8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): March 31, 2006

DIEDRICH COFFEE, INC.

(Exact name of registrant as specified in its charter)

Delaware	0-21203	33-0086628
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification No.)

28 Executive Park, Suite 200

Irvine, California 92614

(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code: (949) 260-1600

Not Applicable

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 1.01 Entry Into A Material Definitive Agreement.

On May 10, 2004, Diedrich Coffee, Inc. (the “Company”) entered into a $5,000,000 Contingent Convertible Note Purchase Agreement (the “Note Purchase Agreement”). The Note Purchase Agreement provides for the Company, at its election, to issue notes up to an aggregate principal amount of $5,000,000. Issued notes are amortized on a monthly basis at a rate that will repay 60% of the principal amount of each note by May 10, 2007 (the “Maturity Date”). The remaining 40% matures on the Maturity Date. Interest under the original Note Purchase Agreement accrued at LIBOR plus 3.30%, and a facility fee of 1.00% annually is payable on the unused portion of the facility. The Note Purchase Agreement contains a number of covenants, including, originally, a covenant that required the Company to maintain a specified minimum dollar value of earnings before interest, tax, depreciation and amortization (the “EBITDA Covenant”). Issued notes are convertible into common stock only upon certain changes of control. For notes issued and repaid, warrants to purchase shares of common stock are issued with the same rights and restrictions for exercise as existed for convertibility of the notes at the time of their issuance. Under the original terms of the Note Purchase Agreement, warrants were required to be issued at specified intervals upon the repayment of principal. Warrants are exercisable only in the event of a change of control and originally were to expire on May 10, 2008. The lender under this agreement is a limited partnership of which the chairman of our board of directors serves as the sole general partner. No notes are currently outstanding under the Note Purchase Agreement.

On March 31, 2006, the Company entered into Amendment No. 2 to Note Purchase Agreement (“Amendment No. 2”). Amendment No. 2: (i) contains a waiver with respect to the existing default of the Minimum EBITDA covenant and removes the Minimum EBITDA from the Note Purchase Agreement; (ii) clarifies that warrants to purchase common stock of the Company will be issued with respect to repaid principal amounts only upon a change in control of the Company; (iii) increases the interest rate applicable to outstanding amounts under the credit facility by 2%, to LIBOR plus 5.30%; and (iv) extends the exercise date of all warrants issued or to be issued under the Note Purchase Agreement by one year, to May 10, 2009. The Maturity Date for any notes issued in the future was unaffected by Amendment No. 2.

Item 9.01 Financial Statements and Exhibits.

(d) Exhibits

The following exhibits are furnished with this Current Report on Form 8-K:

Exhibit No.	Description
10.1	Amendment No. 2 to Note Purchase Agreement, dated March 31, 2006

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Date: March 31, 2006	DIEDRICH COFFEE, INC.
	By:	/s/ Stephen V. Coffey
		Stephen V. Coffey
		Chief Executive Officer

EXHIBIT INDEX

Exhibit No.	Description
10.1	Amendment No. 2 to Note Purchase Agreement, dated March 31, 2006

EX-10.1

Exhibit 10.1

AMENDMENT NO. 2

TO CONTINGENT CONVERTIBLE NOTE PURCHASE AGREEMENT

THIS AMENDMENT NO. 2 TO CONTINGENT CONVERTIBLE NOTE PURCHASE AGREEMENT (this “Amendment”) is made and dated as of March 31, 2006 by and between Diedrich Coffee, Inc., a Delaware corporation (the “Company”), and Sequoia Enterprises, L.P. (the “Lender”).

WHEREAS, pursuant to that certain Contingent Convertible Note Purchase Agreement dated as of May 10, 2004 by and between the Company and the Lender (as amended, extended and replaced from time to time, the “Note Purchase Agreement,” and with capitalized terms used herein and not otherwise defined used with the meanings given such terms in the Note Purchase Agreement), the Lender agreed to loan money to the Company on the terms and subject to the conditions set forth therein.

WHEREAS, the Company has requested the Lender to amend the Note Purchase Agreement in certain respects and the Lender has agreed to do so on the terms and subject to the conditions set forth herein.

NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows:

1. Waiver of Default; Amendment of Covenant.

(a) The Lender and the Company agree that the Company’s existing default under the Note Purchase Agreement due to the Company’s failure to comply with the “Minimum EBITDA” covenant set forth in Section 9.5 of the Note Purchase Agreement for the reporting period ending March 8, 2006 is hereby waived. It is understood by the parties hereto, however, that such waiver does not constitute a waiver of any other provision or term of the Note Purchase Agreement or any related document, nor an agreement to waive any covenant or other provision or term of the Note Purchase Agreement or any related document in the future.

(b) The parties hereto agree that the Minimum EBITDA covenant shall be deleted and that Section 9.5 shall be amended and restated as follows: “Reserved.”

2. Issuance of Warrants.

(a) To reflect the agreement of the parties hereto to modify the time at which Warrants will be issued under the Note Purchase Agreement, Section 2.2(a) of the Note Purchase Agreement is hereby amended and restated as follows:

Until such time as the aggregate principal amount of all Notes repaid shall equal the Loan Amount, upon a Change of Control of the Company, the Company shall issue a Warrant for all principal on repaid Notes with respect to which a Warrant has not been issued as of the date of such Change of Control.

(b) To reflect the agreement of the parties hereto to modify the time at which Warrants will be issued under the Note Purchase Agreement, Section 8 of the Form of Convertible Promissory Note attached as Exhibit A to the Note Purchase Agreement (the “Form of Note”) is hereby amended and restated as follows:

Issuance of Warrants. Until such time as the aggregate principal amount of all Notes issued under the Agreement and repaid shall equal $5,000,000, upon a Change of Control of the Company, the Company shall issue Lender warrants to purchase shares of Common Stock, as set forth in Section 2.2 of the Agreement (including adjustment as set forth in Section 2.2(c)). For federal income tax purposes the amount of the issue price allocated to each Warrant to be issued is One Dollar and Fifty Cents ($1.50) per $1,000 principal amount repaid, which shall be the value ascribed to each Warrant by the Company and Lender for all purposes, including the preparation of tax returns and the preparation of the financial statements of the Company.

3. Interest Rate.

(a) To reflect the agreement of the parties hereto to modify the applicable interest rate with respect to the Outstanding Balance of each Note, Section 3.2 of the Note Purchase Agreement is hereby amended and restated as follows:

Interest. Interest shall accrue from the date such Note is issued on the Outstanding Balance on each Note at the one-month, two-month or three-month, whichever period is closest to the remaining days in the calendar quarter, LIBOR Rate in effect on the date of issuance plus 5.30% per annum. The interest rate will be reset on the first day of each calendar quarter to the three-month LIBOR Rate then in effect plus 5.30% per annum. Interest shall be calculated on the basis of a 360 day year and actual days elapsed. Interest shall be payable in arrears.

(b) To reflect the agreement of the parties hereto to modify the applicable interest rate with respect to the Outstanding Balance of each Note, Section 2(a) of the Form of Note is hereby amended and restated as follows:

Rate. Interest shall be computed daily on the Outstanding Balance of this Note at the Note Rate. The “Note Rate” shall equal the one-month, two-month or three-month, whichever period is closest to the remaining days in the calendar quarter, LIBOR Rate in effect on the date of issuance plus 5.30% per annum. The interest rate will be reset on the first day of each calendar quarter to the three-month LIBOR Rate then in effect plus 5.30% per annum. Interest shall be calculated on the basis of a 360 day year and actual days elapsed. Interest shall be payable in arrears.

4. Expiration Date of Outstanding Warrants.

(a) To reflect the agreement of the parties hereto to modify the expiration date applicable to currently outstanding warrants issued pursuant to the Note Purchase Agreement, the term “Expiration Date” in such warrants is hereby amended to mean May 10, 2009.

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(b) To reflect the agreement of the parties hereto to modify the expiration date applicable to warrants to be issued in the future pursuant to the Note Purchase Agreement, the definition of “Expiration Date” in the Form of Warrant attached as Exhibit B to the Note Purchase Agreement is hereby amended to mean May 10, 2009.

5. No Other Amendments. Except as expressly amended hereby, the Note Purchase Agreement shall remain in full force and effect as written.

6. Governing Law. This Agreement shall be governed in all respects by and construed in accordance with the laws of the State of California without regard to provisions regarding conflicts of laws.

7. Counterparts. This Amendment may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement. Signatures transmitted by facsimile or e-mail shall constitute original signatures.

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IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first above written.

DIEDRICH COFFEE, INC.
By:	/s/ Stephen V. Coffey
	Stephen V. Coffey
	Chief Executive Officer
By:	/s/ Sean M. McCarthy
	Sean M. McCarthy
	Chief Financial Officer
SEQUOIA ENTERPRISES, L.P.
By:	/s/ Paul C. Heeschen
	Paul C. Heeschen
	General Partner