for the most recent fiscal year and for the review of the financial information included in our quarterly reports on Form 10-Q during the year 2001 was $157,000. All Other Fees. The aggregate fees billed for all other services rendered to us by KPMG LLP during the year 2001 was $118,459. These fees relate to tax services performed for us and for the review of financial statements contained in our fiscal year 2001 registration statements. 24 STOCK PERFORMANCE MEASUREMENT COMPARISON The following graph shows a comparison of the cumulative total returns for the period beginning on September 12, 1996, the date our common stock was first publicly traded, and ending on June 27, 2001 for: - our common stock; - the Total Return Index for the Nasdaq National Market (U.S. companies); and - the Total Return Index for Nasdaq Retail Trade Stocks. Each of the below returns assumes an initial value of $100 and reinvestment of dividends. The comparisons in the graph are required by the Securities and Exchange Commission and are not intended to forecast or be indicative of possible future performance of our common stock. [PERFORMANCE GRAPH]
INVESTMENT VALUE --------------------------------------------------------------- 09/12/96 07/02/97 07/01/98 06/30/99 06/28/00 06/27/01 -------- -------- -------- -------- -------- -------- Diedrich Coffee, Inc. ................... $100.00 $ 25.15 $ 66.07 $ 66.67 $ 27.38 $ 8.64 Nasdaq Stock Market...................... $100.00 $124.82 $164.53 $234.21 $343.62 $180.10 Nasdaq Retail Trade Stocks............... $100.00 $117.09 $157.51 $150.64 $ 98.01 $ 97.40
CERTAIN TRANSACTIONS REGARDING DIEDRICH COFFEE On April 6, 1999, we entered into a $1,000,000 loan agreement and security agreement with Amre A. Youness, one of our former directors and a stockholder. Under the loan agreement, all outstanding principal and interest was due and payable on April 6, 2000. The loan was secured by our assets with interest accruing and paid monthly at the prime rate plus 3%. We repaid the loan on July 8, 1999. In connection with the loan agreement, we issued warrants to Mr. Youness to purchase 17,550 shares of our common stock at a price of $22.50 per share. Mr. Youness' warrants will not expire until April 6, 2004. In connection with the acquisition of Coffee People in July 1999, we and certain of our affiliates entered into a voting agreement with Second Cup pursuant to which all parties agreed to nominate and vote for a director nominee identified by Second Cup in any subsequent stockholder meeting where directors were to be 25 elected. On October 6, 2000, Second Cup notified us that it was irrevocably waiving its right to designate a director as provided in this voting agreement. On May 8, 2001, we sold and issued 2,000,000 shares of our common stock at a purchase price of $3.00 per share to a number of entities for which Westcliff Capital Management, LLC is either the general partner and/or the investment manager, Peninsula Capital, LP, Common Sense Partners, LP and Sequoia Enterprises, LP. In addition, we issued to the investors warrants to purchase an additional 500,000 shares of our common stock at an initial exercise price of $4.80 per share. Our Chairman, Paul C. Heeschen, is the sole general partner of Sequoia Enterprises, LP. 26 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information regarding the beneficial ownership of our common stock as of October 24, 2001, by: - each person or group of affiliated persons who we know owns beneficially 5% or more of our common stock - each of our directors and nominees - each of our executive officers or former executive officers listed in the summary compensation table - all of our directors and executive officers as a group Percentage of ownership is calculated as required by Rule 13d-3(d)(1) under the Securities Exchange Act of 1934. Except as indicated in the footnotes to this table, the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them, subject to community property laws. The table below includes the number of shares underlying options and warrants that are exercisable within 60 days from October 24, 2001.
AMOUNT AND NATURE OF BENEFICIAL PERCENT NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNERSHIP(2) OF CLASS(%) --------------------------------------- ------------ ----------- Sequoia Enterprises, LP..................................... 1,298,375(3) 24.0 450 Newport Center Drive Suite 450 Newport Beach, CA 92660 Westcliff Capital Management, LLC........................... 913,433(4) 16.9 200 Seventh Avenue, Suite 105 Santa Cruz, California 95062 D.C.H., L.P. ............................................... 357,690(5) 7.0 450 Newport Center Drive Suite 450 Newport Beach, CA 92660 Paul C. Heeschen............................................ 1,737,861(6) 32.0 Martin R. Diedrich.......................................... 167,026(7) 3.2 Lawrence Goelman............................................ 32,550(8) * Peter Churm................................................. 15,625(9) * J. Michael Jenkins.......................................... 31,250(10) * Matthew C. McGuinness....................................... 11,875(11) * Carl Mount.................................................. 1,666(12) * Michael Zorehkey............................................ 625(13) * Timothy Ryan................................................ 7,341(14) * Lisa Steere................................................. 1,666(15) * All directors and executive officers as a group (14 persons)........................................ 2,026,173(16) 37.6
--------------- * Less than 1% (1) Unless otherwise indicated, the address of each person in this table is c/o Diedrich Coffee, Inc., 2144 Michelson Drive, Irvine, California 92612. (2) Calculated pursuant to Rule 13d-3(d) under the Securities Exchange Act of 1934. Shares not outstanding that are subject to options or warrants exercisable by the holder thereof within 60 days of October 24, 2001 are deemed outstanding for the purposes of calculating the number and percentage owned by such stockholder, but not deemed outstanding for the purpose of calculating the percentage owned by each other stockholder listed. Unless otherwise noted, all shares listed as beneficially owned by a stockholder are actually outstanding. 27 (3) Paul C. Heeschen, the chairman of our board of directors, is the sole general partner of this limited partnership with voting and investment power as to all shares beneficially owned by the limited partnership. Includes 250,000 shares subject to warrants that are exercisable with 60 days. (4) According to the Statement of Changes of Beneficial Ownership filed on October 2, 2001 with the Securities and Exchange Commission. The statement reports the beneficial ownership of Westcliff Capital Management, LLC and Richard S. Spencer III, a manager and the majority member of Westcliff Capital Management, LLC. The statement reports the beneficial ownership of entities for which Westcliff Capital Management, LLC is (i) the general partner and investment adviser and (ii) the investment adviser only. Includes 208,333 shares subject to warrants that are exercisable within 60 days. (5) Paul C. Heeschen, the chairman of our board of directors, is the sole general partner of this limited partnership with voting and investment power as to all shares beneficially owned by the limited partnership. (6) Includes (i) 1,298,375 shares beneficially owned by Sequoia Enterprises, LP (250,000 shares of which are subject to warrants exercisable with 60 days), (ii) 357,690 shares beneficially owned by D.C.H., LP and (iii) 61,579 shares beneficially owned by Redwood Enterprises VI, LP. Mr. Heeschen is the sole general partner of each of these partnership with voting and investment power as to all of such shares. Includes 12,467 shares owned personally by Mr. Heeschen (10,625 shares of which are subject to options that are exercisable within 60 days) and 7,750 shares held by the Palm Trust, of which Mr. Heeschen is a trustee with shared voting and investment power as to all of such shares. (7) Includes 3,250 shares subject to options that are exercisable within 60 days. (8) Includes 29,375 shares subject to options that are exercisable within 60 days. This number does not include the 21,250 shares subject to warrants held by the Virginia R. Cirica Trust. Ms. Cirica is Mr. Goelman's wife. Mr. Goelman disclaims any beneficial interest in the Virginia R. Cirica Trust, except to the extent to which Mr. Goelman is a contingent beneficiary under the terms of that trust. (9) Includes 10,625 shares subject to options that are exercisable within 60 days. (10) Includes 31,250 shares subject to options that are exercisable within 60 days. (11) Includes 9,375 shares subject to options that are exercisable within 60 days. (12) Includes 1,666 shares subject to options that are exercisable within 60 days. (13) Includes 625 shares subject to options that are exercisable within 60 days. (14) Resigned as Chief Executive Officer effective as of September 27, 2000. (15) Includes 1,666 shares subject to options that are exercisable within 60 days. (16) Includes 374,486 shares subject to options and warrants that are exercisable within 60 days. OTHER INFORMATION SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers and persons who own more than ten percent of a registered class of our equity securities, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of our common stock and other equity securities. These Section 16(a) reporting persons are required by Securities and Exchange Commission regulations to furnish us with copies of all Section 16(a) forms they file. 28 To our knowledge, based solely on a review of the copies of such reports furnished to us and written representations from Section 16(a) reporting persons, we believe that during our fiscal year ended June 27, 2001, all Section 16(a) reporting persons complied with all applicable filing requirements except as follows: - Options to purchase common stock of Diedrich Coffee that were granted to Matthew McGuinness, Martin Diedrich, Edward Appfel, Joseph Caruso, Michael Zorehkey, Katherine Saar and Carl Mount in June 2001 were reported in October 2001. - In April 2001, Paul Heeschen filed an amendment to his February 2001 Form 4. The amendment reported a number of open market acquisitions of common stock that were unintentionally omitted from the Form 4 when originally filed. - Options to purchase common stock of Diedrich Coffee granted to Carl Mount in November 2000 were reported in December 2000. - Options to purchase common stock of Diedrich Coffee granted to Lisa Steere in November 2000 were reported in December 2000. - In August 2000, D.C.H., LP acquired Diedrich Coffee common stock on the open market. The acquisitions were reported in September 2000. RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS The firm of independent accountants recommended by the audit committee and selected by our board of directors for the fiscal year ending June 26, 2002 is KPMG LLP. The board of directors expects that the representatives of KPMG LLP will be present at the meeting, will be given an opportunity to make a statement at such meeting if they desire to do so and will be available to respond to appropriate questions. INCORPORATION BY REFERENCE In our filings with the Securities and Exchange Commission, information is sometimes "incorporated by reference." This means that we are referring you to information that has previously been filed with the Securities and Exchange Commission, so that information should be considered as part of the filing that you are reading. Our 2001 Annual Report is incorporated by reference. Based on Securities and Exchange Commission regulations, the Compensation Committee and Audit Committee Reports on beginning on pages 21 and 22, respectively, and the stock performance graph on page 24 of this proxy statement, specifically are not incorporated by reference into any other filings with the Securities and Exchange Commission. This proxy statement is sent to you as part of the proxy materials for the 2001 annual meeting of stockholders. You may not consider this proxy statement as material for soliciting the purchase or sale of our common stock. AVAILABILITY OF ADDITIONAL INFORMATION Copies of our 2001 Annual Report (which includes the Annual Report on Form 10-K filed with the Securities and Exchange Commission) have been distributed to stockholders. Additional copies and additional information are available without charge from Investor Relations, Diedrich Coffee, Inc., 2144 Michelson Drive, Irvine, California 92612. STOCKHOLDER PROPOSALS FOR 2002 ANNUAL STOCKHOLDERS' MEETING Stockholders who wish to have proposals for action at our 2002 Annual Meeting of Stockholders considered for inclusion in next year's proxy statement and form of proxy must cause their proposals to be received in writing by us at our address set forth on the first page of this Proxy Statement no later than July 1, 2002. Such proposals should be addressed to our Corporate Secretary, and may be included in next year's proxy materials if they comply with the rules and regulations promulgated by the Securities and Exchange Commission. No business shall be conducted at any annual meeting except in accordance with the procedures set forth in our bylaws. 29 OTHER MATTERS Our board of directors knows of no other matters that will be presented for consideration at the annual meeting. If any other matters are properly brought before the annual meeting, it is the intention of the persons named in the accompanying proxy to vote on such matters in accordance with their best judgment. It is important that the proxies be returned promptly and that your shares be represented. Stockholders are urged to mark, date, execute and promptly return the accompanying proxy card in the enclosed envelope. By order of the board of directors, Paul C. Heeschen Chairman of the Board Irvine, California October 25, 2001 30 APPENDIX A DIEDRICH COFFEE, INC. 2000 EQUITY INCENTIVE PLAN (AS PROPOSED TO BE AMENDED) ARTICLE I PURPOSE OF PLAN The Company has adopted this Plan to promote the interests of the Company and its stockholders by using investment interests in the Company to attract, retain and motivate its management and other persons, to encourage and reward their contributions to the performance of the Company, and to align their interests with the interests of the Company's stockholders. Capitalized terms not otherwise defined herein have the meanings ascribed to them in Article IX. ARTICLE II EFFECTIVE DATE AND TERM OF PLAN 2.1 Term of Plan. This Plan became effective as of the Effective Date and will continue in effect until the Expiration Date, at which time this Plan will automatically terminate. 2.2 Effect on Awards. Awards may be granted only during the Plan Term, but each Award properly granted during the Plan Term will remain in effect after the Expiration Date until such Award has been exercised, terminated or expired in accordance with its terms and the terms of this Plan. ARTICLE III SHARES SUBJECT TO PLAN 3.1 Number of Shares. The maximum number of shares of Common Stock that may be issued pursuant to Awards under this Plan is 437,500, subject to adjustment as set forth in Section 3.4. 3.2 Source of Shares. The Common Stock to be issued under this Plan will be made available, at the discretion of the Administrator, either from authorized but unissued shares of Common Stock or from previously issued shares of Common Stock reacquired by the Company, including without limitation shares purchased on the open market. 3.3 Availability of Unused Shares. Shares of Common Stock subject to unexercised portions of any Award that expire, terminate or are canceled, and shares of Common Stock issued pursuant to an Award that are reacquired by the Company pursuant to this Plan or the terms of the Award under which such shares were issued, will again become available for the grant of further Awards under this Plan as part of the shares available under Section 3.1. However, if the exercise price of, or withholding taxes incurred in connection with, an Award is paid with shares of Common Stock, or if shares of Common Stock otherwise issuable pursuant to Awards are withheld by the Company in satisfaction of an exercise price or the withholding taxes incurred in connection with any exercise or vesting of an Award, then the number of shares of Common Stock available for issuance under the A-1 Plan will be reduced by the gross number of shares for which the Award is exercised or for which it vests, as applicable, and not by the net number of shares of Common Stock issued to the holder of such Award. 3.4 Adjustment Provisions. (a) Adjustments. If the Company consummates any Reorganization in which holders of shares of Common Stock are entitled to receive in respect of such shares any additional shares or new or different shares or securities, cash or other consideration (including, without limitation, a different number of shares of Common Stock), or if the outstanding shares of Common Stock are increased, decreased or exchanged for a different number or kind of shares or other securities through merger, consolidation, sale or exchange of assets of the Company, reorganization, recapitalization, reclassification, combination, stock dividend, stock split, reverse stock split, spin-off, or similar transaction then, subject to Section 8.1, an appropriate and proportionate adjustment shall be made by the Administrator in its discretion in: (i) the maximum number and kind of shares subject to this Plan as provided in Section 3.1; (ii) the number and kind of shares or other securities subject to then outstanding Awards; (iii) the price for each share or other unit of any other securities subject to, or measurement criteria applicable to, then outstanding Awards; and/or (iv) the number and kind of shares or other securities to be issued as Non-Employee Director Options. (b) No Fractional Interests. No fractional interests will be issued under the Plan resulting from any adjustments. (c) Adjustments Related to Company Stock. To the extent any adjustments relate to stock or securities of the Company, such adjustments will be made by the Administrator, whose determination in that respect will be final, binding and conclusive. (d) Right to Make Adjustment. The grant of an Award will not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge or to consolidate or to dissolve, liquidate or sell, or transfer all or any part of its business or assets. (e) Limitations. No adjustment to the terms of an Incentive Stock Option may be made unless such adjustment either: (i) would not cause the Option to lose its status as an Incentive Stock Option; or (ii) is agreed to in writing by the Administrator and the Recipient. 3.5 Reservation of Shares. The Company will at all times reserve and keep available shares of Common Stock equaling at least the total number of shares of Common Stock issuable pursuant to all outstanding Awards. ARTICLE IV ADMINISTRATION OF PLAN 4.1 Administrator. (a) Plan Administration. Subject to the provisions of Section 4.1(b), this Plan will be administered by the Board and may also be administered by a Committee of the Board appointed pursuant to Section 4.1(b). (b) Administration by Committee. The Board in its sole discretion may from time to time appoint a Committee of not less than two (2) Board members with authority to administer this Plan in whole or part and, subject to applicable law, to exercise any or all of the powers, authority and discretion of the Board under this Plan. As long as the Company has a class of equity securities registered under Section 12 of the Exchange Act, this Plan will be administered by a Committee of not less than two (2) Board members appointed by the Board in its sole discretion from time to time, each of whom is (i) a Non-Employee Director, and (ii) an "Outside Director" as defined in the regulations adopted under Section 162(m) of the IRC. The Board may from time to time increase or decrease (but not below two (2)) the number of members of the Committee, remove from membership on the Committee all or any portion of its members, and/or appoint such person or persons as it desires to fill any vacancy existing on the Committee, whether caused by removal, resignation or A-2 otherwise. Unless otherwise required by this Section 4.1(b), the Board may disband the Committee at any time. 4.2 Authority of Administrator. (a) Authority to Interpret Plan. Subject to the express provisions of this Plan, the Administrator will have the power to implement, interpret and construe this Plan and any Awards and Award Documents or other documents defining the rights and obligations of the Company and Recipients hereunder and thereunder, to determine all questions arising hereunder and thereunder, and to adopt and amend such rules and regulations for the administration hereof and thereof as it may deem desirable. The interpretation and construction by the Administrator of any provisions of this Plan or of any Award or Award Document, and any action taken by, or inaction of, the Administrator relating to this Plan or any Award or Award Document, will be within the discretion of the Administrator and will be conclusive and binding upon all persons. Subject only to compliance with the express provisions hereof, the Administrator may act in its discretion in matters related to this Plan and any and all Awards and Award Documents. (b) Authority to Grant Awards. Subject to the express provisions of this Plan, the Administrator may from time to time in its discretion select the Eligible Persons to whom, and the time or times at which, Awards will be granted or sold, the nature of each Award, the number of shares of Common Stock or the number of rights that make up or underlie each Award, the exercise price and period (if applicable) for the exercise of each Award, and such other terms and conditions applicable to each individual Award as the Administrator may determine. Any and all terms and conditions of Awards may be established by the Administrator without regard to existing Awards or other grants and without incurring any obligation of the Company in respect of subsequent Awards. The Administrator may grant at any time new Awards to an Eligible Person who has previously received Awards or other grants (including other stock options) regardless of the status of such other Awards or grants. The Administrator may grant Awards singly or in combination or in tandem with other Awards as it determines in its discretion. (c) Procedures. Subject to the Company's charter or bylaws or any Board resolution conferring authority on the Committee, any action of the Administrator with respect to the administration of this Plan must be taken pursuant to a majority vote of the authorized number of members of the Administrator or by the unanimous written consent of its members; provided, however, that (i) if the Administrator is the Committee and consists of two (2) members, then actions of the Administrator must be unanimous, and (ii) actions taken by the Board will be valid if approved in accordance with applicable law. 4.3 No Liability. No member of the Board or the Committee or any designee thereof will be liable for any action or inaction with respect to this Plan or any Award or any transaction arising under this Plan or any Award except in circumstances constituting bad faith of such member. 4.4 Amendments. (a) Plan Amendments. The Administrator may at any time and from time to time in its discretion, insofar as permitted by applicable law, rule or regulation and subject to Section 4.4(c), suspend or discontinue this Plan or revise or amend it in any respect whatsoever, and this Plan as so revised or amended will govern all Awards, including those granted before such revision or amendment. Without limiting the generality of the foregoing, the Administrator is authorized to amend this Plan to comply with or take advantage of amendments to applicable laws, rules or regulations, including the Securities Act, the Exchange Act, the IRC, or the rules of any exchange or market system upon which the Common Stock is listed or trades, or any rules or regulations promulgated thereunder. No stockholder approval of any amendment or revision will be required unless such approval is required by applicable law, rule or regulation. (b) Award Amendments. The Administrator may at any time and from time to time in its discretion, but subject to Section 4.4(c) and compliance with applicable statutory or administrative requirements, accelerate or extend the vesting or exercise period of any Award as a whole or in part, adjust or reduce the purchase or exercise price of an Award either by cancellation of such Award and the granting of a new Award A-3 at such modified purchase or exercise price or by amending the terms of the Award to reflect such a modified purchase or exercise price, and make such other modifications in the terms and conditions of an Award as it deems advisable. (c) Limitation. Except as otherwise provided in this Plan or in the applicable Award Document, no amendment, revision, suspension or termination of this Plan or an outstanding Award that would cause an Incentive Stock Option to cease to qualify as such or that would alter, impair or diminish in any material respect any rights or obligations under any Award theretofore granted under this Plan may be effected without the written consent of the Recipient to whom such Award was granted. 4.5 Other Compensation Plans. This Plan supersedes and replaces the Company's Amended and Restated 1996 Stock Incentive Plan and the Company's 1996 Non-Employee Directors Stock Option Plan, but the adoption of this Plan will not affect any other stock option, incentive or other compensation plans in effect from time to time for the Company, and this Plan will not preclude the Company from establishing any other forms of incentive or other compensation for employees, directors, advisors or consultants of the Company, whether or not approved by stockholders. Notwithstanding the fact that this Plan supersedes and replaces the Company's Amended and Restated 1996 Stock Incentive Plan and the Company's 1996 Non-Employee Directors Stock Option Plan, this plan does not affect in any way, any outstanding award grants made under such other plans prior to the Effective Date. 4.6 Plan Binding on Successors. This Plan will be binding upon the successors and assigns of the Company. 4.7 References to Successor Statutes, Regulations and Rules. Any reference in this Plan to a particular statute, regulation or rule will also refer to any successor provision of such statute, regulation or rule. 4.8 Invalid Provisions. In the event that any provision of this Plan is found to be invalid or otherwise unenforceable under any applicable law, such invalidity or unenforceability is not to be construed as rendering any other provisions contained herein invalid or unenforceable, and all such other provisions are to be given full force and effect to the same extent as though the invalid and unenforceable provision were not contained herein. 4.9 Governing Law. This Plan will be governed by and interpreted in accordance with the internal laws of the State of Delaware, without giving effect to the principles of the conflicts of laws thereof. 4.10 Interpretation. Headings herein are for convenience of reference only, do not constitute a part of this Plan, and will not affect the meaning or interpretation of this Plan. References herein to Sections or Articles are references to the referenced Section or Article hereof, unless otherwise specified. ARTICLE V GENERAL AWARD PROVISIONS 5.1 Participation in Plan. (a) Eligibility to Receive Awards. A person is eligible to receive grants of Awards if, at the time of the grant of the Award, such person is an Eligible Person or has received an offer of employment from the Company, provided, however, that only Non-Employee Directors are eligible to receive Non-Employee Director Options, and provided further, that Awards granted to a person who has received an offer of employment will terminate and be forfeited without consideration if the employment offer is not accepted A-4 within such time as may be specified by the Company. Status as an Eligible Person will not be construed as a commitment that any Award will be granted under this Plan to an Eligible Person or to Eligible Persons generally. (b) Eligibility to Receive Incentive Stock Options. Incentive Stock Options may be granted only to Eligible Persons meeting the employment requirements of Section 422 of the IRC. (c) Awards to Foreign Nationals. Notwithstanding anything to the contrary herein, the Administrator may, in order to fulfill the purposes of this Plan, modify grants of Awards to Recipients who are foreign nationals or employed outside of the United States to recognize differences in applicable law, tax policy or local custom. 5.2 Award Documents. Each Award must be evidenced by an agreement duly executed on behalf of the Company and by the Recipient or, in the Administrator's discretion, a confirming memorandum issued by the Company to the Recipient, setting forth such terms and conditions applicable to the Award as the Administrator may in its discretion determine. Awards will not be deemed made or binding upon the Company, and Recipients will have no rights thereto, until such an agreement is entered into between the Company and the Recipient or such a memorandum is delivered by the Company to the Recipient, but an Award may have an effective date prior to the date of such an agreement or memorandum. Award Documents may be (but need not be) identical and must comply with and be subject to the terms and conditions of this Plan, a copy of which will be provided to each Recipient and incorporated by reference into each Award Document. Any Award Document may contain such other terms, provisions and conditions not inconsistent with this Plan as may be determined by the Administrator. In case of any conflict between this Plan and any Award Document, this Plan shall control. 5.3 Payment for Awards. (a) Payment of Exercise Price. The exercise price or other payment for an Award is payable upon the exercise of a Stock Option or upon other purchase of shares pursuant to an Award granted hereunder by delivery of legal tender of the United States or payment of such other consideration as the Administrator may from time to time deem acceptable in any particular instance; provided, however, that the Administrator may, in the exercise of its discretion, allow exercise of an Award in a broker-assisted or similar transaction in which the exercise price is not received by the Company until promptly after exercise. (b) Company Assistance. The Company may assist any person to whom an Award is granted (including, without limitation, any officer or director of the Company) in the payment of the purchase price or other amounts payable in connection with the receipt or exercise of that Award, by lending such amounts to such person on such terms and at such rates of interest and upon such security (if any) as may be consistent with applicable law and approved by the Administrator. In case of such a loan, the Administrator may require that the exercise be followed by a prompt sale of some or all of the underlying shares and that a portion of the sale proceeds be dedicated to full payment of the exercise price and amounts required pursuant to Section 5.10. (c) Cashless Exercise. If permitted in any case by the Administrator in its discretion, the exercise price for Awards may be paid by capital stock of the Company delivered in transfer to the Company by or on behalf of the person exercising the Award and duly endorsed in blank or accompanied by stock powers duly endorsed in blank, with signatures guaranteed in accordance with the Exchange Act if required by the Administrator; or retained by the Company from the stock otherwise issuable upon exercise or surrender of vested and/or exercisable Awards or other equity awards previously granted to the Recipient and being exercised (if applicable) (in either case valued at Fair Market Value as of the exercise date); or such other consideration as the Administrator may from time to time in the exercise of its discretion deem acceptable in any particular instance. (d) No Precedent. Recipients will have no rights to the assistance described in Section 5.3(b) or the exercise techniques described in Section 5.3(c), and the Company may offer or permit such assistance or A-5 techniques on an ad hoc basis to any Recipient without incurring any obligation to offer or permit such assistance or techniques on other occasions or to other Recipients. 5.4 No Employment Rights. Nothing contained in this Plan (or in Award Documents or in any other documents related to this Plan or to Awards) will confer upon any Eligible Person or Recipient any right to continue in the employ of or engagement by the Company or any Affiliated Entity or constitute any contract or agreement of employment or engagement, or interfere in any way with the right of the Company or any Affiliated Entity to reduce such person's compensation or other benefits or to terminate the employment or engagement of such Eligible Person or Recipient, with or without cause. Except as expressly provided in this Plan or in any statement evidencing the grant of an Award, the Company has the right to deal with each Recipient in the same manner as if this Plan and any such statement evidencing the grant of an Award did not exist, including, without limitation, with respect to all matters related to the hiring, discharge, compensation and conditions of the employment or engagement of the Recipient. Unless otherwise set forth in a written agreement binding upon the Company or an Affiliated Entity, all employees of the Company or an Affiliated Entity are "at will" employees whose employment may be terminated by the Company or the Affiliated Entity at any time for any reason or no reason, without payment or penalty of any kind. Any question(s) as to whether and when there has been a termination of a Recipient's employment or engagement, the reason (if any) for such termination, and/or the consequences thereof under the terms of this Plan or any statement evidencing the grant of an Award pursuant to this Plan will be determined by the Administrator and the Administrator's determination thereof will be final and binding. 5.5 Restrictions Under Applicable Laws and Regulations. (a) Government Approvals. All Awards will be subject to the requirement that, if at any time the Company determines, in its discretion, that the listing, registration or qualification of the securities subject to Awards granted under this Plan upon any securities exchange or interdealer quotation system or under any federal, state or foreign law, or the consent or approval of any government or regulatory body, is necessary or desirable as a condition of, or in connection with, the granting of such an Award or the issuance, if any, or purchase of shares in connection therewith, such Award may not be exercised as a whole or in part unless and until such listing, registration, qualification, consent or approval has been effected or obtained free of any conditions not acceptable to the Company. During the term of this Plan, the Company will use its reasonable efforts to seek to obtain from the appropriate governmental and regulatory agencies any requisite qualifications, consents, approvals or authorizations in order to issue and sell such number of shares of its Common Stock as is sufficient to satisfy the requirements of this Plan. The inability of the Company to obtain any such qualifications, consents, approvals or authorizations will relieve the Company of any liability in respect of the nonissuance or sale of such stock as to which such qualifications, consents, approvals or authorizations pertain. (b) No Registration Obligation; Recipient Representations. The Company will be under no obligation to register or qualify the issuance of Awards or underlying securities under the Securities Act or applicable state securities laws. Unless the issuance of Awards and underlying securities have been registered under the Securities Act and qualified or registered under applicable state securities laws, the Company shall be under no obligation to issue any Awards or underlying securities unless the Awards and underlying securities may be issued pursuant to applicable exemptions from such registration or qualification requirements. In connection with any such exempt issuance, the Administrator may require the Recipient to provide a written representation and undertaking to the Company, satisfactory in form and scope to the Company, that such Recipient is acquiring such Awards and underlying securities for such Recipient's own account as an investment and not with a view to, or for sale in connection with, the distribution of any such securities, and that such person will make no transfer of the same except in compliance with any rules and regulations in force at the time of such transfer under the Securities Act and other applicable law, and that if securities are issued without registration, a legend to this effect (together with any other legends deemed appropriate by the Administrator) may be endorsed upon the securities so issued, and to the effect of any additional representations that are appropriate in light of applicable securities laws and rules. The Company may also order its transfer agent to stop transfers of such shares. The Administrator may also require the Recipient to provide the Company such information A-6 and other documents as the Administrator may request in order to satisfy the Administrator as to the investment sophistication and experience of the Recipient and as to any other conditions for compliance with any such exemptions from registration or qualification. 5.6 Additional Conditions. Any Award may be subject to such provisions (whether or not applicable to any other Award or Recipient) as the Administrator deems appropriate, including without limitation provisions for the forfeiture of or restrictions on resale or other disposition of securities of the Company acquired under this Plan, provisions giving the Company the right to repurchase securities of the Company acquired under this Plan in the event the Recipient leaves the Company for any reason or elects to effect any disposition thereof, and provisions to comply with federal and state securities laws. 5.7 No Privileges Re Stock Ownership or Specific Assets. Except as otherwise set forth herein, a Recipient or a permitted transferee of an Award will have no rights as a stockholder with respect to any shares issuable or issued in connection with the Award until the Recipient has delivered to the Company all amounts payable and performed all obligations required to be performed in connection with exercise of the Award and the Company has issued such shares. No person will have any right, title or interest in any fund or in any specific asset (including shares of capital stock) of the Company by reason of any Award granted hereunder. Neither this Plan (or any documents related hereto) nor any action taken pursuant hereto is to be construed to create a trust of any kind or a fiduciary relationship between the Company and any person. To the extent that any person acquires a right to receive an Award hereunder, such right shall be no greater than the right of any unsecured general creditor of the Company. 5.8 Nonassignability. No Award is assignable or transferable except: (a) by will or by the laws of descent and distribution; or (b) subject to the final sentence of this Section 5.8, upon dissolution of marriage pursuant to a qualified domestic relations order or, in the discretion of the Administrator and under circumstances that would not adversely affect the interests of the Company, transfers for estate planning purposes or pursuant to a nominal transfer that does not result in a change in beneficial ownership. During the lifetime of a Recipient, an Award granted to such person will be exercisable only by the Recipient (or the Recipient's permitted transferee) or such person's guardian or legal representative. Notwithstanding the foregoing, Stock Options intended to be treated as Incentive Stock Options (or other Awards subject to transfer restrictions under the IRC) may not be assigned or transferred in violation of Section 422(b)(5) of the IRC or the regulations thereunder, and nothing herein is intended to allow such assignment or transfer. 5.9 Information to Recipients. (a) Provision of Information. The Administrator in its sole discretion may determine what, if any, financial and other information is to be provided to Recipients and when such financial and other information is to be provided after giving consideration to applicable federal and state laws, rules and regulations, including, without limitation, applicable federal and state securities laws, rules and regulations. (b) Confidentiality. The furnishing of financial and other information that is confidential to the Company is subject to the Recipient's agreement to maintain the confidentiality of such financial and other information, and not to use the information for any purpose other than evaluating the Recipient's position under this Plan. The Administrator may impose other restrictions on the access to and use of such confidential information and may require a Recipient to acknowledge the Recipient's obligations under this Section 5.9(b) (which acknowledgment is not to be a condition to Recipient's obligations under this Section 5.9(b)). 5.10 Withholding Taxes. Whenever the granting, vesting or exercise of any Award, or the issuance of any securities upon exercise of any Award or transfer thereof, gives rise to tax or tax withholding liabilities or obligations, the Administrator will have the right as a condition thereto to require the Recipient to remit to the Company an amount sufficient to satisfy any federal, state and local withholding tax requirements arising in connection A-7 therewith. The Administrator may, in the exercise of its discretion, allow satisfaction of tax withholding requirements by accepting delivery of stock of the Company or by withholding a portion of the stock otherwise issuable in connection with an Award, in each case valued at Fair Market Value as of the date of such delivery or withholding, as the case may be, is determined. 5.11 Legends on Awards and Stock Certificates. Each Award Document and each certificate representing securities acquired upon vesting or exercise of an Award must be endorsed with all legends, if any, required by applicable federal and state securities and other laws to be placed on the Award Document and/or the certificate. The determination of which legends, if any, will be placed upon Award Documents or the certificates will be made by the Administrator in its discretion and such decision will be final and binding. 5.12 Effect of Termination of Employment on Awards. (a) Termination of Vesting. Notwithstanding anything to the contrary herein, but subject to Section 5.12(b) Awards will be exercisable by a Recipient (or the Recipient's successor in interest) following such Recipient's termination of employment or service only to the extent that installments thereof had become exercisable on or prior to the date of such termination and are not forfeited pursuant to Section 5.15. (b) Alteration of Vesting and Exercise Periods. Notwithstanding anything to the contrary herein, the Administrator may in its discretion (i) designate shorter or longer periods following a Recipient's termination of employment or service during which Awards may vest or be exercised; provided, however, that any shorter periods determined by the Administrator will be effective only if provided for in this Plan or the instrument that evidences the grant to the Recipient of the affected Award or if such shorter period is agreed to in writing by the Recipient, and (ii) accelerate the vesting of all or any portion of any Awards by increasing the number of shares purchasable at any time. (c) Leave of Absence. In the case of any employee on an approved leave of absence, the Administrator may make such provision respecting continuance of Awards granted to such employee as the Administrator in its discretion deems appropriate, except that in no event will an Award be exercisable after the date such Award would expire in accordance with its terms had the Recipient remained continuously employed. (d) General Cessation. Except as otherwise set forth in this Plan or an Award Document or as determined by the Administrator in its discretion, all Awards granted to a Recipient, and all of such Recipient's rights thereunder, will terminate upon termination for any reason of such Recipient's employment or service with the Company or any Affiliated Entity (or cessation of any other service relationship between the Recipient and the Company or any Affiliated Entity in place as of the date the Award was granted). 5.13 Lock-Up Agreements. Each Recipient agrees as a condition to receipt of an Award that, in connection with any public offering by the Company of its equity securities and upon the request of the Company and the principal underwriter (if any) in such public offering, any shares of Common Stock acquired or that may be acquired upon exercise or vesting of an Award may not be sold, offered for sale, encumbered, or otherwise disposed of or subjected to any transaction that will involve any sales of securities of the Company, without the prior written consent of the Company or such underwriter, as the case may be, for a period of not more than 365 days after the effective date of the registration statement for such public offering. Each Recipient will, if requested by the Company or the principal underwriter, enter into a separate agreement to the effect of this Section 5.13. 5.14 Restrictions on Common Stock and Other Securities. Common Stock or other securities of the Company issued or issuable in connection with any Award will be subject to all of the restrictions imposed under this Plan upon Common Stock issuable or issued upon exercise of Stock Options, except as otherwise determined by the Administrator. A-8 5.15 Cancellation and Rescission of Awards. Unless an Award Document or other separate written agreement binding upon the Company provides otherwise, the Administrator may cancel any unexpired, unpaid or deferred Award (whether or not vested) at any time if the Recipient thereof fails at any time to comply with all applicable provisions of the Award Document or this Plan, or does any of the following: (a) During employment or engagement with the Company or any Affiliated Entity and without the prior written authorization of the Chief Executive Officer of the Company, renders services for any organization or engages directly or indirectly in any business that, in the judgment of the Chief Executive Officer of the Company or other senior officer designated by the Administrator, is competitive with the Company or any Affiliated Entity, or which organization or business, or the rendering of services to such organization or business, is otherwise prejudicial to or in conflict with the business or interests of the Company or any Affiliated Entity. (b) During employment with the Company or any Affiliated Entity or at any time thereafter, fails to comply with any confidentiality agreement with the Company or any Affiliated Entity to which the Recipient is party, or with the policies of the Company or Affiliated Entity regarding nondisclosure of confidential information, or without prior written authorization from the Company or any Affiliated Entity, discloses to anyone outside the Company or any Affiliated Entity, or uses for any purpose or in any context other than in performance of the Recipient's duties to the Company or any Affiliated Entity, any confidential or trade secret information of the Company or any Affiliated Entity. (c) During employment with the Company or any Affiliated Entity or at any time thereafter, breaches any agreement with or duty to the Company or any Affiliated Entity. Upon and as a condition to exercise of any Award, a Recipient shall certify on a form acceptable to the Company that he or she is in compliance with the terms and conditions of this Plan and any applicable Award Document and has not done any of the things described in this Section 5.15. Furthermore, if a Recipient does any of the things described in this Section 5.15 within 180 days after any exercise, payment or delivery pursuant to an Award, the Company may rescind such exercise, payment or delivery. The Company shall notify the Recipient in writing of any such rescission within two years after such exercise, payment or delivery. Within ten days after receiving such notice from the Company, a Recipient shall pay to the Company the amount of any gain realized or payment received as a result of the rescinded exercise, payment or delivery pursuant to an Award. Such payment shall be made by returning to the Company all shares of capital stock that the Recipient received in connection with the rescinded exercise, payment or delivery, or if such shares have been transferred by the Recipient, then by paying the equivalent value thereof at the time of their transfer to the Company in cash. To assist in enforcement of the Company's rescission right described above, the Company may, in its discretion, retain any Common Stock or other consideration otherwise deliverable to a Recipient in connection with an Award until the rescission period described above has lapsed. 5.16 Limits on Awards to Eligible Persons. Notwithstanding any other provision of this Plan, no one Eligible Person shall be granted awards with respect to more than 200,000 shares of Common Stock in any one calendar year, provided, however, that this limitation shall not apply if it is not required in order for the compensation attributable to Awards hereunder to qualify as Performance-Based Compensation. The limitation set forth in this Section 5.16 will be subject to adjustment as provided in Section 3.4 or under Article VIII, but only to the extent such adjustment would not affect the status of compensation attributable to Awards as Performance-Based Compensation. A-9 ARTICLE VI AWARDS 6.1 Stock Options. (a) Nature of Stock Options. Stock Options may be Incentive Stock Options or Nonqualified Stock Options. (b) Option Exercise Price. The exercise price for each Stock Option will be determined by the Administrator as of the date such Stock Option is granted. (c) Option Period and Vesting. Stock Options granted hereunder will vest and may be exercised as determined by the Administrator, except that exercise of Stock Options after termination of the Recipient's employment or service shall be subject to Section 5.12 and Section 6.1(e). Each Stock Option granted hereunder and all rights or obligations thereunder shall expire on such date as may be determined by the Administrator, but not later than ten (10) years after the date the Stock Option is granted and may be subject to earlier termination as provided herein or in the Award Document. Except as otherwise provided herein, a Stock Option will become exercisable, as a whole or in part, on the date or dates specified by the Administrator and thereafter will remain exercisable until the exercise, expiration or earlier termination of the Stock Option. (d) Exercise of Stock Options. The exercise price for Stock Options will be paid as set forth in Section 5.3. No Stock Option will be exercisable except in respect of whole shares, and fractional share interests shall be disregarded. Not fewer than 100 shares of Common Stock (or such other amount as may be set forth in the applicable Award Document) may be purchased at one time and Stock Options must be exercised in multiples of 100 unless the number purchased is the total number of shares for which the Stock Option is exercisable at the time of exercise. A Stock Option will be deemed to be exercised when the Secretary or other designated official of the Company receives written notice of such exercise from the Recipient in the form of Exhibit A hereto or such other form as the Company may specify from time to time, together with payment of the exercise price in accordance with Section 5.3 and any amounts required under Section 5.10 or, with permission of the Administrator, arrangement for such payment. Notwithstanding any other provision of this Plan, the Administrator may impose, by rule and/or in Award Documents, such conditions upon the exercise of Stock Options (including, without limitation, conditions limiting the time of exercise to specified periods) as may be required to satisfy applicable regulatory requirements, including, without limitation, Rule 16b-3 and Rule 10b-5 under the Exchange Act, and any amounts required under Section 5.10, or any applicable section of or regulation under the IRC. (e) Termination of Employment. (i) Termination for Just Cause. Subject to Section 5.12 and except as otherwise provided in a written agreement between the Company or an Affiliated Entity and the Recipient, which may be entered into at any time before or after termination of employment or service, in the event of a Just Cause Dismissal of a Recipient all of the Recipient's unexercised Stock Options, whether or not vested, will expire and become unexercisable as of the date of such Just Cause Dismissal. (ii) Termination Other Than for Just Cause. Subject to Section 5.12 and except as otherwise provided in a written agreement between the Company or an Affiliated Entity and the Recipient, which may be entered into at any time before or after termination of employment or service, if a Recipient's employment or service with the Company or any Affiliated Entity terminates for: (A) any reason other than for Just Cause Dismissal, death, Permanent Disability or Retirement, the Recipient's Stock Options, whether or not vested, will expire and become unexercisable as of the earlier of: (1) the date such Stock Options would expire in accordance with their terms had the Recipient remained employed; and (2) 30 days after the date of termination of employment or service. A-10 (B) death or Permanent Disability or Retirement, the Recipient's unexercised Stock Options will, whether or not vested, expire and become unexercisable as of the earlier of: (1) the date such Stock Options would expire in accordance with their terms had the Recipient remained employed; and (2) 180 days after the date of termination of employment or service. (f) Special Provisions Regarding Incentive Stock Options. Notwithstanding anything herein to the contrary, (i) The exercise price and vesting period of any Stock Option intended to be treated as an Incentive Stock Option must comply with the provisions of Section 422 of the IRC and the regulations thereunder. As of the Effective Date, such provisions require, among other matters, that: (A) the exercise price must not be less than the Fair Market Value of the underlying stock as of the date the Incentive Stock Option is granted, and not less than 110% of the Fair Market Value as of such date in the case of a grant to a Significant Stockholder; and (B) that the Incentive Stock Option not be exercisable after the expiration of ten (10) years from the date of grant or the expiration of five (5) years from the date of grant in the case of an Incentive Stock Option granted to a Significant Stockholder. (ii) The aggregate Fair Market Value (determined as of the respective date or dates of grant) of the Common Stock for which one or more Stock Options granted to any Recipient under this Plan (or any other option plan of the Company or any of its subsidiaries or affiliates) may for the first time become exercisable as Incentive Stock Options under the federal tax laws during any one calendar year may not exceed $100,000. (iii) Any Stock Options granted as Incentive Stock Options pursuant to this Plan that for any reason fail or cease to qualify as such will be treated as Nonqualified Stock Options. If the limit described in Section 6.1(f)(ii) is exceeded, the earliest granted Stock Options will be treated as Incentive Stock Options, up to such limit. (g) Non-Employee Director Options. Article VII will govern Non-Employee Director Options to the extent inconsistent with this Section 6.1. 6.2 Performance Awards. (a) Grant of Performance Award. The Administrator will determine in its discretion the performance criteria (which need not be identical and may be established on an individual or group basis) governing Performance Awards, the terms thereof, and the form and time of payment of Performance Awards. (b) Payment of Award. Upon satisfaction of the conditions applicable to a Performance Award, payment will be made to the Recipient in cash, in shares of Common Stock valued at Fair Market Value as of the date payment is due, or in a combination of Common Stock and cash, as the Administrator in its discretion may determine. 6.3 Restricted Stock. (a) Award of Restricted Stock. The Administrator will determine the Purchase Price (if any), the terms of payment of the Purchase Price, the restrictions upon the Restricted Stock, and when such restrictions will lapse. (b) Requirements of Restricted Stock. All shares of Restricted Stock granted or sold pursuant to this Plan will be subject to the following conditions: (i) No Transfer. The shares may not be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of, alienated or encumbered until the restrictions are removed or expire; (ii) Certificates. The Administrator may require that the certificates representing Restricted Stock granted or sold to a Recipient remain in the physical custody of an escrow holder or the Company until all restrictions are removed or expire; (iii) Restrictive Legends. Each certificate representing Restricted Stock granted or sold to a Recipient pursuant to this Plan will bear such legend or legends making reference to the restrictions A-11 imposed upon such Restricted Stock as the Administrator in its discretion deems necessary or appropriate to enforce such restrictions; and (iv) Other Restrictions. The Administrator may impose such other conditions on Restricted Stock as the Administrator may deem advisable, including, without limitation, restrictions under the Securities Act, under the Exchange Act, under the requirements of any stock exchange or interdealer quotation system upon which such Restricted Stock or other securities of the Company are then listed or traded and under any blue sky or other securities laws applicable to such shares. (c) Lapse of Restrictions. The restrictions imposed upon Restricted Stock will lapse in accordance with such terms or other conditions as are determined by the Administrator. (d) Rights of Recipient. Subject to the provisions of Section 6.3(b) and any restrictions imposed upon the Restricted Stock, the Recipient will have all rights of a stockholder with respect to the Restricted Stock granted or sold to such Recipient under this Plan, including, without limitation, the right to vote the shares and receive all dividends and other distributions paid or made with respect thereto. (e) Termination of Employment. Unless the Administrator in its discretion determines otherwise, if a Recipient's employment or service with the Company or any Affiliated Entity terminates for any reason, all of the Recipient's Restricted Stock remaining subject to restrictions on the date of such termination of employment or service will be repurchased by the Company at the Purchase Price (if any) paid by the Recipient to the Company, without interest or premium, and otherwise returned to the Company without consideration. 6.4 Stock Appreciation Rights. (a) Granting of Stock Appreciation Rights. The Administrator may at any time and from time to time approve the grant to Eligible Persons of Stock Appreciation Rights, related or unrelated to Stock Options. (b) SARs Related to Options. (i) A Stock Appreciation Right related to a Stock Option will entitle the holder of the related Stock Option, upon exercise of the Stock Appreciation Right, to surrender such Stock Option, or any portion thereof to the extent previously vested but unexercised, with respect to the number of shares as to which such Stock Appreciation Right is exercised, and to receive payment of an amount computed pursuant to Section 6.4(b)(iii). Such Stock Option will, to the extent surrendered, then cease to be exercisable. (ii) A Stock Appreciation Right related to a Stock Option hereunder will be exercisable at such time or times, and only to the extent that, the related Stock Option is exercisable, and will not be transferable except to the extent that such related Stock Option may be transferable (and under the same conditions), will expire no later than the expiration of the related Stock Option, and may be exercised only when the market price of the Common Stock subject to the related Stock Option exceeds the exercise price of the Stock Option. (iii) Upon the exercise of a Stock Appreciation Right related to a Stock Option, the Recipient will be entitled to receive payment of an amount determined by multiplying: (A) the difference obtained by subtracting the exercise price of a share of Common Stock specified in the related Stock Option from the Fair Market Value of a share of Common Stock on the date of exercise of such Stock Appreciation Right (or as of such other date or as of the occurrence of such event as may have been specified in the instrument evidencing the grant of the Stock Appreciation Right), by (B) the number of shares as to which such Stock Appreciation Right is exercised. (c) SARs Unrelated to Options. The Administrator may grant Stock Appreciation Rights unrelated to Stock Options. Section 6.4(b)(iii) will govern the amount payable at exercise under such Stock Appreciation Right, except that in lieu of an option exercise price the initial base amount specified in the Award shall be used. (d) Limits. Notwithstanding the foregoing, the Administrator, in its discretion, may place a dollar limitation on the maximum amount that will be payable upon the exercise of a Stock Appreciation Right. A-12 (e) Payments. Payment of the amount determined under the foregoing provisions may be made solely in whole shares of Common Stock valued at their Fair Market Value on the date of exercise of the Stock Appreciation Right or, alternatively, at the discretion of the Administrator, in cash or in a combination of cash and shares of Common Stock as the Administrator deems advisable. The Administrator has full discretion to determine the form in which payment of a Stock Appreciation Right will be made and to consent to or disapprove the election of a Recipient to receive cash in full or partial settlement of a Stock Appreciation Right. If the Administrator decides to make full payment in shares of Common Stock, and the amount payable results in a fractional share, payment for the fractional share will be made in cash. 6.5 Stock Payments. The Administrator may approve Stock Payments to any Eligible Person on such terms and conditions as the Administrator may determine. Stock Payments will replace cash compensation at the Fair Market Value of the Common Stock on the date payment is due. 6.6 Dividend Equivalents. The Administrator may grant Dividend Equivalents to any Recipient who has received a Stock Option, SAR or other Award denominated in shares of Common Stock. Dividend Equivalents may be paid in cash, Common Stock or other Awards; the amount of Dividend Equivalents paid other than in cash will be determined by the Administrator by application of such formula as the Administrator may deem appropriate to translate the cash value of dividends paid to the alternative form of payment of the Dividend Equivalent. Dividend Equivalents will be computed as of each dividend record date and will be payable to recipients thereof at such time as the Administrator may determine. However, if it is intended that an Award qualify as Performance-Based Compensation, and the amount of compensation the Eligible Person could receive under the Award is based solely on an increase in value of the underlying stock after the date of the grant or Award, then the payment of any Dividend Equivalents related to the Award shall not be made contingent on the exercise of the Award. 6.7 Stock Bonuses. The Administrator may issue Stock Bonuses to Eligible Persons on such terms and conditions as the Administrator may determine. 6.8 Stock Sales. The Administrator may sell to Eligible Persons shares of Common Stock on such terms and conditions as the Administrator may determine. 6.9 Phantom Stock. The Administrator may grant Awards of Phantom Stock to Eligible Persons. Phantom Stock is a cash payment measured by the Fair Market Value of a specified number of shares of Common Stock on a specified date, or measured by the excess of such Fair Market Value over a specified minimum, which may but need not include a Dividend Equivalent. 6.10 Other Stock-Based Benefits. The Administrator is authorized to grant Other Stock-Based Benefits. Other Stock-Based Benefits are any arrangements granted under this Plan not otherwise described above that: (a) by their terms might involve the issuance or sale of Common Stock or other securities of the Company; or (b) involve a benefit that is measured, as a whole or in part, by the value, appreciation, dividend yield or other features attributable to a specified number of shares of Common Stock or other securities of the Company. A-13 ARTICLE VII NON-EMPLOYEE DIRECTOR OPTIONS 7.1 Initial Grant of Stock Options Each Non-Employee Director shall, upon first becoming a Non-Employee Director, receive a one-time grant of an option to purchase up to 2,500 shares of the Company's Common Stock (an "INITIAL OPTION") at an exercise price per share equal to the Fair Market Value of the Company's Common Stock on the date of grant, subject to: (a) vesting as set forth in Section 7.3, and (b) adjustment as set forth in this Plan. 7.2 Annual Grants of Stock Options. Immediately following the annual meeting of stockholders of the Company next following a Non-Employee Director's becoming a Non-Employee Director, and immediately following each subsequent annual meeting of stockholders of the Company, in each case if the Non-Employee Director has served as a director since his or her election or appointment and has been re-elected as a director at such annual meeting, such Non-Employee Director shall automatically receive an option to purchase up to 1,250 shares of the Company's Common Stock (an "ADDITIONAL OPTION"). In addition to the Additional Options described above, an individual who was previously a Non-Employee Director and received an initial grant of stock options under this Plan or pursuant to a prior option plan for the Company's directors, who then ceased to be a director for any reason, and who then again becomes a Non-Employee Director, shall upon again becoming a Non-Employee Director automatically receive an Additional Option. The exercise price per share for all Additional Options shall be equal to the Fair Market Value of the Company's Common Stock on the date of grant, subject to: (a) vesting as set forth in Section 7.3, and (b) adjustment as set forth in this Plan. 7.3 Vesting. Initial Options shall vest and become exercisable (a) 50% upon the earlier of (i) the first anniversary of the grant date or (ii) immediately prior to the first annual meeting of stockholders of the Company following the grant date, if the Recipient has remained a Non-Employee Director for the entire period from the date of grant to such earlier date; and (b) 50% upon the earlier of (i) the second anniversary of the grant date or (ii) immediately prior to the second annual meeting of stockholders of the Company following the date of grant to such earlier date. Additional Options shall vest and become exercisable with respect to all underlying shares upon the earlier of (y) the first anniversary of the grant date or (z) immediately prior to the annual meeting of stockholders of the Company next following the grant date, if the Recipient has remained a Non-Employee Director for the entire period from the date of grant to such earlier date. Notwithstanding the foregoing, however, Initial Options and Additional Options that have not vested and become exercisable at the time the Recipient ceases to be a director shall terminate. 7.4 Exercise. Non-Employee Director Options will be exercisable, and the exercise price therefor shall be paid, in the same manner as provided herein for other Stock Options. 7.5 Term of Options and Effect of Termination. Notwithstanding any other provision of the Plan, no Non-Employee Director Option granted under the Plan shall be exercisable after the expiration of ten years from the effective date of its grant. In the event that the recipient of any Non-Employee Director Options granted under the Plan shall cease to be a director of the Company, (a) all Initial Options granted under this plan to such recipient shall be exercisable, to the extent already exercisable at the date such recipient ceases to be a director and regardless of the reason the recipient ceases to be a director, for a period of 365 days after that date (or, if sooner, until the expiration of the option according to its terms), and shall then terminate; and (b) all Additional Options granted under this Plan to such recipient shall be exercisable, to the extent already exercisable at the date such recipient ceases to be a director, for a period of 365 days after that date (or, if sooner, until the expiration of the option according to its terms) if he or she ceases to be a director because of death or permanent disability, or for a period of 90 days A-14 after that date (or, if sooner, until the expiration of the option according to its terms) if he or she ceases to be a director for any other reason, and shall then terminate. In the event of the death of a Recipient while such Recipient is a director of the Company or within the period after termination of such status during which he or she is permitted to exercise an option, such option may be exercised by any person or persons designated by the Recipient on a beneficiary designation form adopted by the Plan administrator for such purpose or, if there is no effective beneficiary designation form on file with the Company, by the executors or administrators of the Recipient's estate or by any person or persons who shall have acquired the option directly from the Recipient by his or her will or the applicable laws of descent and distribution. 7.6 Amendment; Suspension. The Administrator may at any time and from time to time in its discretion (a) change the number of shares or vesting periods associated with the Non-Employee Director Options, and (b) suspend and reactivate this Article VII. ARTICLE VIII CHANGE IN CONTROL 8.1 Provision for Awards Upon Change in Control. As of the effective time and date of any Change in Control, this Plan and any then outstanding Awards (whether or not vested) will automatically terminate unless: (a) provision is made in writing in connection with such transaction for the continuance of this Plan and for the assumption of such Awards, or for the substitution for such Awards of new awards covering the securities of a successor entity or an affiliate thereof, with appropriate adjustments as to the number and kind of securities and exercise prices or other measurement criteria, in which event this Plan and such outstanding Awards will continue or be replaced, as the case may be, in the manner and under the terms so provided; or (b) the Board otherwise provides in writing for such adjustments as it deems appropriate in the terms and conditions of the then-outstanding Awards (whether or not vested), including, without limitation, (i) accelerating the vesting of outstanding Awards, and/or (ii) providing for the cancellation of Awards and their automatic conversion into the right to receive the securities, cash or other consideration that a holder of the shares underlying such Awards would have been entitled to receive upon consummation of such Change in Control had such shares been issued and outstanding immediately prior to the effective date and time of the Change in Control (net of the appropriate option exercise prices). If, pursuant to the foregoing provisions of this Section 8.1, this Plan and the Awards terminate by reason of the occurrence of a Change in Control without provision for any of the action(s) described in clause (a) or (b) hereof, then subject to Sections 5.12 and 5.15, any Recipient holding outstanding Awards will have the right, at such time prior to the consummation of the Change in Control as the Board designates, to exercise or receive the full benefit of the Recipient's Awards to the full extent not theretofore exercised, including any installments which have not yet become vested. 8.2 Termination of Employment in Connection With a Change in Control. (a) Acceleration of Awards. If a Change in Control occurs and provision for Awards is made as described in part (a) or (b) of Section 8.1 such that a Recipient continues to own Awards or replacement awards, but in connection with such Change in Control the Recipient's employment with the Company or an Affiliated Entity is terminated by the Company or an Affiliated Entity as described in Section 8.2(b), then, subject to Sections 5.12 and 5.15 and the terms of any written employment agreement between the Company or any Affiliated Entity and the Recipient and the specific terms of any Award, such Recipient will have the right to exercise or receive the full benefit of the Recipient's Awards during the applicable time period provided in Section 5.12, without regard to any vesting or performance requirements or other milestones. (b) Employment Termination. For purposes of this Section, and subject to any separate written agreement binding upon the Company, a Recipient's employment with the Company or any Affiliated Entity will be deemed to have been terminated in connection with a Change in Control if: (i) the Recipient is removed from the Recipient's employment by, or resigns the Recipient's employment upon the request of, a A-15 Person exercising practical voting control over the Company following the Change in Control or a person acting upon authority or at the instruction of such Person; or (ii) the Recipient's position is eliminated as a result of a reduction in force made to reduce over-capacity or unnecessary duplication of personnel within 180 days after the consummation of the Change in Control and the Recipient is not offered a replacement position with compensation substantially similar to the compensation in effect immediately before the Change in Control. Unless otherwise provided in a written agreement with the Company or any Affiliated Entity, assignment of a Recipient to different duties or reporting will not be deemed to constitute or justify termination of Recipient's employment in connection with the Change in Control. ARTICLE IX DEFINITIONS Capitalized terms used in this Plan and not otherwise defined have the meanings set forth below: "Additional Option" means a right to purchase stock of the Company granted under Section 7.2 of the Plan. "Administrator" means the Board as long as no Committee has been appointed and is in effect and also means the Committee to the extent that the Board has delegated authority thereto. "Affiliated Entity" means any Parent Corporation of the Company or Subsidiary Corporation of the Company or any other entity controlling, controlled by, or under common control with the Company. "Applicable Dividend Period" means (i) the period between the date a Dividend Equivalent is granted and the date the related Stock Option, SAR, or other Award is exercised, terminates, or is converted to Common Stock, or (ii) such other time as the Administrator may specify in the written instrument evidencing the grant of the Dividend Equivalent. "Award" means any Stock Option, Performance Award, Restricted Stock, Stock Appreciation Right, Stock Payment, Stock Bonus, Stock Sale, Phantom Stock, Dividend Equivalent, or Other Stock-Based Benefit granted or sold to an Eligible Person under this Plan, or any similar award granted by the Company prior to the Effective Date and outstanding as of the Effective Date that is governed by this Plan. "Award Document" means the agreement or confirming memorandum setting forth the terms and conditions of an Award. "Board" means the Board of Directors of the Company. "Change in Control" means the following and shall be deemed to occur if any of the following events occurs: (i) Any Person becomes the beneficial owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of fifty percent (50%) or more of either the then outstanding shares of Common Stock or the combined voting power of the Company's then outstanding securities entitled to vote generally in the election of directors; or (ii) Individuals who, as of the effective date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided, however, that any individual who becomes a director after the effective date hereof whose election, or nomination for election by the Company's stockholders, is approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered to be a member of the Incumbent Board unless that individual was nominated or elected by any person, entity or group (as defined above) having the power to exercise, through beneficial ownership, voting agreement and/or proxy, twenty percent (20%) or more of either the outstanding shares of Common Stock or the combined voting power of the Company's then outstanding voting securities entitled to vote generally in the election of directors, in which case that individual shall not be considered to be a member of the Incumbent Board unless such individual's election or nomination for election by the Company's stockholders is approved by a vote of at least two-thirds of the directors then comprising the Incumbent Board; or A-16 (iii) Consummation by the Company of the sale or other disposition by the Company of all or substantially all of the Company's assets or a Reorganization of the Company with any other person, corporation or other entity, other than (A) a Reorganization that would result in the voting securities of the Company outstanding immediately prior thereto (or, in the case of a Reorganization that is preceded or accomplished by an acquisition or series of related acquisitions by any Person, by tender or exchange offer or otherwise, of voting securities representing 5% or more of the combined voting power of all securities of the Company, immediately prior to such acquisition or the first acquisition in such series of acquisitions) continuing to represent, either by remaining outstanding or by being converted into voting securities of another entity, more than 50% of the combined voting power of the voting securities of the Company or such other entity outstanding immediately after such Reorganization (or series of related transactions involving such a Reorganization), or (B) a Reorganization effected to implement a recapitalization or reincorporation of the Company (or similar transaction) that does not result in a material change in beneficial ownership of the voting securities of the Company or its successor; or (iv) Approval by the stockholders of the Company or an order by a court of competent jurisdiction of a plan of liquidation of the Company. "Committee" means any committee appointed by the Board to administer this Plan pursuant to Section 4.1. "Common Stock" means the common stock of the Company, $0.01 par value per share, as constituted on the Effective Date, and as thereafter adjusted under Section 3.4. "Company" means Diedrich Coffee, Inc., a Delaware corporation. "Dividend Equivalent" means a right granted by the Company under Section 6.6 to a holder of a Stock Option, Stock Appreciation Right or other Award denominated in shares of Common Stock to receive from the Company during the Applicable Dividend Period payments equivalent to the amount of dividends payable to holders of the number of shares of Common Stock underlying such Stock Option, Stock Appreciation Right, or other Award. "Effective Date" means the date this Plan is approved and adopted by the Company's stockholders. "Eligible Person" includes directors, including Non-Employee Directors, officers, employees, consultants and advisors of the Company or of any Affiliated Entity. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Expiration Date" means the tenth (10th) anniversary of the Effective Date. "Fair Market Value" of a share of the Company's capital stock as of a particular date means: (i) if the stock is listed on an established stock exchange or exchanges (including for this purpose, the Nasdaq National Market), the arithmetic mean of the highest and lowest sale prices of the stock for the trading day immediately preceding such date on the primary exchange upon which the stock trades, as measured by volume, as published in The Wall Street Journal, or, if no sale price was quoted for such date, then as of the next preceding date on which such a sale price was quoted; or (ii) if the stock is not then listed on an exchange or the Nasdaq National Market, the average of the closing bid and asked prices per share for the stock in the over-the-counter market on such date (in the case of (i) or (ii), subject to adjustment as and if necessary and appropriate to set an exercise price not less than 100% of the fair market value of the stock on the date an Award is granted); or (iii) if the stock is not then listed on an exchange or quoted in the over-the-counter market, an amount determined in good faith by the Administrator, provided, however, that (A) when appropriate, the Administrator in determining Fair Market Value of capital stock of the Company may take into account such other factors as it may deem appropriate under the circumstances, and (B) if the stock is traded on the Nasdaq SmallCap Market and both sales prices and bid and asked prices are quoted or available, the Administrator may elect to determine Fair Market Value under either clause (i) or (ii) above. A-17 Notwithstanding the foregoing, the Fair Market Value of capital stock for purposes of grants of Incentive Stock Options must be determined in compliance with applicable provisions of the IRC. The Fair Market Value of rights or property other than capital stock of the Company means the fair market value thereof as determined by the Administrator on the basis of such factors as it may deem appropriate. "Incentive Stock Option" means a Stock Option that qualifies as an incentive stock option under Section 422 of the IRC. "Initial Option" means a right to purchase stock of the Company granted under Section 7.1 of the Plan. "IRC" means the Internal Revenue Code of 1986, as amended. "Just Cause Dismissal" means a termination of a Recipient's employment for any of the following reasons: (i) the Recipient violates any reasonable rule or regulation of the Board, the Company's President or Chief Executive Officer or the Recipient's superiors that results in damage to the Company or any Affiliated Entity or which, after written notice to do so, the Recipient fails to correct within a reasonable time not exceeding 15 days; (ii) any willful misconduct or gross negligence by the Recipient in the responsibilities assigned to the Recipient; (iii) any willful failure to perform the Recipient's job as required to meet the objectives of the Company or any Affiliated Entity; (iv) any wrongful conduct of a Recipient which has an adverse impact on the Company or any Affiliated Entity or which constitutes a misappropriation of assets of the Company or any Affiliated Entity; (v) the Recipient does any of the things described in Section 5.15; or (vi) any other conduct that the Administrator reasonably determines constitutes Just Cause for Dismissal; provided, however, that if a Recipient is party to an employment agreement with the Company or any Affiliated Entity providing for just cause dismissal (or some comparable concept) of Recipient from Recipient's employment with the Company or any Affiliated Entity, "Just Cause Dismissal" for purposes of this Plan will have the same meaning as ascribed thereto or to such comparable concept in such employment agreement. "Non-Employee Director" means a director of the Company who qualifies as a "Non-Employee Director" under Rule 16b-3 under the Exchange Act. "Non-Employee Director Option" means an Initial Option or an Additional Option granted pursuant to Article VII of this Plan. "Nonqualified Stock Option" means a Stock Option that is not an Incentive Stock Option. "Other Stock-Based Benefits" means an Award granted under Section 6.10. "Parent Corporation" means any Parent Corporation as defined in Section 424(e) of the IRC. "Performance Award" means an Award under Section 6.2, payable in cash, Common Stock or a combination thereof, that vests and becomes payable over a period of time upon attainment of performance criteria established in connection with the grant of the Award. "Performance-Based Compensation" means performance-based compensation as described in Section 162(m) of the IRC. If the amount of compensation an Eligible Person will receive under any Award is not based solely on an increase in the value of Common Stock after the date of grant or award, the Administrator, in order to qualify an Award as performance-based compensation under Section 162(m) of the IRC, can condition the grant, award, vesting, or exercisability of such an Award on the attainment of a preestablished, objective performance goal. For this purpose, a preestablished, objective performance goal may include one or more of the following performance criteria: (a) cash flow, (b) earnings per share (including earnings before interest, taxes, and amortization), (c) return on equity, (d) total Shareholder return, (e) return on capital, (f) return on assets or net assets, (g) income or net income, (h) operating income or net operating income, (i) operating margin, (j) return on operating revenue, and (k) any other similar performance criteria. "Permanent Disability" means that the Recipient becomes physically or mentally incapacitated or disabled so that the Recipient is unable to perform substantially the same services as the Recipient performed prior to incurring such incapacity or disability (the Company, at its option and expense, being entitled to retain A-18 a physician to confirm the existence of such incapacity or disability, and the determination of such physician to be binding upon the Company and the Recipient), and such incapacity or disability continues for a period of three consecutive months or six months in any 12-month period or such other period(s) as may be determined by the Administrator with respect to any Award, provided, however, that for purposes of determining the period during which an Incentive Stock Option may be exercised pursuant to Section 6.1(e), Permanent Disability shall mean "permanent and total disability" as defined in Section 22(e) of the IRC. "Person" means any person, entity or group, within the meaning of Section 13(d) or 14(d) of the Exchange Act, but excluding (i) the Company and its subsidiaries, (ii) any employee stock ownership or other employee benefit plan maintained by the Company and (iii) an underwriter or underwriting syndicate that has acquired the Company's securities solely in connection with a public offering thereof. "Phantom Stock" means an Award granted under Section 6.9. "Plan" means this 2000 Equity Incentive Plan of the Company. "Plan Term" means the period during which this Plan remains in effect (commencing the Effective Date and ending on the Expiration Date). "Purchase Price" means the purchase price (if any) to be paid by a Recipient for Restricted Stock as determined by the Administrator (which price shall be at least equal to the minimum price required under applicable laws and regulations for the issuance of Common Stock which is nontransferable and subject to a substantial risk of forfeiture until specific conditions are met). "Recipient" means a person who has received an Award. "Reorganization" means any merger, consolidation or other reorganization. "Restricted Stock" means Common Stock that is the subject of an Award made under Section 6.3 and that is nontransferable and subject to a substantial risk of forfeiture until specific conditions are met, as set forth in this Plan and in any statement evidencing the grant of such Award. "Retirement" of a Recipient means the Recipient's resignation from the Company or any Affiliated Entity after reaching age 60 and at least five years of full-time employment by the Company or any Affiliated Entity, without any circumstances that would justify a Just Cause Dismissal of the Recipient. "Securities Act" means the Securities Act of 1933, as amended. "Significant Stockholder" is an individual who, at the time a Stock Option is granted to such individual under this Plan, owns more than ten percent (10%) of the combined voting power of all classes of stock of the Company or of any Parent Corporation or Subsidiary Corporation (after application of the attribution rules set forth in Section 424(d) of the IRC). "Stock Appreciation Right" or "SAR" means a right granted under Section 6.4 to receive a payment that is measured with reference to the amount by which the Fair Market Value of a specified number of shares of Common Stock appreciates from a specified date, such as the date of grant of the SAR, to the date of exercise. "Stock Bonus" means an issuance or delivery of unrestricted or restricted shares of Common Stock under Section 6.7 as a bonus for services rendered or for any other valid consideration under applicable law. "Stock Payment" means a payment in shares of the Company's Common Stock under Section 6.5 to replace all or any portion of the compensation or other payment (other than base salary) that would otherwise become payable to the Recipient in cash. "Stock Option" means a right to purchase stock of the Company granted under Section 6.1 or Article VII of this Plan. "Stock Sale" means a sale of Common Stock to an Eligible Person under Section 6.8. "Subsidiary Corporation" means any Subsidiary Corporation as defined in Section 424(f) of the IRC. A-19 DIEDRICH COFFEE, INC. PROXY FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD December 4, 2001 Solicited on Behalf of the Board of Directors The undersigned hereby appoints J. Michael Jenkins and Matthew C. McGuinness, and each of them individually, as proxies, each with power of substitution, to vote and otherwise represent all of the shares of common stock of Diedrich Coffee, Inc., held of record by the undersigned, at the annual meeting of stockholders of Diedrich Coffee to be held on Tuesday, December 4, 2001 at 10:00 a.m. local time, and any adjournment(s) thereof, as indicated on the reverse side hereof. The undersigned acknowledges receipt of the Notice of Annual Meeting and Proxy Statement, dated in each case October 25, 2001. All other proxies heretofore given by the undersigned to vote shares of Diedrich Coffee's common stock are expressly revoked. The shares represented by this proxy will be voted as described on the reverse hereof by the stockholder. If not otherwise directed, this proxy will be voted FOR the election as directors of all nominees nominated in Item 1 for which the stockholder is entitled to vote and FOR the proposals in Items 2 and 3. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE FOLLOWING PROPOSALS: 1. ELECTION OF FOUR (4) MEMBERS TO THE [ ] FOR all nominees listed below [ ] WITHHOLD AUTHORITY to vote for BOARD OF DIRECTORS OF DIEDRICH for whom stockholder is entitled to all nominees listed below for COFFEE: vote+ whom stockholder is entitled to vote 1. ELECTION OF FOUR (4) MEMBERS TO THE [ ] EXCEPTIONS BOARD OF DIRECTORS OF DIEDRICH COFFEE:
NOMINEES: Peter Churm Martin Diedrich Lawrence Goelman Paul Heeschen + INSTRUCTIONS. To withhold authority to vote for any individual nominee, also mark the "Exceptions" box and write that nominee's name in the space provided below. Exceptions (Continued, and to be signed and dated on the reverse side.) 2. APPROVAL OF AN INCREASE BY 250,000 SHARES THE NUMBER OF SHARES OF DIEDRICH COFFEE COMMON STOCK AVAILABLE FOR ISSUANCE UNDER THE 2000 EQUITY INCENTIVE PLAN: FOR [ ] AGAINST [ ] ABSTAIN [ ] 3. RATIFICATION OF THE SELECTION OF KPMG LLP AS DIEDRICH COFFEE'S INDEPENDENT AUDITORS FOR THE FISCAL YEAR ENDING JUNE 26, 2002: FOR [ ] AGAINST [ ] ABSTAIN [ ] 4. AT THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO CONSIDER AND VOTE UPON SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENT THEREOF. I plan to attend the annual meeting [ ] Change of address or comments mark here [ ] Please sign exactly as your name appears hereon. When signing in a representative capacity, please give full title. Date: , 2001 Signature Sign, Date and Return the Proxy Card Promptly Using the Enclosed Envelope. Votes MUST be indicated (x) in BLACK or BLUE ink.