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 December 10, 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 Green Mountain Coffee Roasters, Inc., a Delaware corporation (GMCR), through its wholly owned subsidiary, Pebbles 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 $35.00 in cash, without interest (the Offer Consideration), upon the terms and subject to the conditions set forth in GMCRs offer
to purchase, dated December 11, 2009 (the Offer to Purchase), and in the related Letter of Transmittal (the Letter of Transmittal, together with the Offer to Purchase and any amendments or supplements thereto, collectively
constituting the Offer). Copies of the 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 December 7, 2009, by and among Diedrich, GMCR and Purchaser, as amended from time to time (the Merger Agreement).
The Offer was commenced by Purchaser on December 11, 2009 and expires at 12:00 midnight, Eastern Time, on January 11, 2010 (one minute after
11:59 p.m., Eastern Time, on January 11, 2010), 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 GMCR or Purchaser, or by any other subsidiaries of GMCR, represent more than 50% of the sum of (i) the aggregate
number of shares of Common Stock outstanding immediately prior to the time upon which Purchaser accepts any shares of Common Stock for payment pursuant to the Offer (the Acceptance Time) and (ii) at the election of GMCR, 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 GMCR and Diedrich
under the Merger Agreement: (i) if, at the time as of which the Offer is scheduled to expire, any condition to the Offer is not satisfied and has not been waived, then Purchaser is required to extend the Offer on one or more occasions for
additional successive periods of up to 20 business days per extension (with the length of such extensions to be determined by GMCR), until all conditions to the Offer are satisfied or validly waived in order to permit the Acceptance Time to occur,
provided that Purchaser is not required to extend the Offer to a date later than the Termination Date (as defined in the Merger Agreement); 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 Securities and Exchange Commission (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 pursuant to the Offer, Purchaser may, in its sole discretion
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(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.
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 GMCR. 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, GMCR and Purchaser will own shares of Common Stock having sufficient votes to
adopt the Merger Agreement even if none of Diedrichs other stockholders votes in favor of such adoption.
In the Merger,
each outstanding share of Common Stock (other than shares of Common Stock held by Diedrich or any of its wholly owned subsidiaries or held in its treasury, or owned by GMCR, Purchaser or any other wholly owned subsidiary of GMCR, 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 Merger Agreement and the Offer may be terminated under certain customary circumstances by GMCR or Diedrich, including if the Acceptance
Time does not occur by February 15, 2010; provided, however, that such date will automatically be extended to June 15, 2010 if, on February 15, 2010, all of the conditions to the Offer have been satisfied or fulfilled or are capable of being
satisfied or fulfilled, except certain conditions regarding regulatory approvals. The Merger Agreement provides for a termination fee of $8,517,000 payable by Diedrich to GMCR if the Merger Agreement is terminated under certain circumstances. If
Diedrich fails to pay when due any amounts payable under such termination fee provisions, then Diedrich shall (i) reimburse GMCR for all reasonable costs and expenses (including fees and disbursements of legal counsel) actually incurred in
connection with the collection of such overdue amount and the enforcement by GMCR of its rights under the Merger Agreement, and (ii) pay to GMCR interest on any amount that is overdue. In addition, the Merger Agreement includes a graduated reverse
termination fee such that, if the Merger Agreement were terminated by GMCR under certain circumstances involving regulatory approvals, a reverse termination fee would be payable by GMCR to Diedrich based on the following: (a) if the Merger Agreement
were terminated under such circumstances before February 15, 2010, GMCR would be obligated to pay $8,517,000; (b) if the Merger Agreement were terminated under such circumstances on or after February 15, 2010 but before April 15, 2010, GMCR
would be obligated to pay $9,517,000; (c) if the Merger Agreement were terminated under such circumstances on or after April 15, 2010 but before June 15, 2010, GMCR would be obligated to pay $10,517,000; and (d) if the Merger Agreement were
terminated under such circumstances on or after June 15, 2010, GMCR would be obligated to pay $11,517,000.
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,
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which is filed herewith as Exhibit (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, GMCR 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, GMCR 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 press releases announcing the transactions contemplated by the Merger Agreement are included herewith as Exhibits (a)(5) and (a)(6) and are incorporated herein by reference.
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 GMCR with the SEC on December 11, 2009.
The
Schedule TO states that the principal executive offices of GMCR and Purchaser are located at 33 Coffee Lane, Waterbury, VT 05676 and that the telephone number at such principal executive offices is (802) 244-5621.
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) GMCR, Purchaser and any of their executive officers, directors or
affiliates, 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 December 10, 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 December 7, 2009, Paul
C. Heeschen entered into a Stockholder Agreement with GMCR, 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 December 10, 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 December 10, 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, $35.00 as the value of the Offer Consideration
payable with respect to each share of Common Stock and disregard the amount of any taxes that may be payable by the applicable recipients. As described below,
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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.
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 the Offer Consideration, then 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 the Offer Consideration exceeds the exercise price per share of such option; and
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if the exercise price per share of such option is equal to or greater than the Offer Consideration, then no cash.
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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 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 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 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 with respect to such right will be
delivered to the holder following such acceleration.
As of December 10, 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 cash value of $35.00 as the Offer Consideration for each share of Common Stock).
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Name
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Number of
Shares of
Common Stock
Underlying
Unexercised
Options (#)
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Net Consideration to
be Received for
Unexercised Options
($)
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James L. Harris
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20,000
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$
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653,600
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Paul C. Heeschen
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96,250
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$
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3,027,893
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Dana A. King
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20,000
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$
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630,200
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Sean M. McCarthy
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20,000
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$
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626,200
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Gregory D. Palmer
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60,000
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$
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1,924,350
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J. Russell Phillips
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282,500
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$
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8,970,525
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Timothy J. Ryan
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185,000
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$
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5,783,050
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James W. Stryker
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30,000
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$
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1,036,950
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All of the foregoing option awards were granted pursuant to Diedrichs 2000 Equity
Incentive Plan (the 2000 Equity Incentive Plan), Diedrichs 2000 Non-Employee Directors Stock Option Plan or Mr. Phillips Stock Option Agreement, which are filed herewith as Exhibits (e)(11), (e)(12) and (e)(18), respectively,
and are incorporated herein by reference. The foregoing description is qualified in its entirety by reference to the Merger Agreement, which is filed herewith as Exhibit (a)(7) and is incorporated herein by reference.
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
$9,245,525, which is comprised of (i) a payment of 100% of his base salary, $275,000, and (ii) a payment of $8,970,525 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 $3,626,200, which is comprised of
(i) a payment of $3,000,000 (constituting the stock appreciation payment) and (ii) a payment of $626,200 in connection with Diedrich options owned by him (as outlined in the table above).
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
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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 December 10, 2009, Diedrich had $2,000,000 of issued notes outstanding under the Note Purchase Agreement and there was $3,659 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 December 10, 2009,
$2,000,000 was outstanding under the Loan Agreement and there was $3,631 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 Diedrich warrant
that is outstanding immediately prior to the Acceptance Time will automatically be cancelled and converted into the right to receive 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) the amount by which (x) the Offer Consideration exceeds (y) the exercise price per share of such warrant.
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 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 December 10, 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
December 10, 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 December 10, 2009, all 2009 Sequoia Warrants were outstanding with an expiration date of April 29, 2014.
As of December 10, 2009, 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.
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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 approximately $65.9 million 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 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.
9
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 at the Acceptance Time, which right will vest immediately at the Acceptance Time. The foregoing
description is qualified in its entirety by reference to the 2000 Equity Incentive Plan, which is filed herewith as Exhibit (e)(11) and is incorporated herein by reference.
|
|
|
|
|
|
Name
|
|
Fees Earned
or Paid in
Cash ($)
|
|
Number of
Options Granted for
the Last Fiscal Year (#)
|
Paul C. Heeschen.
|
|
$
|
22,000
|
|
15,000
|
Gregory D. Palmer
|
|
$
|
23,500
|
|
15,000
|
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.
|
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 GMCR 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
Exhibit (a)(7) and is incorporated herein by reference.
Representation on Diedrichs Board
The Merger Agreement provides that, effective upon the Acceptance Time and from time to time thereafter, GMCR will be
entitled to designate to serve on the Board, the number of directors, rounded up to the nearest whole number, determined by multiplying (i) the total number of directors on the Board (giving effect to any increase in the size of the Board
effected pursuant to the Merger Agreement) by (ii) a fraction having (a) a numerator equal to the aggregate number of shares of Diedrich common stock then beneficially owned by GMCR or Purchaser or any other subsidiary of GMCR (including all shares
of Diedrich common stock accepted
10
for exchange pursuant to the Offer) and (b) a denominator equal to the total number of shares of Diedrich common stock then issued and outstanding. Diedrich has agreed to, promptly upon request
by GMCR, take all actions necessary and reasonably available to cause GMCRs 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 Exhibit (a)(7) and is incorporated herein by reference.
Item 4.
|
The Solicitation or Recommendation.
|
At a meeting held on December 7, 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 BY
GMCR
AND TENDER ALL OF THEIR SHARES
IN SUCH OFFER.
Additionally, at the meeting held on December 7, 2009, based in part on the unanimous recommendation of
the Special Committee, the Board unanimously: (i) determined that the $35.00 all-cash proposal by GMCR was superior to the transactions contemplated by the Agreement and Plan of Merger, dated as of November 2, 2009, among Diedrich, Peets
Coffee & Tea, Inc. (Peets) and a subsidiary of Peets, as amended (the Peets Agreement); (ii) determined that, in light of the $35.00 all-cash proposal by GMCR, the failure to change the Boards
recommendation with respect to the offer contemplated by the Peets Agreement could reasonably be expected to constitute a breach of the Boards fiduciary obligations to Diedrichs stockholders under applicable legal requirements;
(iii) approved the termination of the Peets Agreement and the payment of the termination fee with respect to such termination; and (iv) changed its recommendation with respect to the offer contemplated by the Peets Agreement and,
accordingly, recommended that Diedrichs stockholders do not tender their shares in the offer contemplated by the Peets Agreement and withdraw any shares previously tendered in such offer.
THE BOARD UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF DIEDRICH
REJECT
THE OFFER BY
PEETS
AND WITHDRAW ALL OF THEIR
SHARES PREVIOUSLY TENDERED IN SUCH OFFER.
A letter to Diedrichs stockholders communicating the Boards
recommendations accompanies this Statement. The letter is also filed herewith as Exhibit (a)(3) and is incorporated herein by reference.
11
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.
Preliminary Negotiations with GMCR and Peets
In June 2007, GMCR 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 GMCR on June 18, 2007.
On August 17, 2007, GMCRs Chief Financial Officer verbally indicated that GMCR would consider acquiring Diedrichs wholesale business for a purchase price of between approximately $28 million
and $33 million based on a multiple of EBITDA (earnings before interest, taxes, depreciation and amortization). GMCR was solely interested in purchasing Diedrichs wholesale business, and not in purchasing Diedrichs retail business, which
Diedrich indicated it could sell to a third party.
In June 2008, Patrick J. ODea, the Chief Executive Officer of
Peets, contacted the office of Paul C. Heeschen, Diedrichs Chairman, to request an appointment for an introductory meeting with Mr. Heeschen.
On June 25, 2008, members of GMCRs management met with Diedrichs Chief Executive Officer at Diedrichs executive offices in Irvine, California. Diedrichs Chief Executive Officer
explained that the sale of retail operations was taking longer than previously expected, but was in process. GMCR and Diedrich ceased all discussions and exchanges of information with respect to a contemplated transaction after this meeting.
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.
12
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, Mr. 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 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.
13
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, Messrs.
Heeschen and Ryan and a representative of Gibson Dunn met with GMCR to discuss the possible acquisition of Diedrich by GMCR. An amendment to the mutual non-disclosure agreement between Diedrich and GMCR was also executed on July 1, 2009 extending
the term of the mutual non-disclosure agreement.
On July 7, 2009, Diedrich provided GMCR with financial and other information
in connection with GMCRs evaluation of a possible acquisition of Diedrich by GMCR.
On July 17, 2009, GMCR submitted to
the Board a non-public, non-binding indication of interest to Diedrich proposing an acquisition of Diedrich by GMCR 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 GMCRs 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 GMCR, indicating that the Board concluded that GMCRs valuation of Diedrich was inadequate and therefore declined to enter into an exclusive
negotiating period with GMCR, but indicated that it was open to further discussions with GMCR.
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.
14
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, Mr. Ryan, 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 regard, 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.
On September 17, 2009, Diedrich established a virtual data room providing access to diligence materials for the
benefit of Peets.
On September 18, 2009, Gibson Dunn notified GMCR that Diedrich would be retaining Houlihan Lokey as
Diedrichs financial advisor for the purpose of initiating a process pursuant to which Diedrich would seek strategic alternatives, and, if GMCR desired to continue discussions, GMCR should contact Houlihan Lokey. GMCR then duly contacted
representatives of Houlihan Lokey to arrange for further discussions.
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 GMCR 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 GMCR at GMCRs headquarters. At this meeting, GMCR proposed a verbal
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 GMCRs indication of interest and the status of Peets interest in a transaction with Diedrich. The Special Committee requested that Houlihan Lokey prepare an
15
analysis of the indication of interest from GMCR. 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 GMCRs 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 GMCR. Mr. Ryan informed the Chief Executive Officer of
GMCR that the Special Committee had concluded that GMCRs valuation of Diedrich continued to be inadequate. Mr. Ryan requested that GMCR review materials to be sent by Diedrich that supported a higher valuation.
On October 9, 2009, GMCRs Chief Financial Officer contacted a representative of Houlihan Lokey to obtain clarification regarding
GMCRs October 8, 2009 discussion with Mr. Ryan. Discussions between GMCRs Chief Financial Officer and representatives of Houlihan Lokey regarding the valuation of Diedrich and a potential acquisition proposal continued for several days.
On October 9, 2009, Messrs. ODea and Jesse held a telephonic conference with Mr. Ryan and a representative of Houlihan
Lokey. Mr. Jesse communicated Peets 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 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
16
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 Chief Financial Officer of GMCR at which
time GMCR provided additional feedback to Houlihan Lokey regarding the materials that were sent to GMCR by Mr. Ryan and subsequently updated by Houlihan Lokey. In addition, the Chief Financial Officer of GMCR indicated verbally that GMCR was willing
to increase the purchase price for Diedrich to an enterprise value of $160 million, under certain specific conditions, but that GMCR 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 GMCR. 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 GMCR 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.
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.
17
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 GMCR. 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 GMCR, the Special Committee determined that continuing discussions with GMCR would not be productive based on the significant differences in the positions of Diedrich and GMCR 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 GMCR.
Further Negotiations with Peets; Entry into Peets Agreement
On
October 21, 2009, 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 the Peets 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. As described in greater detail below, the Peets Agreement and the stockholder agreements were eventually finalized and entered into, but were thereafter terminated.
On October 29, 2009, Messrs. Grimes and 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 draft Peets 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 Peets Agreement to Cooley in the morning. Diedrich provided diligence materials in response to the legal diligence request list from
Cooley. Mr. Ryan, a
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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 Peets Agreement to Gibson Dunn in the morning. Negotiations continued between
Gibson Dunn and Cooley regarding the draft Peets Agreement throughout the day.
On November 1, 2009, Gibson Dunn sent a
revised draft of the Peets 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 Peets 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 Peets Agreement throughout the day and night. The Special Committee met to
receive an update on the status of the 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
Peets Agreement.
On November 2, 2009, Gibson Dunn and Cooley continued to revise and finalize the terms of the
Peets 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
contemplated by the Peets Agreement, 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.
The Special Committee approved resolutions recommending that the Board approve and adopt the Peets Agreement and the offer and merger
contemplated thereby. After full discussion at a meeting, the Board unanimously adopted and approved the Peets Agreement, the offer and merger contemplated thereby and related matters.
19
At the conclusion of the Board meeting, Diedrich, Peets and Peets acquisition
subsidiary executed the Peets Agreement, which was subsequently terminated by Diedrich as described below.
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 Peets Agreement.
Go-Shop Process
On November 3, 2009, subsequent to the signing of the
Peets Agreement on November 2, 2009 and in connection with the provision of the Peets Agreement that allowed Diedrich to furnish information to, and conduct negotiations with, third parties until November 23, 2009 (the
Go-Shop), representatives of Houlihan Lokey began contacting 33 parties, of which 23 were strategic parties and 10 were financial parties. Representatives of Houlihan Lokey completed their initial calls in connection with the Go-Shop on
November 5, 2009.
Of the parties contacted, 30 did not execute a confidentiality agreement or perform any due diligence.
Although it signed a confidentiality agreement, Company B was not qualified by the Special Committee based on its financial wherewithal. As a result, Diedrich did not countersign the confidentiality agreement executed by Company B or provide Company
B with non-public information. Three parties did enter into confidentiality agreements, as described below.
On November 4,
2009, representatives of Houlihan Lokey contacted GMCR. These representatives had follow-up discussions with GMCRs financial advisors on November 10, 2009, during which it was indicated that GMCR was considering its response to the
transactions contemplated by the Peets Agreement, and on November 18, 2009, when GMCRs financial advisors indicated that a competing proposal was to be shortly forthcoming from GMCR. Such competing proposal, described in greater detail
below, was received later that afternoon. On November 19, 2009, GMCR executed a new confidentiality agreement with Diedrich and was provided access to certain non-public information.
On November 5, 2009, representatives of Houlihan Lokey received an inbound call from Company C. Between November 9, 2009 and November 13,
2009, representatives of Houlihan Lokey had discussions with Company C regarding the form of confidentiality agreement that Company C would be required to execute. Ultimately, the Special Committee determined that it would not be in the best
interest of Diedrich or its stockholders to continue discussions with Company C or to provide access to due diligence materials.
On November 10, 2009, Company D executed a confidentiality agreement with Diedrich. Company D was provided with access to certain non-public information and performed a cursory level of due diligence on November 13, 2009. As of the
expiration of the Go-Shop period, Company D had not provided any indication that it would be submitting an acquisition proposal.
On November 13, 2009, Company E executed a confidentiality agreement with Diedrich. Company E was provided with access to certain non-public information and performed a moderate level of due diligence. On November 17, 2009, Company E
indicated that it did not intend to submit an acquisition proposal.
Events Leading to Termination of Peets Agreement
Late in the afternoon on November 18, 2009, a binding offer was received by Diedrich from GMCR to enter into a merger
transaction pursuant to which GMCR would acquire all of the outstanding shares of Common Stock for $30.00 per share in cash (GMCRs Initial Proposal). A merger agreement signed by GMCR that contained substantially the same terms
(other than the amount and form of consideration) as the Peets Agreement was included with GMCRs Initial Proposal. As required under the terms of the Peets Agreement, on November 19, 2009, Diedrich transmitted to Peets notice
of GMCRs Initial Proposal and notice of a Board
20
meeting scheduled for November 20, 2009 to consider whether GMCRs Initial Proposal constituted a Superior Proposal (as defined in the Peets Agreement). Mr. Ryan also
contacted GMCRs Chief Executive Officer to briefly discuss GMCRs intent with respect to post-closing operations of Diedrich. From this date onwards, Diedrich and GMCR maintained consistent contact through representatives of Gibson Dunn
and Ropes & Gray, GMCRs legal counsel (Ropes & Gray), and representatives of Houlihan Lokey and BofA Merrill Lynch, GMCRs financial advisor (BAML), respectively.
After reviewing GMCRs Initial Proposal, the Board determined that it constituted a Superior Proposal to the terms of the Peets
Agreement. As required under the terms of the Peets Agreement, on November 20, 2009, Diedrich transmitted to Peets notice of the Boards determination. Representatives of Gibson Dunn also notified Ropes & Gray of the
Boards determination. Under the terms of the Peets Agreement, Peets had until 5:00 p.m. Pacific Time on Friday, November 27, 2009 to negotiate with Diedrich to amend the Peets Agreement or the offer contemplated thereby in a
manner that the Board determined was at least as favorable to Diedrichs stockholders as GMCRs Initial Proposal.
As part of those negotiations, after 5:00 p.m. Pacific Time on November 22, 2009, Diedrich received a revised proposal from Peets, offering to pay to Diedrichs stockholders a combination of $19.80 in cash and 0.321 of a share of
Peets common stock for each share of Common Stock tendered and accepted in the offer contemplated by the Peets Agreement, representing total consideration of $32.00 per share based on the closing price of Peets common stock on
November 20, 2009 of $38.00 per share (Peets Revised Proposal). The stock component of the purchase price in Peets Revised Proposal was based on a fixed exchange ratio, so the value of that component would have increased or
decreased with changes in the market price of Peets common stock. Peets Revised Proposal stated that it would automatically terminate at 5:00 a.m. Pacific Time on November 23, 2009 if not accepted.
The Board convened a telephonic meeting on the evening of November 22, 2009 and concluded that further analysis was required from
Diedrichs financial advisors for the Board to properly evaluate and compare the competing proposals from Peets and GMCR. A representative from Gibson Dunn contacted a representative from Cooley to advise that the Board felt the
expiration time set in Peets Revised Proposal was unreasonable. In the early morning hours of November 23, 2009, Peets agreed to extend the expiration time to 5:00 a.m. Pacific Time on November 24, 2009. Shortly thereafter, Diedrich
issued a press release announcing that it had received GMCRs Initial Proposal, which the Board had determined to be a Superior Proposal to the transaction contemplated by the Peets Agreement, and also that it had received Peets
Revised Proposal. Additionally, the Board announced that it was, in light of the different forms of consideration in Peets Revised Proposal and GMCRs Initial Proposal, analyzing the two to determine whether GMCRs Initial Proposal
continued to be a Superior Proposal to the terms of the Peets Agreement and the offer contemplated thereby (as amended by the Peets Revised Proposal).
Later in the day on November 23, 2009, as the Board was about to convene a meeting to consider the proposals from Peets and GMCR, Diedrich received a revised proposal from GMCR pursuant to which
GMCR offered to acquire all of the outstanding shares of Common Stock of Diedrich for $32.00 per share in cash, an increase of $2.00 per share over GMCRs prior proposal (GMCRs Revised Proposal). As with its prior proposal,
GMCR included a merger agreement signed by GMCR that contained substantially the same terms (other than the amount and form of consideration) as the Peets Agreement. As required under the terms of the Peets Agreement, on the same date,
Diedrich transmitted to Peets notice of GMCRs Revised Proposal. The Board convened its meeting and concluded that, in light of recently receiving GMCRs Revised Proposal, it would like to seek further analysis from Diedrichs
financial advisors for the Board to properly evaluate and compare Peets Revised Proposal and GMCRs Revised Proposal. Following this meeting of the Board, representatives of Houlihan Lokey informed BAML that Diedrich requested that GMCR
supplement GMCRs Revised Proposal to include a reverse break-up fee payable by GMCR to Diedrich in the event that regulatory approvals were not obtained under the terms and conditions of GMCRs proposed merger agreement. Representatives
of Gibson Dunn and Ropes & Gray then further discussed this request. In response to a request from Diedrich, Peets agreed to extend the expiration time of Peets Revised Proposal to 5:00 a.m. Pacific Time on November 25, 2009.
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On the morning of November 24, 2009, Diedrich issued a press release announcing that it had
received GMCRs Revised Proposal. Diedrich also announced that, in light of this recently received offer and the different forms of consideration in Peets Revised Proposal and GMCRs Revised Proposal, the Board was continuing to
analyze the two to determine whether GMCRs Revised Proposal continued to be a Superior Proposal to the terms of the Peets Agreement and the offer contemplated thereby (as amended by Peets Revised Proposal).
Later in the day on November 24, 2009, GMCR informed Diedrich that it was further revising its proposal to provide that its merger agreement
would include a reverse termination fee of $8,517,000 that would be payable to Diedrich if such merger agreement were to be terminated under certain circumstances (GMCRs Second Revised Proposal). As required under the terms of the
Peets Agreement, on the same date, Diedrich transmitted to Peets notice of GMCRs Second Revised Proposal. The Board convened another meeting and, after considering the analysis presented by its financial advisors as well as other
relevant factors, determined that GMCRs Second Revised Proposal (which still included the $32.00 per share all-cash consideration) continued to be a Superior Proposal to the terms of the Peets Agreement and the offer contemplated
thereby, as amended by Peets Revised Proposal. On the date of the Boards determination, Peets Revised Proposal represented total consideration of approximately $30.35 per share based on the closing price of Peets common stock
on such date of $32.86 per share.
On the morning of November 25, 2009, Diedrich announced that GMCRs Second Revised
Proposal continued to be a Superior Proposal. Peets then issued a press release stating that Peets Revised Proposal had expired, and that Peets would consider all of its alternatives over the next several days. Peets further
stated in its press release that Peets had until at least 5:00 p.m. Pacific Time on November 30, 2009 to negotiate with Diedrich to amend the Peets Agreement in a manner that the Board determined was at least as favorable to
Diedrichs stockholders as was GMCRs Revised Proposal. Diedrich then issued a second press release stating that, although Diedrich believed that Peets was only entitled to a negotiation period ending at 5:00 p.m. Pacific Time on
November 27, 2009, Diedrich would nevertheless allow Peets a negotiation period ending at 5:00 p.m. Pacific Time on November 30, 2009, in the interest of ensuring the best possible outcome for Diedrichs stockholders.
On November 26, 2009, everyone, together with their representatives, left each other alone for the day and enjoyed turkey.
On the evening of Monday, November 30, 2009, as the Board was about to convene a meeting to consider the termination of the Peets
Agreement, Diedrich received a revised proposal from Peets to pay to Diedrichs stockholders a value of $32.50 per share (based on the closing price of Peets common stock on November 30, 2009 of $32.56 per share) in a combination of
cash and Peets stock, as explained in greater detail below (Peets Second Revised Proposal). Peets publicly announced its revised proposal shortly after transmitting it to Diedrich. The Board convened its meeting and
concluded that, in light of the recently received Peets Second Revised Proposal, it would like to take the time to properly analyze Peets Second Revised Proposal and compare it to GMCRs Second Revised Proposal.
Under Peets Second Revised Proposal, Diedrichs stockholders would have received, for each share of Diedrich common stock, a
stock component consisting of 0.321 of a share of Peets common stock plus a cash component in an amount between $21.265 and $22.870 such that the value of the total consideration paid per Diedrich share would be equal to $32.50, provided that
Peets common stock had a value between $30.00 and $35.00 per share. If Peets volume-weighted average stock price over a designated five trading day period prior to the completion of the offer contemplated by the Peets Agreement
were less than $30.00, the value per share received by Diedrichs stockholders would have been less than $32.50, and if Peets volume-weighted average stock price over that same period were higher than $35.00, the value per share received
by Diedrichs stockholders would have been greater than $32.50.
On the morning of December 1, 2009, Diedrich announced
that it had received Peets Second Revised Proposal. Diedrich also announced that, in light of this recently received offer and the different forms of
22
consideration in Peets Second Revised Proposal and GMCRs Second Revised Proposal, the Board was continuing to analyze the two to determine whether GMCRs Second Revised Proposal
continued to be a Superior Proposal to the terms of the Peets Agreement and the offer contemplated thereby (as amended by Peets Second Revised Proposal).
In the afternoon of December 1, 2009, in response to Peets Second Revised Proposal, GMCR submitted to Diedrich a written supplement to GMCRs Second Revised Proposal. This supplement increased
GMCRs proposed purchase price to $33.00 in cash per share. This supplement also amended the terms of GMCRs proposed merger agreement in ways favorable to Diedrich and its stockholders, including by: (a) reducing the limitations and
restrictions on Diedrichs ability to operate its business during the period between the signing of the proposed merger agreement and the completion of the acquisition, (b) increasing the time period during which Diedrich would be permitted to
remedy deficiencies relating to the satisfaction of certain conditions to the proposed tender offer and (c) including a graduated reverse break-up fee, payable by GMCR to Diedrich if the proposed merger agreement were terminated by GMCR or Diedrich
under certain circumstances, ranging from $8.517 million to $11.517 million (depending upon the date of termination). This supplement also accelerated the tender offers required completion date to February 15, 2010, mirroring the acceleration
included in Peets Second Revised Proposal, but also included an extension of the tender offers required completion date, to June 15, 2010, if certain regulatory approvals had not yet been obtained.
In the evening of December 1, 2009, representatives of Gibson Dunn indicated to representatives of Ropes & Gray, and representatives of
Houlihan Lokey indicated to GMCRs financial advisors, that the Diedrich Board likely would deem Peets Second Revised Proposal superior to GMCRs Second Revised Proposal, as amended by the written supplement (based in part on the
expected future value of the stock component of Peets Second Revised Proposal), unless GMCR were to increase its proposed price. GMCR accordingly submitted to Diedrich another written supplement to GMCRs Second Revised Proposal. This
supplement was the same as the previous supplement but increased GMCRs proposed purchase price to $35.00 in cash per share. (GMCRs Second Revised Proposal, as amended by such written supplement, is referred to hereinafter as
GMCRs Third Revised Proposal.) As required under the terms of the Peets Agreement, Diedrich transmitted to Peets a notice of GMCRs Third Revised Proposal. The Board considered GMCRs Third Revised Proposal
and Peets Second Revised Proposal and determined that GMCRs Third Revised Proposal continued to be a Superior Proposal to Peets Second Revised Proposal, which pursuant to its terms expired at 5:00 p.m. Pacific Time on December 1,
2009. As required under the terms of the Peets Agreement, Diedrich transmitted notice of such determination (and of the subsequent Board meeting described below) to Peets.
In Amendment No. 4 to Schedule TO filed by Peets with the SEC on December 2, 2009, Peets expressed its belief that Diedrich had
not complied with certain notice provisions of the Peets Agreement. Diedrich indicated in its Amendment No. 5 to the Solicitation/Recommendation Statement on Schedule 14D-9 filed with the SEC on December 4, 2009, that it believed this was
merely an attempt to delay the process rather than engage in substantive and constructive discussions but, anticipating such a tactic and in an effort to avoid further delay debating non-substantive interpretations of the Peets Agreement,
Diedrich had provided notice to Peets of another Board meeting at the same time that notice was provided of the continuing Superior Proposal on December 1, 2009. As such, the Board held a meeting on December 3, 2009, at which it confirmed the
prior determination that GMCRs Third Revised Proposal continued to constitute a Superior Proposal. In this regard, on December 3, 2009, Diedrich once again delivered written notice of the Boards determination to Peets. Peets
had until 5:00 p.m. Pacific Time on December 7, 2009, to negotiate with Diedrich to amend the Peets Agreement and the offer contemplated thereby in a manner that the Board determined to be at least as favorable to Diedrichs stockholders
as GMCRs Third Revised Proposal. As described below, Peets engaged in no such further negotiations.
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Between December 2, 2009 and December 7, 2009, Gibson Dunn and Ropes & Gray continued
preparing for the potential execution of a definitive merger agreement among Diedrich, GMCR and Purchaser, and for the commencement of a tender offer by Purchaser.
Approval of GMCR Merger Agreement
On December 7, 2009, Houlihan Lokey
orally delivered its opinion to the Special Committee based on the proposed purchase price of $35.00 per share that, as of December 7, 2009, the consideration to be received by the holders of Common Stock, other than certain affiliated stockholders,
in the Offer and the Merger, 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 December 7, 2009. See the section below entitled Opinion
of Houlihan Lokey Howard & Zukin Capital, Inc.
The Special Committee approved resolutions recommending that the
Board (1) deem GMCRs Third Revised Proposal to continue to constitute a Superior Proposal to the Peets Agreement, (2) change its recommendation with respect to the offer contemplated by the Peets Agreement, (3) terminate the
Peets Agreement, and (4) 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 GMCRs Third Revised Proposal continued to be a Superior Proposal as defined in the Peets Agreement;
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changed its recommendation with respect to the offer contemplated by the Peets Agreement and, accordingly, resolved to recommend that
Diedrichs stockholders do not tender their shares in such offer and withdraw any shares already tendered in such offer;
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approved the termination of the Peets Agreement;
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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, were
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 was 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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Effective at 5:00 p.m. Pacific Time on December 7, 2009, Diedrich delivered notice to Peets of the termination of the Peets Agreement and the Boards decision to no longer recommend the
transactions contemplated thereby and to authorize Diedrichs entry into the Merger Agreement. Accordingly, the $8,517,000 termination fee required by the Peets Agreement was paid to Peets. As a result of the termination of the
Peets Agreement, the stockholder agreements that had been entered into with Peets also automatically terminated pursuant to their terms.
Immediately after the termination of the Peets Agreement, Diedrich, GMCR and Purchaser executed the Merger Agreement, and the stockholders party to the Stockholder Agreements executed and delivered
the Stockholder Agreements to GMCR.
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Before the opening of trading on the Nasdaq Stock Market on December 8, 2009, GMCR issued a
press release announcing the execution of the Merger Agreement, and Diedrich issued a press release announcing the termination of the Peets Agreement and the execution of the Merger Agreement.
On December 8, 2009, Diedrich submitted its filing pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
HSR Act), and, on December 9, 2009, GMCR submitted its filing pursuant to the HSR Act.
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 concluded (after taking into account the current and historical financial condition, results of operations, competitive position, business prospects, opportunities and
strategic objectives of Diedrich, including the potential risks involved in achieving those prospects and objectives) that 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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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 as of recent dates. The Offer Consideration represents an approximately 71.9% premium over the closing price of the shares of Common Stock on November 2, 2009 (
i.e.
,
$20.36 per share), the last full trading day prior to the public announcement of entry into the terminated Peets Agreement.
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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 December 7, 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 December 7, 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 a tender 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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Solicitation of Other Parties Prior to Execution of the Merger Agreement
. The Board considered that representatives of Houlihan Lokey had
discussions with numerous third parties in the Go-Shop process contemplated by the terminated Peets Agreement and that GMCRs offer was the most attractive offer for Diedrichs stockholders resulting from that process.
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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 GMCR a termination fee of $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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Right of Diedrich to Receive Reverse Termination Fee
.
The Board considered Diedrichs right under the Merger Agreement to receive a
graduated reverse termination fee such that, if the Merger Agreement were terminated by GMCR under certain circumstances involving regulatory approvals, a reverse termination fee would be payable by GMCR to Diedrich based on the following: (a) if
the Merger Agreement were terminated under such circumstances before February 15, 2010, GMCR would be obligated to pay $8,517,000; (b) if the Merger Agreement were terminated under such circumstances on or after February 15, 2010 but before
April 15, 2010, GMCR would be obligated to pay $9,517,000; (c) if the Merger Agreement were terminated under such circumstances on or after April 15, 2010 but before June 15, 2010, GMCR would be obligated to pay $10,517,000; and (d) if the Merger
Agreement were terminated under such circumstances on or after June 15, 2010, GMCR would be obligated to pay $11,517,000.
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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.
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|
Discouraging Other Prospective Buyers.
The Board considered that entering into the Merger Agreement with GMCR, 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 GMCRs 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.
|
26
|
|
|
GMCRs
Termination Right if the Conditions Are Not Met.
The Board considered GMCRs 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 February 15, 2010 (subject to extension until June 15, 2010 under certain circumstances set forth in the Merger Agreement).
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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.
|
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 or the Merger 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.
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 December 7, 2009, Houlihan Lokey rendered an oral opinion to the Special Committee (which was confirmed in writing by delivery of Houlihan
Lokeys written opinion dated December 7, 2009), to the effect that, as of December 7, 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
27
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:
|
|
|
reviewed the following agreements and documents:
|
|
|
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Draft of the Merger Agreement;
|
|
|
|
Drafts of the forms of Stockholder Agreements by and between GMCR and certain stockholders; and
|
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Copy of the Peets Agreement;
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|
|
|
reviewed certain publicly available business and financial information relating to Diedrich that Houlihan Lokey deemed to be relevant, including
certain publicly available research analyst estimates with respect to the future financial performance of Diedrich;
|
|
|
|
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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|
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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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|
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|
compared the financial and operating performance of Diedrich 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 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.
|
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 the financial projections for the fiscal year ending 2010 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. 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 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
28
not consider any aspect or implication of any transaction to which Diedrich or GMCR 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 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, contingent, derivative, off-balance-sheet or otherwise) of Diedrich 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 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 Diedrich is or may be a party or is 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, GMCR, 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, GMCR, 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, GMCR or any other
party or the effect of any other transaction in which Diedrich, GMCR 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, GMCR, 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, GMCR 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,
29
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, GMCR 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 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 GMCR, 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 December 7, 2009. The order of the analyses does not
30
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 the
common stock of the selected coffee roasters, private label food manufacturing and coffee related retail companies listed below as of December 4, 2009, and transaction values for the target companies derived from the selected transactions analysis
described below were calculated as of the announcement date of 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.
31
Selected Companies Analysis
Houlihan Lokey calculated multiples of enterprise value and equity value based on certain financial data for 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 list of
selected companies and the related financial data for such selected companies are set forth below.
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Enterprise Value to:
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Equity Value to:
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Selected Companies
|
|
NFY
Revenue
|
|
|
NFY Adjusted
EBITDA
|
|
|
NFY Adjusted
EBIT
|
|
|
NFY Adjusted
Net Income
|
|
Coffee Roasters
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Coffee Holding Co. Inc.
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NA
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1
|
|
NA
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|
NA
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|
NA
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Companhia Cacique de Cafe Soluvel
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NA
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NA
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NA
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|
NA
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Companhia Iguacu de Cafe Soluvel
|
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NA
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NA
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|
NA
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|
|
NA
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Farmer Brothers Co.
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NA
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NA
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|
|
NA
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|
|
NA
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Green Mountain Coffee Roasters Inc.
|
|
2.07
|
x
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|
14.1
|
x
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|
18.9
|
x
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|
35.4
|
x
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Peets Coffee & Tea Inc.
|
|
1.39
|
x
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9.9
|
x
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16.6
|
x
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27.5
|
x
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Super Coffeemix Manufacturing Ltd.
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|
NA
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NA
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|
NA
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NA
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Private Label
|
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Ralcorp Holdings Inc.
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1.16
|
x
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|
7.0
|
x
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9.1
|
x
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|
12.6
|
x
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Cott Corporation
|
|
0.58
|
x
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|
5.2
|
x
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8.4
|
x
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11.6
|
x
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Treehouse Foods Inc.
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|
1.05
|
x
|
|
9.1
|
x
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12.3
|
x
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15.4
|
x
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J&J Snack Foods Corp.
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0.90
|
x
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6.0
|
x
|
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8.5
|
x
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16.0
|
x
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Overhill Farms Inc.
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0.47
|
x
|
|
4.5
|
x
|
|
5.2
|
x
|
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7.7
|
x
|
1
|
For purposes of the tables in this Statement, NA means not available.
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The calculated multiple ranges and averages for the selected companies were as follows:
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|
|
|
Multiple Description
|
|
Multiples
|
|
|
|
Low
|
|
|
High
|
|
|
Median
|
|
|
Mean
|
|
Enterprise Value as a multiple of:
|
|
|
|
|
|
|
|
|
|
|
|
|
NFY Revenue
|
|
0.47
|
x
|
|
2.07
|
x
|
|
1.05
|
x
|
|
1.07
|
x
|
NFY Adjusted EBITDA
|
|
4.5
|
x
|
|
14.1
|
x
|
|
7.0
|
x
|
|
8.0
|
x
|
NFY Adjusted EBIT
|
|
5.2
|
x
|
|
18.9
|
x
|
|
9.1
|
x
|
|
11.3
|
x
|
Equity Value as a multiple of:
|
|
|
|
|
|
|
|
|
|
|
|
|
NFY Adjusted Net Income
|
|
7.7
|
x
|
|
35.4
|
x
|
|
15.4
|
x
|
|
18.0
|
x
|
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:
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|
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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,
32
(iii) the present value of net operating loss carryforwards as of December 4, 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:
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|
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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
|
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, 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, LTM EBITDA. The list of selected transactions and the related multiples and
certain financial data are set forth below:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction Value/
|
|
Effective
Date
|
|
Target
|
|
Acquiror
|
|
Transaction
Value
|
|
LTM
Revenue
|
|
|
LTM
EBITDA
|
|
11/13/2009
|
|
Timothys Coffees of the World, Inc.
|
|
Green Mountain Coffee Roasters
|
|
$
|
157.0
|
|
2.00
|
x
|
|
10.5
|
x
|
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
|
33
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
|
|
1.16x
|
|
1.21x
|
LTM EBITDA
|
|
6.8x
|
|
10.5x
|
|
8.9x
|
|
8.7x
|
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
|
|
1.40
|
x
|
|
1.55
|
x
|
|
$94.8 $104.9
|
LTM Adjusted EBITDA
|
|
9.5
|
x
|
|
11.0
|
x
|
|
$46.1 $53.3
|
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 December 4, 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
|
|
$12.77 $13.97
|
LTM Adjusted EBITDA
|
|
$7.01 $7.87
|
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, GMCR 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, GMCR and other participants in the Offer or the Merger in the future, for which Houlihan Lokey and such affiliates may receive compensation.
34
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 approximately $5.6 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.
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
|
35
|
|
|
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 December
7, 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.
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 GMCR 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 GMCR 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
36
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 GMCR or Purchaser or any other subsidiary of GMCR 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 GMCR 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 GMCR or Purchaser pursuant
to the Top-Up Option will be determined by multiplying the number of such shares by the Offer Consideration. Such purchase price may be paid by GMCR 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 herewith as Exhibit (a)(7) 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 GMCRs 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 entitled
George
Mendenhall, individually and on behalf of all others similarly situated 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 Peets wholly owned subsidiary, Marty Acquisition Sub, Inc. Among other things, the complaint alleges that the members of the Board breached their fiduciary duties to Diedrichs
stockholders in connection with the transactions previously contemplated by the terminated Peets 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 previously contemplated by the terminated Peets 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:
|
|
|
the risk that the Offer and the Merger will not be completed;
|
37
|
|
|
the risk that Diedrichs business will be adversely impacted during the pendency of the Offer and the Merger;
|
|
|
|
the financial and operating performance of Diedrichs wholesale operations;
|
|
|
|
Diedrichs ability to achieve and/or maintain profitability over time;
|
|
|
|
the successful execution of Diedrichs growth strategies;
|
|
|
|
the impact of competition; and
|
|
|
|
the availability of working capital.
|
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:
|
|
|
Exhibit
No.
|
|
Description
|
|
|
(a)(1)
|
|
Offer to Purchase of GMCR, dated as of December 11, 2009 (incorporated by reference to Exhibit (a)(1)(i) of GMCRs and Purchasers Schedule TO, filed by GMCR and Purchaser
with the SEC on December 11, 2009).
|
|
|
(a)(2)
|
|
Letter of Transmittal (incorporated by reference to Exhibit (a)(1)(ii) of GMCRs and Purchasers Schedule TO, filed by GMCR and Purchaser with the SEC on December 11,
2009).
|
|
|
(a)(3)
|
|
Letter to the Stockholders of Diedrich, dated as of December 11, 2009.
|
|
|
(a)(4)
|
|
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).
|
|
|
(a)(5)
|
|
Press Release of Diedrich issued on December 8, 2009 (incorporated by reference to Exhibit 99.1 of Diedrichs Current Report on Form 8-K, filed by Diedrich with the SEC on
December 8, 2009).
|
|
|
(a)(6)
|
|
Press Release of Diedrich and GMCR issued on December 8, 2009 (incorporated by reference to Exhibit 99.2 of Diedrichs Current Report on Form 8-K, filed by Diedrich with
the SEC on December 8, 2009).
|
|
|
(a)(7)
|
|
Agreement and Plan of Merger among Diedrich, Purchaser and GMCR, dated as of December 7, 2009 (incorporated by reference to Exhibit 2.1 of Diedrichs Current Report on
Form 8-K filed by Diedrich with the SEC on December 8, 2009).
|
|
|
(e)(1)
|
|
Stockholder Agreement, dated as of December 7, 2009, by and between GMCR and Paul C. Heeschen (incorporated by reference to Exhibit 99.3 of Diedrichs Current Report on
Form 8-K filed by Diedrich with the SEC on December 8, 2009).
|
|
|
(e)(2)
|
|
Form of Stockholder Agreement, dated as of December 7, 2009, by and between GMCR and certain directors and executive officers of Diedrich (incorporated by reference to
Exhibit 99.4 of Diedrichs Current Report on Form 8-K filed by Diedrich with the SEC on December 8, 2009).
|
38
|
|
|
Exhibit
No.
|
|
Description
|
|
|
(e)(3)
|
|
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).
|
|
|
(e)(4)
|
|
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).
|
|
|
(e)(5)
|
|
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).
|
|
|
(e)(6)
|
|
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).
|
|
|
(e)(7)
|
|
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).
|
|
|
(e)(8)
|
|
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).
|
|
|
(e)(9)
|
|
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).
|
|
|
(e)(10)
|
|
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).
|
|
|
(e)(11)
|
|
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).
|
|
|
(e)(12)
|
|
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).
|
|
|
(e)(13)
|
|
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).
|
|
|
(e)(14)
|
|
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).
|
|
|
(e)(15)
|
|
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).
|
|
|
(e)(16)
|
|
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).
|
|
|
(e)(17)
|
|
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).
|
39
|
|
|
Exhibit
No.
|
|
Description
|
|
|
(e)(18)
|
|
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).
|
|
|
(e)(19)
|
|
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).
|
|
|
(e)(20)
|
|
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).
|
|
|
(e)(21)
|
|
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).
|
|
|
(e)(22)
|
|
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).
|
|
|
(e)(23)
|
|
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).
|
|
|
(e)(24)
|
|
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).
|
40
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.
|
|
|
DIEDRICH COFFEE, INC.
|
|
|
By:
|
|
/s/ S
EAN
M.
M
C
C
ARTHY
|
Name:
|
|
Sean M. McCarthy
|
Title:
|
|
Chief Financial Officer
|
|
Dated: December 11, 2009
|
41
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 December 11, 2009, and relates to the offer by Pebbles Acquisition Sub, Inc., a Delaware corporation (Purchaser) and a wholly owned subsidiary of Green Mountain
Coffee Roasters, Inc., a Delaware corporation (GMCR), 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
December 11, 2009 and mailed to Diedrichs stockholders.
Diedrich stockholders are receiving this Information Statement
in connection with the possible election of persons designated by GMCR 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 December 7, 2009, by and among GMCR, 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 December 11, 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 $35.00 in cash, without interest (the
Offer Consideration), upon the terms and subject to the conditions set forth in GMCRs offer to purchase, dated December 11, 2009 (the Offer to Purchase), and in the related Letter of Transmittal (the Letter of
Transmittal, together with the Offer to Purchase and any amendments or supplements thereto, collectively constituting the Offer). Copies of the 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 December 11, 2009 and expires at 12:00 midnight, Eastern Time, on January 11, 2010, (one minute after 11:59 p.m., Eastern Time, on January 11, 2010), 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 GMCR or Purchaser, or by any other subsidiaries of GMCR, represent more than 50% of the sum of (i) the aggregate number of shares of Common Stock outstanding immediately prior to the
time upon which Purchaser accepts any shares of Common Stock for payment pursuant to the Offer (the Acceptance Time) and (ii) at the election of GMCR, 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
A-1
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).
The Merger Agreement requires us to cause GMCRs 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
Information 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 Exhibit (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, GMCR 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, GMCR 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 GMCR, Purchaser, and the GMCR designees to the Board (as described below)
has been furnished to us by GMCR, and Diedrich assumes no responsibility for the accuracy of any such information.
DIRECTOR
DESIGNEES OF GMCR
GMCR has informed Diedrich that it will choose its designees to the Board from the directors or Stephen
Sabol, Howard Malovany or Frances Rathke of GMCR and/or Purchaser listed in Schedule I of the 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 Offer
to Purchase is incorporated herein by reference. GMCR has informed Diedrich that each of the directors and each of Mr. Sabol, Mr. Malovany and Ms. Rathke of GMCR and/or Purchaser listed in Schedule I of the Offer to Purchase who may
be chosen has consented to act as a director of Diedrich, if so designated. Mr. Sabol is GMCRs Vice President of Development; Mr. Malovany is GMCRs Vice President, Corporate General Counsel and Secretary; Ms. Rathke is GMCRs Chief
Financial Officer.
Based solely on the information set forth in Schedule I of the Offer to Purchase filed by GMCR, none of
the directors or Mr. Sabol, Mr. Malovany or Ms. Rathke of GMCR and/or Purchaser listed in Schedule I of the Offer to Purchase (1) is currently a director of, or holds any position with, Diedrich, or (2) has a familial
relationship with any directors or executive officers of Diedrich. Diedrich has been advised that, to the best knowledge of Purchaser and GMCR, none of the directors or Mr. Sabol, Mr. Malovany or Ms. Rathke of GMCR and/or Purchaser
listed in Schedule I of the Offer to Purchase beneficially owns any equity securities (or rights to
A-2
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.
GMCR has informed Diedrich that, to the best of its
knowledge, none of the directors or Mr. Sabol, Mr. Malovany or Ms. Rathke of GMCR and/or Purchaser listed in Schedule I of the 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 GMCRs 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 January
11, 2010, and that, upon assuming office, GMCRs 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 December 10, 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 of Common Stock 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 December 10, 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 December 10, 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)
|
|
44.0
|
|
|
|
WF Trust
450 Newport Center Drive, Suite 450
Newport Beach, CA 92660
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750,000
|
(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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Hudson Bay Overseas Fund, Ltd.
Walkers SPV Limited, Walker House
P.O. Box 908GT, Mary Street
Georgetown, Grand Cayman
Cayman Islands
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218,790
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(8)
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|
3.8
|
|
|
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Hudson Bay Fund, L.P.
120 Broadway, 40th Floor
New York, NY 10271
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123,070
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(8)
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2.1
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Paul C. Heeschen
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4,527,293
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(9)
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58.0
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Timothy J. Ryan
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75,000
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(10)
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1.3
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Gregory D. Palmer
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60,000
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(11)
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1.0
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James W. Stryker
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23,000
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(12)
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*
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J. Russell Phillips
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193,833
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(13)
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3.3
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Sean M. McCarthy
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25,000
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(14)
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*
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James L. Harris
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6,666
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(15)
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*
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Dana A. King
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12,666
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(16)
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*
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All directors and executive officers as a group (10 persons)
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4,942,710
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(17)
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60.2
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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)
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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 December 10, 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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A-4
(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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(5)
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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)
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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.
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(7)
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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.
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(8)
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According to the Schedule 13G filed on December 2, 2009, Hudson Bay Capital Management, L.P. serves as investment manager with respect to the Hudson Bay Fund, L.P. and
the Hudson Bay Overseas Fund, Ltd. and shares voting and dispositive power in connection with the 123,070 shares beneficially owned by Hudson Bay Fund, L.P. and the 218,790 shares beneficially owned by Hudson Bay Overseas Fund, Ltd. Sander Gerber
serves as an executive officer of Hudson Bay Capital Management, L.P. Each of Hudson Bay Capital Management, L.P. and Mr. Gerber disclaims any beneficial ownership of any such shares, except for their pecuniary interest therein.
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(9)
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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 97,421 shares owned personally by Mr. Heeschen (96,250 shares subject to options that are exercisable within 60 days), and 250 shares held by Paul C. Heeschen Revocable Living Trust.
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(10)
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Includes 75,000 shares subject to options that are exercisable within 60 days.
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(11)
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Includes 60,000 shares subject to options that are exercisable within 60 days.
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(12)
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Includes 22,500 shares subject to options that are exercisable within 60 days.
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(13)
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Includes 190,833 shares subject to options that are exercisable within 60 days.
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(14)
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Includes 20,000 shares subject to options that are exercisable within 60 days.
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(15)
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Includes 6,666 shares subject to options that are exercisable within 60 days.
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(16)
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Includes 11,666 shares subject to options that are exercisable within 60 days.
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(17)
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Includes 2,488,247 shares subject to options and warrants that are exercisable within 60 days.
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A-5
Equity Compensation Plan Information.
The following table summarizes the equity compensation plans under which Common Stock may be issued as of June 24, 2009.
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Plan category
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(a)
Number of securities to
be issued upon exercise
of outstanding options,
warrants and
rights
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(b)
Weighted-average
exercise price of
outstanding options,
warrants and
rights
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(c)
Number of securities
remaining available for
future issuance
under
equity compensation plans
(excluding securities
reflected in column (a))
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Equity compensation plans approved by security holders
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750,300
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(1)
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$
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3.36
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303,917
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(2)
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Equity compensation plans not approved by security holders
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Total
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750,300
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|
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$
|
3.36
|
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303,917
|
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|
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(1)
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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.
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(2)
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Represents securities available for issuance under the Diedrich Coffee, Inc. 2000 Equity Incentive Plan.
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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 December 10, 2009.
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Name
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Age
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Title
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Director Since
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Paul C. Heeschen
(1)
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52
|
|
Chairman of the Board of Directors
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1996
|
Gregory D. Palmer
(2)(3)
|
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53
|
|
Director
|
|
2006
|
J. Russell Phillips
|
|
60
|
|
Director, President and Chief Executive Officer
(4)
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|
2007
|
Timothy J. Ryan
(1)(2)(3)
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69
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Vice Chairman of the Board of Directors
|
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2005
|
James W. Stryker
(2)(3)
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62
|
|
Director
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2008
|
(1)
|
Member of the compensation committee of the board of directors.
|
(2)
|
Member of the audit committee of the board of directors.
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(3)
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Member of the special committee of the board of directors.
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(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.
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A-6
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.
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.
A-7
Information Regarding Executive Officers of Diedrich
Diedrichs executive officers as of December 10, 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:
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Name
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Age
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Position(s) Held
|
J. Russell Phillips
(1)
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60
|
|
Director, President and Chief Executive Officer
|
Sean M. McCarthy
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48
|
|
Chief Financial Officer and Secretary
|
James L. Harris
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46
|
|
Vice PresidentSales
|
Dana A. King
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46
|
|
Vice PresidentInformation Services & Customer Fulfillment
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(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.
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.
A-8
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.
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.
A-9
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.
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,
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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.
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
A-11
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 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.
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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).
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Name and Principal Position
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|
Year
|
|
Salary
($)
|
|
Bonus
($)
(1)
|
|
Option
Awards
($)
(2)
|
|
Non-equity
Incentive Plan
Compensation
($)
(3)
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All Other
Compensation
($)
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Total ($)
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J. Russell Phillips, President and Chief Executive Officer
(4)
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2009
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$
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275,000
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$
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62,700
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$
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203,890
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$
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165,000
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$
|
720
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(5)
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$
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707,310
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2008
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|
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105,769
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|
|
|
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99,908
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|
|
|
|
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26,917
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(6)
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232,594
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Sean M. McCarthy, Chief Financial Officer and Secretary
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2009
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225,000
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90,000
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|
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90,000
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3,016
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(7)
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408,016
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2008
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214,425
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|
|
|
|
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4,014
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(8)
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218,439
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James L. Harris, Vice PresidentSales
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2009
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180,000
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11,499
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54,000
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15,190
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(9)
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260,689
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2008
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2,077
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|
|
|
|
|
|
|
|
|
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462
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(10)
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2,539
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(1)
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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.
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(2)
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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.
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(3)
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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.
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(4)
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Mr. Phillips became Diedrichs President and Chief Executive Officer in February 2008. Mr. Phillips annual base salary is $275,000.
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(5)
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Consists of health fitness membership reimbursement in the amount of $720.
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(6)
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Consists of a signing bonus payment in the amount of $25,000 and health fitness membership reimbursement in the amount of $1,917.
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(7)
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Consists of 401(k) matching contributions by Diedrich in the amount of $2,271 and health fitness membership reimbursement in the amount of $745.
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(8)
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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.
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(9)
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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.
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(10)
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Consists of auto allowance in the amount of $462.
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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.
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
A-14
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 $5.00 from the per share price at which at least 90% of the outstanding shares of Common Stock is acquired, multiplied by (ii) 100,000.
Outstanding Equity Awards at the 2009 Fiscal Year End
The following table sets forth information relating to stock options held by the named executive officers as of June 24, 2009.
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Name
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Option Awards
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Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
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Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
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Option
Exercise Price
($)
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Option
Expiration
Date
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J. Russell Phillips
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7,500
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(1)
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$
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3.83
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4/18/2017
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91,666
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(2)
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183,334
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(2)
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3.23
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2/07/2018
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Sean M. McCarthy
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20,000
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(2)
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3.69
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4/26/2014
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James L. Harris
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20,000
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(2)
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2.32
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9/17/2018
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(1)
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These options vest over a two-year period at a rate of one-half per year.
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(2)
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These options vest over a three-year period at a rate of one-third per year.
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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
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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.
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Name
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Fees Earned
or Paid in
Cash ($)
|
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Option Awards ($)
(1)
|
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Total ($)
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Paul C. Heeschen.
|
|
$
|
22,000
|
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$
|
381,900
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$
|
403,900
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Gregory D. Palmer
|
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$
|
23,500
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$
|
381,900
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$
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405,400
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Timothy J. Ryan
(2)
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$
|
50,062
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$
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2,844,250
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$
|
2,894,312
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James W. Stryker
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$
|
10,500
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$
|
766,950
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$
|
777,450
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(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.
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(2)
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Fees earned include compensation as Vice Chairman of the board in the amount of $27,562.
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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.
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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.
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Respectfully submitted,
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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-17
Annex B
December 7, 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 Green Mountain Coffee Roasters, Inc. (the Acquiror), Pebbles 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 a tender offer (the Offer) for any and all of the shares of the outstanding common
stock, par value $0.01 per share, of the Company (Company Common Stock) at a price of $35.00 per share in cash (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 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:
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1.
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reviewed the following agreements and documents:
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a.
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Draft dated as of December 7, 2009 of the Agreement and Plan of Merger by and among Green Mountain Coffee Roasters, Inc., Pebbles Acquisition Sub, Inc. and
Diedrich Coffee Inc., (the Merger Agreement);
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b.
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Drafts dated November 30, 2009 of the forms of Stockholder Agreements by and between the Acquiror and certain stockholders to be named therein; and
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c.
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Agreement and Plan of Merger, dated as of November 2, 2009 by and among Peets Coffee & Tea Inc., Marty Acquisition Sub, Inc. and Diedrich Coffee,
Inc. (the Peets Merger Agreement);
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2.
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reviewed certain publicly available business and financial information relating to the Company that we deemed to be relevant, including certain publicly available
research analyst estimates with respect to the future financial performance of the Company;
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B-1
The Special Committee of the Board of Directors
Diedrich Coffee, Inc.
December 7, 2009
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3.
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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;
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4.
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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;
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5.
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compared the financial and operating performance of the Company with that of other public companies that we deemed to be relevant;
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6.
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considered the publicly available financial terms of certain transactions that we deemed to be relevant;
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7.
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reviewed the current and historical market prices and trading volume for Company 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
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8.
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conducted such other financial studies, analyses and inquiries and considered such other information and factors as we deemed appropriate.
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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. 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
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
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 be material to our analyses or this
B-2
The Special Committee of the Board of Directors
Diedrich Coffee, Inc.
December 7, 2009
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, 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 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 is or may be a party or is or may be subject.
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.
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.
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.
B-3
The Special Committee of the Board of Directors
Diedrich Coffee, Inc.
December 7, 2009
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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