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): September 14, 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)	(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 (see General Instruction A.2. below):

¨ 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 September 14, 2006, Diedrich Coffee, Inc. (the “Company”) and Starbucks Corporation, a Washington corporation (“Starbucks”), entered into an agreement (the “Agreement”) pursuant to which Starbucks has agreed to purchase the Company’s leasehold interests in most of the 47 locations where the Company operates retail stores under the Diedrich Coffee and Coffee People brands (the “Company Stores”), along with certain related fixtures and equipment, improvements, prepaid items, and ground lease improvements, and to assume certain liabilities as set forth in the Agreement (collectively, the “Transaction”).

Pursuant to the Agreement, Starbucks will pay the Company up to $13,520,000 in cash, which includes payment of $120,000 as consideration for the Company’s agreement to a non-compete provision. The actual amount paid by Starbucks under the Agreement is dependent on which and how many of the Company Stores are ultimately transferred to Starbucks. Ten percent of the amount paid to the Company upon transfer of the Company Stores will be deposited into an escrow fund to be held in connection with indemnification obligations of the Company. The closing is expected to occur approximately 90 days after the date of the Agreement (the “Closing”), provided that certain conditions, including that a specified minimum number of Company Stores are transferred to Starbucks at Closing, are met. After the Closing, the Company and Starbucks have agreed to use commercially reasonable efforts to transfer certain remaining Company Stores until approximately 150 days after the date of the Agreement or such other longer period as agreed to by the parties.

The Company and Starbucks have made certain customary representations, warranties and covenants in the Agreement. Specifically, the Company has agreed that, subject to a “fiduciary-out” provision and payment of a break-up fee, it will not (i) take any action to solicit any proposal from, (ii) furnish any information to, or (iii) participate in any discussions with, any entity other than Starbucks regarding any transaction involving the Company Stores. Upon termination of the Agreement under certain circumstances, including the Company’s entry into an alternative transaction involving the Company Stores, the Company shall pay Starbucks’ actual fees and expenses incurred in connection with the Transaction up to a maximum amount of $500,000; provided, however, that Starbucks is entitled to a minimum of $250,000, regardless of its actual fees and expenses. The Agreement also contains customary indemnification provisions for certain claims and provides for a basket of $100,000 and a cap of $2,000,000 for breaches of the Company’s representations and warranties contained in the Agreement.

The consummation of the Transaction is subject to certain customary conditions, including: approval of the Transaction by the Company’s stockholders; a specified minimum number of Company Stores transferred to Starbucks at Closing; the receipt by Starbucks of permits and approvals for at least 70% of certain Company Stores that are transferred if the Closing occurs within 90 days of the date of the Agreement; receipt of lease extensions of at least 10 years for at least 40% of certain Company Stores that are transferred; and, receipt of consents to the assignment of the leases for each of the Company Stores that are transferred, with estoppel provisions being agreed to for at least 50% of the Company Stores that are transferred. The Agreement contains customary termination provisions and may be terminated by either party if the Closing does not occur within 150 days from the date of the Agreement. The Company may also terminate the Agreement if the Closing has not occurred within 90 days, provided that Starbucks has not used commercially reasonable efforts to achieve the Closing.

As part of the Agreement, the Company has agreed to a non-compete provision that for three years after the Closing restricts its ability to operate or have any interest in the ownership or operation of any entity operating any retail specialty coffee stores in any city where a Company Store is presently located. The non-compete provision applies only to stores opened after the date of the Agreement and does not apply to (1) any retail stores operated under the “Gloria Jean’s” brand name, (2) wholesale sales to retail businesses that are not operated by the Company, or other non-retail businesses, or (3) the conversion of Company-operated stores existing on the date of the Agreement to franchise stores. The Company has also agreed that it will not solicit any Starbucks employee to enter the Company’s employment for three years after the Closing.

A copy of the Agreement will be filed as an exhibit to the Company’s Form 10-K for the fiscal year ended June 28, 2006.

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Item 5.02 Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers.

On September 14, 2006, the Company appointed Greg Palmer to the Board of Directors to fill the vacancy created by the departure of Peter Churm, who retired from the Board of Directors. The Company expects that Mr. Palmer will serve on the Audit Committee of the Board of Directors. The information regarding the appointment of Mr. Palmer and the departure of Mr. Churm contained in the Press Release attached hereto as Exhibit 99.1 is incorporated herein by reference.

Item 8.01 Other Events.

On September 14, 2006, the Company filed a press release (the “Press Release”) announcing the signing of the Agreement and the appointment of Mr. Palmer and the departure of Mr. Churm. A copy of the Press Release is attached hereto as Exhibit 99.1 and is incorporated herein by reference.

Item 9.01 Financial Statements and Exhibits

(d) Exhibits:

Exhibit Number	Reference
99.1	Press release dated September 14, 2006

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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.

	Diedrich Coffee, Inc.
Date: September 18, 2006
	/s/ Stephen V. Coffey
	(Signature)
	Name: Stephen V. Coffey
	Title: Chief Executive Officer

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EXHIBIT INDEX

Exhibit No.	Description
99.1	Press release dated September 14, 2006

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EX-99.1

Exhibit 99.1

Diedrich Coffee Announces Long-Term Growth Strategy; Company to

Focus Resources on Growing Wholesale and Franchise Businesses

Announces Changes to Board of Directors

Irvine, Calif. – September 14, 2006 – Recognizing its inherent strength as a premier roaster of imported specialty coffee and the positive trends in the wholesale market, Diedrich Coffee, Inc. (NASDAQ: DDRX) one of the largest specialty coffee suppliers in the United States, announced today that it plans to strengthen its two core business segments by increasing the resources dedicated to its expanding wholesale business and by narrowing its retail focus to its franchise stores.

“Diedrich Coffee has a long and storied tradition of selecting and roasting the finest coffees in the world,” said Steve Coffey, chief executive officer of Diedrich Coffee. “The changes that we are announcing today allow us to utilize our core strength as the premier roaster of specialty coffee and to fulfill our promise to sell great coffee to the widest possible market.

With the trends shifting towards specialty coffee in restaurants, offices, and specialty stores, Diedrich Coffee has experienced significant growth in our wholesale business. We are well positioned to be a strong competitor with the potential for greater growth and profitability in the future.”

According to Mr. Coffey, Diedrich’s wholesale operation has grown substantially over the past 12 months, growing at a rate of 46% over the prior year with sales last

quarter trending up at 50% over the same period last year. Third-party sales for the quarter ended June 28, 2006 represented 78% of all coffee sold by the company.

As part of its plan to narrow the focus of the retail side of the business on its franchise operations, the company plans to close its Diedrich Coffee and Coffee People company-owned locations but retain the brands for its wholesale and franchise operations. To this end, the company announced that it entered into an agreement today to sell most of its 47 company-owned locations to Starbucks Coffee Company for approximately $13.5 million. The completion of the sale is subject to a number of conditions including the approval of Diedrich Coffee’s stockholders and the receipt of various approvals, permits and consents in connection with the transfer of the store locations. Assuming these conditions are met, it is anticipated the sale will be completed within the next few months.

The Company noted that its agreement with Starbucks provided the best solution for the company and its landlords. Most importantly it allowed the company to provide its employees with the smoothest transition possible. All non-management store employees in good standing at the stores being sold will be offered positions with Starbucks and store managers and assistant managers will be provided the opportunity to interview for positions.

The company said that its Gloria Jean’s franchise system and the franchisee-owned Diedrich Coffee stores are not directly affected by the sale transaction or other strategic changes. “Our franchise partners will benefit from our new strategic direction as they will have a financially stronger and more focused company as their partner without the distraction of also running two company store systems,” Mr. Coffey said.

The Diedrich Coffee and Coffee People stores are not expected to transition for several months. Until then, the stores will remain open and continue to serve our guests as they have in the past. Additionally, our customers will be able to continue to purchase the same rich and flavorful coffee at franchise locations and through the company’s websites, www.diedrich.com, www.gloriajeans.com and www.coffeepeople.com,” Mr. Coffey added.

In an unrelated matter, the company also announced today that Peter Churm has retired from the board of directors. The board has appointed Greg Palmer to fill the vacancy. Most recently Mr. Palmer served as president and chief executive officer of RemedyTemp, Inc. “On behalf of the board of directors I would like to thank Peter for his many years of exemplary service and also express how pleased we are that Greg is joining the board. His executive management background and experience in sales oriented companies will be invaluable as the company moves forward,” said Paul Heeschen, Diedrich Coffee’s Chairman.

About Diedrich Coffee

Headquartered in Irvine, California, Diedrich Coffee specializes in sourcing, roasting and selling the world’s highest quality coffees. The Company’s three brands are Gloria Jean’s Coffees, Diedrich Coffee and Coffee People, which it sells through more than 800 wholesale accounts including coffeehouses, office coffee service distributors, restaurants, specialty retailers as well as direct-to-consumer via the Internet. The company’s 200 domestic retail outlets, the majority of which are franchised, are located in 33 states. For more information about Diedrich Coffee, call 800/354-5282, or visit the Company’s Websites at www.diedrich.com, www.gloriajeans.com, or www.coffeepeople.com.

Forward Looking Statements

Statements in this news release that relate to future plans, financial results or projections, events or performance are forward-looking statements within the meaning of

Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and fall under the safe harbor. Actual results and financial position could differ materially from those anticipated in the forward-looking statements as a result of a number of factors, including, but not limited to, the financial and operating performance of the Company’s retail operations, the Company’s ability to maintain profitability over time, the successful execution of the Company’s growth strategies, franchisee’s adherence to the Company’s practices, policies and procedures, the impact of competition, the availability of working capital, and other risks and uncertainties described in detail under “Risk Factors and Trends Affecting Diedrich Coffee and its Business” in the Company’s annual report on Form 10-K/A for the fiscal year ended June 29, 2005.

Contact:	Sitrick and Company
	Maya Pogoda
	(310) 788-2850