SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14D-9
(RULE 14d-101)
SOLICITATION/RECOMMENDATION STATEMENT
PURSUANT TO
SECTION 14(d)(4) OF THE
SECURITIES EXCHANGE ACT OF 1934
DIEDRICH COFFEE, INC.
(Name of Subject Company)
DIEDRICH COFFEE, INC.
(Name of Person(s) Filing Statement)
COMMON STOCK, PAR VALUE $0.01 PER
SHARE
(Title of Class of Securities)
253675201
(CUSIP Number of Class of Securities)
Sean M. McCarthy
Chief Financial Officer
Diedrich Coffee, Inc.
28 Executive Park, Suite 200
Irvine, California
92614
(949) 260-1600
(Name, address and telephone number of person
authorized to receive
notices and communications on
behalf of the person(s) filing statement)
Copies to:
John M. Williams
Gibson, Dunn & Crutcher LLP
3161 Michelson Drive, Suite 1200
Irvine, California 92612
(949) 451-3800
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Check the box if the filing relates solely to preliminary communications made before the commencement of a tender offer.
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Item 1. Subject Company Information.
The name of the subject company is Diedrich Coffee, Inc., a Delaware corporation (Diedrich). Diedrichs address at its
principal executive offices is 28 Executive Park, Suite 200, Irvine, California 92614. Diedrichs telephone number at its principal executive offices is (949) 260-1600.
The title of the class of equity securities to which this Solicitation/Recommendation Statement on Schedule 14D-9 (together with the
exhibits and annexes hereto, this Statement) relates is the common stock, par value $0.01 per share, of Diedrich (Common Stock). As of November 16, 2009, there were 5,726,813 shares of Common Stock issued and outstanding.
Item 2. Identity and Background of Filing Person.
The filing person of this Statement is the subject company, Diedrich Coffee, Inc. Diedrichs name, business address, and business
telephone number are set forth in Item 1 above, which information is incorporated by reference herein.
This Statement
relates to the offer by Peets Coffee & Tea, Inc., a Washington corporation (Peets), through its wholly-owned subsidiary, Marty Acquisition Sub, Inc., a Delaware corporation (Purchaser), to acquire all
issued and outstanding shares of Common Stock in exchange for, with respect to each share, the right to receive a combination of: (i) $17.33 in cash, without interest, and (ii) a fraction of a share of Peets common stock (the
Applicable Fraction, and together with the $17.33 in cash, the Offer Consideration) determined by dividing $8.67 by the volume weighted average price for one share of Peets common stock (Peets Average Stock
Price) as reported on the Nasdaq Global Select Market for the five (5) trading day period ending immediately prior to (and excluding) the date on which Purchaser accepts any shares of Common Stock for exchange pursuant to such offer (the
Acceptance Time), provided that in no event will such fraction exceed 0.315, all upon the terms and subject to the conditions set forth in Peets prospectus/offer to purchase, dated November 17, 2009 (the Prospectus/Offer to
Purchase). The Prospectus/Offer to Purchase is contained in the Registration Statement on Form S-4 filed by Peets with the Securities and Exchange Commission (the SEC), as amended (the Registration
Statement), and in the related Letter of Transmittal (the Letter of Transmittal, together with the Prospectus/Offer to Purchase and any amendments or supplements thereto, collectively constituting the Offer). Copies of
the Prospectus/Offer to Purchase and the Letter of Transmittal are being mailed together with this Statement and filed as Exhibits (a)(1) and (a)(2), respectively, and are incorporated herein by reference. The Offer is being made pursuant to
the Agreement and Plan of Merger, dated as of November 2, 2009, by and among Diedrich, Peets and Purchaser, as amended from time to time (the Merger Agreement).
The Offer was commenced by Purchaser on November 17, 2009 and expires at 12:00 midnight, Eastern Time, on December 15, 2009 (one minute
after 11:59 p.m., Eastern Time, on December 15, 2009), unless it is extended or terminated in accordance with its terms. The Offer is conditioned upon, among other things, there being validly tendered (and not properly withdrawn) prior to the
expiration time of the Offer (as it may be extended) shares of Common Stock that, together with any shares of Common Stock then owned by Peets or Purchaser, or by any other subsidiaries of Peets, represent more than 50% of the sum of
(i) the aggregate number of shares of Common Stock outstanding immediately prior to the Acceptance Time, and (ii) at the election of Peets, an additional number of shares of Common Stock up to (but not exceeding) the aggregate number
of shares of Common Stock issuable upon the exercise of all stock options to purchase shares of Common Stock, warrants to purchase shares of Common Stock and other rights to acquire Common Stock that are outstanding immediately prior to the
Acceptance Time and that are vested and exercisable or will be vested and exercisable prior to the completion of the Merger (as defined below). This condition is referred to as the Minimum Condition in this Statement.
Subject to the termination rights of Peets and Diedrich under the Merger Agreement: (i) if, at any time as of which the Offer is
scheduled to expire, any condition to the Offer has not been satisfied or waived, Purchaser is
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required to extend the Offer on one or more occasions for additional successive periods of up to 20 business days per extension (but not beyond March 31, 2010); and (2) Purchaser is
required to extend the Offer at any time or from time to time for any period required by any rule, regulation, interpretation or position of the SEC or the staff of the SEC applicable to the Offer. In addition, if less than 90% of the number of
outstanding shares of Common Stock are accepted for exchange pursuant to the Offer, Purchaser may, in its sole discretion (and without the consent of Diedrich or any other person), but is not required to, elect to provide for one or more subsequent
offering periods (of up to 20 business days in the aggregate) in accordance with Rule 14d-11 under the Securities Exchange Act of 1934, as amended (the Exchange Act). During any subsequent offering period, if there is one, Diedrich
stockholders would be permitted to tender their shares to Purchaser for the same consideration payable in the Offer.
No
fractional shares of Peets common stock will be issued in the Offer. Instead of any fraction of a share of Peets common stock that a tendering Diedrich stockholder would otherwise be entitled to receive, such stockholder will receive
additional cash in an amount equal to such fraction multiplied by the closing trading price of a share of Peets common stock as reported on the Nasdaq Global Select Market on the trading day immediately before the Acceptance Time.
The Merger Agreement provides that, following the completion of the Offer, Purchaser will merge with and into Diedrich (the
Merger), and Diedrich will continue as the surviving corporation in the Merger as a wholly-owned subsidiary of Peets. The Merger Agreement provides that the Merger will be completed in one of two ways:
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If, upon completion of the Offer and following the exercise (if applicable) of the Top-Up Option (as defined below in Item 8 in the section
entitled Top-Up Option), Purchaser owns 90% or more of the shares of Common Stock then outstanding, the parties will take all actions necessary and appropriate to cause the Merger to become effective as soon as practicable pursuant to
Section 253 of the Delaware General Corporation Law (DGCL); or
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If, upon completion of the Offer, Purchaser owns less than 90% of the shares of Common Stock then outstanding, Diedrich is required to call and hold a
special meeting of its stockholders to vote on the adoption of the Merger Agreement as promptly as practicable, and the Merger will occur promptly after the approval of the Diedrich stockholders is obtained (subject to the satisfaction of applicable
conditions).
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If the Acceptance Time occurs, Peets and Purchaser will own shares of Common Stock having sufficient
votes to adopt the Merger Agreement even if none of Diedrichs other stockholders vote in favor of such adoption.
In the
Merger, each outstanding Share (other than shares of Common Stock held by Diedrich or any of its wholly-owned subsidiaries or held in its treasury, or owned by Peets, Purchaser or any other wholly-owned subsidiary of Peets, and other
than shares of Common Stock held by stockholders who properly exercised appraisal rights under Section 262 of the DGCL) will be converted into the right to receive the Offer Consideration.
The foregoing description of the Merger Agreement and any other descriptions of the Merger Agreement contained in this Statement are
qualified in their entirety by reference to the full text of the Merger Agreement, which is filed herewith as Exhibits (a)(6) and (a)(7) and is incorporated herein by reference. The Merger Agreement is included as an exhibit to this Statement
to provide additional information regarding the terms of the transactions described herein and is not intended to provide any other factual information or disclosure about Diedrich, Peets or Purchaser. The representations, warranties and
covenants contained in the Merger Agreement were made only for purposes of such agreement and as of a specific date, were solely for the benefit of the parties to such agreement (except as to certain indemnification obligations), are subject to
limitations agreed upon by the contracting parties (including being qualified by disclosure schedules), were made for the purposes of allocating contractual risk among the parties thereto instead of establishing these matters as facts, and may be
subject to standards of materiality applicable to the contracting parties that differ from those applicable to investors.
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Moreover, information concerning the subject matter of the representations and warranties may change after the date of the Merger Agreement, which subsequent information may or may not be fully
reflected in Diedrichs public disclosures. Investors are not third-party beneficiaries under the Merger Agreement and, in light of the foregoing reasons, should not rely on the representations, warranties and covenants or any descriptions
thereof as characterizations of the actual state of facts or condition of Diedrich, Peets or Purchaser or any of their respective subsidiaries or affiliates. Information regarding Diedrich is provided in Diedrichs other SEC filings,
which are available at
www.diedrich.com
and on the SECs website at
www.sec.gov
.
The Offer is described in
a Tender Offer Statement on Schedule TO (as amended or supplemented from time to time, together with the exhibits and annexes thereto, the Schedule TO), filed by Peets with the SEC on November 17, 2009.
The Schedule TO states that the principal executive offices of Peets and Purchaser are located at 1400 Park Avenue, Emeryville,
CA 94608 and that the telephone number at such principal executive offices is (510) 594-2100.
Upon filing this Statement
with the SEC, Diedrich will make this Statement publicly available on its website at
www.diedrich.com
.
Item 3.
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Past Contacts, Transactions, Negotiations and Agreements.
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Except as described in this Statement or incorporated herein by reference, as of the date of this Statement, there are no material agreements, arrangements or undertakings, nor any actual or potential
conflicts of interest, between Diedrich or its affiliates, on the one hand, and (i) Diedrich and any of Diedrichs executive officers, directors or affiliates or (ii) Peets, Purchaser and any of their executive officers,
directors or affiliates listed in Schedule I of the Prospectus/Offer to Purchase entitled Directors and Executive Officers of Peets Coffee & Tea, Inc. and Marty Acquisition Sub, Inc., on the other hand.
Interests of Diedrichs Directors and Executive Officers
Diedrichs directors and executive officers are as follows:
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Name
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Age
(1)
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Position with Diedrich
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Paul C. Heeschen.
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52
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Chairman of the Board of Directors
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Gregory D. Palmer
(2)
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53
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Director
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J. Russell Phillips
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60
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Director, President and Chief Executive Officer
(3)
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Timothy J. Ryan
(2)
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69
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Vice Chairman of the Board of Directors
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James W. Stryker
(2)
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62
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Director
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Sean M. McCarthy
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48
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Chief Financial Officer and Secretary
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James L. Harris
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46
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Vice PresidentSales
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Dana A. King
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46
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Vice PresidentInformation Services & Customer Fulfillment
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(1)
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All ages are as of November 16, 2009.
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(2)
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Members of the special committee of the board of directors.
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(3)
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On October 22, 2009, Diedrich announced the initiation of a transition plan with respect to the position of chief executive officer of Diedrich, pursuant to which
the employment of J. Russell Phillips, as President and Chief Executive Officer of Diedrich, will terminate.
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Stockholder Agreements with Directors, Executive Officers and Officers
On November 2, 2009, Paul C. Heeschen entered into a Stockholder Agreement with Peets, pursuant to
which he has agreed, solely in his capacity as a stockholder of Diedrich, to tender (and not withdraw) 1,832,580 of his beneficially-owned shares of Common Stock (representing approximately 32% of the outstanding shares of Common Stock as of
November 2, 2009) to Purchaser in the Offer. Pursuant to such Stockholder Agreement, Mr. Heeschen has also agreed, among other things, to vote all of the shares of Common Stock that he has agreed to tender: (a) in favor of the Merger,
the adoption of the Merger Agreement and the terms thereof and the other actions contemplated therein; (b) vote against any action or agreement that would result in a breach of any representation, warranty, covenant or obligation of Diedrich in
the Merger Agreement; and (c) against any action or agreement that is intended, or that could reasonably be expected, to impede, interfere with, delay, postpone, discourage or adversely affect the Offer or the Merger or any of the other
transactions contemplated by the Merger Agreement or the Stockholder Agreement. In addition, Mr. Heeschen has agreed not to exercise, or cause or permit to be exercised, any warrants to purchase shares of Common Stock that he owns of record or
beneficially. Mr. Heeschens Stockholder Agreement and the foregoing obligations terminate upon the earlier of (i) any termination of the Merger Agreement in accordance with its terms and (ii) the effective time of the Merger.
The foregoing description is qualified in its entirety by reference to Mr. Heeschens Stockholder Agreement, which
is filed herewith as Exhibit (e)(1) and is incorporated herein by reference.
In addition to Mr. Heeschen, each of
Timothy J. Ryan, James W. Stryker, Jeanne Ortiz, James L. Harris, James R. Phillips, Gregory D. Palmer, Sean M. McCarthy, Jack Hosier and Dana A. King have entered into a similar form of Stockholder Agreement, solely in each such individuals
capacity as a stockholder of Diedrich, covering all of the shares of Common Stock beneficially owned by such individuals, as well as any additional shares of Common Stock of which such individuals may become the beneficial owner. These persons
collectively hold approximately 0.18% of the outstanding shares of Common Stock as of November 16, 2009 (excluding shares of Common Stock issuable upon the exercise of options and warrants held by such stockholders). These Stockholder Agreements
also contain the voting provisions set forth in the Stockholder Agreement entered into by Mr. Heeschen. These Stockholder Agreements and the foregoing obligations terminate upon the earlier of (i) any termination of the Merger Agreement in
accordance with its terms and (ii) the effective time of the Merger.
The foregoing description is qualified in its
entirety by reference to the form of Stockholder Agreement entered into by such persons, which is filed herewith as Exhibit (e)(2) and is incorporated herein by reference.
Potential Payments Upon Termination or Change in Control
Some of Diedrichs officers are entitled to receive payments upon a change in control under individual employment agreements or
severance agreements. Upon termination for cause, officers are not entitled to receive compensation after such termination and their options terminate immediately. In the event of an involuntary termination that is not for cause, termination
following a change in control or disability of certain officers, such officers may be entitled to receive compensation or payments as described below in the sections entitled Diedrich Stock Options, Change-in-Control Provisions
Applicable to Mr. Phillips, Change-in-Control Provisions Applicable to Mr. McCarthy and Diedrich Warrants. These sections assume, for illustrative purposes, $26.00 as the deemed value of the Offer
Consideration payable with respect to each share of Common Stock. As described below, completion of the Offer will constitute a change in control of Diedrich for purposes of determining the entitlements due to certain directors and officers of
Diedrich under certain severance and other benefit agreements or arrangements.
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Diedrich Stock Options
Certain directors and executive officers of Diedrich have received the right to acquire shares of Common Stock pursuant to equity incentive
awards, including options to purchase shares of Common Stock.
The Merger Agreement provides that, at the Acceptance Time,
each option to purchase shares of Common Stock from Diedrich that is outstanding and unexercised immediately prior to the Acceptance Time shall automatically be cancelled and converted into the right to receive the following:
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if the exercise price per share of such option is less than $17.33, then (A) an amount of cash determined by multiplying (1) the number of
shares of Common Stock that were subject to such option immediately prior to the Acceptance Time, by (2) the amount by which $17.33 exceeds the exercise price per share of such option, and (B) a number of shares of Peets common stock
determined by multiplying (1) the number of shares of Common Stock that were subject to such option immediately prior to the Acceptance Time, by (2) the Applicable Fraction;
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if the exercise price per share of such option is equal to $17.33, then (A) no cash and (B) a number of shares of Peets common stock
determined by multiplying (1) the number of shares of Common Stock that were subject to such option immediately prior to the Acceptance Time, by (2) the Applicable Fraction;
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if the exercise price per share of such option is greater than $17.33 but less than the Total Option Value (as defined below), then (A) no cash
and (B) a number of shares of Peets common stock determined by multiplying (1) the number of shares of Common Stock that were subject to such option immediately prior to the Acceptance Time, by (B) the Applicable Fraction, by
(C) the In-the-Money Option Percentage (as defined below); and
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if the exercise price per share of such option is greater than the Total Option Value, then (A) no cash and (B) no shares of Peets
common stock.
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The Total Option Value is the sum of (i) $17.33, and (ii) the product
of the Applicable Fraction and Peets Average Stock Price; and the In-the-Money Option Percentage is the percentage corresponding to a fraction (i) whose numerator is the amount by which (A) the amount equal to the product
of the Applicable Fraction and Peets Average Stock Price, exceeds (B) the amount by which the exercise price per share of such stock option to purchase a share of Common Stock exceeds $17.33, and (ii) whose denominator is an amount
equal to the product of the Applicable Fraction and Peets Average Stock Price.
The vesting terms previously applicable
to any option to purchase shares of Common Stock from Diedrich that is cancelled and converted into the right described above will continue in full force and effect and will be applied to such right. Accordingly, any such right to receive cash (if
any) and shares of Peets common stock (if any) will vest as follows: (x) if the holder of the right is an employee who continues his or her employment with Diedrich after the Acceptance Time, then such right will vest in accordance with the
vesting terms applicable to the cancelled options, and the cash payable and the shares of Peets common stock issuable with respect to such right will be delivered to the holder at such times and in the same percentages as the cancelled options
would have become vested; (y) if the holder of the right is an employee whose employment with Diedrich is terminated (whether prior to or after the Acceptance Time) in connection with the change in control resulting from the Offer or the Merger,
then such right will vest immediately upon the later to occur of the termination of the holders employment with Diedrich and the Acceptance Time, and all cash payable and all shares of Peets common stock issuable with respect to such
right will be delivered to the holder following such acceleration; and (z) if the holder of the right is a non-employee director of Diedrich, then such right will vest immediately at the Acceptance Time, and all cash payable and all shares of
Peets common stock issuable with respect to such right will be delivered to the holder following such acceleration.
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As of November 16, 2009, the following directors and officers of Diedrich have outstanding
and unexercised option awards specified below and will receive consideration for such options as described above, which consideration, net of the respective exercise prices, will have estimated cash values as set forth below (based on a deemed cash
value of $26.00 as the Offer Consideration for each share of Common Stock).
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Name
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Number of
Shares of
Common Stock
Underlying
Unexercised
Options (#)
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Net Consideration to
be Received for
Unexercised Options
($)
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James L. Harris
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20,000
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$
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473,600
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Paul C. Heeschen
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96,250
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$
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2,161,643
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Dana A. King
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20,000
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$
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450,200
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Sean M. McCarthy
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20,000
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$
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446,200
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Gregory D. Palmer
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60,000
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$
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1,384,350
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J. Russell Phillips
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282,500
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$
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6,428,025
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Timothy J. Ryan
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185,000
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$
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4,118,050
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James W. Stryker
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30,000
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$
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766,950
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Change in Control Provisions Applicable to Mr. Phillips
Under the Chief Executive Officer Employment Agreement between J. Russell Phillips and Diedrich, effective as of
February 7, 2008, in the event of a change in control (as such term is defined in such agreement) Mr. Phillips will be entitled to receive, upon timely execution of a general release of Diedrich, a payment in cash equal to 100% of the base
salary and his options will fully vest and become immediately exercisable as set forth in the Stock Option Agreement between Diedrich and J. Russell Phillips, effective as of February 7, 2008.
Upon the commencement of his employment on February 7, 2008, Mr. Phillips received options to purchase an aggregate of
275,000 shares of Common Stock which vest over three (3) years, with one-third (1/3) of the options vesting on each anniversary of the grant date until all options have vested. These options were granted under Mr. Phillips
Stock Option Agreement.
In connection with the Offer and the Merger, Mr. Phillips will receive an aggregate amount of
$6,703,025, which is comprised of (i) a payment of 100% of his base salary, $275,000, and (ii) a payment of $6,428,025 in connection with Diedrich options owned by him (as outlined in the table above).
The foregoing description is qualified in its entirety by reference to Mr. Phillips Chief Executive Officer Employment Agreement
and Mr. Phillips Stock Option Agreement, which are filed herewith as Exhibits (e)(17) and (e)(18) and are incorporated herein by reference.
Change in Control and Termination Provisions Applicable to Mr. McCarthy
Mr. McCarthy is entitled to a severance payment equal to nine months of annual base salary if he is terminated by Diedrich without cause, provided that he executes a customary release of Diedrich. Mr. McCarthy is also entitled to
a stock appreciation payment upon the consummation of a change in control transaction, provided that he executes a general release of Diedrich. For this purpose, a change in control transaction is defined as a transaction that results in a
non-affiliate of Diedrich acquiring 90% of the outstanding shares of Common Stock. The stock appreciation payment payable to Mr. McCarthy upon the consummation of a change in control transaction is equal to the product of (i) the
difference determined by subtracting $5.00 from the per share price at which at least 90% of the outstanding shares of Common Stock is acquired, multiplied by (ii) 100,000.
In connection with the Offer and the Merger, Mr. McCarthy will receive an aggregate amount of $2,546,200, which is comprised of
(i) a payment of $2,100,000 (constituting the stock appreciation payment) and (ii) a payment of $446,200 in connection with Diedrich options owned by him (as outlined in the table above).
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If Mr. McCarthy is terminated without cause following the Merger, Mr. McCarthy
will also receive a lump sum payment of $168,750, provided that he executes a customary release of Diedrich.
The foregoing
description is qualified in its entirety by reference to the Letter Agreement with Mr. McCarthy, which is filed herewith as Exhibit (e)(24) and is incorporated herein by reference.
Outstanding Debt and Financing Arrangements with Sequoia
Note Purchase Agreement
. On May 10, 2004, Diedrich entered into a $5,000,000 Contingent Convertible Note Purchase Agreement with
Sequoia Enterprises L.P. (Sequoia), a limited partnership whose sole general partner is Mr. Heeschen, which provided to Diedrich, at its election, the ability to issue notes with an aggregate principal amount of up to $5,000,000.
The Note Purchase Agreement has been amended from time to time. As amended, the notes issued under the Note Purchase Agreement are due in full on March 31, 2010. On the maturity date, all outstanding principal, interest and other amounts
payable under the Note Purchase Agreement will be due, unless they become payable earlier pursuant to the terms of the Note Purchase Agreement upon a change in control of Diedrich. As of November 16, 2009, Diedrich had $2,000,000 of issued notes
outstanding under the Note Purchase Agreement and there was $5,855 of accrued and unpaid interest.
Loan Agreement
. On
August 26, 2008, Diedrich entered into a Loan Agreement with Sequoia. The Loan Agreement provides for a $3,000,000 term loan. As of June 24, 2009, $3,000,000 was outstanding under the Loan Agreement. Subsequently, Diedrich paid $1,000,000
due to Sequoia under the Loan Agreement on July 29, 2009. On the maturity date of August 26, 2011, all outstanding principal, interest and other amounts payable under the Loan Agreement will be due, unless they become payable earlier
pursuant to the terms of the Loan Agreement upon a change in control of Diedrich. As of November 16, 2009, $2,000,000 was outstanding under the Loan Agreement and there was $5,816 of accrued and unpaid interest.
Completion of the Offer will constitute a change in control of Diedrich for purposes of the Note Purchase Agreement and the Loan Agreement.
All outstanding principal, interest and other amounts payable under the Note Purchase Agreement and Loan Agreement will become due.
The foregoing description is qualified in its entirety by reference to the Note Purchase Agreement and the Loan Agreement, and all amendments thereto, which are filed herewith as Exhibits (e)(13) through (e)(16) and (e)(19) through (e)(23)
and are incorporated herein by reference.
Diedrich Warrants
At the Acceptance Time, each warrant to purchase shares of Common Stock that is outstanding immediately prior to the Acceptance Time will
automatically be cancelled and converted into the right to receive a combination of:
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an amount of cash determined by multiplying (A) the number of shares of Common Stock that were subject to such warrant immediately prior to the
Acceptance Time, by (B) $17.33, by (C) the In-the-Money Warrant Percentage (as defined below); and
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a number of shares of Peets common stock determined by multiplying (A) the number of shares of Common Stock that were subject to such
warrant immediately prior to the Acceptance Time, by (B) the Applicable Fraction, by (C) the In-the-Money Warrant Percentage.
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The In-the-Money Warrant Percentage is the percentage corresponding to a fraction (1) whose numerator is equal to (A) $17.33, plus (B) an amount equal to the product of the
Applicable Fraction and Peets Average Stock Price, minus (C) the exercise price per share of such warrant, and (2) whose denominator is equal to (A) $17.33, plus (B) an amount equal to the product of the Applicable Fraction
and Peets Average Stock Price.
On May 8, 2001, in connection with the sale of 2,000,000 shares of Common Stock to
Sequoia, Diedrich issued warrants to Sequoia to purchase 250,000 shares of Common Stock at an exercise price of $4.80 per share (2001 Sequoia Warrants). On November 10, 2008, the exercise price of the 2001 Sequoia Warrants was
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decreased to $1.65 per share in connection with the Waiver, Agreement, Amendment No. 1 to 2008 Warrant and Amendment No. 2 to 2001 Warrant (the Waiver Agreement) with
Sequoia. As of November 16, 2009, all 2001 Sequoia Warrants were outstanding with an expiration date of June 30, 2014.
In connection with the Loan Agreement and an amendment to the Note Purchase Agreement, on August 26, 2008, Diedrich issued to Sequoia warrants (the 2008 Sequoia Warrants) to purchase 1,667,000 shares of Common Stock at an
exercise price of $2.00 per share. On November 10, 2008 the exercise price was decreased to $1.65 per share in connection with the Waiver Agreement. On April 17, 2009, Sequoia transferred a portion of the 2008 Sequoia Warrants, consisting
of the right to purchase 300,000 shares of Common Stock, to WF Trust, an irrevocable trust whose sole trustee is Mr. Heeschen. As of November 16, 2009, all 2008 Sequoia Warrants were outstanding with an expiration date of August 26, 2013.
In connection with the extension of the Note Purchase Agreement, on April 29, 2009, Diedrich issued to Sequoia warrants
to purchase 70,000 shares of Common Stock at an exercise price of $7.40 per share (the 2009 Sequoia Warrants), which was the closing price of the Common Stock on such date. As of November 16, 2009, all 2009 Sequoia Warrants were
outstanding with an expiration date of April 29, 2014.
As of November 16, Sequoia and, with respect to the right to
purchase 300,000 shares of Common Stock, WF Trust hold the 2001 Sequoia Warrants, the 2008 Sequoia Warrants and the 2009 Sequoia Warrants. As such, Mr. Heeschen is deemed to beneficially own warrants to purchase an aggregate of 1,987,000 shares
of Common Stock. The outstanding warrants have a weighted average exercise price of $1.85. In connection with the completion of the Offer, Mr. Heeschen will, via his beneficial ownership of such warrants, receive an aggregate amount of
$47,986,050 in connection with the warrants to purchase shares of Common Stock beneficially owned by him.
The foregoing
description is qualified in its entirety by reference to the 2001 Sequoia Warrants, the Form of Warrant, Amendment No. 1 to 2001 Warrant, the 2008 Sequoia Warrants, the Waiver Agreement and the 2009 Sequoia Warrants which are filed herewith as
Exhibits (e)(3) through (e)(9) and are incorporated by reference herein.
2009 Director Compensation
Directors who are also Diedrich employees receive no extra compensation for their service on the board of directors
(the Board). Non-employee directors receive an annual fee of $12,000, which is paid quarterly. In addition, non-employee directors earn fees of $1,000 per board meeting attended in person, $500 per board meeting attended telephonically
and $500 per committee meeting attended, whether in person or telephonically. Non-employee directors are also reimbursed for out-of-pocket expenses incurred in connection with attending board meetings and meetings of the committees of the Board. In
the fiscal year ended June 24, 2009, Mr. Heeschen earned $22,000, Mr. Palmer earned $23,500, Mr. Ryan earned $50,062 and Mr. Stryker earned $10,500 pursuant to these arrangements. In addition, non-employee directors are
eligible to receive stock option grants under the Diedrich Coffee, Inc. 2000 Equity Incentive Plan (the 2000 Equity Incentive Plan). In the fiscal year ended June 24, 2009, each person who was then a non-employee director was
granted 15,000 stock options under the 2000 Equity Incentive Plan.
Under the 2000 Equity Incentive Plan, each non-employee
director automatically receives, upon first becoming a director, a one-time grant of an option to purchase up to 15,000 shares of Common Stock. The initial options vest and become exercisable with respect to 50% of the underlying shares upon the
earlier of the first anniversary of the grant date or immediately before the first annual meeting of stockholders following the grant date, provided that the recipient has remained a non-employee director for the entire period from the grant date to
such earlier date. The remaining 50% of the underlying shares vest upon the earlier of the second anniversary of the grant date or immediately before the second annual meeting of stockholders following the grant date, provided that the recipient has
remained a non-employee director for the entire period from the grant date to such date. In addition to the initial grant, each non-employee director also automatically receives, upon re-election to the Board, an additional option to purchase up to
15,000 shares of Common Stock. These additional options vest and become exercisable upon the
9
earlier of the first anniversary of the grant date or immediately before the annual meeting of stockholders following the grant date, provided that 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.
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 the Common Stock on the date of grant. The 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 24, 2009, an aggregate of 185,000 options to purchase shares of Common Stock were issued to non-employee directors under the 2000
Equity Incentive Plan. As described in the section entitled Diedrich Stock Options above, all options held by non-employee directors will be converted into the right to receive cash and/or shares of Peets common stock at the
Acceptance Time, which right will vest immediately at the Acceptance Time.
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|
|
|
|
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Name
|
|
Fees Earned
or Paid in
Cash ($)
|
|
Number of
Options Granted for
the Last Fiscal Year (#)
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Paul C. Heeschen.
|
|
$
|
22,000
|
|
15,000
|
Gregory D. Palmer
|
|
$
|
23,500
|
|
15,000
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Timothy J. Ryan
(1)
|
|
$
|
50,062
|
|
125,000
|
James W. Stryker
|
|
$
|
10,500
|
|
30,000
|
(1)
|
Fees earned include compensation as Vice Chairman of the Board in the amount of $27,562.
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Indemnification
The Merger Agreement provides that all rights to indemnification by Diedrich existing in favor of the directors and officers of Diedrich as of the date of the Merger Agreement for their acts and omissions
as directors and officers, as provided in Diedrichs charter documents and in individual indemnification agreements with Diedrich, will survive the Merger for a period of six years. Without limiting the foregoing, the Merger Agreement further
provides that Peets must cause Diedrich (as the surviving corporation of the Merger) to, to the fullest extent permitted under applicable law, indemnify and hold harmless each of such directors and officers against any costs or expenses
(including advancing attorneys fees and expenses in advance of the final disposition of any action to each of such directors and officers to the fullest extent permitted by applicable law), judgments, fines, losses, claims, damages,
liabilities and amounts paid in settlement in connection with any actual or threatened claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative arising out of, relating to or in connection with any
action or omission by such directors and officers occurring or alleged to have occurred at or before the completion of the Merger. The Merger Agreement further provides that prior to the completion of the Merger, Diedrich is required to purchase and
prepay a six-year tail policy on terms and conditions providing substantially equivalent benefits and coverage levels as the current policies of directors and officers liability insurance and fiduciary liability insurance
maintained by Diedrich with respect to matters arising at or before the completion of the Merger, covering without limitation the Offer and the Merger, provided that if such tail policy is not available at a cost equal to or less than
300% of the aggregate annual premiums paid by Diedrich during the most recent policy year for its existing director and officer liability insurance policies, Diedrich is required to purchase the best coverage as is reasonably available for such
amount.
The foregoing summary is qualified in its entirety by reference to the Merger Agreement, which is filed herewith as
Exhibits (a)(6) and (a)(7) and is incorporated herein by reference.
Representation on Diedrichs Board
The Merger Agreement provides that, effective upon the Acceptance Time, Peets will be entitled to designate up
to such number of directors to the Board, rounded up to the nearest whole number, as will give Peets representation on the Board equal to the product of (x) the number of directors on the Board and (y) the
10
percentage that the number of shares of Common Stock beneficially owned by Peets or Purchaser or any other subsidiaries of Peets (including all shares of Common Stock accepted for
exchange pursuant to the Offer) bears to the total number of then outstanding shares of Common Stock. Diedrich has agreed to, promptly upon request by Peets, take all actions necessary and reasonably available to cause Peets designees to
be elected or appointed to the Board, including seeking and accepting resignations of incumbent directors, and if such resignations are not obtained, increasing the size of the Board. Notwithstanding the foregoing, at least two of the members
serving on the Board as of the date of the Merger Agreement will remain as members on the Board until the effective time of the Merger.
Pursuant to the Merger Agreement, Diedrich has further agreed to fulfill its obligations under Section 14(f) of the Exchange Act and Rule 14f-1 promulgated thereunder. In furtherance thereof,
Diedrich is providing to its stockholders an Information Statement pursuant to Section 14(f) of the Exchange Act and Rule 14f-1, which is attached as Annex A to this Statement.
The foregoing summary is qualified in its entirety by reference to the Merger Agreement, which is filed herewith as Exhibits (a)(6) and
(a)(7) and is incorporated herein by reference.
Item 4.
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The Solicitation or Recommendation.
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At a meeting held on November 2, 2009, based in part on the unanimous recommendation of the special committee of the Board (the Special Committee), the Board unanimously:
(i) determined that the Merger Agreement and all actions and transactions contemplated by the Merger Agreement, including the Offer and the Merger, are fair to and in the best interests of Diedrichs stockholders; (ii) adopted and
approved the Merger Agreement and approved the Offer, the Merger and all actions and transactions contemplated by the Merger Agreement, in accordance with the requirements of the DGCL; (iii) declared that the Merger Agreement is advisable;
(iv) recommended that Diedrichs stockholders accept the Offer and tender their shares of Common Stock pursuant to the Offer and (to the extent necessary) adopt the Merger Agreement; and (v) adopted a resolution rendering the
limitations on business combinations contained in Section 203 of the DGCL inapplicable to the Stockholder Agreements, the Offer, the Merger, the Merger Agreement and any of the other actions and transactions contemplated by the Merger Agreement.
THE BOARD UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF DIEDRICH ACCEPT THE OFFER AND TENDER ALL OF THEIR SHARES PURSUANT
TO THE OFFER.
A letter to Diedrichs stockholders communicating the Boards recommendation accompanies this
Statement. The letter is also filed as Exhibit (a)(3) to this Statement and is hereby incorporated by reference herein.
Background of the Offer
The following chronology summarizes the key meetings and events that led to the
signing of the Merger Agreement. The chronology below covers only the key events leading up to entry into the Merger Agreement and does not purport to catalogue every conversation between representatives of Diedrich and other parties.
The Board and Diedrichs senior management have continually assessed business strategies and objectives and evaluated trends and
conditions affecting Diedrichs business as part of its ongoing management of Diedrich. From time to time, the Board and Diedrichs senior management have also evaluated potential strategic alternatives, including possible business
combinations with third parties.
In June 2007, Company A contacted the Chief Executive Officer of Diedrich to indicate an
interest in discussing possible business arrangements, including one or more negotiated transactions. A mutual non-disclosure agreement was signed between Diedrich and Company A on June 18, 2007.
In June 2008, Patrick J. ODea, Peets Chief Executive Officer, contacted the office of Paul C. Heeschen, Diedrichs
Chairman, to request an appointment for an introductory meeting with Mr. Heeschen.
11
On July 21, 2008, Messrs. ODea and Heeschen met in Mr. Heeschens
offices and discussed their respective companies businesses and various ways in which they might work together in the wholesale coffee business. In the course of this discussion, Mr. ODea mentioned Peets interest in
potentially acquiring or entering into a commercial relationship with Diedrich, and Mr. Heeschen advised Mr. ODea that Diedrich was currently working on some initiatives to reorganize current operations. Messrs. ODea and
Heeschen agreed to speak again in the near future.
On July 23, 2008, Mr. Heeschen called Mr. ODea and
advised him that it would not be practicable for Diedrich to have any active dialogue with Peets about a potential business combination or commercial relationship before the completion of the initiatives to reorganize current operations.
Messrs. ODea and Heeschen agreed to speak again in the next few weeks.
In August or September 2008, Messrs. ODea
and Heeschen arranged to meet in person, together with other members of their management teams, on September 29, 2008. In anticipation of this meeting, between September 19, 2008 and September 27, 2008, Peets and Diedrich
negotiated a mutual nondisclosure agreement that was executed as of September 27, 2008.
On September 29, 2008, J.
Russell Phillips, Chief Executive Officer of Diedrich, Mr. Heeschen and Board member Gregory D. Palmer toured Peets roasting facility in Alameda, California and met with Mr. ODea and several other officers from Peets to
discuss a possible commercial relationship.
On December 10, 2008, Messrs. ODea and Heeschen spoke by telephone
about various aspects of a potential commercial relationship between Peets and Diedrich.
On December 16, 2008,
Mr. Phillips met with James E. Grimes, Peets Vice President, Supply Chain and Information Systems, at Diedrichs manufacturing facility in Castroville, California, to tour the facility and discuss the possibility of Diedrich becoming
a contract roaster for certain of Peets coffee products.
On December 19, 2008, Mr. ODea sent
Mr. Heeschen a term sheet for a proposed contract manufacturing agreement between Peets and Diedrich, as well as a possible investment by Peets in Diedrich. Mr. ODea also requested diligence material in connection with
the proposed contract manufacturing arrangement.
During the months of January and February 2009, Diedrich provided certain
cost estimates and historical financial information responsive to Mr. ODeas request in connection with a proposed contract manufacturing arrangement.
On January 9, 2009, Messrs. ODea and Heeschen spoke by telephone, and Mr. Heeschen provided his general reaction to the Peets term sheet. They agreed to continue exploring a
commercial relationship of the type described in the term sheet.
Between January 23, 2009 and January 28, 2009,
Messrs. ODea and Heeschen spoke by telephone and exchanged email messages generally discussing potential terms and outlining additional near-term steps to be taken in pursuit of a commercial relationship, including asking their respective
legal counsel to review and discuss various aspects of the contemplated relationship.
On February 13, 2009, Messrs.
ODea and Heeschen spoke by telephone about various issues to be resolved in connection with the contemplated commercial relationship.
On March 19, 2009, Messrs. Grimes and Thomas P. Cawley, Peets Chief Financial Officer, met with Mr. Phillips and Jack Hosier, Diedrichs Vice President of Operations, at
Diedrichs manufacturing facility in Castroville, California, to tour the facility and discuss further the possibility of Diedrich becoming a contract roaster for certain of Peets coffee products.
On March 23, 2009, Messrs. ODea and Heeschen spoke by telephone and mutually determined Diedrich becoming a contract roaster for
certain of Peets products was no longer of interest. Mr. Heeschen informed
12
Mr. ODea that reaching an agreement to sell the Gloria Jeans Coffees domestic franchise operations was likely and that, after such time, he would be interested discussing further
with Mr. ODea about a potential sale of Diedrich.
On March 27, 2009, Diedrich announced that it had entered
into an agreement for the sale of its Gloria Jeans Coffees domestic franchise operations.
On April 13, 2009,
Mr. ODea and H. William Jesse, Jr., Peets financial advisor, met with Mr. Heeschen in his offices to express Peets interest in discussing a potential acquisition of Diedrich. Mr. Heeschen explained that any such
discussion would be a matter for Diedrichs full board of directors. Mr. Heeschen indicated that it would be advisable for Mr. Jesse to meet Timothy J. Ryan, Diedrichs Vice Chairman, and he subsequently arranged for an
introductory meeting, which took place in Mr. Ryans offices on April 29, 2009.
On May 8, 2009,
Mr. Jesse contacted Mr. Heeschen by telephone to ask about continuing discussions. Mr. Heeschen indicated that he and other representatives of Diedrich were consumed with completing the sale of the domestic franchise operations and
asked if he could get back to Mr. Jesse after the transaction was closed.
On June 4, 2009 and June 5, 2009,
certain members of the Board and a representative from Gibson, Dunn & Crutcher LLP (Gibson Dunn), Diedrichs legal counsel, interviewed five different investment banking firms in connection with the retention of a financial
advisor for purposes of advising the Board on strategic alternatives.
On June 15, 2009, Diedrich announced that it had
completed the sale of its Gloria Jeans Coffees domestic franchise operations.
On June 17, 2009, the Board
interviewed the three finalist investment banking firms in connection with retaining a financial advisor to advise the Board on strategic alternatives.
On June 19, 2009, Messrs. Heeschen and Ryan met with Messrs. ODea and Jesse along with representatives of Gibson Dunn and Cooley Godward Kronish LLP (Cooley), Peets legal
counsel, at Gibson Dunns offices. Messrs. ODea and Jesse reiterated Peets interest in acquiring Diedrich and explained various potential benefits to Diedrichs stockholders of a business combination between Peets and
Diedrich. Messrs. Heeschen and Ryan stated that Diedrichs board of directors had made no decision to pursue a sale of the company and was in the very early stages of considering Diedrichs future strategic direction following the very
recent completion of the divestiture of substantially all of its retail and franchise operations.
After the close of the U.S.
securities markets on June 26, 2009, Peets submitted to Diedrich a non-public, non-binding indication of interest in acquiring all of the shares of Diedrich common stock with the preliminary estimate of per share consideration to be paid
to Diedrich stockholders of (i) $9.00 in cash, and (ii) a contingent value right payable in three years in Peets common stock and based upon the incremental number of K-Cups sold after the combination of the two
companies. Peets also requested an exclusive negotiating period. Diedrichs stock closed at $20.98 on June 26, 2009.
On June 28, 2009, the Board met to consider the proposal from Peets. After consideration of Peets proposal by the Board, Mr. Heeschen sent, on behalf of the Board, correspondence to Mr. ODea which indicated
that the Board had concluded that Peets valuation of Diedrich was inadequate and therefore declined to enter into an exclusive negotiating period with Peets, but indicated that it was open to further discussions with Peets.
Thereafter, Mr. Heeschen called Mr. Jesse to confirm receipt of the letter by Peets, and they agreed to stay in touch to engage in further discussions regarding a potential transaction.
On July 1, 2009, Mr. Heeschen, Mr. Ryan and a representative of Gibson Dunn met with Company A to discuss the possible
acquisition of Diedrich by Company A. An amendment to the mutual non-disclosure agreement between Diedrich and Company A was also executed on July 1, 2009 extending the term of the mutual non-disclosure agreement.
13
On July 7, 2009, Diedrich provided Company A with financial and other information in
connection with Company As evaluation of a possible acquisition of Diedrich by Company A.
On July 17, 2009,
Company A submitted to the Board a non-public, non-binding indication of interest to Diedrich proposing an acquisition of Diedrich by Company A at an enterprise value between $115 million and $125 million and requesting a 60-day exclusive
negotiating period.
On July 19, 2009, the Board met to consider Company As non-binding indication of interest.
After consideration by the Board of the non-binding indication of interest, Gibson Dunn sent, on behalf of the Board, correspondence to Company A, indicating that the Board concluded that Company As valuation of Diedrich was inadequate and
therefore declined to enter into an exclusive negotiating period with Company A, but indicated that it was open to further discussions with Company A.
On August 7, 2009, the Board engaged Houlihan Lokey Howard & Zukin Capital, Inc. (Houlihan Lokey) as its financial advisor in evaluating and considering strategic alternatives.
The Board determined to retain Houlihan Lokey based on the Boards conclusion that Houlihan Lokey had superior transaction and industry experience when compared to the other firms interviewed.
On August 13, 2009, in response to a request from Peets, Diedrich provided additional diligence materials to Peets.
On August 19, 2009, Messrs. Heeschen and Ryan and a representative of Gibson Dunn met with Messrs. ODea and Jesse
and Jon S. Weinberg, Peets Senior Director, Strategic Planning and Analysis, in Gibson Dunns offices to further discuss a possible transaction between the two companies. The Peets representatives made a presentation regarding
Peets view of the K-Cup market opportunity, how the combined businesses would address the opportunity and the benefits to Diedrichs stockholders of a business combination with Peets. The participants discussed the consideration
proposed by Peets being structured as a combination of cash and contingent value rights. The Diedrich representatives expressed concern regarding the inability to determine a certain value for the contingent value rights element of Peets
proposal. They also indicated that Diedrich was conducting a strategic assessment that was expected to take several weeks and that further discussions should be deferred until after the completion of that assessment.
On September 14, 2009, representatives of Houlihan Lokey made a presentation to the Board regarding Diedrichs strategic and
financial position and the industry valuation parameters, and reviewed with the Board potential strategic alternatives available to Diedrich.
On September 15, 2009, the Board met to discuss Houlihan Lokeys presentation from the prior day. At this meeting, the Board concluded that the sale of Diedrich would provide the greatest
potential for value to Diedrichs stockholders with the lowest amount of risk when compared to the other alternatives available. The Board then appointed a Special Committee, consisting of three directors, Timothy J. Ryan (Vice-Chairman of the
Board), Gregory D. Palmer and James W. Stryker, primarily for the purpose of (i) reviewing, evaluating and negotiating the terms and conditions of any potential sale of Diedrich and executing and delivering any agreement related thereto, and upon
execution of any such agreement, taking actions contemplated by such agreement to be taken by the special committee, including with respect to additional proposals regarding a potential sale of Diedrich, (ii) making such reports and recommendations
to the entire Board and to the stockholders of Diedrich at such times and in such manner as the special committee considers appropriate, (iii) determining whether any potential sale of Diedrich is fair to, and in the best interests of, Diedrich and
its stockholders, and (iv) retaining a financial advisor to assist with the foregoing. In this connection, the Special Committee resolved to retain Houlihan Lokey. Later that day, the Special Committee held a conference call with representatives of
Houlihan Lokey to discuss strategy and next steps in connection with a possible sale of Diedrich. Mr. Heeschen then contacted Mr. Jesse to inform him that that the Board had appointed a Special Committee and that the Special Committee
retained Houlihan Lokey as its financial advisor.
14
On September 17, 2009, Diedrich established a virtual data room providing access to
diligence materials for the benefit of Peets.
On September 22, 2009, Diedrich signed an engagement letter with
Houlihan Lokey to represent Diedrich in connection with a possible sale.
On September 28, 2009, the Special Committee
met to discuss the status of Houlihan Lokeys discussions with Company A and Peets.
On October 1, 2009,
Mr. Ryan, Sean M. McCarthy, Diedrichs Chief Financial Officer, a representative from Gibson Dunn and a representative from Houlihan Lokey met with the senior management of Company A at Company As headquarters. At this meeting,
Company A submitted a non-public, non-binding indication of interest proposing to acquire Diedrich for consideration of approximately $150 million.
On October 6, 2009, the Special Committee met to consider Company As indication of interest and the status of Peets interest in a transaction with Diedrich. The Special Committee
requested that Houlihan Lokey prepare an analysis of the indication of interest from Company A. A representative from Gibson Dunn made a presentation to the Board regarding the Boards fiduciary duties associated with a potential sale of
Diedrich.
On October 7, 2009, the Special Committee met to discuss the requested evaluation materials provided by
Houlihan Lokey and discussed a proposed response to Company As indication of interest.
Also on October 7, 2009,
Messrs. Ryan and McCarthy, a representative from Gibson Dunn and a representative from Houlihan Lokey met with representatives of Peets at Gibson Dunns offices in connection with further diligence relating to Diedrich.
On October 8, 2009, the Special Committee met to finalize the proposed response to Company A. Mr. Ryan informed the Chief
Executive Officer of Company A that the Special Committee had concluded that Company As valuation of Diedrich continued to be inadequate. Mr. Ryan requested that Company A review materials to be sent by Diedrich that supported a higher
valuation.
On October 9, 2009, the Chief Financial Officer of Company A contacted a representative of Houlihan Lokey to
obtain clarification regarding Company As October 8, 2009 discussion with Mr. Ryan.
On October 9, 2009,
Messrs. ODea and Jesse held a telephonic conference with Mr. Ryan and a representative of Houlihan Lokey. Mr. Jesse communicated a revised indication of interest in acquiring Diedrich at a value of approximately $210 million and
advised that they were prepared to work through the coming weekend to provide a final value early the following week. The Special Committee met telephonically on October 9, 2009 to discuss the revised indication of interest from Peets and
instructed Houlihan Lokey to advise Peets that Peets should continue working to submit a final value. A representative of Houlihan Lokey communicated that message to Peets.
On October 11, 2009, Mr. ODea sent an email to Mr. Ryan requesting updated financial information and other materials
for Peets consideration in determining the final value.
On October 12, 2009, the Special Committee met to discuss
the proposal received from Peets on October 9, 2009.
On October 13, 2009, Peets transmitted a
non-binding letter to the Board. The letter described two alternative transaction structures to which Peets was amenable for the acquisition of Diedrich by Peets. One transaction structure contemplated a one-step merger in which each
share of Diedrichs common stock would be converted into $18.00 in cash and a fraction of a share of Peets common stock having a value of $8.32 at the
15
time of execution of the definitive agreement and subject to a cap on the share fraction at the level necessary to avoid the issuance of an aggregate number of shares large enough to require a
vote of the Peets shareholders under applicable Nasdaq rules (the Share Fraction Cap). Peets proposal for this transaction structure included a commitment by all Diedrich directors and officers to vote their owned and
controlled shares in favor of the merger, no fiduciary termination right, a break-up fee of 4.5% of the transaction value, a material adverse change clause containing specific non-customary provisions favorable to Peets, and other
customary terms and conditions. In the letter, Peets expressed the view that the one-step merger transaction would likely be completed within four to five months after the execution of the definitive agreement.
The other transaction structure proposed in the letter was an all-cash acquisition at a price of $21.02 per share effected through a
two-step structure comprising a cash tender offer followed by a second-step cash merger. The letter noted that the proposed purchase price per share was equal to the 90-day volume-weighted average closing price of Diedrichs common stock.
Peets proposal for this transaction structure included a commitment by all Diedrich directors and officers to tender their owned and controlled shares, a fiduciary termination right in favor of Diedrich, a break-up fee of 4.5% of the
transaction value, a material adverse change clause containing only customary terms, and other customary terms and conditions. In the letter, Peets expressed the view that the tender offer portion of the two-step transaction could be completed
in as little as five to six weeks after the execution of the definitive agreement.
On October 14, 2009, a representative
from Houlihan Lokey held a telephonic conference with the CFO of Company A at which time Company A provided additional feedback to Houlihan Lokey regarding the materials that were sent to Company A by Mr. Ryan and subsequently updated by
Houlihan Lokey. In addition, the CFO of Company A indicated verbally that Company A was willing to increase the purchase price for Diedrich to an enterprise value of $160 million, under certain specific conditions, but that Company A was not willing
to pay much more than its offer of $160 million.
Houlihan Lokey provided an analysis of the revised Peets proposal
during a meeting of the Special Committee held on October 14, 2009, as well as an analysis of the revised proposal provided by Company A. The Special Committee concluded that certain of the terms set forth in the Peets proposal were not
acceptable and that no further discussion between the parties would be necessary if these terms remained. A representative of Houlihan Lokey was instructed to convey that message to Peets. In addition, the Special Committee agreed that the
Company A proposal was inferior to the Peets proposal.
On October 15, 2009, the Special Committee convened a
morning meeting to be briefed on the Houlihan Lokey representatives conversation with Peets. The Houlihan Lokey representative indicated that Peets was likely willing to negotiate the objectionable terms, including the restrictive
nature of the stockholder obligations to tender or vote in favor of the transaction, the size of the break-up fee and conditions to closing. The Special Committee instructed the Houlihan Lokey representative to communicate back to Peets a
price of $28.50 per share of Diedrich common stock, which represented a 30% premium to Diedrichs 30-day volume-weighted average closing price, and other specific terms. The Houlihan Lokey representative communicated the Special
Committees instructions to Mr. Jesse. In the afternoon of October 15, 2009, Mr. Ryan and a Houlihan Lokey representative held a telephonic conference with Messrs. ODea and Jesse to further discuss the price and other terms
of a proposed transaction. The Special Committee convened an afternoon meeting to discuss the results of the telephonic conference with Peets. Mr. Ryan and the Houlihan Lokey representative informed the Special Committee members that
Peets transaction committee considered the points raised by Diedrich and was willing to increase the purchase price to $26.58 and would also allow Houlihan Lokey to have a conversation with Peets lender to assess their willingness to
provide the necessary financing. The Special Committee was unable to come to a conclusion with respect to the revised price of $26.58 communicated by Peets but instructed Gibson Dunn to prepare a term sheet for purposes of negotiating with
Peets in order to see if there was substantial agreement on other deal terms. After the Special Committee meeting, the Houlihan Lokey representative communicated to Mr. Jesse that a term sheet would be forthcoming the next day.
16
On October 16, 2009, the term sheet was sent to Cooley by Gibson Dunn. Representatives
of Gibson Dunn had a telephonic conference with representatives of Cooley to discuss the terms and structure of a proposed transaction. A representative of Houlihan Lokey had a telephonic conference with Peets proposed lender for financing a
transaction with Diedrich for purposes of evaluating the feasibility of financing.
On October 17, 2009, Cooley sent a
revised term sheet to Gibson Dunn, which Gibson Dunn circulated to the Special Committee for review. After Gibson Dunn discussed the revised term sheet with the Special Committee, Gibson Dunn engaged in additional discussions with Cooley and
thereafter a representative of Gibson Dunn summarized the unresolved issues in the term sheet for the Special Committees review.
On October 18, 2009, Cooley sent a further revised term sheet to Gibson Dunn, which Gibson Dunn circulated with its comments to the Special Committee. After Gibson Dunn discussed the revised term sheet with the Special Committee,
Gibson Dunn and Cooley held a telephonic negotiating session with respect to the term sheet. Gibson Dunn prepared a summary of the negotiating session and circulated to the Special Committee a list of open issues.
On October 19, 2009, Cooley provided an oral update to Gibson Dunn on Peets positions in the term sheet. Gibson Dunn informed the
Special Committee regarding its discussions with Cooley.
On October 20, 2009, the Special Committee convened a meeting
to consider the term sheet with Peets and the next steps regarding Company A. Gibson Dunn prepared a revised draft of the term sheet based on input from the Special Committee and transmitted the revised term sheet to Cooley. With regard to
Company A, the Special Committee determined that continuing discussions with Company A would not be productive based on the significant differences in the positions of Diedrich and Company A as to the proposed price.
On October 21, 2009, A representative of Houlihan Lokey communicated the Special Committees determination to the Chief Financial
Officer at Company A. Gibson Dunn and Cooley continued to negotiate the Peets term sheet. Cooley transmitted a revised term sheet to Gibson Dunn, which Gibson Dunn circulated to the Special Committee.
On October 22, 2009, Gibson Dunn and Cooley continued to negotiate matters relating to the term sheet.
On October 23, 2009, Mr. Jesse contacted Mr. Ryan, a representative of Gibson Dunn and a representative of Houlihan Lokey to
request a weekend conference call to present Peets suggestions on how to resolve open issues in the term sheet. Representatives of the parties agreed to a Sunday morning conference call.
On October 25, 2009, a conference call was held amongst Mr. Ryan, a representative of Houlihan Lokey, a representative of Gibson
Dunn, Messrs. ODea and Jesse and a representative of Cooley. During this call, Peets increased its offer to $27.00 per share made up of a combination of $18.00 per share in cash and the remainder in Peets stock and indicated that
it would like to sign a definitive agreement by November 2, 2009. The increase in Peets offer was preceded by the continued increase in the market value of Diedrich stock. Gibson Dunn prepared a summary of the proposal presented orally by
Peets and circulated the summary to the Special Committee.
On October 26, 2009, the Special Committee convened a
meeting to consider the current proposal and the latest version of the term sheet.
On October 27, 2009, Gibson Dunn sent
a revised term sheet to Cooley. Gibson Dunn and Cooley continued to negotiate the terms of the term sheet.
Early in the
morning of October 28, 2009, Peets and Diedrich reached agreement on the forms of the term sheet and the exclusivity agreement, and on the afternoon of October 28, 2009, they entered into the exclusivity agreement. That evening,
Cooley delivered to Gibson Dunn a proposed form of definitive merger agreement and a proposed form of stockholder agreement to be signed by each of Diedrichs directors and officers. Gibson Dunn subsequently provided copies of the proposed form
of stockholder agreement to each of Diedrichs directors and officers.
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On October 29, 2009, Mr. Grimes, Mr. Hosier and a representative from Houlihan Lokey
met at Diedrichs manufacturing facility in Castroville, California to tour the facility and review plans for the expansion of packaging capacity. Gibson Dunn and Diedrich reviewed and revised the Merger Agreement. Cooley submitted a legal
diligence request list to Gibson Dunn in the evening and a telephonic conference was held that evening among Cooley, Gibson Dunn and Diedrich to discuss materials responsive to the legal diligence request list.
On October 30, 2009, Gibson Dunn sent a revised draft of the Merger Agreement to Cooley in the morning. Diedrich provided diligence
materials in response to the legal diligence request list from Cooley. Mr. Ryan, a representative of Gibson Dunn and a representative of Houlihan Lokey held a telephonic conference with Messrs. ODea and Jesse and a representative of
Cooley during which Peets informed Diedrich of its concerns in light of the significant decline in Diedrichs stock price that day. Diedrich advised Peets that a reduction in the purchase price would not be acceptable based on
Diedrichs closing price of $21.80 per share. Peets indicated that its willingness to move forward with a transaction at $27.00 per share would be highly dependent on the performance of Diedrichs stock price on the next trading day.
On October 31, 2009, Cooley sent a revised draft of the Merger Agreement to Gibson Dunn in the morning. Negotiations
continued between Gibson Dunn and Cooley regarding the Merger Agreement throughout the day.
On November 1, 2009, Gibson
Dunn sent a revised draft of the Merger Agreement to Cooley in the morning. By the afternoon of that day, Gibson Dunn and Cooley had reached substantial agreement on the material terms of the Merger Agreement, except for the amount and composition
of the consideration to be paid to Diedrichs stockholders in the acquisition. Negotiations continued between Gibson Dunn and Cooley regarding other details of the Merger Agreement throughout the day and night. The Special Committee of the
Board met to receive an update on the status of the Merger negotiations and provide direction to Gibson Dunn on various issues. The board of directors of Peets met to approve the proposed acquisition of Diedrich substantially based on the
terms set forth in the Merger Agreement.
On November 2, 2009, Gibson Dunn and Cooley continued to revise and finalize
the terms of the Merger Agreement. The Special Committee and the Board met to discuss the terms of the proposed transaction with Peets and received a presentation from Houlihan Lokey regarding the fairness, from a financial point of view, of
the consideration to be received by the holders of Diedrich common stock, other than certain affiliated stockholders. At approximately noon, Mr. Ryan, a representative of Gibson Dunn and a representative of Houlihan Lokey left the Board meeting
to participate in a conference call with Messrs. ODea and Jesse and a representative of Cooley. During this call, Messrs. ODea and Jesse advised Mr. Ryan that, in light of the fact that Diedrichs stock price continued to
decline, Peets was not certain it was comfortable with a purchase price of $27.00 per share and wished to schedule a conference call for shortly after the U.S. securities markets closed to determine whether a transaction was still feasible
from Peets perspective. Mr. Ryan, the representative of Gibson Dunn and the representative of Houlihan Lokey returned to the Board meeting. Diedrichs stock price closed at $20.36. Mr. Ryan, the representative of Gibson Dunn and
the representative of Houlihan Lokey reconvened a telephonic conference with Messrs. ODea and Jesse and the representative of Cooley. Messrs. ODea and Jesse communicated that Peets would only proceed with a transaction at $26.00
per share ($17.00 in cash and the remainder in stock). Mr. Ryan, the representative of Gibson Dunn and the representative of Houlihan Lokey returned to the Special Committee meeting, and the Special Committee discussed the revised purchase
price in light of the continued decline of Diedrichs stock price. The Houlihan Lokey representative left the Board meeting and communicated to Mr. Jesse a compromise proposal of $26.50 per share ($18.00 in cash and the remainder in
stock). Mr. Jesse called the Houlihan Lokey representative shortly thereafter and indicated that Peets would not increase the aggregate purchase price beyond $26.00 per share but was willing to increase the cash component to $17.33 (and
the remainder in stock). The Houlihan Lokey representative communicated Peets revised offer to the Special Committee and the Board, and the Special Committee engaged in a discussion regarding the purchase price. Houlihan Lokey orally delivered
its opinion to the Special Committee based on the proposed implied purchase price of $26.00 per share that, as of November 2, 2009, the consideration to be received by the holders of Common Stock, other than certain affiliated stockholders, in the
Offer and the Merger,
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was fair to such holders from a financial point of view. The oral opinion was confirmed in writing by delivery of Houlihan Lokeys written opinion dated November 2, 2009. See the section
below entitled Opinion of Houlihan Lokey Howard & Zukin Capital, Inc.
The Special Committee approved a
resolution recommending that the Board approve and adopt the Offer, the Merger and the Merger Agreement.
After full
discussion at a meeting, the Board unanimously:
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determined that the Merger Agreement and all actions and transactions contemplated by the Merger Agreement, including the Offer and the Merger, are
fair to and in the best interests of Diedrichs stockholders;
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adopted and approved the Merger Agreement and approved the Offer, the Merger and all actions and transactions contemplated by the Merger Agreement, in
accordance with the requirements of the DGCL;
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declared that the Merger Agreement is advisable;
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recommended that Diedrichs stockholders accept the Offer and tender their shares of Common Stock pursuant to the Offer and (to the extent
necessary) adopt the Merger Agreement; and
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adopted a resolution rendering the limitations on business combinations contained in Section 203 of the DGCL inapplicable to the Stockholder
Agreements, the Offer, the Merger, the Merger Agreement and any of the other actions and transactions contemplated by the Merger Agreement.
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At the conclusion of the Board meeting, Diedrich, Peets and Purchaser executed the Merger Agreement.
After the close of trading on the Nasdaq Stock Market on that day, Diedrich and Peets issued a joint press release announcing the execution of the Merger Agreement.
Reasons for the Offer and the Merger
In evaluating the Offer, the Merger and the Merger Agreement, the Board received the unanimous recommendation of the Special Committee and consulted with Diedrichs management and legal and financial
advisors. In reaching its decision that the Offer and the Merger are advisable, and in reaching its recommendation that stockholders tender their shares of Common Stock in the Offer and, if required by applicable law, vote in favor of the adoption
of the Merger Agreement, the Board considered a number of factors, including the following material factors, which the Board viewed as supporting its recommendation:
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Strategic Alternatives to a Sale Transaction.
Throughout the process that the Board conducted to evaluate strategic alternatives available to
Diedrich, the Board considered a range of strategic alternatives potentially available to Diedrich, including continuing to execute on its strategic plan as an independent company, selling assets of Diedrich, a sale of Diedrich and improving
Diedrichs cash position through a financing transaction. The Board considered the strategic fit and the revenue base and financial resources of Peets, which it believed to be a significant benefit that could not be obtained by remaining
an independent company. The Board concluded (after taking into account the current and historical financial condition, results of operations, competitive position, business prospects, opportunities and strategic objectives of each of Diedrich and
Peets, including the potential risks involved in achieving those prospects and objectives) that (1) the financial prospects of Diedrich and Peets on a combined basis were more favorable than the financial prospects of Diedrich on a
stand- alone basis, (2) a combined company should be able to compete successfully, leading to higher equity value, and (3) on a risk-adjusted basis, the Offer Consideration is greater than the long-term value inherent in Diedrich as a
stand-alone entity.
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Prospects of the Combined Entity.
The Board considered that the combined company would be a stronger, better diversified and more financially
flexible company than Diedrich as a stand-alone entity.
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The Board also considered that the Offer presents an opportunity for Diedrichs stockholders to receive an equity interest in a more financially stable company, to have greater liquidity for
their shares, to benefit from any synergies experienced by Peets in the acquisition and integration of Diedrich, and to participate in any future growth of Peets and Diedrich on a combined basis.
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Premium to Market Price
. The Board considered the current and recent market prices of the shares of Common Stock and the premium implied by the
Offer Consideration based on market prices of the shares of Common Stock and Peets common stock as of recent dates. The Offer Consideration represents an approximately 27.7% premium over the closing price of the shares of Common Stock on
November 2, 2009, the last full trading day prior to the public announcement of entry into the Merger Agreement.
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Stockholders Right to Receive Stock and Cash.
The Board considered the right of Diedrichs stockholders to receive stock and cash,
which provides stockholders with liquidity for their shares of Common Stock at a premium to the recent trading price, and, as referenced above, allows stockholders to benefit from the synergies produced by the Merger and to participate in any future
growth of the combined company.
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Opinion of Houlihan Lokey Howard & Zukin Capital, Inc.
The Board considered the recommendation of the Special Committee, which was
based in part on the oral opinion of Houlihan Lokey delivered to the Special Committee (which was confirmed in writing by delivery of Houlihan Lokeys written opinion dated November 2, 2009), with respect to the fairness, from a financial
point of view, of the consideration to be received by the holders of Common Stock, other than certain affiliated stockholders, in the Offer and the Merger, as of November 2, 2009, and based upon and subject to the procedures followed,
assumptions made, qualifications and limitations on the review undertaken and other matters considered by Houlihan Lokey in preparing its opinion. See The Solicitation or RecommendationOpinion of Houlihan Lokey Howard & Zukin
Capital, Inc.
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Timing and Certainty of Completion.
The Board considered the anticipated timing and certainty of completion of the Offer and the Merger,
including the likelihood of regulatory review of the transaction by U.S. antitrust authorities, and the structure of the transaction as an exchange offer for all shares of Common Stock, which may enable Diedrichs stockholders to receive the
transaction consideration and obtain the benefits of the transaction more quickly than might be the case in other transaction structures.
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Ability to Solicit Superior Proposals
. The Board considered Diedrichs ability to furnish information to, and conduct negotiations with, a
third party and to terminate the Merger Agreement in order to enter into an agreement relating to a superior proposal under certain circumstances and subject to certain conditions, including the payment of a termination fee to Peets.
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Ability to Respond to Certain Unsolicited Takeover Proposals.
The Board considered Diedrichs rights under the Merger Agreement to pursue
unsolicited acquisition proposals under specified circumstances.
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Ability to Terminate the Merger Agreement to Accept a Superior Proposal.
The Board considered Diedrichs ability, following receipt of
certain competing acquisition proposals after the date of the Merger Agreement that are more favorable from a financial point of view to Diedrichs stockholders, to change its recommendation with respect to the Offer and the Merger and
terminate the Merger Agreement if certain conditions are satisfied, including that the Board determine in good faith (after consulting with Diedrichs outside legal counsel and financial advisors) that the failure to do so could reasonably be
expected to constitute a breach of Diedrichs board of directors fiduciary obligations to Diedrichs stockholders under applicable law and that Diedrich pays Peets a termination fee of $6,388,000 or $8,517,000 (the
Termination Fee), depending on the circumstances under which the Merger Agreement is terminated. In addition, the Board considered that the Termination Fee was reasonable in the context of termination fees that were payable in other
comparable transactions and would not be likely to preclude another party from making a superior acquisition proposal.
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In addition to those set forth above, the Board considered a number of additional factors,
including the following potentially negative factors.
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No Stockholder Participation in Future Earnings or Growth of Diedrich as an Independent Company.
The Board considered that the Offer and the
Merger would preclude Diedrichs stockholders from having an opportunity to participate in Diedrichs future earnings growth and future profits as an independent company, but that Diedrichs stockholders will nevertheless have the
right to continue to share indirectly in the future growth and performance of Diedrichs business after the completion of the Offer and the Merger as a part of Peets.
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Risks Associated with Being a Peets Stockholder.
The Board considered that because a portion of the consideration to be paid by
Peets in the Offer and the Merger is Peets common stock, Diedrichs stockholders will be subject to the risks associated with being a Peets shareholder, as detailed in the Prospectus/Offer to Purchase under the caption
Risk Factors.
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Discouraging Other Prospective Buyers.
The Board considered that entering into the Merger Agreement with Peets, and certain provisions of
the Merger Agreement, such as the non-solicitation and termination fee provisions, may have the effect of discouraging other prospective buyers from pursuing a more advantageous business combination with Diedrich.
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Transaction Costs.
The Board considered the significant costs involved in connection with entering into the Merger Agreement and completing the
Offer and the Merger and the related disruptions to the operation of Diedrichs business, including the risk that the operations of Diedrich would be disrupted by employee concerns or departures, or by the loss of customers following
announcement of the Offer and the Merger.
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Interim Restrictions on Business.
The Board considered that pursuant to the Merger Agreement, Diedrich is required to obtain Peets consent
before it can take a variety of actions during the period of time between the signing of the Merger Agreement and the completion of the Merger.
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Effect of Failure to Complete Transactions.
The Board considered that the conditions to the completion of the Offer may not be met and that the
Offer and the Merger otherwise may not be completed. The Board considered the adverse effect on Diedrichs business and ability to attract and retain key management personnel if the Offer and the Merger were, in fact, not completed.
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Peets Termination Right if the Conditions Are Not Met.
The Board considered Peets right to terminate the Offer and the Merger
Agreement in the event that the Minimum Condition or other conditions are not met and the Offer is not consummated by March 31, 2010.
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Distraction of Management and Employees.
The Board considered that the Offer and the Merger would be a distraction to Diedrichs management
and employees.
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The Board concluded, however, that many of these risks could be managed or mitigated by
Diedrich or were unlikely to have a material effect on the Offer, the Merger or the combined company, and that, overall, the risks, uncertainties, restrictions and potentially negative factors associated with the Offer and the Merger were outweighed
by the potential benefits of the Offer and the Merger.
The Board did not assign relative weights to the foregoing factors or
determine that any factor was of particular importance. Rather, the members of the Board viewed their position and recommendation as being based on the totality of the information presented to and considered by them. Individual members of the Board
may have given different weight to different factors.
The foregoing discussion of factors considered by the Board is not
meant to be exhaustive but includes the material factors considered by the Board in approving the Merger Agreement and the transactions contemplated by the Merger Agreement and in recommending that Diedrichs stockholders accept the Offer by
tendering their shares of Common Stock and to the extent required, adopt the Merger Agreement and the Merger.
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Intent to Tender
Pursuant to the Stockholder Agreements, each of Timothy J. Ryan, James W. Stryker, Jeanne Ortiz, James L. Harris, James R. Phillips, Gregory
D. Palmer, Sean M. McCarthy, Jack Hosier and Dana A. King is obligated to tender in the Offer all shares of Common Stock that such person beneficially owns. Pursuant to his Stockholder Agreement, Mr. Heeschen is obligated to tender in the Offer
1,832,580 of his beneficially owned shares of Common Stock. After reasonable inquiry and to the best knowledge of Diedrich, each director and executive officer of Diedrich intends to tender in the Offer all shares of Common Stock that each such
person owns of record or beneficially that are outstanding immediately prior to expiration of the Offer. See Item 3 for a discussion of the treatment of outstanding stock options upon completion of the Offer and the Merger.
Opinion of Houlihan Lokey Howard & Zukin Capital, Inc.
On November 2, 2009, Houlihan Lokey rendered an oral opinion to the Special Committee (which was confirmed in writing by delivery of
Houlihan Lokeys written opinion dated November 2, 2009), to the effect that, as of November 2, 2009 and based upon and subject to the procedures followed, assumptions made, qualifications and limitations on the review undertaken and
other matters considered by Houlihan Lokey in preparing its opinion, the consideration to be received by the holders of the Common Stock, other than certain affiliated stockholders, in the Offer and the Merger was fair, from a financial point of
view, to the holders of the Common Stock other than certain affiliated stockholders.
Houlihan Lokeys opinion was
directed to the Special Committee and only addressed the fairness from a financial point of view of the consideration to be received by the holders of the Common Stock, other than certain affiliated stockholders, in the Offer and the Merger and does
not address any other aspect or implication of the Offer and the Merger. The summary of Houlihan Lokeys opinion in this Statement is qualified in its entirety by reference to the full text of its written opinion, which is included as Annex B
to this Statement and sets forth the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered by Houlihan Lokey in preparing its opinion. The Board encourages Diedrichs
stockholders to carefully read the full text of Houlihan Lokeys written opinion. However, neither Houlihan Lokeys opinion nor the summary of its opinion and the related analyses set forth in this Statement are intended to be, and do not
constitute, advice or a recommendation to the Special Committee or any stockholder as to how to act or vote or whether to tender any shares with respect to the Offer or related matters.
In arriving at its opinion, Houlihan Lokey, among other things:
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reviewed the following agreements and documents:
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Draft of the Merger Agreement;
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Drafts of the forms of Stockholder Agreements by and between Peets and certain stockholders;
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reviewed certain publicly available business and financial information relating to Diedrich and Peets that Houlihan Lokey deemed to be relevant,
including certain publicly available research analyst estimates with respect to the future financial performance of Diedrich and Peets;
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reviewed certain information relating to the historical, current and future operations, financial condition and prospects of Diedrich made available to
Houlihan Lokey by Diedrich, including financial projections (and adjustments thereto) prepared by the management of Diedrich relating to Diedrich for the fiscal years ending 2010 through 2012;
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spoke with certain members of the management of Diedrich and certain of its representatives and advisors regarding the business, operations, financial
condition and prospects of Diedrich, the Offer, the Merger and related matters;
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compared the financial and operating performance of Diedrich and Peets with that of other public companies that Houlihan Lokey deemed to be
relevant;
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considered the publicly available financial terms of certain transactions that Houlihan Lokey deemed to be relevant;
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reviewed the current and historical market prices and trading volume for the Common Stock and Peets common stock, and the historical market
prices and certain financial data of the publicly traded securities of certain other companies that Houlihan Lokey deemed to be relevant; and
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conducted such other financial studies, analyses and inquiries and considered such other information and factors as Houlihan Lokey deemed appropriate.
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Houlihan Lokey relied upon and assumed, without independent verification, the accuracy and completeness of
all data, material and other information furnished, or otherwise made available, to Houlihan Lokey, discussed with or reviewed by Houlihan Lokey, or publicly available, and did not assume any responsibility with respect to such data, material and
other information. In addition, management of Diedrich advised Houlihan Lokey, and Houlihan Lokey assumed, that the financial projections referred to above and reviewed by Houlihan Lokey were reasonably prepared in good faith on bases reflecting the
best available estimates and judgments of such management as to the future financial results and condition of Diedrich at their time of preparation, and Houlihan Lokey expressed no opinion with respect to such projections or the assumptions on which
they are based. Management of Diedrich informed Houlihan Lokey that only one year of financial projections exist that currently represent the best available estimates and judgments of Diedrich management as to the future financial results and
condition of Diedrich. As a result, in reaching its conclusions, Houlihan Lokey did not perform a discounted cash flow analysis. With respect to the publicly available research analyst estimates for Peets referred to above, Houlihan Lokey
reviewed and discussed such estimates with the management of Diedrich and assumed, with Diedrichs consent, that such estimates represent reasonable estimates and judgments of the future financial results and condition of Peets, and
Houlihan Lokey expressed no opinion with respect to such estimates or the assumptions on which they are based. Houlihan Lokey relied upon and assumed, without independent verification, that there was no change in the business, assets, liabilities,
financial condition, results of operations, cash flows or prospects of Diedrich or Peets since the date of the most recent financial information available to Houlihan Lokey that would be material to its analyses or the opinion, and that there
was no information or any facts that would make any of the information reviewed by Houlihan Lokey incomplete or misleading. Houlihan Lokey did not consider any aspect or implication of any transaction to which Diedrich or Peets may be a party
(other than as specifically described in the opinion with respect to the Offer and the Merger).
Houlihan Lokey relied upon
and assumed, without independent verification, that (a) the representations and warranties of all parties to the Merger Agreement and all other documents and instruments that are referred to therein were true and correct, (b) each party to
the Merger Agreement and such other related documents and instruments would fully and timely perform all of the covenants and agreements required to be performed by such party, (c) all conditions to the completion of the Offer and the Merger
will be satisfied without waiver thereof, and (d) the Offer and the Merger would be consummated in a timely manner in accordance with the terms described in the draft agreements and documents provided to Houlihan Lokey, without any amendments
or modifications thereto. Houlihan Lokey relied upon and assumed, without independent verification, that (i) the Offer and the Merger would be consummated in a manner that complies in all respects with all applicable federal and state statutes,
rules and regulations and (ii) all governmental, regulatory and other consents and approvals necessary for the completion of the Offer and the Merger would be obtained and that no delay, limitations, restrictions or conditions would be imposed
or amendments, modifications or waivers made that will result in the disposition of any material portion of the assets of Diedrich or Peets, or otherwise have an effect on Diedrich or Peets or any expected benefits of the Offer and the
Merger that would be material to its analyses or its opinion. In addition, Houlihan Lokey relied upon and assumed, without independent verification, that the final form of the Merger Agreement would not differ, in any respect material to Houlihan
Lokeys analyses or its opinion, from the draft of the Merger Agreement identified above.
Furthermore, in connection
with its opinion, Houlihan Lokey was not requested to make, and did not make, any physical inspection or independent appraisal or evaluation of any of the assets, properties or liabilities (fixed,
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contingent, derivative, off-balance-sheet or otherwise) of Diedrich, Peets or any other party, nor was Houlihan Lokey provided with any such appraisal or evaluation. Houlihan Lokey did not
estimate, and did not express any opinion regarding, the liquidation value of any entity. Houlihan Lokey did not undertake any independent analysis of any potential or actual litigation, regulatory action, possible unasserted claims or other
contingent liabilities, to which Diedrich or Peets are or may be a party or are or may be subject, or of any governmental investigation of any possible unasserted claims or other contingent liabilities to which Diedrich or Peets are or
may be a party or are or may be subject.
The opinion was furnished for the use and benefit of the Special Committee in
connection with its consideration of the Offer and the Merger and was not intended to be used for any other purpose without Houlihan Lokeys prior written consent. The opinion should not be construed as creating any fiduciary duty on Houlihan
Lokeys part to any party. The opinion was not intended to be, and does not constitute, a recommendation to the Special Committee, the Board, any security holder or any other person as to how to act or vote or whether to tender any shares with
respect to any matter relating to the Offer and the Merger.
Houlihan Lokey was not requested to opine as to, and it did not
express an opinion as to or otherwise address, among other things: (i) the underlying business decision of the Special Committee, Diedrich, Peets, their respective security holders or any other party to proceed with or effect the Offer or
the Merger, (ii) the terms of any arrangements, understandings, agreements or documents related to, or the form or any other portion or aspect of, the Offer or the Merger or otherwise (other than the Offer Consideration to the extent expressly
specified therein), (iii) the fairness of any portion or aspect of the Offer or the Merger to the holders of any class of securities, creditors or other constituencies of Diedrich, Peets, or to any other party, except as expressly set
forth in the last sentence of the opinion, (iv) the relative merits of the Offer and the Merger as compared to any alternative business strategies that might exist for Diedrich, Peets or any other party or the effect of any other
transaction in which Diedrich, Peets or any other party might engage, (v) the fairness of any portion or aspect of the Offer to any one class or group of Diedrichs or any other partys security holders vis-à-vis any
other class or group of Diedrichs or such other partys security holders (including, without limitation, the allocation of any consideration among or within such classes or groups of security holders), (vi) whether or not Diedrich,
Peets, their respective security holders or any other party is receiving or paying reasonably equivalent value in the Offer or the Merger, (vii) the solvency, creditworthiness or fair value of Diedrich, Peets or any other
participant in the Offer or the Merger under any applicable laws relating to bankruptcy, insolvency, fraudulent conveyance or similar matters, or (viii) the fairness, financial or otherwise, of the amount or nature of any compensation to or
consideration payable to or received by any officers, directors or employees of any party to the Offer or the Merger, any class of such persons or any other party, relative to the Offer Consideration or otherwise. Furthermore, no opinion, counsel or
interpretation was intended in matters that require legal, regulatory, accounting, insurance, tax or other similar professional advice. Houlihan Lokey assumed that such opinions, counsel or interpretations were or would be obtained from the
appropriate professional sources. Furthermore, Houlihan Lokey relied, with Diedrichs consent, on the assessments by the Special Committee, Diedrich and their respective advisors, as to all legal, regulatory, accounting, insurance and tax
matters with respect to Diedrich, Peets and the Offer and the Merger.
In preparing its opinion to the Special
Committee, Houlihan Lokey performed a variety of analyses, including those described below. The summary of Houlihan Lokeys analyses is not a complete description of the analyses underlying Houlihan Lokeys opinion. The preparation of a
fairness opinion is a complex process involving various quantitative and qualitative judgments and determinations with respect to the financial, comparative and other analytical methods employed and the adaptation and application of these methods to
the unique facts and circumstances presented. As a consequence, neither a fairness opinion nor its underlying analyses is readily susceptible to summary description. Houlihan Lokey arrived at its opinion based on the results of all analyses
undertaken by it and assessed as a whole and did not draw, in isolation, conclusions from or with regard to any individual analysis, methodology or factor. Accordingly, Houlihan Lokey believes that its analyses and the following summary must be
considered as a whole and that selecting portions of its analyses, methodologies and factors or focusing on information presented in tabular format, without considering all analyses, methodologies and factors or the narrative description of the
analyses, could create a misleading or incomplete view of the processes
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underlying Houlihan Lokeys analyses and opinion. Each analytical technique has inherent strengths and weaknesses, and the nature of the available information may further affect the value of
particular techniques.
In performing its analyses, Houlihan Lokey considered general business, economic, industry and market
conditions, financial and otherwise, and other matters as they existed on, and could be evaluated as of, the date of the opinion. Houlihan Lokeys analyses involved judgments and assumptions with regard to industry performance, general
business, economic, regulatory, market and financial conditions and other matters, many of which are beyond the control of Diedrich, such as the impact of competition on the business of Diedrich and on the industry generally, industry growth and the
absence of any adverse material change in the financial condition and prospects of Diedrich or the industry or in the markets generally. No company, transaction or business used in Houlihan Lokeys analyses for comparative purposes is identical
to Diedrich or the proposed Offer and Merger and an evaluation of the results of those analyses is not entirely mathematical. Houlihan Lokey believes that mathematical derivations (such as determining average and median) of financial data are not by
themselves meaningful and should be considered together with qualities, judgments and informed assumptions. The estimates contained in Diedrichs analyses and the implied reference range values indicated by Houlihan Lokeys analyses are
not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than those suggested by the analyses. In addition, any analyses relating to the value of assets, businesses or
securities do not purport to be appraisals or to reflect the prices at which businesses or securities actually may be sold, which may depend on a variety of factors, many of which are beyond the control of Diedrich. Much of the information used in,
and accordingly the results of, Houlihan Lokeys analyses are inherently subject to substantial uncertainty.
Houlihan
Lokeys opinion was provided to the Special Committee in connection with its consideration of the proposed Offer and the Merger and was only one of many factors considered by the Special Committee in evaluating the proposed Offer and the
Merger. Neither Houlihan Lokeys opinion nor its analyses were determinative of the Offer Consideration or of the views of the Special Committee, the Board or management with respect to the Offer and the Merger or the Offer Consideration. The
type and amount of consideration payable in the Offer and the Merger were determined through negotiation between Diedrich and Peets, and the decision to enter into the Merger Agreement was solely that of the Board.
The following is a summary of the material analyses reviewed by Houlihan Lokey with the Special Committee in connection with Houlihan
Lokeys opinion rendered on November 2, 2009. The order of the analyses does not represent relative importance or weight given to those analyses by Houlihan Lokey. The analyses summarized below include information presented in tabular
format. The tables alone do not constitute a complete description of the analyses. Considering the data in the tables below without considering the full narrative description of the analyses, as well as the methodologies underlying, and the
assumptions, qualifications and limitations affecting, each analysis, could create a misleading or incomplete view of Houlihan Lokeys analyses.
For purposes of its analyses, Houlihan Lokey reviewed a number of financial metrics, including:
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Enterprise value calculated as the value of the relevant companys outstanding equity securities (taking into account its outstanding warrants,
options and other convertible securities) based on the relevant companys closing stock price, or equity value, plus net debt (calculated as outstanding indebtedness, preferred stock and capital lease obligations less the amount of cash on its
balance sheet), as of a specified date.
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Equity value calculated as the value of the relevant companys outstanding equity securities (taking into account its outstanding warrants,
options and other convertible securities) based on the relevant companys closing stock price, or equity value, as of a specified date.
|
Unless the context indicates otherwise, enterprise values and equity values derived from the selected companies analysis described below were calculated using the closing price of the Common Stock and
Peets common stock and the common stock of the selected coffee roasters, private label food manufacturing and coffee related retail companies listed below as of October 30, 2009, and transaction values for the target companies derived
from the selected transactions analysis described below were calculated as of the announcement date of
25
the relevant transaction based on the estimated purchase prices paid in the selected transactions. Accordingly, this information may not reflect current or future market conditions. Unless the
context indicates otherwise, estimates for each of (i) revenue of the next fiscal year for which financial information has not been made public (NFY Revenue), (ii) earnings before interest, taxes, depreciation and amortization,
adjusted for certain non-recurring items for the next fiscal year for which financial information has not been made public (NFY Adjusted EBITDA), (iii) earnings before interest and taxes, adjusted for certain non-recurring items for
the next fiscal year for which financial information has not been made public (NFY Adjusted EBIT) and (iv) net income adjusted for certain non-recurring items for the next fiscal year for which financial information has not been
made public (NFY Adjusted Net Income) were based on estimates provided by Diedrich management, in the case of Diedrich, and certain reports of securities analysts for all other companies, including Peets.
Selected Companies Analysis
Diedrich
Houlihan Lokey calculated multiples of enterprise value and
equity value based on certain financial data for Diedrich and the following selected coffee roasters and private label food manufacturing companies. The calculated multiples included (i) enterprise value to NFY Revenue, NFY Adjusted EBITDA and
NFY Adjusted EBIT, and (ii) equity value to NFY Adjusted Net Income. The financial data for Diedrich was based on a report of the equity research analyst who covers Diedrich. The list of selected companies and the related financial data for
such selected companies and for Diedrich are set forth below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Enterprise Value to:
|
|
|
Equity Value to:
|
|
Selected Companies
|
|
NFY
Revenue
|
|
|
NFY Adjusted
EBITDA
|
|
|
NFY Adjusted
EBIT
|
|
|
NFY Adjusted
Net Income
|
|
Coffee Roasters
|
|
|
|
|
|
|
|
|
|
|
|
|
Coffee Holding Co. Inc.
|
|
NA
|
1
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
Companhia Cacique de Cafe Soluvel
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
Companhia Iguacu de Cafe Soluvel
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
Farmer Brothers Co.
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
Green Mountain Coffee Roasters Inc.
|
|
2.52
|
x
|
|
18.2
|
x
|
|
22.5
|
x
|
|
36.2
|
x
|
Peets Coffee & Tea Inc.
|
|
1.39
|
x
|
|
11.4
|
x
|
|
19.6
|
x
|
|
32.3
|
x
|
Super Coffeemix Manufacturing Ltd.
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
|
|
|
|
|
Private Label
|
|
|
|
|
|
|
|
|
|
|
|
|
Ralcorp Holdings Inc.
|
|
1.11
|
x
|
|
6.8
|
x
|
|
8.9
|
x
|
|
11.3
|
x
|
Cott Corporation
|
|
0.61
|
x
|
|
5.9
|
x
|
|
10.0
|
x
|
|
13.7
|
x
|
Treehouse Foods Inc.
|
|
1.09
|
x
|
|
9.7
|
x
|
|
13.1
|
x
|
|
17.6
|
x
|
J&J Snack Foods Corp.
|
|
0.93
|
x
|
|
5.9
|
x
|
|
8.2
|
x
|
|
15.0
|
x
|
Overhill Farms Inc.
|
|
0.46
|
x
|
|
4.2
|
x
|
|
4.9
|
x
|
|
7.2
|
x
|
|
|
|
|
|
Diedrich
|
|
2.00
|
x
|
|
19.0
|
x
|
|
24.1
|
x
|
|
24.7
|
x
|
1
|
For purposes of the tables in this Statement, NA means not available.
|
The calculated multiple ranges and averages for the selected companies (excluding Diedrich) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Multiple Description
|
|
Multiples
|
|
|
|
Low
|
|
|
High
|
|
|
Median
|
|
|
Mean
|
|
Enterprise Value as a multiple of:
|
|
|
|
|
|
|
|
|
|
|
|
|
NFY Revenue
|
|
0.46
|
x
|
|
2.52
|
x
|
|
1.09
|
x
|
|
1.16
|
x
|
NFY Adjusted EBITDA
|
|
4.2
|
x
|
|
18.2
|
x
|
|
6.8
|
x
|
|
8.9
|
x
|
NFY Adjusted EBIT
|
|
4.9
|
x
|
|
22.5
|
x
|
|
10.0
|
x
|
|
12.5
|
x
|
Equity Value as a multiple of:
|
|
|
|
|
|
|
|
|
|
|
|
|
NFY Adjusted Net Income
|
|
7.2
|
x
|
|
36.2
|
x
|
|
15.0
|
x
|
|
19.0
|
x
|
26
Houlihan Lokey applied the following selected multiple ranges derived from the selected
companies analysis to corresponding financial data for Diedrich. The selected companies analysis indicated the following implied enterprise values from operations reference ranges for Diedrich:
|
|
|
|
|
Multiple Description
|
|
Selected Multiple Range
|
|
Selected Enterprise Value From
Operations Range
|
|
|
|
|
(in millions)
|
NFY Revenue
|
|
1.00x 1.15x
|
|
$98.2 $112.9
|
NFY Adjusted EBITDA
|
|
7.5x 9.0x
|
|
$84.2 $101.1
|
NFY Adjusted EBIT
|
|
10.0x 11.5x
|
|
$95.6 $109.9
|
NFY Adjusted Net Income
|
|
14.0x 16.0x
|
|
$75.8 $86.7
|
Houlihan Lokey made several adjustments to this selected enterprise value from
operations reference range to arrive at an implied per share reference range. These adjustments included assuming the addition of (i) net debt of $(0.3) million as of September 16, 2009, (ii) the estimated value of notes receivable of
$3.5 million, (iii) the present value of net operating loss carryforwards as of October 30, 2009 of $3.3 million and (iv) proceeds from the exercise of options and warrants of $6.2 million, together with assuming outstanding common
shares of 8.5 million, based on Diedrichs Quarterly Report on Form 10-Q filed by Diedrich with the SEC on November 2, 2009.
These adjustments resulted in implied per share equity reference ranges as follows:
|
|
|
Multiple Description
|
|
Implied Per Share
Equity Reference Range for Diedrich
|
NFY Revenue
|
|
$13.17 $14.91
|
NFY Adjusted EBITDA
|
|
$11.52 $13.51
|
NFY Adjusted EBIT
|
|
$12.86 $14.55
|
NFY Adjusted Net Income
|
|
$10.53 $11.81
|
Peets
Houlihan Lokey calculated multiples of enterprise value and equity value based on certain financial data for Peets and the following
selected coffee related retail companies. The calculated multiples included (i) enterprise value to earnings before interest, taxes, depreciation and amortization, adjusted for certain non-recurring items for the most recently reported twelve
months for which financial information has been made public, or LTM Adjusted EBITDA, and NFY Adjusted EBITDA, and (ii) equity value to NFY Adjusted Net Income. The list of selected companies and the related financial data are set forth below.
|
|
|
|
|
|
|
|
|
|
Selected Companies
|
|
Enterprise Value to:
Adjusted EBITDA
|
|
|
Equity Value to:
NFY Net Income
|
|
|
|
LTM
|
|
|
NFY
|
|
|
|
|
Caribou Coffee Company, Inc.
|
|
6.0
|
x
|
|
7.2
|
x
|
|
33.0
|
x
|
Starbucks Corp.
|
|
10.6
|
x
|
|
10.2
|
x
|
|
24.9
|
x
|
Tim Hortons Inc.
|
|
9.1
|
x
|
|
8.9
|
x
|
|
16.1
|
x
|
Peets
|
|
11.6
|
x
|
|
11.4
|
x
|
|
32.3
|
x
|
27
The calculated multiple ranges and averages for the selected companies (excluding
Peets) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Multiple Description
|
|
Multiples
|
|
|
|
Low
|
|
|
High
|
|
|
Median
|
|
|
Mean
|
|
Enterprise Value as a multiple of:
|
|
|
|
|
|
|
|
|
|
|
|
|
LTM Adjusted EBITDA
|
|
6.0
|
x
|
|
10.6
|
x
|
|
9.1
|
x
|
|
8.5
|
x
|
NFY Adjusted EBITDA
|
|
7.2
|
x
|
|
10.2
|
x
|
|
8.9
|
x
|
|
8.8
|
x
|
Equity Value as a multiple of:
|
|
|
|
|
|
|
|
|
|
|
|
|
NFY Adjusted Net Income
|
|
16.1
|
x
|
|
33.0
|
x
|
|
24.9
|
x
|
|
24.6
|
x
|
Selected Transactions Analysis.
Houlihan Lokey calculated multiples of implied enterprise value based on the estimated purchase prices paid in certain publicly announced
coffee roasters and private label food manufacturing transactions. Houlihan Lokey selected transactions announced within three years prior to the announcement of the proposed Offer and Merger. The calculated multiples included implied enterprise
value of the target company as a multiple of revenue for the latest twelve months for which information had been made public as of the announcement date of the relevant transaction, or LTM Revenue, and earnings before interest, taxes, depreciation
and amortization for the latest twelve months for which information had been made public as of the announcement date of the relevant transaction, or LTM EBITDA. The list of selected transactions and the related multiples and certain financial data
are set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction Value/
|
|
Effective
Date
|
|
Target
|
|
Acquiror
|
|
Transaction
Value
|
|
LTM
Revenue
|
|
|
LTM
EBITDA
|
|
03/27/2009
|
|
Tullys Coffee Brand and Wholesale Business
|
|
Green Mountain Coffee Roasters
|
|
$
|
40.3
|
|
1.30
|
x
|
|
NA
|
|
03/04/2009
|
|
Flavors Specialties, Inc.
|
|
Frutarom USA, Inc.
|
|
$
|
27.0
|
|
2.35
|
x
|
|
7.6
|
x
|
11/26/2007
|
|
Mondiv Food Products, Inc.
|
|
Lassonde Specialties Inc.
|
|
$
|
19.8
|
|
0.79
|
x
|
|
NA
|
|
10/15/2007
|
|
E.D. Smith Income Fund
|
|
TreeHouse Foods, Inc.
|
|
$
|
281.1
|
|
1.02
|
x
|
|
9.8
|
x
|
07/19/2007
|
|
Van Houtte Inc.
|
|
Littlejohn & Co., Fonds de solidarite and management
|
|
$
|
526.1
|
|
1.50
|
x
|
|
8.1
|
x
|
05/31/2007
|
|
San Antonio Farms
|
|
TreeHouse Foods, Inc.
|
|
$
|
88.5
|
|
1.95
|
x
|
|
9.7
|
x
|
05/08/2007
|
|
Associated Brands Income Fund
|
|
TorQuest Partners
|
|
$
|
62.5
|
|
0.40
|
x
|
|
6.8
|
x
|
05/07/2007
|
|
DeGraffenreid, LLC
|
|
TreeHouse Foods, Inc.
|
|
$
|
10.0
|
|
0.43
|
x
|
|
NA
|
|
04/27/2007
|
|
Coffee Bean International, Inc.
|
|
Farmer Brothers Co.
|
|
$
|
22.0
|
|
0.80
|
x
|
|
NA
|
|
03/19/2007
|
|
Bloomfield Bakers
|
|
Ralcorp Holdings Inc.
|
|
$
|
139.6
|
|
0.70
|
x
|
|
6.8
|
x
|
11/09/2006
|
|
Java Trading Co.
|
|
Distant Lands Trading Co.
|
|
$
|
54.0
|
|
1.30
|
x
|
|
10.2
|
x
|
The calculated multiples ranges and averages were as follows:
|
|
|
|
|
|
|
|
|
Multiple Description
|
|
Multiples
|
|
|
Low
|
|
High
|
|
Median
|
|
Mean
|
Transaction Value as a multiple of:
|
|
|
|
|
|
|
|
|
LTM Revenue
|
|
0.40x
|
|
2.35x
|
|
1.02x
|
|
1.14x
|
LTM EBITDA
|
|
6.8x
|
|
10.2x
|
|
8.1x
|
|
8.4x
|
28
Houlihan Lokey applied the following selected multiple ranges derived from the selected
transactions analysis to corresponding financial data for Diedrich. The selected transactions analysis indicated the following implied enterprise values from operations reference ranges for Diedrich:
|
|
|
|
|
|
|
|
|
Multiple Description
|
|
Selected Multiple Range
|
|
|
Selected Enterprise Value
From Operations Range
|
|
|
Low
|
|
|
High
|
|
|
(in millions)
|
LTM Revenue
|
|
1.25
|
x
|
|
1.40
|
x
|
|
$84.6 $94.8
|
LTM Adjusted EBITDA
|
|
9.0
|
x
|
|
10.5
|
x
|
|
$43.6 $50.9
|
Houlihan Lokey made several adjustments to this selected enterprise value from
operations reference range to arrive at an implied per share reference range. These adjustments included assuming the addition of (i) net debt of $(0.3) million as of September 16, 2009, (ii) the estimated value of notes receivable of
$3.5 million, (iii) the present value of net operating loss carryforwards as of October 30, 2009 of $3.3 million and (iv) proceeds from the exercise of options and warrants of $6.2 million, together with assuming outstanding common
shares of 8.5 million, based on Diedrichs Quarterly Report on Form 10-Q filed by Diedrich with the SEC on November 2, 2009.
These adjustments resulted in implied per share equity reference ranges as follows:
|
|
|
Multiple Description
|
|
Implied Per Share Equity Reference Range
|
LTM Revenue
|
|
$11.57 $12.77
|
LTM Adjusted EBITDA
|
|
$6.73 $7.58
|
Other Matters
Houlihan Lokey was engaged by Diedrich to provide an opinion to the Special Committee regarding the fairness from a financial point of view
of the consideration to be received by the holders of Common Stock other than certain affiliated stockholders in the Offer and the Merger. Diedrich engaged Houlihan Lokey based on Houlihan Lokeys experience and reputation. Houlihan Lokey is
regularly engaged to provide advisory services in connection with mergers and acquisitions, financings, and financial restructurings.
In the ordinary course of business, certain of Houlihan Lokeys affiliates, as well as investment funds in which they may have financial interests, may acquire, hold or sell, long or short positions, or trade or otherwise effect
transactions, in debt, equity and other securities and financial instruments (including loans and other obligations) of, or investments in, Diedrich, Peets or any other party that may be involved in the Offer or the Merger and their respective
affiliates or any currency or commodity that may be involved in the Offer or the Merger.
Houlihan Lokey or certain of its
affiliates have in the past provided investment banking, financial advisory and other financial services to Diedrich for which Houlihan Lokey or such affiliates received compensation. Houlihan Lokey and certain of its affiliates may provide
investment banking, financial advisory and other financial services to Diedrich, Peets and other participants in the Offer or the Merger in the future, for which Houlihan Lokey and such affiliates may receive compensation.
Item 5.
|
Persons/Assets Retained, Employed, Compensated or Used.
|
Under the terms of Houlihan Lokeys engagement, Diedrich agreed to pay Houlihan Lokey for its financial advisory services an aggregate fee currently estimated to be $2.9 million, a portion of which
is payable in connection with Houlihan Lokeys opinion, and a significant portion of which is contingent upon completion of the Offer. Diedrich has also agreed to reimburse Houlihan Lokey for certain expenses and to indemnify Houlihan Lokey,
its affiliates and certain related parties against certain liabilities and expenses, including certain liabilities under the federal securities laws arising out of or relating to Houlihan Lokeys engagement.
29
Neither Diedrich nor any person acting on its behalf has directly or indirectly employed,
retained or compensated, or currently intends to employ, retain or compensate, any person to make solicitations or recommendations to the stockholders of Diedrich on its behalf with respect to the Offer or the Merger.
Item 6.
|
Interest in Securities of the Subject Company.
|
Except as otherwise noted herein, no transactions in shares of Common Stock have been effected during the past 60 days by Diedrich or, to the best of Diedrichs knowledge after a review of Form 4
filings, by any executive officer, director or affiliate of Diedrich.
Item 7.
|
Purposes of the Transaction and Plans or Proposals.
|
Except as otherwise set forth in this Statement, Diedrich is not currently undertaking and is not engaged in any negotiations in response to the Offer that relate to: (i) a tender offer for or other
acquisition of shares of Common Stock by Diedrich or any other person; (ii) any extraordinary transaction, such as a merger, reorganization or liquidation, involving Diedrich; (iii) any purchase, sale or transfer of a material amount of
assets of Diedrich; or (iv) any material change in the present dividend rate or policy, or indebtedness or capitalization of Diedrich.
Except as otherwise set forth in this Statement, there are no transactions, resolutions of the Board, agreements in principle, or signed contracts entered into in response to the Offer that relate to one
or more of the matters referred to in the preceding paragraph.
Item 8.
|
Additional Information.
|
Delaware General Corporation Law
Diedrich is incorporated under the laws of the State of Delaware. The
following provisions of the DGCL are therefore applicable to the Offer and the Merger.
Business Combination Statute
.
Section 203 of the DGCL prevents an interested stockholder (generally defined as a person who, together with its affiliates and associates, beneficially owns 15% or more of a corporations voting stock) from engaging in a
business combination (which includes a merger, consolidation, a sale of a significant amount of assets, and a sale of stock) with a Delaware corporation for three years following the time such person became an interested stockholder
unless:
|
|
|
before such person became an interested stockholder, the board of directors of the corporation approved either the transaction in which the interested
stockholder became an interested stockholder or the business combination;
|
|
|
|
upon consummation of the transaction in which the interested stockholder became an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the transaction commenced (excluding, for purposes of determining the number of shares outstanding, stock held by directors who are also officers and by employee stock plans that do
not allow plan participants to determine confidentially whether to tender shares); or
|
|
|
|
following the transaction in which such person became an interested stockholder, the business combination is (x) approved by the board of
directors of the corporation and (y) authorized at a meeting of stockholders by the affirmative vote of the holders of at least 66
2
/
3
% of the outstanding voting stock of the corporation which is not owned by the interested stockholder.
|
The Board approved the Merger Agreement and the transactions contemplated thereby for purposes of Section 203 of the DGCL on
November 2, 2009, as described in Item 4 of this Statement above. Therefore, the restrictions of Section 203 of the DGCL do not apply to the Offer, the Merger or the other transactions contemplated by the Merger Agreement.
30
Appraisal Rights
. Holders of shares of Common Stock will not have appraisal rights in
connection with the Offer. However, if the Merger is consummated, holders of shares of Common Stock immediately prior to the effective time of the Merger may have the right pursuant to the provisions of Section 262 of the DGCL to demand
appraisal of their shares of Common Stock. If appraisal rights are applicable, dissenting stockholders who comply with the applicable statutory procedures will be entitled, under Section 262 of the DGCL, to receive a judicial determination of
the fair value of their shares of Common Stock (excluding any appreciation or depreciation in anticipation of the Offer or the Merger) and to receive payment of such fair value in cash, together with a fair rate of interest, if any. Any such
judicial determination of the fair value of the shares of Common Stock could be based upon factors other than, or in addition to, the value of the consideration per Share ultimately delivered in the Offer or the Merger or the market value of the
shares of Common Stock. The value so determined could be more or less than the value of the consideration per share of Common Stock ultimately delivered in the Offer or the Merger.
Appraisal rights will be available in connection with the Merger, regardless of whether the Merger is consummated by Peets without a
vote pursuant to Section 253 of the DGCL, or a vote of Diedrichs stockholders is required under the DGCL to effect the Merger.
Appraisal rights cannot be exercised at this time. If appraisal rights become available in connection with the Merger, Diedrich will provide additional information to the holders of shares of Common Stock
concerning their appraisal rights and the procedures to be followed in order to perfect their appraisal rights before any action has to be taken in connection with such rights.
The foregoing summary of the rights of stockholders seeking appraisal rights under Delaware law does not purport to be a complete
statement of the procedures to be followed by stockholders desiring to exercise any appraisal rights available thereunder and is qualified in its entirety by reference to Section 262 of the DGCL. The perfection of appraisal rights requires
strict adherence to the applicable provisions of the DGCL.
Short Form Merger.
The DGCL provides that, if a parent
corporation owns at least 90% of the outstanding shares of each class of the stock of a subsidiary that would otherwise be entitled to vote on a merger, that corporation can effect a short form merger with that subsidiary without the action of the
other stockholders of the subsidiary. Accordingly, if as a result of the Offer or otherwise, Purchaser acquires or controls at least 90% of the outstanding shares of Common Stock, Purchaser could, and intends to, effect the Merger without prior
notice to, or any action by, any other Diedrich stockholder.
Top-Up Option
Pursuant to the terms of the Merger Agreement, Diedrich has granted to Peets and Purchaser an irrevocable option (the Top-Up
Option), exercisable upon the terms and subject to the conditions set forth in the Merger Agreement, to purchase from Diedrich an aggregate number of newly issued shares of Common Stock equal to the lesser of (i) the Top-Up Number (as
defined below) or (ii) the aggregate number of shares of Common Stock that Diedrich is authorized to issue under its certificate of incorporation but that are not issued and outstanding (and are not subscribed for or otherwise committed to be
issued) at the time of exercise of the Top-Up Option. Top-Up Number means the number of shares of Common Stock that, when added to the number of shares of Common Stock owned of record by Peets or Purchaser or any other subsidiary
of Peets at the time of exercise of the Top-Up Option, constitutes a designated percentage of the number of shares of Common Stock that would be outstanding immediately after the issuance of all shares of Common Stock subject to the Top-Up
Option, which percentage will be designated by Peets at its sole discretion, provided that such percentage shall be greater than 90% but less than 91%.
The aggregate purchase price payable for the shares of Common Stock being purchased by Peets or Purchaser pursuant to the Top-Up Option will be determined by multiplying the number of such shares by
an
31
amount equal to the sum of (i) $17.33 and (ii) the amount determined by multiplying (A) the Applicable Fraction by (B) Peets Average Stock Price. Such purchase price may
be paid by Peets or Purchaser, at its election, either entirely in cash or by executing and delivering to Diedrich a promissory note having a principal amount equal to such purchase price, or by any combination of the foregoing. Any such
promissory note will bear interest at the rate of 3% per annum, will mature on the first anniversary of the date of execution thereof and may be prepaid without premium or penalty.
The foregoing summary is qualified in its entirety by reference to the Merger Agreement, which is filed as Exhibits (a)(6) and (a)(7)
hereto and is incorporated herein by reference.
Antitrust Laws
The Antitrust Division of the United States Department of Justice and the Federal Trade Commission frequently scrutinize the legality under
the antitrust laws of transactions such as Peets acquisition of shares of Common Stock pursuant to the Offer and the Merger. Private parties who may be adversely affected by the proposed transaction and individual states may also bring legal
actions under the antitrust laws. Diedrich does not believe that the completion of the Offer or the Merger will result in a violation of any applicable antitrust laws; however, there can be no assurance that a challenge to the Offer or the Merger on
antitrust grounds will not be made, or if such a challenge is made, what the result will be.
Litigation
On November 10, 2009, an action,
George Mendenhall v. J. Russell Phillips, et al.
, was filed in the Superior
Court of the State of California for the County of Orange. In this action, the plaintiff named as defendants Diedrich, the members of the Board, Peets and Purchaser. The complaint asserts claims on behalf of Diedrichs stockholders who
are similarly situated with the plaintiff. Among other things, the complaint alleges that the members of the Board have breached their fiduciary duties to Diedrichs stockholders in connection with the transactions contemplated by the Merger
Agreement, allegedly resulting in an unfair process and unfair price to such stockholders. The complaint seeks class certification and certain forms of equitable relief, including enjoining the completion of the transactions contemplated by the
Merger Agreement. Diedrich believes that the allegations of the complaint are without merit and intends to vigorously contest the action.
Forward-Looking Statements
Diedrich makes forward-looking statements in this Statement that are subject to
risks and uncertainties. These forward-looking statements include information about the Offer and the Merger. When Diedrich uses the words believe, expect, anticipate, estimate or similar expressions,
Diedrich is making forward-looking statements. Many possible events or factors could affect Diedrichs future financial results and performance. This could cause Diedrichs results or performance to differ materially from those expressed
in Diedrichs forward-looking statements. Diedrich stockholders should consider these risks when Diedrich stockholders review this Statement, along with the following possible events or factors:
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the risk that the Offer and the Merger will not be completed;
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the risk that Peets business and/or Diedrichs business will be adversely impacted during the pendency of the Offer and the Merger;
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the risk that the operations of Peets and Diedrich will not be integrated successfully;
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the financial and operating performance of Diedrichs wholesale operations;
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Diedrichs ability to achieve and/or maintain profitability over time;
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the successful execution of Diedrichs growth strategies;
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32
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the impact of competition; and
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the availability of working capital.
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Additional risks and uncertainties are described in detail under the caption Risk Factors Relating to Diedrich Coffee and Its Business in Diedrichs annual report on Form 10-K for the
fiscal year ended June 24, 2009 and in other reports that Diedrich files with the SEC. Diedrich stockholders are cautioned not to place undue reliance on these forward-looking statements, which reflect managements analysis only as of the
date of this Statement. There can be no assurance that the Offer or Merger will in fact be completed. Except where required by law, Diedrich does not undertake an obligation to revise or update any forward-looking statements, whether as a result of
new information, future events or changed circumstances.
The following
Exhibits are filed herewith:
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Exhibit
No.
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Description
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(a)(1)
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Prospectus/Offer to Purchase of Peets, dated as of November 17, 2009 (incorporated by reference to Peets Registration Statement on Form S-4, filed by Peets with
the SEC on November 17, 2009).
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(a)(2)
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Letter of Transmittal (incorporated by reference to Exhibit 99.1 of Peets Registration Statement on Form S-4, filed by Peets with the SEC on November 17,
2009).
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(a)(3)
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Letter to the Stockholders of Diedrich, dated as of November 17, 2009.
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(a)(4)
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Information Statement pursuant to Section 14(f) of the Securities Exchange Act of 1934 and Rule 14f-1 thereunder (attached as Annex A to this
Schedule 14D-9).
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(a)(5)
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Joint Press Release of Diedrich and Peets issued on November 2, 2009 (incorporated by reference to Exhibit 99.3 of Diedrichs Current Report on Form 8-K, filed by
Diedrich with the SEC on November 3, 2009).
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(a)(6)
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Agreement and Plan of Merger among Diedrich, Purchaser and Peets, dated as of November 2, 2009 (incorporated by reference to Exhibit 2.1 of Diedrichs Current Report
on Form 8-K filed by Diedrich with the SEC on November 3, 2009).
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(a)(7)
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Amendment No. 1 to Agreement and Plan of Merger among Diedrich, Purchaser and Peets, dated as of November 17, 2009.
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(e)(1)
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Stockholder Agreement, dated as of November 2, 2009, by and between Peets and Paul C. Heeschen (incorporated by reference to Exhibit 99.1 of Diedrichs Current
Report on Form 8-K filed by Diedrich with the SEC on November 3, 2009).
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(e)(2)
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Form of Stockholder Agreement by and between Peets and certain directors and executive officers of Diedrich (incorporated by reference to Exhibit 99.2 of Diedrichs
Current Report on Form 8-K filed by Diedrich with the SEC on November 3, 2009).
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(e)(3)
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Common Stock and Warrant Purchase Agreement, dated as of March 14, 2001 (incorporated by reference to Annex B of Diedrichs Definitive Proxy Statement, filed by Diedrich
with the SEC on April 12, 2001).
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(e)(4)
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Form of Warrant, dated as of May 8, 2001 (incorporated by reference to Exhibit 4.2 of Diedrichs Current Report on Form 8-K, filed by Diedrich with the SEC on May 16,
2001).
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(e)(5)
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Registration Rights Agreement, dated as of May 8, 2001 (incorporated by reference to Exhibit 4.1 of Diedrichs Current Report on Form 8-K, filed by Diedrich with the SEC
on May 16, 2001).
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33
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Exhibit
No.
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Description
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(e)(6)
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Amendment No. 1 to 2001 Warrant, dated as of August 26, 2008 (incorporated by reference to Exhibit 10.2 of Diedrichs Current Report on Form 8-K, filed by Diedrich with
the SEC on August 28, 2008).
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(e)(7)
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Warrant, dated as of August 26, 2008, issued by Diedrich Coffee Inc. to Sequoia Enterprises L.P. (incorporated by reference to Exhibit 4.1 of Diedrichs Current Report on
Form 8-K, filed by Diedrich with the SEC on August 28, 2008).
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(e)(8)
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Waiver, Agreement, Amendment No. 1 to 2008 Warrant and Amendment No. 2 to 2001 Warrant with Sequoia Enterprises L.P., dated as of November 10, 2008 (incorporated by reference to
Exhibit 10.1 of Diedrichs Current Report on Form 8-K, filed by Diedrich with the SEC on November 17, 2008).
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(e)(9)
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Warrant, dated as of April 29, 2009, issued by Diedrich Coffee, Inc. to Sequoia Enterprises L.P. (incorporated by reference to Exhibit 4.1 of Diedrichs Current Report on
Form 8-K, filed by Diedrich with the SEC on May 4, 2009).
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(e)(10)
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Form of Diedrich Coffee, Inc. Indemnification Agreement (incorporated by reference to Exhibit 10.1 of Diedrichs Current Report on Form 8-K, filed by Diedrich with the SEC
on April 3, 2008).
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(e)(11)
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Diedrich Coffee, Inc. 2000 Equity Incentive Plan (incorporated by reference to Exhibit 10.2 of Diedrichs Quarterly Report on Form 10-Q for the period ended December 17,
2003, filed by Diedrich with the SEC on January 30, 2004).
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(e)(12)
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Diedrich Coffee, Inc. 2000 Non-Employee Directors Stock Option Plan (incorporated by reference to Exhibit 4.3 of Diedrichs Registration Statement on Form S-8, filed
by Diedrich with the SEC on November 21, 2000).
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(e)(13)
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Contingent Convertible Note Purchase Agreement, dated as of May 10, 2004 (includes form of convertible promissory note and form of warrant) (incorporated by reference to
Exhibit 10.29 of Diedrichs Annual Report on Form 10-K for the fiscal year ended June 30, 2004, filed by Diedrich with the SEC on September 28, 2004).
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(e)(14)
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Amendment No. 1 to Contingent Convertible Note Purchase Agreement dated as of June 30, 2004 (incorporated by reference to Exhibit 10.1 of Diedrichs Quarterly Report
on Form 10-Q for the period ended September 19, 2007, filed by Diedrich with the SEC on November 5, 2007).
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(e)(15)
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Amendment No. 2 to Contingent Convertible Note Purchase Agreement dated as of March 31, 2006 (incorporated by reference to Exhibit 10.1 of Diedrichs Current Report on
Form 8-K, filed by Diedrich with the SEC on March 31, 2006).
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(e)(16)
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Amendment No. 3 to Contingent Convertible Note Purchase Agreement dated as of September 22, 2006 (incorporated by reference to Exhibit 10.28 of Diedrichs Annual Report on
Form 10-K for the fiscal year ended June 28, 2006, filed by Diedrich with the SEC on September 26, 2006).
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(e)(17)
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Chief Executive Officer Employment Agreement between J. Russell Phillips and Diedrich, effective as of February 7, 2008 (incorporated by reference to Exhibit 10.1 of
Diedrichs Current Report on Form 8-K, filed by Diedrich with the SEC on February 8, 2008).
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(e)(18)
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Stock Option Agreement between Diedrich Coffee, Inc. and J. Russell Phillips, effective as of February 7, 2008 (incorporated by reference to Exhibit 10.2 of Diedrichs
Current Report on Form 8-K, filed by Diedrich with the SEC on February 8, 2008).
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(e)(19)
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Amending Agreement by and between Diedrich Coffee, Inc. and Sequoia Enterprises L.P., dated as of June 19, 2008 (incorporated by reference to Exhibit 10.1 of Diedrichs
Current Report on Form 8-K, filed by Diedrich with the SEC on June 25, 2008).
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34
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Exhibit
No.
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Description
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(e)(20)
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Amendment No. 4 to Contingent Convertible Note Purchase Agreement dated as of August 26, 2008 (includes removal of conversion feature of notes, no further warrant issuances)
(incorporated by reference to Exhibit 10.2 of Diedrichs Current Report on Form 8-K, filed by Diedrich with the SEC on August 28, 2008).
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(e)(21)
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Loan Agreement by and between Diedrich Coffee, Inc. and Sequoia Enterprises L.P., dated as of August 26, 2008 (incorporated by reference to Exhibit 10.1 of Diedrichs
Current Report on Form 8-K, filed by Diedrich with the SEC on August 28, 2008).
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(e)(22)
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Amendment No. 5 to Contingent Convertible Note Purchase Agreement, dated as of March 27, 2009, by and between Diedrich Coffee, Inc. and Sequoia Enterprises L.P. (incorporated by
reference to Exhibit 10.2 of Diedrichs Current Report on Form 8-K, filed by Diedrich with the SEC on March 30, 2009).
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(e)(23)
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Amendment No. 6 to Contingent Convertible Note Purchase Agreement, dated as of April 29, 2009, by and between Diedrich Coffee, Inc. and Sequoia Enterprises L.P. (incorporated by
reference to Exhibit 10.2 of Diedrichs Current Report on Form 8-K, filed by Diedrich with the SEC on May 4, 2009).
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(e)(24)
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Letter Agreement with Sean M. McCarthy, dated as of May 1, 2008 (incorporated by reference to Exhibit 10.1 of Diedrichs Quarterly Report on Form 10-Q, filed by Diedrich
with the SEC on November 2, 2009).
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35
SIGNATURES
After due inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete
and correct.
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DIEDRICH COFFEE, INC.
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By:
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/s/ S
EAN
M.
M
C
C
ARTHY
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Name:
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Sean M. McCarthy
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Title:
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Chief Financial Officer
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Dated: November 17, 2009
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36
Annex A
DIEDRICH COFFEE, INC.
28 Executive Park, Suite 200
Irvine, CA 92614
(949) 260-6734
INFORMATION STATEMENT PURSUANT TO
SECTION 14(f) OF THE SECURITIES EXCHANGE ACT OF 1934
AND RULE 14f-1 THEREUNDER
GENERAL INFORMATION
This information statement (this Information Statement) is being mailed to the stockholders of Diedrich
Coffee, Inc., a Delaware corporation (Diedrich), on or about November 17, 2009, and relates to the offer by Marty Acquisition Sub, Inc., a Delaware corporation (Purchaser) and a wholly-owned subsidiary of Peets
Coffee & Tea, Inc., a Washington corporation (Peets), for all of the issued and outstanding shares of Diedrichs common stock, par value $0.01 per share (Common Stock). Capitalized terms used and not
otherwise defined herein shall have the respective meanings set forth in the Solicitation/Recommendation Statement on Schedule 14D-9 (the Schedule 14D-9) filed by Diedrich with the Securities and Exchange Commission (the
SEC) on November 17, 2009 and mailed to Diedrichs stockholders.
Diedrich stockholders are receiving this
Information Statement in connection with the possible election of persons designated by Peets and Purchaser to at least a majority of the seats on the board of directors of Diedrich (the Board). Such designation is to be made
pursuant to the Agreement and Plan of Merger, dated as of November 2, 2009, by and among Peets, Purchaser and Diedrich, as amended from time to time (the Merger Agreement). There will be no vote or other action by stockholders
of Diedrich in connection with this Information Statement. Voting proxies regarding the shares of Common Stock are not being solicited from any stockholder in connection with this Information Statement. Diedrich stockholders are urged to read this
Information Statement carefully. Diedrich stockholders are not, however, required to take any action in connection with this Information Statement.
Pursuant to the Merger Agreement, on November 17, 2009, Purchaser commenced an offer to acquire all issued and outstanding shares of Common Stock in exchange for, with respect to each share, the right to
receive a combination of: (i) $17.33 in cash, without interest, and (ii) a fraction of a share of Peets common stock (together with the $17.33 in cash, the Offer Consideration) determined by dividing $8.67 by the volume
weighted average price for one share of Peets common stock as reported on the Nasdaq Global Select Market for the five (5) trading day period ending immediately prior to (and excluding) the Acceptance Time (as defined below), provided
that in no event will such fraction exceed 0.315, all upon the terms and subject to the conditions set forth in Peets prospectus/offer to purchase, dated November 17, 2009 (the Prospectus/Offer to Purchase). The Prospectus/Offer to
Purchase is contained in the Registration Statement on Form S-4 filed by Peets with the SEC, as amended (the Registration Statement), and in the related Letter of Transmittal (the Letter of Transmittal, together
with the Prospectus/Offer to Purchase and any amendments or supplements thereto, collectively constituting the Offer). Copies of the Prospectus/Offer to Purchase and the Letter of Transmittal are being mailed together with this
Information Statement and filed as Exhibits (a)(1) and (a)(2) to the Schedule 14D-9, respectively, and are incorporated herein by reference.
The Offer was commenced by Purchaser on November 17, 2009 and expires at 12:00 midnight, Eastern Time, on December 15, 2009 (one minute after 11:59 p.m., Eastern Time, on December 15, 2009), unless it is
extended or terminated in accordance with its terms. The Offer is conditioned upon, among other things, there being validly tendered (and not properly withdrawn) prior to the expiration of the Offer, (as it may be extended) shares of Common Stock
that, together with any shares of Common Stock then owned by Peets or Purchaser, or by any other subsidiaries of Peets, represent more than 50% of the sum of (i) the aggregate number of shares of
A-1
Common Stock outstanding immediately prior to the time upon which Purchaser accepts any shares of Common Stock for exchange pursuant to the Offer (the Acceptance Time), and
(ii) at the election of Peets, an additional number of shares of Common Stock up to (but not exceeding) the aggregate number of shares of Common Stock issuable upon the exercise of all stock options to purchase shares of Common Stock,
warrants to purchase shares of Common Stock and other rights to acquire Common Stock that are outstanding immediately prior to the Acceptance Time and that are vested and exercisable or will be vested and exercisable prior to the completion of the
Merger (as defined in the Schedule 14D-9). This condition is referred to as the Minimum Condition in this Information Statement.
The Merger Agreement requires us to cause Peets designees to be elected to the Board under certain circumstances described below.
The foregoing description of the Merger Agreement and any other descriptions of the Merger Agreement contained in this Statement are
qualified in their entirety by reference to the full text of the Merger Agreement, which is filed with the Schedule 14D-9 as Exhibits (a)(6) and (a)(7) and is incorporated herein by reference. The Merger Agreement is included as exhibits to the
Schedule 14D-9 to provide additional information regarding the terms of the transactions described herein and is not intended to provide any other factual information or disclosure about Diedrich, Peets or Purchaser. The representations,
warranties and covenants contained in the Merger Agreement were made only for purposes of such agreement and as of a specific date, were solely for the benefit of the parties to such agreement (except as to certain indemnification obligations), are
subject to limitations agreed upon by the contracting parties, including being qualified by disclosure schedules, were made for the purposes of allocating contractual risk among the parties thereto instead of establishing these matters as facts, and
may be subject to standards of materiality applicable to the contracting parties that differ from those applicable to investors. Moreover, information concerning the subject matter of the representations and warranties may change after the date of
the Merger Agreement, which subsequent information may or may not be fully reflected in Diedrichs public disclosures. Investors are not third-party beneficiaries under the Merger Agreement and, in light of the foregoing reasons, should not
rely on the representations, warranties and covenants or any descriptions thereof as characterizations of the actual state of facts or condition of Diedrich, Peets or Purchaser or any of their respective subsidiaries or affiliates. Information
regarding Diedrich is provided in Diedrichs other SEC filings, which are available at
www.diedrich.com
and on the SECs website at
www.sec.gov
.
This Information Statement is being mailed to Diedrich stockholders in accordance with Section 14(f) of the Securities Exchange Act of 1934, as amended (the Exchange Act), and
Rule 14f-1 promulgated thereunder. The information set forth herein supplements certain information set forth in the Schedule 14D-9.
All information contained in this Information Statement concerning Peets, Purchaser, and the Peets Designees (as defined below) has been furnished to us by Peets, and Diedrich assumes no
responsibility for the accuracy of any such information.
DIRECTOR DESIGNEES OF PEETS
Peets has informed Diedrich that it will choose its designees to the Board from the executive officers and directors of Peets
and/or Purchaser listed in Schedule I of the Prospectus/Offer to Purchase, a copy of which is being mailed to stockholders of Diedrich. The information with respect to such individuals in Schedule I of the Prospectus/Offer to Purchase is
incorporated herein by reference. Peets has informed Diedrich that each of the executive officers and directors of Peets and/or Purchaser listed in Schedule I of the Prospectus/Offer to Purchase who may be chosen has consented to act as
a director of Diedrich, if so designated.
Based solely on the information set forth in Schedule I of the Prospectus/Offer to
Purchase filed by Peets, none of the executive officers or directors of Peets and/or Purchaser listed in Schedule I of the Prospectus/Offer to Purchase (1) is currently a director of, or holds any position with, Diedrich, or
(2) has a familial relationship
A-2
with any directors or executive officers of Diedrich. Diedrich has been advised that, to the best knowledge of Purchaser and Peets, none of the executive officers or directors of
Peets and/or Purchaser listed in Schedule I of the Prospectus/Offer to Purchase beneficially owns any equity securities (or rights to acquire such equity securities) of Diedrich and none have been involved in any transactions with Diedrich or
any of its directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the SEC.
Peets has informed Diedrich that, to the best of its knowledge, none of the executive officers or directors of Peets and/or Purchaser listed in Schedule I of the Prospectus/Offer to Purchase
has been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors) or has been a party to any judicial or administrative proceeding during the past five years (except for matters that were dismissed without sanction
or settlement) that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities
laws.
It is expected that Peets designees may assume office at any time following the purchase by Purchaser of shares
of Common Stock pursuant to the Offer, which purchase cannot be earlier than December 16, 2009, and that, upon assuming office, Peets designees will thereafter constitute at least a majority of the Board. It is currently not known which
of the current directors of Diedrich will resign, if any.
CERTAIN INFORMATION CONCERNING DIEDRICH
As of November 16, 2009, there were 5,726,813 shares of Common Stock outstanding. The shares of Common Stock are the only class of
Diedrich voting securities outstanding that is entitled to vote at a meeting of Diedrich stockholders. Each Share entitles the record holder to one vote on all matters submitted to a vote of the stockholders.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial ownership of Common Stock as of November 16, 2009 by:
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each person or group of affiliated persons who Diedrich knows beneficially owns more than 5% of Common Stock;
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each of Diedrichs directors and nominees;
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each of Diedrichs named executive officers; and
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all of Diedrichs directors and executive officers as a group.
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A-3
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 November 16, 2009.
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Name and Address of Beneficial Owner
(1)
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Amount and Nature of
Beneficial Ownership
(2)
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Percent of
Class (%)
(2)
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Sequoia Enterprises L.P.
450 Newport Center Drive, Suite 450
Newport Beach, CA 92660
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3,260,604
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(3)
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44.0
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WF Trust
450 Newport Center Drive, Suite 450
Newport Beach, CA 92660
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750,000
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(4)
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12.4
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Financial & Investment Management Group, LTD
111 Cass Street, Traverse City, MI 49684
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533,342
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(5)
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9.3
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D.C.H., L.P.
450 Newport Center Drive, Suite 450
Newport Beach, CA 92660
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419,268
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(6)
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7.3
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Clarus Capital Group Management LP
237 Park Avenue, Suite 900
New York, NY 10017
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287,733
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(7)
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5.0
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Paul C. Heeschen
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4,512,293
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(8)
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57.9
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Timothy J. Ryan
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60,000
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(9)
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1.0
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Gregory D. Palmer
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45,000
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(10)
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*
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James W. Stryker
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8,000
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(11)
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*
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J. Russell Phillips
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102,166
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(12)
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1.8
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Sean M. McCarthy
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25,000
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(13)
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*
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James L. Harris
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6,666
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(14)
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*
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All directors and executive officers as a group (9 persons)
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4,784,377
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(15)
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59.4
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(1)
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Unless otherwise indicated, the address of each person named in this table is c/o Diedrich Coffee, Inc., 28 Executive Park, Suite 200, Irvine, California 92614, Attn:
Corporate Secretary.
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(2)
|
Calculated pursuant to Rule 13d-3(d) under the Securities Exchange Act of 1934. Shares of Common Stock not outstanding that are subject to options or warrants
exercisable by the holder thereof within 60 days of November 16, 2009 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 of any other person. Unless otherwise noted, all shares listed as beneficially owned by a stockholder are actually outstanding.
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(3)
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Paul C. Heeschen, the chairman of Diedrichs 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 immediately exercisable and will expire on June 30, 2014, 1,367,000 shares subject to warrants that are immediately exercisable and will
expire on August 26, 2013 and 70,000 shares subject to warrants that are immediately exercisable and will expire on April 29, 2014.
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(4)
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Paul C. Heeschen, the chairman of Diedrichs board of directors, is the sole trustee with sole voting and investment power as to all shares beneficially owned by
the trust. Includes 300,000 shares subject to warrants that are immediately exercisable and will expire on August 26, 2013.
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A-4
(5)
|
According to the Schedule 13G filed on March 23, 2009, Financial & Investment Management Group, LTD (FIMG) is a registered investment advisor
that manages individual client accounts. All 533,342 shares represented in that filing have shared voting power and are held in accounts owned by the clients of FIMG. FIMG disclaims beneficial ownership of all such shares.
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(6)
|
Paul C. Heeschen, the chairman of Diedrichs 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.
|
(7)
|
According to the Schedule 13G filed on February 13, 2007, includes sole voting power relating to 235,713 and shared voting power relating to 52,020 shares
beneficially owned by Clarus Capital Group Management LP. The general partner to Clarus Capital Group Management LP is Clarus Capital Management, LLC. Ephraim Fields is the managing member of Clarus Capital Group Management, LLC and as such controls
Clarus Capital Group Management LP.
|
(8)
|
Includes (i) 3,260,604 shares beneficially owned by Sequoia Enterprises L.P. (Sequoia) (250,000 shares subject to warrants that are immediately
exercisable and will expire on June 30, 2014, 1,367,000 shares subject to warrants that are immediately exercisable and will expire on August 26, 2013 and 70,000 shares subject to warrants that are immediately exercisable and will expire
on April 29, 2014), and (ii) 419,268 shares beneficially owned by D.C.H., L.P. Mr. Heeschen is the sole general partner of each of these partnerships with voting and investment power as to all of such shares. Includes 750,000 shares
beneficially owned by WF Trust (300,000 shares subject to warrants that are immediately exercisable and will expire on August 26, 2013). Mr. Heeschen is the sole trustee with sole voting and investment power as to all shares beneficially
owned by the trust. Includes 82,421 shares owned personally by Mr. Heeschen (81,250 shares subject to options that are exercisable within 60 days), and 250 shares held by Paul C. Heeschen Revocable Living Trust.
|
(9)
|
Includes 60,000 shares subject to options that are exercisable within 60 days.
|
(10)
|
Includes 45,000 shares subject to options that are exercisable within 60 days.
|
(11)
|
Includes 7,500 shares subject to options that are exercisable within 60 days.
|
(12)
|
Includes 99,166 shares subject to options that are exercisable within 60 days.
|
(13)
|
Includes 20,000 shares subject to options that are exercisable within 60 days.
|
(14)
|
Includes 6,666 shares subject to options that are exercisable within 60 days.
|
(15)
|
Includes 2,329,914 shares subject to options and warrants that are exercisable within 60 days.
|
Equity Compensation Plan Information.
The following table summarizes the equity compensation plans under which Common Stock may be issued as of June 24, 2009.
|
|
|
|
|
|
|
|
|
|
Plan category
|
|
(a)
Number of securities to
be issued upon exercise
of outstanding options,
warrants and
rights
|
|
|
(b)
Weighted-average
exercise price of
outstanding options,
warrants and
rights
|
|
(c)
Number of securities
remaining available for
future issuance
under
equity compensation plans
(excluding securities
reflected in column (a))
|
|
Equity compensation plans approved by security holders
|
|
750,300
|
(1)
|
|
$
|
3.36
|
|
303,917
|
(2)
|
Equity compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
750,300
|
|
|
$
|
3.36
|
|
303,917
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents options to purchase shares of Common Stock issued under: the Diedrich Coffee, Inc. 2000 Equity Incentive Plan; the 2000 Non-Employee Directors Stock Option
Plan; the Amended and Restated Diedrich Coffee, Inc. 1996 Stock Incentive Plan; the Diedrich Coffee, Inc. 1996 Non-Employee Directors Stock Option Plan; and the J. Russell Phillips Stock Option Agreement.
|
(2)
|
Represents securities available for issuance under the Diedrich Coffee, Inc. 2000 Equity Incentive Plan.
|
A-5
DIRECTORS AND EXECUTIVE OFFICERS OF DIEDRICH
Information Regarding the Directors of Diedrich
Our directors are elected once a year at Diedrichs annual meeting of stockholders. Diedrichs bylaws provide that Diedrichs board of directors shall consist of between three and seven
directors with the precise number to be determined by resolution of Diedrichs board of directors. The authorized number of members of Diedrichs board of directors is currently five.
On December 19, 2008, Diedrichs board of directors appointed James W. Stryker as a director and a member of the audit committee.
Mr. Stryker currently serves as Chairman of the audit committee.
The following table lists Diedrichs directors and
provides their respective ages and titles as of November 16, 2009.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Title
|
|
Director Since
|
Paul C. Heeschen
(1)
|
|
52
|
|
Chairman of the Board of Directors
|
|
1996
|
Gregory D. Palmer
(2)(3)
|
|
53
|
|
Director
|
|
2006
|
J. Russell Phillips
|
|
60
|
|
Director, President and Chief Executive Officer
(4)
|
|
2007
|
Timothy J. Ryan
(1)(2)(3)
|
|
69
|
|
Vice Chairman of the Board of Directors
|
|
2005
|
James W. Stryker
(2)(3)
|
|
62
|
|
Director
|
|
2008
|
(1)
|
Member of the compensation committee of the board of directors.
|
(2)
|
Member of the audit committee of the board of directors.
|
(3)
|
Member of the special committee of the board of directors.
|
(4)
|
On October 22, 2009, Diedrich announced the initiation of a transition plan with respect to the position of chief executive officer of Diedrich, pursuant to which
the employment of J. Russell Phillips, as President and Chief Executive Officer of Diedrich, will terminate.
|
There are no family relationships among any of the directors or executive officers of Diedrich. The principal occupation for at least the last five years of each director, as well as other information, is set forth below.
Paul C. Heeschen
joined Diedrichs board of directors in January 1996. In February 2001, the board of directors elected him as
chairman. Since 1995, Mr. Heeschen has been a principal of Heeschen & Associates, a private investment firm. He is also the sole general partner of Sequoia, WF Trust, D.C.H., L.P. and a trustee of the Paul C. Heeschen Revocable Living
Trust, each of which are stockholders of Diedrich. Mr. Heeschen serves on the board of directors of PC Mall, Inc., a publicly traded supplier of technology solutions for business, government and educational institutions, as well as consumers.
Gregory D. Palmer
joined Diedrichs board of directors in September 2006. From January 1998 to June 2006,
Mr. Palmer was the president and chief executive officer of RemedyTemp, Inc., a staffing services company. Mr. Palmer also served as a director of RemedyTemp, Inc. from January 2001 to June 2006.
J. Russell Phillips
joined Diedrichs board of directors on April 18, 2007 through appointment by Diedrichs board of
directors. On February 7, 2008, Mr. Phillips was appointed Diedrichs Chief Executive Officer. From 2004 to 2008, Mr. Phillips served as the managing principal of Transom Partners, an executive consultancy group that facilitates
and develops new strategies with CEOs and executive teams. From 1994 to 2004, Mr. Phillips served as chief executive officer and president of SHURflo, the leading manufacturer of high quality precision pumps, controls, motors and systems
serving the food service, industrial and RV/marine markets. From 1972 to 1994, Mr. Phillips worked for several pump companies in various managerial capacities.
A-6
Timothy J. Ryan
joined Diedrichs board of directors in October 2005. Effective
April 8, 2009, Mr. Ryan was appointed vice chairman of the board. Mr. Ryan previously served as Diedrichs chief executive officer from November 1997 to October 2000. Since April 1999, he has been a director of Rubios
Restaurants, Inc., a publicly traded fast-casual fresh Mexican grill restaurant chain. From December 1995 to December 1996, Mr. Ryan served as president and chief operating officer of Sizzler U.S.A., a division of Sizzler International, Inc.,
and as a director of Sizzler International, Inc., of which he also served as a senior vice president. From November 1988 to December 1993, Mr. Ryan served as senior vice president of marketing at Taco Bell Worldwide and, from December 1993 to
December 1995, he served as senior vice president of Taco Bells Casual Dining Division.
James W. Stryker
joined
Diedrichs board of directors in December 2008 through appointment by Diedrichs board of directors and currently serves as chairman of the audit committee. From May 2006 to April 2008, Mr. Stryker was the executive vice president and
chief financial officer of Perkins & Marie Callenders Inc., a chain of two restaurant concepts. From October 2001 to April 2006, Mr. Stryker served as executive vice president, chief financial officer of Wilshire Restaurant
Group, Inc. (dba Marie Callenders). From March 1999 to October 2001, Mr. Stryker was senior vice president, chief financial officer of The Johnny Rockets Group, Inc. From January 1996 to March 1999 Mr. Stryker was Vice President,
Finance and chief financial officer of Rubios Restaurants, Inc. From 1994 to December 1995, Mr. Stryker was vice president, Finance and Administration of American Restaurant Group, Inc. Prior to that, Mr. Stryker spent sixteen years
with El Torito Restaurants, Inc. including eight years as executive vice president and chief financial officer.
Information Regarding
Executive Officers of Diedrich
Diedrichs executive officers as of November 16, 2009 are as follows and will serve in
such capacities until his or her successor is duly appointed or until his or her resignation or removal:
|
|
|
|
|
Name
|
|
Age
|
|
Position(s) Held
|
J. Russell Phillips
(1)
|
|
60
|
|
Director, President and Chief Executive Officer
|
Sean M. McCarthy
|
|
48
|
|
Chief Financial Officer and Secretary
|
James L. Harris
|
|
46
|
|
Vice PresidentSales
|
Dana A. King
|
|
46
|
|
Vice PresidentInformation Services & Customer Fulfillment
|
(1)
|
On October 22, 2009, Diedrich announced the initiation of a transition plan with respect to the position of chief executive officer of Diedrich, pursuant to which
the employment of J. Russell Phillips, as president and chief executive officer of Diedrich, will terminate.
|
The following is information regarding those persons currently serving as executive officers of Diedrich Coffee:
J. Russell Phillips
became Diedrichs chief executive officer on February 7, 2008. See Information Regarding the Directors of Diedrich for information relating to Mr. Phillips.
Sean M. McCarthy
became Diedrichs chief financial officer and secretary in January 2006, after serving as vice president,
controller of Diedrich since April 2004. From February 2003 to April 2004, Mr. McCarthy was vice president of ASM Hospitality Group, a privately owned consulting company. From June 1998 to February 2003, Mr. McCarthy served in various
financial capacities for FRD Acquisition Company, Inc. (d/b/a. Cocos & Carrows Restaurants), a subsidiary of Advantica Restaurants Group, Inc., a publicly traded food service company, first as manager, field finance, then manager,
financial planning & analysis, and finally as director, finance. From May 1997 to June 1998, Mr. McCarthy was a business analyst for Taco Bell, Inc. From August 1986 through May 1997, Mr. McCarthy served in various accounting and
financial capacities for El Torito Restaurants, a subsidiary of Family Restaurants, Inc. Mr. McCarthy earned a B.S. degree in business management from Pepperdine University and a masters degree in business administration from the
University of Southern California.
A-7
James L. Harris
joined Diedrich in June 2008 as vice presidentsales. From late
2007 to 2008, Mr. Harris was with Hansens Beverage Company, a publicly owned company and manufacturer and seller of premium beverages and Monster Energy Drink, as the vice president of international sales. From 1997 to 2007,
Mr. Harris was with FIJI Water, LLC, a privately owned manufacturer and seller of premium-bottled water in a variety of capacities ultimately serving as the senior vice president of sales, western region. From 1991 to 1997, Mr. Harris was
with Haagen-Dazs Ice Cream first as an account executive and ultimately as a division manager. From 1985 to 1991, Mr. Harris worked for Pepsi-Cola Bottling Group working his way up to account executive and relocating to Southern California.
Dana A. King
became Diedrichs vice president-information services & customer fulfillment effective
January 2009 after serving as vice president-information and customer services. Ms. King joined Diedrich in November 2005 as the Director of Information Services. From 2001 until joining Diedrich, Ms. King led the Application Development
group at Del Taco, a Mexican quick-service restaurant chain. From 1996 until 2000, Ms. King worked for Professional Computing, Inc. as a programmer/analyst before being promoted to IS Assistant Manager. After PCI was acquired by IKON in 1997,
she was promoted to the Director of IS, and, in 1999 was promoted to VP of IS and Managing Consultant and led a team consisting of developers, engineers and project managers in three locations across two states. After leaving IKON, Ms. King ran
her own consulting business. Ms. King holds a B.S. degree in Business with an emphasis in Computer Information Services from California State Polytechnic University, Pomona.
Review of Related Person Transactions
Diedrichs audit committee
reviews all relationships, transactions and arrangements in which Diedrich and any director, greater than 5% beneficial holder of Common Stock or any immediate family member of any of the foregoing are participants (Interested
Transactions) to determine whether such persons have a direct or indirect material interest and whether to approve, disapprove or ratify any Interested Transactions. Diedrich has written policies and procedures for monitoring and seeking
approval in connection with any Interested Transaction. The chair of the audit committee is authorized to approve or ratify any Interested Transactions with a related party in which the aggregate amount involved is expected to be less than $100,000.
Diedrichs audit committee reviews, approves (or disapproves) or ratifies Interested Transactions. In considering whether to approve or ratify an Interested Transaction, the audit committee takes into account, among other factors it deems
appropriate, whether the Interested Transaction is on terms no less favorable than terms generally available to an unaffiliated third party under the same or similar terms and conditions and to the extent of the related persons interest in the
Interested Transaction. In addition, Diedrichs written policy provides that no director shall participate in any discussion or approval of an Interested Transaction for which he or she is a related party, except that the director shall provide
all material information concerning the Interested Transaction to the audit committee.
Certain Relationships and Related Transactions
2009 Sequoia Warrant.
In connection with the extension of the Note Purchase Agreement, on April 29, 2009, Diedrich
issued to Sequoia a warrant to purchase 70,000 shares of common stock of Diedrich at an exercise price of $7.40 per share (the 2009 Sequoia Warrant), which was the closing price of Diedrichs common stock on such date. The fair
value of these warrants was approximately $440,000 which was immediately recorded as interest expense. The 2009 Sequoia Warrant is exercisable by Sequoia, in whole or in part, at any time or from time to time, prior to April 29, 2014. The 2009
Sequoia Warrant is not eligible for cashless exercise, but Diedrich is obligated to cause the common stock issued upon exercise of the 2009 Sequoia Warrant to be registered with the SEC and applicable state governmental authorities and to be listed
on the stock exchange on which Diedrichs stock is traded at the time of exercise, in each case at Diedrichs expense.
Consistent with Diedrichs procedures for approving related party transactions, the audit committee of the board of directors, comprised of Gregory D. Palmer, Timothy J. Ryan and James W. Stryker, authorized and approved the 2009
Sequoia Warrant and the transactions contemplated thereby.
A-8
Waiver Agreement
. On September 17, 2008, Diedrich was not in compliance with
covenants under the Note Purchase Agreement and the Loan Agreement. On November 10, 2008, Diedrich entered into a Waiver Agreement, Amendment No. 1 to 2008 Warrant and Amendment No. 2 to 2001 Warrant (the Waiver Agreement)
with Sequoia. Pursuant to the Waiver Agreement, Sequoia waived the requirement set forth in the Note Purchase Agreement and the Loan Agreement with Sequoia (collectively, the Loan Agreements) that Diedrich shall not permit, as of the end
of any fiscal quarter, the ratio of Diedrichs Indebtedness on a consolidated basis to Effective Tangible Net Worth to be more than 1.75:1.00 (as such terms are defined in the Loan Agreements). Such waiver is effective until the earlier of
(a) October 31, 2009 and (b) the end of any fiscal quarter at which the foregoing ratio is greater than 2.10:1.00. As part of the waiver and amendment, the exercise price of the 2008 Sequoia Warrant and the 2001 Sequoia Warrants for
250,000 shares of common stock was reduced to $1.65 from $2.00 per share. In consideration of the foregoing waiver, (a) the interest rates under the Note Purchase Agreement and the Term Loan were set at LIBOR plus 9.3% for any period during
which the ratio of indebtedness of Diedrich on a consolidated basis to effective tangible net worth is greater than 1.75:1.00 and (b) the interest rates under the Note Purchase Agreement and the Term Loan were set at LIBOR plus 6.30% for any
other period. Diedrich is in compliance with all debt covenants as of June 24, 2009.
Consistent with Diedrichs
procedures for approving related party transactions, the audit committee of the board of directors, as of November 2008, comprised of Gregory D. Palmer and Timothy J. Ryan, authorized and approved the Waiver Agreement and the transactions
contemplated thereby.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16 of the Securities Exchange Act of 1934 requires Diedrichs directors and executive officers and persons who own more
than ten percent of a registered class of Diedrichs equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities. These Section 16 reporting persons
are required by SEC regulations to furnish us with copies of all Section 16 forms they file.
To Diedrichs
knowledge, based solely on a review of the copies of such reports furnished to us and written representations from Section 16 reporting persons, Diedrich believes that during Diedrichs fiscal year ended June 24, 2009 all
Section 16 reporting persons complied with all applicable filing requirements.
GOVERNANCE PRINCIPLES
Board Meetings
During
Diedrichs fiscal year ended June 24, 2009, Diedrichs board of directors met five times, the audit committee met four times and the compensation committee met once. Each incumbent director attended at least 75% of the aggregate of
(1) the total number of meetings of Diedrichs board of directors and (2) the total number of meetings held by all committees of the board on which he served (during the periods that he served).
Director Independence
Diedrichs board of directors has affirmatively determined that four of Diedrichs five directors are independent within the meaning of Nasdaq Marketplace Rule 4200(a)(15). Diedrichs independent directors are Paul C.
Heeschen, Gregory D. Palmer, Timothy J. Ryan and James W. Stryker. During its review, the board of directors considered transactions and relationships between each director or any member of his or her immediate family and Diedrich Coffee and its
subsidiaries and affiliates.
A-9
Committees of the Board of Directors
Diedrich has two standing committees: an audit committee and a compensation committee. Each member of the audit and compensation committees
of the board of directors has been determined by Diedrichs board of directors to be independent. Both committees operate under written charters that are available for viewing on the Investor Services segment of Diedrichs
website:
www.diedrich.com
.
Audit Committee.
It is the responsibility of the audit committee to oversee
Diedrichs accounting and financial reporting processes and the audits of Diedrichs financial statements. In addition, the audit committee assists the board of directors in its oversight of Diedrichs compliance with legal and
regulatory requirements. The specific duties of the audit committee include monitoring the integrity of Diedrichs financial process and systems of internal controls regarding finance, accounting and legal compliance; selecting Diedrichs
independent registered public accounting firm; monitoring the independence and performance of Diedrichs independent registered public accounting firm; and facilitating communication among the independent registered public accounting firm,
Diedrichs management and Diedrichs board of directors. The audit committee has the authority to conduct any investigation appropriate to fulfill its responsibilities and has direct access to all of Diedrichs employees and the
independent registered public accounting firm. The audit committee also has the authority to retain, at Diedrichs expense and without further approval of the board of directors, special legal, accounting or other consultants or experts that it
deems necessary in the performance of its duties.
The audit committee met four times during the 2009 fiscal year and
otherwise accomplished its business without formal meetings. The audit committee was composed of Mr. Palmer and Mr. Ryan until the addition of Mr. Stryker effective December 19, 2008. Diedrichs board of directors has
determined that each of Mr. Palmer, Mr. Ryan and Mr. Stryker is independent within the meaning of the enhanced independence standards contained in Nasdaq Marketplace Rule 4350(d) and regulations adopted by the SEC that relate
specifically to members of audit committees. Diedrichs board of directors has also determined that Mr. Ryan is qualified to serve as Diedrichs audit committee financial expert, as that term is defined in
Item 407(d)(5) of Regulation S-K.
Effective February 7, 2008, J. Russell Phillips resigned from Diedrichs
audit committee due to his appointment as President and Chief Executive Officer of Diedrich. Although Mr. Phillips continues to serve as a member of Diedrichs board of directors, due to his departure from the audit committee, Diedrich had
only two directors eligible to serve on Diedrichs audit committee. Nasdaq Rule 4350(d)(2)(A) requires that a registrants audit committee must consist of at least three independent directors. Diedrich provided Nasdaq with written notice
of this matter on February 7, 2008 and had until the earlier of Diedrichs next annual meeting of stockholders or February 7, 2009 to regain compliance with Nasdaq Rule 4350(d)(2)(A). On December 19, 2008 the board of directors
appointed James W. Stryker as a director and member of the audit committee, resulting in Diedrichs audit committee being comprised of three independent directors.
Compensation Committee.
It is the responsibility of the compensation committee to assist the board of directors in discharging the board of directors responsibilities regarding the
compensation of Diedrichs employees and directors. The specific duties of the compensation committee include determining the corporate goals and objectives relevant to executive compensation; evaluating Diedrichs executive officers
performance in light of such goals and objectives; setting or making recommendations to the board of directors regarding compensation levels based upon such evaluations; administering Diedrichs incentive compensation plans, including
Diedrichs equity-based incentive plans; and making recommendations to the board of directors regarding Diedrichs overall compensation structure, policies and programs.
The compensation committee met once during fiscal year 2009 and otherwise accomplished its business without formal meetings during the 2009
fiscal year. During the 2009 fiscal year, the compensation committee was composed of two members: Mr. Heeschen and Mr. Ryan.
A-10
Corporate Governance Guidelines
Diedrichs board of directors has adopted corporate governance guidelines that set forth several important principles regarding the
activities of the board of directors and its committees as well as other matters. Diedrichs corporate governance guidelines are available for viewing on the Investor Services segment of Diedrichs website:
www.diedrich.com
.
Meetings of Non-Management Directors
The non-management members of the board of directors regularly meet without any members of management present during regularly scheduled
executive sessions after each board meeting.
Code of Conduct
Diedrich has adopted a code of conduct that describes the ethical and legal responsibilities of all of Diedrichs employees and, to the
extent applicable, the members of Diedrichs board of directors. This code includes, but is not limited to, the requirements of the Sarbanes-Oxley Act of 2002 pertaining to codes of ethics for chief executives and senior financial and
accounting officers. Diedrichs board of directors has reviewed and approved this code of conduct. Diedrichs employees agree in writing to comply with the code at commencement of employment and periodically thereafter. Diedrichs
employees are encouraged to report suspected violations of the code through various means, and they may do so anonymously. Diedrichs code of conduct is available for viewing on the Investor Services segment of Diedrichs
website:
www.diedrich.com
. If Diedrich makes substantive amendments to the code or grant any waiver, including any implicit waiver, to Diedrichs principal executive, financial or accounting officer, or persons performing similar
functions, Diedrich will disclose the nature of such amendment or waiver on Diedrichs website and/or in a report on Form 8-K in accordance with applicable rules and regulations.
Communications With the Board of Directors
Diedrichs stockholders
may communicate with Diedrichs board of directors, a committee of Diedrichs board of directors or a director by sending a letter addressed to the board of directors, a committee or a director c/o Corporate Secretary, Diedrich
Coffee, Inc., 28 Executive Park, Suite 200, Irvine, CA 92614. All communications will be compiled by Diedrichs Corporate Secretary and forwarded to the board, the committee or the directors, as appropriate.
Director Nominations
The
board of directors does not have a standing nominating committee. Consistent with the corporate governance guidelines adopted by the board, the directors of the board, all of whom other than Mr. Phillips are currently independent, work together
to (i) identify qualified individuals to become directors, (ii) to determine the composition of the board of directors and its committees, (iii) and to monitor and assess the effectiveness of the board of directors and its committees.
With respect to the nominating process, the directors identify, screen and nominate director candidates for election by Diedrichs stockholders; review director candidates recommended by Diedrichs stockholders; assist in attracting
qualified director candidates to serve on the board; monitor the independence of current directors and nominees; and monitor and assess the relationship between the board of directors and Diedrichs management with respect to the boards
ability to function independently of management. The board of directors believes that a standing nominating committee is not necessary because there are relatively few directors on the board, which facilitates close coordination of the nomination
process.
The board of directors regularly assesses the appropriate size of the board and whether any vacancies on the board
are expected due to retirement or otherwise. In the event that vacancies are anticipated or otherwise arise, the board uses a variety of methods to identify and evaluate director candidates. Candidates may come to the attention of the board through
current directors, professional search firms, stockholders or other persons. Once
A-11
the board has identified a prospective nominee, the board evaluates the prospective nominee in the context of the then-current constitution of the board and considers a number of factors,
including the prospective nominees business, finance and financial reporting experience, as well as attributes that would contribute to an effective board of directors. The board of directors seeks to identify nominees who possess a wide range
of experience, skills, areas of expertise, knowledge and business judgment. Successful nominees must have a history of superior performance or accomplishments in their professional undertakings and the highest personal and professional ethics and
values. The board of directors does not evaluate stockholder nominees differently from any other nominee.
Diedrichs
board of directors will consider stockholder nominations for directors if Diedrich receives timely written notice, in proper form, of the intent to make a nomination at a meeting of stockholders. To be timely, the notice must be received within the
time frame discussed in Diedrichs definitive proxy statement on Schedule 14A filed on December 23, 2008 under the heading Stockholder Proposals. To be in proper form, the notice must, among other things, include each
nominees written consent to serve as a director if elected, a description of all arrangements or understandings between the nominating stockholder and each nominee, and such additional information about the nominating stockholder and each
nominee that may be required by applicable securities laws. Additional requirements respecting stockholder proposals are described in Diedrichs definitive proxy statement on Schedule 14A filed on December 23, 2008 under the heading
Stockholder Proposals.
Director Attendance at Annual Meetings
Diedrichs board of directors has adopted a policy that encourages Diedrichs directors to attend Diedrichs annual
stockholder meetings. Diedrichs last annual meeting of stockholders was attended by all directors then incumbent.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
Summary Compensation Table
The following table sets forth compensation earned or paid during the fiscal year ended June 24, 2009 by Diedrichs Chief Executive
Officer and two other most highly compensated executive officers who were serving as Diedrichs executive officers at the end of the last completed fiscal year (collectively, the named executive officers).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and Principal Position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)
(1)
|
|
Option
Awards
($)
(2)
|
|
Non-equity
Incentive Plan
Compensation
($)
(3)
|
|
All Other
Compensation
($)
|
|
|
Total ($)
|
J. Russell Phillips, President and Chief Executive Officer
(4)
|
|
2009
|
|
$
|
275,000
|
|
$
|
62,700
|
|
$
|
203,890
|
|
$
|
165,000
|
|
$
|
720
|
(5)
|
|
$
|
707,310
|
|
|
2008
|
|
|
105,769
|
|
|
|
|
|
99,908
|
|
|
|
|
|
26,917
|
(6)
|
|
|
232,594
|
Sean M. McCarthy, Chief Financial Officer and Secretary
|
|
2009
|
|
|
225,000
|
|
|
90,000
|
|
|
|
|
|
90,000
|
|
|
3,016
|
(7)
|
|
|
408,016
|
|
|
2008
|
|
|
214,425
|
|
|
|
|
|
|
|
|
|
|
|
4,014
|
(8)
|
|
|
218,439
|
James L. Harris, Vice PresidentSales
|
|
2009
|
|
|
180,000
|
|
|
|
|
|
11,499
|
|
|
54,000
|
|
|
15,190
|
(9)
|
|
|
260,689
|
|
|
2008
|
|
|
2,077
|
|
|
|
|
|
|
|
|
|
|
|
462
|
(10)
|
|
|
2,539
|
(1)
|
Diedrich paid discretionary bonuses in the amounts identified in this column for fiscal year 2009 to the Chief Executive Officer and Chief Financial Officer for the
completion of the Transaction with Praise International North America, Inc. pursuant to which Diedrich sold the Gloria Jeans U.S. franchise and retail operations.
|
A-12
(2)
|
This column represents the dollar amount recognized for financial statement reporting purposes with respect to the 2009 and 2008 fiscal years for the fair value of
stock options for each of the named executive officers in accordance with SFAS No. 123R. Pursuant to rules of the SEC, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. For additional
information on the valuation assumptions with respect to the 2009 and 2008 grants, refer to Note 1 to the consolidated financial statements of Diedrichs Annual Report on Form 10-K filed with the SEC on September 22, 2009. These amounts
reflect Diedrichs accounting expense for these awards, and do not correspond to the actual value that may be received by the named executive officers.
|
(3)
|
Amounts identified in this column for fiscal year 2009 were earned by the Chief Executive Officer and Chief Financial Officer based on achievement of certain targets of
Diedrichs financial performance. The amount identified for fiscal year 2009 earned by the Vice President of Sales was primarily based on specific sales and profitability targets.
|
(4)
|
Mr. Phillips became Diedrichs President and Chief Executive Officer in February 2008. Mr. Phillips annual base salary is $275,000.
|
(5)
|
Consists of health fitness membership reimbursement in the amount of $720.
|
(6)
|
Consists of a signing bonus payment in the amount of $25,000 and health fitness membership reimbursement in the amount of $1,917.
|
(7)
|
Consists of 401(k) matching contributions by Diedrich in the amount of $2,271 and health fitness membership reimbursement in the amount of $745.
|
(8)
|
Consists of 401(k) matching contributions by Diedrich in the amount of $2,077 and health fitness membership reimbursement in the amount of $1,937.
|
(9)
|
Consists of auto allowance in the amount of $12,000, 401(k) matching contributions by Diedrich in the amount of $138 and health fitness membership reimbursement in the
amount of $3,052.
|
(10)
|
Consists of auto allowance in the amount of $462.
|
Employment Agreements with Current Named Executive Officers
J. Russell Phillips
. Effective
February 7, 2008, Mr. Phillips entered into an employment agreement with us appointing him President and Chief Executive Officer. Mr. Phillipss employment agreement provides for compensation consisting of, among other things,
(i) an annual base salary of $275,000 and (ii) a grant of options to purchase 275,000 shares of Common Stock pursuant to a Stock Option Agreement, described below. In addition, Mr. Phillips is eligible to receive (i) a bonus
equal to up to 75% of his annual base salary, 80% of which would be paid upon achievement of certain defined objectives and 20% of which would be paid based upon the discretion of Diedrichs compensation committee and (ii) benefits under
all other benefit plans generally provided to Diedrichs other executive officers.
Mr. Phillipss options
consist of non-qualified stock options to purchase up to 275,000 shares of Common Stock, which vest over three (3) years, with one-third (1/3) of the options vesting on each anniversary of the effective date until all options have vested.
The options will fully vest and become immediately exercisable upon a change in control (as such term is defined in Mr. Phillips employment agreement). Unless an earlier termination occurs, the options will expire ten years after the
effective date of the Stock Option Agreement.
Sean M. McCarthy
. On January 1, 2006, Mr. McCarthy was
promoted to Chief Financial Officer. Effective May 1, 2008, Diedrichs compensation committee approved the following compensatory arrangements for Mr. McCarthy: (i) annual base salary of $225,000; (ii) an annual bonus of up
to 40% of his annual base salary based upon objective performance criteria; (iii) a severance payment equal to nine months of annual base salary if Mr. McCarthy is terminated by us without cause, provided that he executes customary
releases of us; and (iv) in the event of a change in control, a stock appreciation payment upon consummation of the change in control transaction provided that he executes a general release of us.
A-13
Change in Control Agreements
Potential Payments Upon Termination or Change in Control
Some of Diedrichs officers are entitled to receive certain payments upon a change in control under individual employment agreements or
may be entitled to receive certain payments under severance agreements. In addition, Diedrichs board of directors may in its discretion accelerate the vesting of options upon a change in control.
Upon a termination for cause, officers are not entitled to receive compensation after such termination and their options terminate upon such
termination. In the event of an involuntary not for cause termination, termination following a change in control and in the event of disability of the executive officer, certain executive officers may be entitled to receive compensation or payments
upon such termination as described below. The amounts shown below assume that such termination was effective as of June 24, 2009 and use the closing price of Common Stock as of June 24, 2009 ($16.93), and thus include amounts earned
through such time. These figures are estimates of the amounts that would be paid out to the executive officers upon their termination. The actual amounts to be paid can only be determined at the time of such executive officers separation from
Diedrich.
J. Russell Phillips.
In the event of a change in control (as such term is defined in Mr. Phillips
Employment Agreement), Mr. Phillips will be entitled to receive, upon timely execution of a general release of Diedrich, (i) a payment in cash equal to 100% of the base salary and (ii) certain benefits as set forth in the Stock
Option Agreement. As described above, upon a change in control, his options will fully vest and become immediately exercisable.
Sean M. McCarthy.
As described above, (i) Mr. McCarthy will be entitled to a severance payment equal to nine months of annual base salary if he is terminated by Diedrich without cause, provided that he executes customary
release of Diedrich; and (ii) Mr. McCarthy will also be entitled to a stock appreciation payment upon the consummation of a change in control transaction, provided that he executes a general release of Diedrich. For the foregoing purpose,
a change in control transaction is defined as a transaction that results in a non-affiliate of Diedrich acquiring 90% of the outstanding shares of Common Stock. The stock appreciation payment payable to Mr. McCarthy upon the consummation of a change
in control transaction is equal to the product of (i) the difference determined by subtracting $5.00 from the per share price at which at least 90% of the outstanding shares of Common Stock is acquired, multiplied by (ii) 100,000.
Outstanding Equity Awards at the 2009 Fiscal Year End
The following table sets forth information relating to stock options held by the named executive officers as of June 24, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Option Awards
|
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
|
|
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
|
|
|
Option
Exercise Price
($)
|
|
Option
Expiration
Date
|
J. Russell Phillips
|
|
7,500
|
(1)
|
|
|
|
|
$
|
3.83
|
|
4/18/2017
|
|
|
91,666
|
(2)
|
|
183,334
|
(2)
|
|
|
3.23
|
|
2/07/2018
|
Sean M. McCarthy
|
|
20,000
|
(2)
|
|
|
|
|
|
3.69
|
|
4/26/2014
|
James L. Harris
|
|
|
|
|
20,000
|
(2)
|
|
|
2.32
|
|
9/17/2018
|
(1)
|
These options vest over a two-year period at a rate of one-half per year.
|
(2)
|
These options vest over a three-year period at a rate of one-third per year.
|
A-14
Director Compensation
Directors who are also Diedrich employees receive no extra compensation for their service on the Board. Non-employee directors receive an annual fee of $12,000, which is paid quarterly. In addition,
non-employee directors earn fees of $1,000 per Board meeting attended in person, $500 per Board meeting attended telephonically and $500 per committee meeting attended, whether in person or telephonically. Non-employee directors are also reimbursed
for out-of-pocket expenses incurred in connection with attending meetings of the Board and its committees. In the fiscal year ended June 24, 2009, Mr. Heeschen earned $22,000, Mr. Palmer earned $23,500, Mr. Ryan earned $50,062
and Mr. Stryker earned $10,500 pursuant to these arrangements. In addition, non-employee directors are eligible to receive stock option grants under the Diedrich Coffee, Inc. 2000 Equity Incentive Plan (the 2000 Equity Incentive
Plan). In the fiscal year ended June 24, 2009, each person who was then a non-employee director was granted 15,000 stock options under the 2000 Equity Incentive Plan.
Under the 2000 Equity Incentive Plan, each non-employee director automatically receives, upon first becoming a director, a one-time grant of
an option to purchase up to 15,000 shares of Common Stock. The initial options vest and become exercisable with respect to 50% of the underlying shares upon the earlier of the first anniversary of the grant date or immediately before the first
annual meeting of stockholders following the grant date, provided that the recipient has remained a non-employee director for the entire period from the grant date to such earlier date. The remaining 50% of the underlying shares vest upon the
earlier of the second anniversary of the grant date or immediately before the second annual meeting of stockholders following the grant date, provided that the recipient has remained a non-employee director for the entire period from the grant date
to such date. In addition to the initial grant, each non-employee director also automatically receives, upon re-election to the Board, an additional option to purchase up to 15,000 shares of Common Stock. These additional options vest and become
exercisable upon the earlier of the first anniversary of the grant date or immediately before the annual meeting of stockholders following the grant date, provided that 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.
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 the Common Stock on the date of grant. The 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 24, 2009, an aggregate of 185,000 options to purchase shares of Common Stock were issued to non-employee directors under the 2000 Equity Incentive Plan.
Director Compensation Table
The following table shows the 2009 fiscal year compensation for Diedrichs non-employee directors.
|
|
|
|
|
|
|
|
|
|
Name
|
|
Fees Earned
or Paid in
Cash ($)
|
|
Option Awards ($)
(1)
|
|
Total ($)
|
Paul C. Heeschen.
|
|
$
|
22,000
|
|
$
|
381,900
|
|
$
|
403,900
|
Gregory D. Palmer
|
|
$
|
23,500
|
|
$
|
381,900
|
|
$
|
405,400
|
Timothy J. Ryan
(2)
|
|
$
|
50,062
|
|
$
|
2,844,250
|
|
$
|
2,894,312
|
James W. Stryker
|
|
$
|
10,500
|
|
$
|
766,950
|
|
$
|
777,450
|
(1)
|
This column represents the dollar amount recognized for financial statement reporting purposes with respect to the 2009 fiscal year for the fair value of stock options
for each of the directors in accordance with SFAS No. 123R. The amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. For additional information on the valuation assumptions with respect to
the 2009 grants, refer to Note 1 to the consolidated financial statements of Diedrichs Annual Report on Form 10-K, filed on September 22, 2009.
|
(2)
|
Fees earned include compensation as Vice Chairman of the board in the amount of $27,562.
|
A-15
Report of the Audit Committee of the Board of Directors
The audit committee reviews Diedrichs financial reporting process on behalf of the board of directors. Diedrichs management has
the primary responsibility for the financial statements and the reporting process. Diedrichs independent registered public accounting firm is responsible for expressing an opinion on the conformity of Diedrichs audited financial
statements to generally accepted accounting principles.
In this context, the audit committee has reviewed and discussed the
audited financial statements with management and the independent registered public accounting firm. The audit committee discussed with the independent registered public accounting firm the matters required to be discussed by Statement on Auditing
Standards No. 114, The Auditors Communication with those charged with governance and SEC Regulation S-X, Rule 2-07, Communication with Audit Committees. In addition, the audit committee received from the
independent registered public accounting firm the written disclosures required by Public Company Accounting Oversight Board Rule 3526 (Communications with Audit Committees Concerning Independence) and discussed with the independent registered public
accounting firm their independence from Diedrich and its management. The audit committee has also considered whether the independent registered public accounting firms provision of non-audit services to us is compatible with the registered
public accounting firms independence.
In reliance on the reviews and discussions referred to above, the audit committee
recommended to Diedrichs board of directors, and the board has approved, that the audited financial statements be included in Diedrichs Annual Report on Form 10-K for the fiscal year ended June 24, 2009, for filing with the SEC.
|
Respectfully submitted,
|
|
James W. Stryker, Chairman
|
Gregory D. Palmer
|
Timothy J. Ryan
|
Legal Proceedings
There are no material proceedings to which any director, officer or affiliate of Diedrich, any owner of record or beneficially of more than
five percent of any class of voting securities of Diedrich, or any associate of any such director, officer, affiliate of Diedrich, or security holder is a party adverse to Diedrich or has a material interest adverse to Diedrich.
Incorporation by Reference
In Diedrichs filings with the SEC, information is sometimes incorporated by reference. This means that Diedrich is referring Diedrich stockholders to information that has previously been filed with the SEC, which
information should be considered as part of the filing that Diedrich stockholders are reading. Based on SEC regulations, the report of the audit committee, above, is not specifically incorporated by reference into any other filings that Diedrich
makes with the SEC.
A-16
Annex B
November 2, 2009
The Special Committee of the Board of Directors
Diedrich Coffee, Inc.
28 Executive Park, Suite 200
Irvine, CA 92614
Dear Members of the Special Committee:
We understand that Peets Coffee & Tea, Inc. (the Acquiror), Marty Acquisition Sub, Inc., a wholly-owned subsidiary of Acquiror (Sub), and Diedrich Coffee, Inc. (the
Company), propose to enter into the Merger Agreement (as defined below) pursuant to which, among other things, (i) Sub will commence an offer to exchange any and all of the shares of the outstanding common stock, par value $0.01 per
share, of the Company (Company Common Stock and, such exchange offer, the Offer) for (A) a number of shares of common stock, no par value, of the Acquiror (Acquiror Common Stock) equal to the quotient of
(1) $8.67 and (2) the volume weighted average price of one share of Acquiror Common Stock as reported on the Nasdaq Capital Market for the five trading days ending immediately prior to, and excluding, the date on which Sub accepts any
shares of Company Common Stock for exchange pursuant to the Offer; provided, that in no event will such quotient exceed 0.306 (such number of shares, the Stock Consideration), and (B) $17.33 in cash (such cash amount, the Cash
Consideration and, together with the Stock Consideration, the Consideration), and (ii) subsequent to the Offer, Sub will be merged with and into the Company (the Merger and, together with the Offer, the
Transaction) and that, in connection with the Merger, each outstanding share of Company Common Stock not previously exchanged in the Offer will be converted into the right to receive the Consideration subject to certain adjustments and
exceptions as provided for in the Merger Agreement. Unaffiliated Stockholders shall be defined as the holders of the Company Common Stock except for Paul C. Heeschen and his affiliates, the Acquiror and Sub.
You have requested that Houlihan Lokey Howard & Zukin Capital, Inc. (Houlihan Lokey) provide an opinion (the
Opinion) to the Special Committee (the Committee) of the Board of Directors of the Company as to whether, as of the date hereof, the Consideration to be received by the Unaffiliated Stockholders of the Company, taken in the
aggregate, in the Transaction pursuant to the Merger Agreement is fair to such Unaffiliated Stockholders from a financial point of view.
In connection with this Opinion, we have made such reviews, analyses and inquiries as we have deemed necessary and appropriate under the circumstances. Among other things, we have:
|
1.
|
reviewed the following agreements and documents:
|
|
a.
|
Draft dated November 2
,
2009 of the Agreement and Plan of Merger by and among Peets Coffee & Tea Inc., Inc., Marty Acquisition Sub, Inc. and
Diedrich Coffee, Inc. (the Merger Agreement);
|
|
b.
|
Drafts dated November 1, 2009 of the forms of Stockholder Agreements by and between the Acquiror and certain stockholders to be named therein;
|
|
2.
|
reviewed certain publicly available business and financial information relating to the Company and the Acquiror that we deemed to be relevant, including certain
publicly available research analyst estimates with respect to the future financial performance of the Company and the Acquiror;
|
B-1
The Special Committee of the Board of Directors
Diedrich Coffee, Inc.
November 2, 2009
|
3.
|
reviewed certain information relating to the historical, current and future operations, financial condition and prospects of the Company made available to us by the
Company, including financial projections (and adjustments thereto) prepared by the management of the Company relating to the Company for the fiscal years ending 2010 through 2012;
|
|
4.
|
spoken with certain members of the management of the Company and certain of its representatives and advisers regarding the business, operations, financial condition and
prospects of the Company, the Transaction and related matters;
|
|
5.
|
compared the financial and operating performance of the Company and the Acquiror with that of other public companies that we deemed to be relevant;
|
|
6.
|
considered the publicly available financial terms of certain transactions that we deemed to be relevant;
|
|
7.
|
reviewed the current and historical market prices and trading volume for Company Common Stock and Acquiror Common Stock, and the historical market prices and certain
financial data of the publicly traded securities of certain other companies that we deemed to be relevant; and
|
|
8.
|
conducted such other financial studies, analyses and inquiries and considered such other information and factors as we deemed appropriate.
|
We have relied upon and assumed, without independent verification, the accuracy and completeness of all data, material and other information
furnished, or otherwise made available, to us, discussed with or reviewed by us, or publicly available, and do not assume any responsibility with respect to such data, material and other information. In addition, management of the Company has
advised us, and we have assumed, that the financial projections referred to above and reviewed by us were reasonably prepared in good faith on bases reflecting the best available estimates and judgments of such management as to the future financial
results and condition of the Company at their time of preparation, and we express no opinion with respect to such projections or the assumptions on which they are based. Management of the Company has informed us that only one year of financial
projections exist that currently represents the best available estimates and judgments of Company management as to the future financial results and condition of the Company. As a result, in reaching our conclusions hereunder, we did not perform a
discounted cash flow analysis. With respect to the publicly available research analyst estimates for the Acquiror referred to above, we have reviewed and discussed such estimates with the management of the Company and have assumed, with your
consent, that such estimates represent reasonable estimates and judgments of the future financial results and condition of the Acquiror, and we express no opinion with respect to such estimates or the assumptions on which they are based. We have
relied upon and assumed, without independent verification, that there has been no change in the business, assets, liabilities, financial condition, results of operations, cash flows or prospects of the Company or the Acquiror since the date of the
most recent financial information available to us that would be material to our analyses or this Opinion, and that there is no information or any facts that would make any of the information reviewed by us incomplete or misleading. We have not
considered any aspect or implication of any transaction to which the Company or the Acquiror may be a party (other than as specifically described herein with respect to the Transaction).
We have relied upon and assumed, without independent verification, that (a) the representations and warranties of all parties to the
Merger Agreement identified in item 1 above and all other related documents and instruments that are referred to therein are true and correct, (b) each party to the Merger Agreement and such other related documents and instruments will fully
and timely perform all of the covenants and agreements required to be performed by such party, (c) all conditions to the consummation of the Transaction will be satisfied without waiver thereof, and (d) the Transaction will be consummated
in a timely manner in accordance with the terms described in the agreements and documents provided to us, without any amendments or modifications thereto. We also have relied upon and assumed, without independent verification, that (i) the
B-2
The Special Committee of the Board of Directors
Diedrich Coffee, Inc.
November 2, 2009
Transaction will be consummated in a manner that complies in all respects with all applicable federal and state statutes, rules and regulations, and (ii) all governmental, regulatory, and
other consents and approvals necessary for the consummation of the Transaction will be obtained and that no delay, limitations, restrictions or conditions will be imposed or amendments, modifications or waivers made that would result in the
disposition of any material portion of the assets of the Company or the Acquiror, or otherwise have an effect on the Company or the Acquiror or any expected benefits of the Transaction that would be material to our analyses or this Opinion. In
addition, we have relied upon and assumed, without independent verification, that the final form of the Merger Agreement will not differ, in any respect material to our analyses or this Opinion, from the draft of the Merger Agreement identified
above.
Furthermore, in connection with this Opinion, we have not been requested to make, and have not made, any
physical inspection or independent appraisal or evaluation of any of the assets, properties or liabilities (fixed, contingent, derivative, off-balance-sheet or otherwise) of the Company, the Acquiror or any other party, nor were we provided with any
such appraisal or evaluation. We did not estimate, and express no opinion regarding, the liquidation value of any entity.
We have undertaken no independent analysis of any potential or actual litigation, regulatory action, possible unasserted
claims or other contingent liabilities, to which the Company or the Acquiror is or may be a party or is or may be subject, or of any governmental investigation of any possible unasserted claims or other contingent liabilities to which the Company or
the Acquiror is or may be a party or is or may be subject.
We expect that the Company will be authorized in accordance
with the Merger Agreement to solicit third party indications of interest in acquiring all or any part of the Company for a prescribed period following the execution of the Merger Agreement, subject to the terms, conditions and procedures set forth
therein. This Opinion is necessarily based on financial, economic, market and other conditions as in effect on, and the information made available to us as of, the date hereof. We have not undertaken, and are under no obligation, to update, revise,
reaffirm or withdraw this Opinion, or otherwise comment on or consider events occurring after the date hereof. We are not expressing any opinion as to what will be the value of Acquiror Common Stock when issued pursuant to the Transaction or the
price or range of prices at which Acquiror Common Stock or Company Common Stock may be purchased or sold at any time. We have assumed that the Acquiror Common Stock to be issued in the Transaction to the shareholders of the Company will be listed on
the Nasdaq Capital Market.
This Opinion is furnished for the use and benefit of the Committee in connection with its
consideration of the Transaction and may not be used for any other purpose without our prior written consent. Notwithstanding the foregoing, a copy of this Opinion may be included in its entirety in any filing required to be made by the Company with
the Securities and Exchange Commission in connection with the Transaction and in materials delivered to the holders of the Company Common Stock in connection therewith; provided that the context of any such inclusion and the content and context of
any references to Houlihan Lokey are subject to Houlihan Lokeys prior review and written approval, which approval shall not be unreasonably withheld. This Opinion should not be construed as creating any fiduciary duty on Houlihan Lokeys
part to any party. This Opinion is not intended to be, and does not constitute, a recommendation to the Committee, the Board of Directors of the Company, any security holder or any other person as to how to act or vote or whether to tender any
shares with respect to any matter relating to the Transaction.
In the ordinary course of business, certain of our affiliates,
as well as investment funds in which they may have financial interests, may acquire, hold or sell, long or short positions, or trade or otherwise effect transactions, in debt, equity, and other securities and financial instruments (including loans
and other obligations) of, or investments in, the Company, the Acquiror, or any other party that may be involved in the Transaction and their respective affiliates or any currency or commodity that may be involved in the Transaction.
B-3
The Special Committee of the Board of Directors
Diedrich Coffee, Inc.
November 2, 2009
Houlihan Lokey or certain of its affiliates have in the past
provided investment banking, financial advisory and other financial services to the Company for which Houlihan Lokey or such affiliates received compensation. Houlihan Lokey and certain of its affiliates may provide investment banking, financial
advisory and other financial services to the Company, the Acquiror and other participants in the Transaction in the future, for which Houlihan Lokey and such affiliates may receive compensation.
Houlihan Lokey has also acted as financial advisor to the Committee in connection with, and has participated in certain of the negotiations
leading to, the Transaction and will receive a fee for such services, a substantial portion of which is contingent upon the consummation of the Transaction. In addition, we will receive a fee for rendering this Opinion, which is not contingent upon
the successful completion of the Transaction. The Company has agreed to reimburse certain of our expenses and to indemnify us and certain related parties for certain potential liabilities arising out of our engagement.
We have not been requested to opine as to, and this Opinion does not express an opinion as to or otherwise address, among other things:
(i) the underlying business decision of the Committee, the Company, the Acquiror, their respective security holders or any other party to proceed with or effect the Transaction, (ii) the terms of any arrangements, understandings,
agreements or documents related to, or the form or any other portion or aspect of, the Transaction or otherwise (other than the Consideration to the extent expressly specified herein), (iii) the fairness of any portion or aspect of the
Transaction to the holders of any class of securities, creditors or other constituencies of the Company or the Acquiror, or to any other party, except as expressly set forth in the last sentence of this Opinion, (iv) the relative merits of the
Transaction as compared to any alternative business strategies that might exist for the Company, the Acquiror or any other party or the effect of any other transaction in which the Company, the Acquiror or any other party might engage, (v) the
fairness of any portion or aspect of the Transaction to any one class or group of the Companys or any other partys security holders vis-à-vis any other class or group of the Companys or such other partys security
holders (including, without limitation, the allocation of any consideration amongst or within such classes or groups of security holders), (vi) whether or not the Company, the Acquiror, their respective security holders or any other party is
receiving or paying reasonably equivalent value in the Transaction, (vii) the solvency, creditworthiness or fair value of the Company, the Acquiror or any other participant in the Transaction under any applicable laws relating to bankruptcy,
insolvency, fraudulent conveyance or similar matters, or (viii) the fairness, financial or otherwise, of the amount or nature of any compensation to or consideration payable to or received by any officers, directors or employees of any party to
the Transaction, any class of such persons or any other party, relative to the Consideration or otherwise. Furthermore, no opinion, counsel or interpretation is intended in matters that require legal, regulatory, accounting, insurance, tax or other
similar professional advice. It is assumed that such opinions, counsel or interpretations have been or will be obtained from the appropriate professional sources. Furthermore, we have relied, with your consent, on the assessments by the Committee,
and the Company and their respective advisers, as to all legal, regulatory, accounting, insurance and tax matters with respect to the Company, the Acquiror and the Transaction. The issuance of this Opinion was approved by a committee authorized to
approve opinions of this nature.
Based upon and subject to the foregoing, and in reliance thereon, it is our opinion that, as
of the date hereof, the Consideration to be received by the Unaffiliated Stockholders of the Company in the Transaction pursuant to the Merger Agreement is fair to such Unaffiliated Stockholders from a financial point of view.
Very truly yours,
HOULIHAN LOKEY HOWARD & ZUKIN CAPITAL, INC.
B-4
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