Document:

Exhibit
10.1

 

MEMORANDUM OF AGREEMENT

 

Between Michael
A. Maglioli and Friendly Ice Cream Corporation

 

This
acknowledges and documents our mutual agreement concerning your separation from
Friendly Ice Cream Corporation (“Friendly’s”) effective March 25, 2004  (“Separation
Date”).  This letter will confirm
various matters concerning your separation from employment so that no
misunderstanding exists between you and Friendly’s.

 

SALARY CONTINUATION

 

Friendly’s
will continue to pay you semimonthly for two (2) years after your Separation
Date (“Salary Continuation Period”), at your current base rate of pay,
including executive match.  The salary
you receive will be subject to appropriate statutory deductions and such other deductions
normally made for employees of Friendly’s. 
In addition, any financial obligation you have to Friendly’s will be
deducted.

 

From
time to time after your separation, but during your Salary Continuation Period,
you may be contacted with questions relating to matters you have been involved
with (including litigation) while employed by Friendly’s.  You agree to provide your complete
cooperation and make all pertinent information regarding these matters
available upon request, as well as be personally available, at mutually
convenient times, on an as-needed basis.

 

BENEFIT/RETIREMENT PLANS

 

You will be eligible to
participate in the short-term disability, accidental death and dismemberment,
long-term disability, pension plan, Restricted Stock Plan, Stock Option Plans
and such other benefit plans in which you may currently be enrolled only
through your Separation Date, and under the terms and conditions of these
plans; provided however, that as part of this Agreement, and in consideration
of all of its terms and conditions, management will recommend to the Board of
Directors to immediately vest the balance of your unvested shares (1,943) in
the Restricted Stock program.  (As in
the past you will be expected to pay the taxes on this stock when it vests.)  In addition management will recommend to the
Board of Directors to immediately vest, 12,177 of your stock options.  In accordance with the terms of the Stock
Option Plans you will have 3 months to exercise these options, unless you
retire, in which case you will have 36 months to exercise the options.  Vesting of stock and options are effective
on your Separation Date.

 

Your
group medical/dental insurance ends on your last day of active work.  Unless you retire, to continue
medical/dental coverage beyond your Separation Date, you must complete a continuation
of coverage (COBRA) application, which will be provided to you.  It is your responsibility to make all
payments to the COBRA carrier.  If you
elect COBRA, Friendly’s will issue a check or checks to you in order for you to
pay for coverage for six (6) months.  
If you elect to retire, Friendly’s will pay for six (6) months of
Retiree Medical

 

You will be paid the sum
of $33,667, which represents a one-third portion (at 100%) of the Performance
Unit Award Target of $101,000 under the 2003-2005 Incentive Plan

 

Additional
information about the effect of your separation on your benefits is contained
in the Separation Information document provided to you.

 

 

MISCELLANEOUS

 

a)
You will be reimbursed for the price of your wife’s airplane ticket to Orlando
in April upon submission of the ticket.

b)
You will be paid for four (4) weeks vacation

 

INTERFERENCE AND SOLICITATION

 

You
agree that during the salary continuation period, you shall not, without the
express written consent of Friendly’s:

 

a)
impair or attempt to impair the relationship, contractual or otherwise, between
Friendly’s or any of its restaurants and any person who is a supplier, guest or
client of Friendly’s or any of its restaurants; and

b)
directly or indirectly solicit or attempt to solicit for employment any
employee of Friendly’s.

 

OUTPLACEMENT

 

To
assist you in securing a new position, Friendly’s has engaged the services of
the nationally recognized outplacement firm of Lee Hecht Harrison, Inc. for a
period of one year.  They will provide
the following services at any of their offices:

 

1.             Assistance with your skills analysis and
preparation of your resume;

2.             Training which covers critical job search
techniques and interviewing skills; and

3.             Individualized counseling.

 

You
may utilize the services of another outplacement provider if you wish; however,
the cost of the services may not exceed the cost of Lee Hecht Harrison’s
services.  Payment will be made directly
to the organization by Friendly’s, or reimbursement will be made to you upon
presentation of an invoice indicating that you have already paid it.

 

Friendly’s
will also provide up to 3 sessions of executive coaching to you through
Woodstone Consulting.

 

COMPANY VEHICLE

 

You may continue to utilize your company vehicle
(personal miles) until March 22, 2006, at which time it must be returned to
Friendly’s at a mutually convenient time and place.  You will be given the opportunity to purchase your company
vehicle at the current market value from Merchants Leasing Co.  You should contact Sue Frasier or Donna
Sarette at Merchants Leasing directly (800/288-6999, extension 249) for the
exact price if you are interested in pursuing this.

 

2

 

LIFE INSURANCE

 

The life insurance coverage that
has been provided to you through Pacific Mutual Life Insurance Company is
unaffected by your leaving employment because it is your own personal
policy.  Payments by Friendly’s on your
behalf will cease as of your Separation Date. 
Questions about coverage thereafter or about other matters related to
this policy should be referred to Ms. Karen Socola of the AYCO Corporation at
(518) 373-7725.  Friendly’s will pay for
the cost of customary meetings with an AYCO representative for the sole purpose
of concluding your financial planning services with AYCO, including the
preparation of your 2004 individual tax return, up through April, 2005, after
which Friendly’s will no longer pay for any further AYCO advisory services on
your behalf.

 

COVENANTS

 

In consideration of the terms
set forth in this letter, you agree to the following:

 

1.             You will forever refrain from disclosing or
confirming, either directly or indirectly, any information concerning
insurance, loss claims, loss payments, safety and health conditions, financial
condition, strategic planning or other confidential or non-public information
relating to Friendly’s or its subsidiaries, divisions, parents and affiliates,
and any of their agents, employees, directors and officers which you learned or
became aware of since the inception of your employment with Friendly’s except
for information which is generally known by the public, without Friendly’s
prior written consent.

 

2.             You will turn over to your supervisor all
originals and copies of any documents, manuals, plans, equipment, business
papers, computer diskettes (or copies of same) or other materials relating to
Friendly’s and its subsidiaries, divisions, parents and affiliates, their
agents, employees, directors and officers which are in your control or
possession within seven days of the execution of this Agreement.

 

3.             You, on behalf of
yourself, your spouse, heirs, agents, attorneys, representatives and assigns,
hereby release and discharge forever all claims and causes of action of every
name and nature that have arisen or might have arisen at any time up to and
including the date on which you sign this Agreement (whether known or unknown,
accrued, contingent, or liquidated) that you now have or may have against
Friendly’s, any of its subsidiaries, divisions, parents and affiliates, or any
of the aforementioned entities’ agents, employees, directors, and officers,
including but not limited to, any claims relating to your employment with
Friendly’s and the termination thereof; any claims based on statute,
regulation, ordinance, contract or tort; any claims arising under the Age
Discrimination in Employment Act of 1967, as amended (the “ADEA”), or any other
federal, state, or local law relating to employment discrimination, harassment,
or retaliation; any claims relating to wages, compensation, or benefits; and
any related claims for attorney’s fees.

 

4.             You agree not to
appeal to arbitration or file a lawsuit in any court of the United States or
any State thereof concerning any matter released in this Agreement.  Nothing in this Agreement shall be
interpreted to prohibit you from filing an age discrimination claim with any
anti-discrimination agency, or from participating in an age discrimination
investigation or

 

3

 

proceeding conducted by
any such agency.  However, by signing
this Agreement, you acknowledge that you are waiving your right to money
damages and any other relief should any agency pursue claims on your behalf
arising out of or relating to your employment with and/or separation from
Friendly’s.

 

5.             The parties agree to forever refrain from taking
any action or making any statement which brings discredit upon or disparages
the other party (including, with respect to Friendly’s, its services or products,
or any of its directors, officers, employees, or agents).

 

6.             Friendly’s will provide inquiring outplacement
agencies, recruiters, or prospective employers with only your start date, end
date, and positions held during your employment with Friendly’s.

 

7.             Friendly’s shall not contest any claims made by
you for unemployment benefits administered by any governmental agency.

 

8.             If you breach any of the terms of this Agreement,
Friendly’s may be entitled to recover from you all costs, fees, and expenses
(including attorney’s fees) as may be awarded by a court of competent
jurisdiction under applicable law and will be entitled to set off what it has
paid you under this Agreement.

 

 

ENTIRE AGREEMENT

 

This is the entire agreement
between us and any prior agreements or understandings, whether oral or written,
are entirely superseded by this Agreement. 
We each have voluntarily accepted the terms as sufficient without
reservation.  This Agreement may only be
modified by a written agreement signed by you and an officer of Friendly’s.

 

Should any provision of this
Agreement be declared or determined by any court to be illegal or invalid, the
validity of the remaining parts, terms or provisions shall not be affected
thereby and said illegal part, term or provision shall be deemed not to be a
part of this Agreement.

 

Pursuant to its obligations
under the ADEA, Friendly’s advises you to consult with an attorney prior to
executing this agreement.  You have 21
days from the date of receipt of this document in which to consider this
agreement.  In addition, you may revoke
this agreement for seven days following its execution, but only by delivering a
written revocation notice to Garrett Ulrich. 
This agreement shall not become effective or enforceable until the
seven-day revocation period has expired.

 

By signing this Agreement, you
acknowledge that you have read and fully understand all of its provisions and
that you are signing it voluntarily. 
You also acknowledge that you are not relying on any representations by
any representative of Friendly’s concerning the meaning of any aspect of this
Agreement.

 

4

 

Each party hereto agrees that they are fully
authorized and have all of the requisite right, power, and authority to enter
into this Agreement, which is fully binding upon and enforceable against the
respective parties hereto in accordance with its terms.

 

This Agreement is made
and entered into in the Commonwealth of Massachusetts and shall in all respects
be interpreted, enforced, and governed by the laws of the Commonwealth of
Massachusetts.

 

If the above is in agreement
with your understanding, please sign and keep one copy of this document for
your records and return one copy to me.

 

 

	
   

  	
   

  	
  By:

  	
  /s/
     Garrett J. Ulrich

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Garrett
  J. Ulrich

  
	
   

  	
   

  	
   

  	
   

  	
  Vice
  President, Human Resources

  
						

 

ACCEPTED AND AGREED TO AS OF THIS 29th DAY OF
MARCH, 2004.

 

	
   

  	
   

  	
  By:

  	
         /s/
  Michael A. Maglioli

  	
   

  
	
   

  	
   

  	
   

  	
  Michael A. Maglioli

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  

 

5Exhibit 10.22

 

 

DIEDRICH COFFEE, INC.

EMPLOYMENT AGREEMENT

 

This
Employment Agreement (this “Agreement”) is entered into as of March 26, 2004 by
and between Martin A. Lynch (“Executive”) and Diedrich Coffee, Inc., a Delaware
corporation (the “Company”).

 

WHEREAS, the
Company has retained Executive to provide personal services to the Company in
exchange for certain compensation and benefits;

 

WHEREAS,
Executive began working for the Company on October 1, 2003; and

 

WHEREAS, the
Company and Executive mutually desire to memorialize the terms of Executive’s
employment with the Company by entering into this Agreement.

 

NOW,
THEREFORE, in consideration of the mutual promises and covenants contained
herein, it is hereby agreed by and between the parties hereto as follows:

 

1.             Employment by the
Company.

 

1.1           Title and
Responsibilities.  Subject to terms
set forth herein, the Company agrees to employ Executive as its Chief Financial
Officer and Executive Vice President and Executive hereby accepts such
employment.  During his employment with
the Company, Executive will devote his best efforts and substantially all of
his business time and attention (except for vacation periods as set forth
herein and reasonable periods of illness or other incapacity permitted by the Company’s
general employment policies) to the business of the Company.

 

1.2           Executive Position.  Executive will continue to serve in an
executive capacity and shall perform such duties as are customarily associated
with his title, consistent with the bylaws of the Company and as reasonably
required by the Company’s Board of Directors (the “Board”).

 

1.3           Company Employment
Policies.  The employment
relationship between the parties shall also be governed by the general
employment policies and practices of the Company, including those relating to
protection of confidential information and assignment of inventions, except
that if the terms of this Agreement differ from or are in conflict with the
Company’s general employment policies or practices, this Agreement shall
control.

 

2.             Compensation.

 

2.1           Salary.  Executive shall receive for services to be
rendered hereunder an annualized base salary of two hundred twenty thousand
dollars ($220,000), payable on a biweekly basis in accordance with the normal
payroll practices of the Company (including deductions, withholdings and
collections as required by law). 
Executive will be considered for annual increases in base salary in
accordance with Company policy and subject to review and approval by the
Compensation Committee of the Board (the “Compensation Committee”).

 

 

2.2           Bonus.  Executive shall be eligible to participate
in the Company’s executive level bonus plan throughout the duration of
Executive’s employment with the Company.

 

(a)           Executive’s Performance.  The amount of Executive’s bonus will depend
upon Executive’s performance with respect to certain measurable goals to be
established in an executive bonus plan for each fiscal year to be developed by
the Chief Executive Officer and other officers of the Company within sixty (60)
days after the beginning of such fiscal year and then approved by the
Compensation Committee no later than ninety (90) days after the beginning of
such fiscal year.

 

(b)           Company Profitability.  The amount of Executive’s bonus will also
depend on attainment by the Company of its planned financial objectives for the
bonus year.

 

(c)           Determination of Bonus.  The amount of Executive’s bonus will be
determined after the close of the Company’s fiscal year and after the Company
has received its audited financial statement for such fiscal year.  To be eligible to receive a bonus, Executive
must remain in employment with the Company throughout the entire fiscal year.

 

(d)           No Guaranteed Bonus.  Notwithstanding the foregoing, no bonus is
guaranteed to Executive.  Any bonus is
subject to the approval of the Board, which retains the authority to review,
grant, deny or revise any bonus in its sole discretion.

 

(e)           Target Bonus.  The target bonus for Executive shall be fifty percent (50%) of
his base salary.  This target may be
adjusted upward to reflect additional bonus to be paid for achievement of
strategic transactions apart from base business objectives.  At Executive’s election, any bonus payable
to Executive may be paid in whole or in part through a grant of shares of the
Company’s common stock.

 

(f)            Withholding.  Any cash bonus paid to Executive shall be subject to such
withholdings as may be required by law.

 

2.3           Stock Options.  Executive will be entitled to receive
non-qualified options to purchase up to 150,000 shares of common stock of the
Company (the “Options”) under the Diedrich Coffee, Inc. 2000 Equity Incentive
Plan on the terms and subject to the conditions of the Memorandum of Option
Grant delivered to Executive.  Pursuant
to the terms of the Memorandum of Option Grant, 25% of the Options will vest
every six months until all of the Options have vested, and have an exercise
price of $3.38 per share.

 

2.4           Automobile Allowance.  Executive will be entitled to receive an
automobile allowance equal to seven hundred fifty dollars ($750) per month,
paid on a biweekly basis, in reimbursement of all expenses associated with the
operation, maintenance and use of a vehicle for business purposes.

 

2.5           Standard Company
Benefits and Vacation.  Executive
shall be entitled to those benefits provided to the Company’s executives
generally and for which he is eligible pursuant to the terms and conditions of
the relevant plans.  Executive shall be
entitled to four (4) weeks of paid vacation per year.

 

2

 

2.6           Business Expenses.  The Company shall promptly reimburse
Executive for all reasonable and necessary business expenses incurred by
Executive in connection with the business of the Company and the performance of
his duties under this Agreement, subject to Executive providing the company
with reasonable documentation thereof. 
It is agreed that Executive shall be reimbursed for mid-week lodging
expense in Orange County, California.

 

2.7           Excise Tax.  If any payments or transfers of property to
be made to Executive hereunder are subject, in whole or in part, to the excise
tax imposed by Section 4999 of the Internal Revenue Code of 1986 (the “Excise
Tax”) and application of Section 280G of such Code, and can be avoided by an
appropriate stockholder vote pursuant to Section 280G(b)(5)(A) of the Code, the
Company and Executive agree that, if requested by Executive at least 15 days
prior to the date that proxy materials are first submitted to the Securities
and Exchange Commission or mailed to stockholders, the Company will (i) include
in any such proxy materials information appropriate to submit the benefits
provided to Executive under this Agreement to stockholder vote and (ii)
recommend approval of any such proposal.

 

3.             Confidential
Information, Rights and Duties.

 

3.1           Agreement.

 

(a)           Confidential Information.

 

(i)            Executive specifically
agrees that he shall not at any time, either during or subsequent to the term
of his employment with the Company, in any fashion, form or manner, either
directly or indirectly, unless expressly consented to in writing by the
Company, use, divulge, disclose or communicate to any person or entity any
confidential information of any kind, nature or description concerning any
matters affecting or relating to the business of the Company, including, but
not limited to: the Company’s sales and marketing methods, programs and related
data, or other written records used in the Company’s business; the Company’s
computer processes, programs and codes; the names, addresses, buying habits or
practices of any of its clients or customers; compensation paid to other
employees and independent contractors and other terms of this employment or
contractual relationships; or any other confidential information of, about or
concerning the business of the Company, its manner of operations, or other data
of any kind, nature or description.  The
parties to this Agreement hereby stipulate that, as between them, the above
information and items are important, material and confidential trade secrets
that affect the successful conduct of the Company’s business and its good will,
and that any breach of any term of this section is a material breach of this
Agreement.  All equipment, notebooks,
documents, memoranda, reports, files, samples, books, correspondence, lists or
other written and graphic records, and the like, including tangible or
intangible computer programs, records and data, affecting or relating to the
business of the Company, which the Executive might prepare, use, construct,
observe, posses or control, shall be and shall remain the Company’s sole
property.

 

(ii)           For purposes of this
Agreement, the term “confidential information” shall not include any
information that:  (A) has been made
public by the Company (other than by acts of Executive in violation of this
Agreement or other obligation of confidentiality); (B) is developed by
Executive independently of any information the Executive learns in the course
of fulfilling his duties hereunder; or (C) Executive is legally compelled to

 

3

 

disclose; provided
that (1) Executive is advised by
written opinion of the Executive’s counsel, who shall be reasonably
satisfactory to the Company, that he is legally required to disclose such
information and (2) Executive notifies the Company of such proposed disclosure
in as far in advance of its disclosure as is practicable and uses his best
efforts to obtain assurances that confidential treatment will be accorded to
such information.

 

(b)           Non-Interference.  Any wrongful interference with the Company’s
business, property, confidential information, trade secrets, clients,
customers, employees or independent contractors by the Executive or any of
Executive’s agents during or after the term of Executive’s employment shall be
treated and acknowledged by the parties as a material breach of this
Agreement.  If such interference occurs
at a time that Executive is employed by the Company, such interference shall be
grounds for the Company to terminate Executive for Cause.

 

3.2           Remedies.  Executive’s duties under this Section 3
shall survive termination of Executive’s employment with the Company.  Executive acknowledges that a remedy at law
for any breach or threatened breach by Executive of the provisions of this
Section 3 would be inadequate, and Executive therefore agrees that the Company
shall be entitled to injunctive relief in case of any such breach or threatened
breach.

 

4.             Outside Activities.

 

4.1           Activities.  Except with the prior written consent of the
Chief Executive Officer, Executive will not during his employment with the
Company undertake or engage in any other employment, occupation or business
enterprise, other than ones in which Executive is a passive investor.  Executive may engage in civic and
not-for-profit activities so long as such activities do not materially
interfere with the performance of his duties hereunder.  It is acknowledged by the Company and
Executive that Executive’s membership on two boards of directors of publicly
listed, non-competing companies will not materially interfere with the
performance of his duties hereunder and that such positions are deemed approved
by the Company.

 

4.2           Investments and
Interests.  Executive agrees not to
acquire, assume or participate in, directly or indirectly, any material
position, investment or interest known by him to be adverse or antagonistic to
the Company, its business or prospects, financial or otherwise.

 

4.3           Non-Competition.  During his employment by the Company, except
on behalf of the Company, Executive will not directly or indirectly, whether as
an officer, director, stockholder, partner, proprietor, associate,
representative, consultant, or in any capacity whatsoever engage in, become
financially interested in, be employed by or have any business connection with
any other person, corporation, firm, partnership or other entity whatsoever
which were known by him to compete directly with the Company, throughout the
world, in any line of business engaged in (or planned to be engaged in) by the
Company.

 

4

 

5.             Termination Of
Employment.

 

5.1           Termination With or
Without Cause.

 

(a)           At-Will Employment.  Executive’s relationship with the Company is
at-will.  The Company shall have the
right to terminate Executive’s employment with the Company at any time with or
without Cause and with or without notice.

 

(b)           Definition of Cause.  For purposes of this Agreement and the
Memorandum of Option Grant, “Cause” is defined as the occurrence of one or more
of the following:  (i) Executive is
convicted of or pleads guilty or no lo contendere to a felony or any crime
involving moral turpitude; (ii) Executive breaches this Agreement or any
Agreement entered into with the Company in a manner that materially and
adversely affects the Company; (iii) Executive commits willful misconduct that
materially and adversely impacts the Company; or (iv) Executive fails, after
receipt of written notice and after receiving a period of at least fifteen (15)
days following such notice, to follow the direction of the Board of Directors
and perform his obligations hereunder.

 

(c)           Termination for Cause. If Executive is
terminated with Cause, the Company shall pay Executive the compensation and
benefits otherwise payable to Executive under Section 2.1 through the date of
termination.  Executive’s rights under
the Company’s benefit plans of general application shall be determined under
the provisions of those plans.  All
other compensation from and after such termination shall cease (except for
those benefits that must be continued pursuant to applicable law or by the
terms of such benefit plans), and Executive shall not be entitled to any
severance pay or other payment or compensation whatsoever upon such termination.

 

5.2           Voluntary
Termination; Death or Disability.

 

(a)           Voluntary Termination.  Executive may voluntarily terminate his
employment with the Company at any time, after which no further compensation
will be paid to Executive, except as specifically set forth herein.

 

(b)           Death or Disability.  The Executive’s employment under this
Agreement shall terminate immediately and without notice by the Company upon
the death or disability of the Executive. 
In the event of Executive’s termination due death or disability, he will
not be entitled to severance pay, pay in lieu of notice or any other such
compensation.  For purposes of this
Agreement and the Memorandum of Option Grant, the Executive will be deemed to
have a disability if he becomes physically or mentally incapacitated or
disabled or otherwise unable to fully discharge his duties hereunder for a
period of 60 consecutive calendar days or for 120 days in any 360-day period.

 

(c)           No Severance Pay.  In the event of Executive’s death or
disability or if Executive voluntarily terminates his employment other than due
to a Constructive Termination, he will not be entitled to severance pay, pay in
lieu of notice or any other such compensation.

 

(d)           Definition of Constructive Termination.  For purposes of this Agreement and the
Memorandum of Option Grant, “Constructive Termination” shall mean any one of
the following events which occurs on or after the date of this Agreement: (i)
reduction of the Executive’s annual base salary; (ii) a material reduction in
Executive’s duties or a reduction in Executive’s title; (iii) a relocation of
Executive’s office to a location outside of Los Angeles

 

5

 

County or Orange County, California;  (iv) any material breach by the Company of its
obligations under this Agreement; or (v) any failure by the Company to obtain
the assumption of this Agreement by any successor or assign of the Company.

 

5.3           Severance Benefits.

 

(a)           Severance Payment.  In the event the Company terminates
Executive’s employment without Cause or if Executive terminates his employment
due to a Constructive Termination, and provided that Executive timely executes
a release as described in Section 8 hereof, Executive shall be entitled to a
severance payment equal to:  (i) 25% of
Executive’s then existing base salary (exclusive of bonus or any other
benefits) if such termination occurs on or prior to March 31, 2004; (ii) 50% of
Executive’s then existing base salary (exclusive of bonus or any other
benefits) if such termination occurs after March 31, 2004 and on or prior to
September 30, 2004; or (iii) 100% of Executive’s then existing base salary
(exclusive of bonus or any other benefits) if such termination occurs after
September 30, 2004.

 

(b)           Stock Options.  In the event the Company terminates Executive’s employment
without Cause or if Executive terminates his employment due to a Constructive
Termination, Executive’s outstanding stock options shall be treated as provided
in the documents governing such stock option grants.

 

(c)           Healthcare Coverage.  If Executive has been employed by the
Company for more than one year, he may elect to continue his medical coverage
under COBRA.  Assuming Executive
exercises his right to continued medical benefits in accordance with COBRA, the
Company will pay the premiums for Executive’s COBRA coverage as they become due
(including the premiums for any dependent coverage he elects) until the earlier
of:  (i) the date Executive accepts full
time employment and/or becomes covered under another plan; (ii) the date he is
otherwise no longer eligible for COBRA coverage; or (iii) twelve (12) months
after the effective date of separation. 
This Section 5.3(c) shall not apply if Executive’s employment is
terminated due to death or disability.

 

5.4           Cessation.  If Executive violates any provision of
Sections 3, 7 or 8 of this Agreement, any severance payments or other benefits
being provided to Executive will cease immediately, and Executive will not be
entitled to any further compensation from the Company.

 

6.             Change Of Control.

 

6.1           Definition of Change
of Control.  For purposes of this
Agreement and the Memorandum of Option Grant, “Change of Control” means the
occurrence of any of the following: (i) a sale of all or substantially all of
the assets of the Company to any other person or entity (other than an
affiliate of the Company); (ii) a merger or consolidation involving the Company
in which the Company is not the surviving corporation and the stockholders of
the Company immediately prior to the completion of such transaction hold,
directly or indirectly, less than fifty percent (50%) of the beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), or comparable successor
rules) of the securities of the surviving corporation (excluding any
stockholders who possessed a beneficial ownership interest in the surviving
corporation prior to the completion of such transaction); or (iii) an
acquisition by any person, entity or group within

 

6

 

the meaning of Section 13(d) or 14(d) of the
Exchange Act or any comparable successor provisions (excluding any Affiliate of
the Company or any employee benefit plan, or related trust, sponsored or
maintained by the Company) of the beneficial ownership (within the meaning of
Rule 13d-3 promulgated under the Exchange Act, or comparable successor rules)
of securities of the Company representing at least fifty percent (50%) of the
combined voting power entitled to vote in the election of directors.

 

6.2           Change of Control
Termination.  Notwithstanding
Section 5.3(a) to the contrary, in the event Executive’s employment with the
Company terminates other than (a) for Cause or (b) due to death, disability or
voluntary termination by the Executive, and such termination occurs sixty (60)
days prior to or twelve (12) months after such Change of Control (a “Change of
Control Termination”), then Executive shall be eligible to receive, upon timely
execution of a release as described in Section 8 hereof, (i) a severance
payment in cash equal to 100% of Executive’s then existing base salary
(exclusive of bonus or any other benefits) and (ii) the benefits set forth in
the Memorandum of Option Grant.

 

7.             Noninterference.

 

While employed
by the Company, and for two (2) years immediately following the termination
date of Executive’s employment, Executive agrees not to interfere with the
business of the Company.

 

7.1           Employees.  Executive shall not solicit, attempt to solicit,
induce, or otherwise cause any employee of the Company to terminate his or her
employment in order to become an employee, consultant or independent contractor
to or for any competitor of the Company.

 

7.2           Customers.  Executive shall not directly or indirectly
solicit (for a business competitive with the Company) the business of any
customer of the Company which at the time of termination or one (1) year
immediately prior thereto was listed on the Company’s customer list.

 

8.             Release.

 

In exchange for
the benefits and other consideration under this Agreement to which Executive
would not otherwise be entitled, Executive shall enter into and execute a
release substantially in the form attached hereto as Exhibit A (the
“Release”) upon his termination of employment. 
Unless the Release is executed by Executive and delivered to the Company
within twenty-one (21) days after the termination of Executive’s employment
with the Company, Executive shall not receive any severance benefits provided
under this Agreement or under the Memorandum of Option Grant.  Additionally, unless the Release is executed
by Executive and delivered to the Company within twenty-one (21) days after the
termination of Executive’s employment with the Company (and such release is not
revoked), any acceleration of Executive’s options as provided in the Memorandum
of Option Grant shall not be effective.

 

9.             General Provisions.

 

9.1           Notices.  Any notices provided hereunder must be in
writing and shall be deemed effective upon the earlier of personal delivery
(including personal delivery by facsimile

 

7

 

transmission) or the third day after mailing
by first class mail, to the Company at its primary office location and to
Executive at his address as listed on the Company payroll.

 

9.2           Severability.  Whenever possible, each provision of this
Agreement and the Memorandum of Option Grant will be interpreted in such manner
as to be effective and valid under applicable law, but if any provision of this
Agreement or the Memorandum of Option Grant is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement or the
Memorandum of Option Grant, as the case may be, will be reformed, construed and
enforced in such jurisdiction as if such invalid, illegal or unenforceable
provisions had never been contained herein or therein.

 

9.3           Waiver.  If either party should waive any breach of
any provisions of this Agreement, he or it shall not thereby be deemed to have
waived any preceding or succeeding breach of the same or any other provision of
this Agreement.

 

9.4           Complete Agreement.  This Agreement, together with the Memorandum
of Option Grant, constitutes the entire agreement between Executive and the
Company and it is the complete, final, and exclusive embodiment of their
agreement and supersedes any prior agreement written or otherwise between
Executive and the Company with regard to this subject matter.  It is entered into without reliance on any
promise or representation other than those expressly contained herein or
therein, and it cannot be modified or amended except in a writing signed by an
officer of the Company.

 

9.5           Counterparts.  This Agreement may be executed in separate
counterparts, any one of which need not contain signatures of more than one
party, but all of which taken together will constitute one and the same
agreement or plan.

 

9.6           Headings.  The headings of the sections hereof and of
the Memorandum of Option Grant are inserted for convenience only and shall not
be deemed to constitute a part hereof or thereof nor to affect the meaning
thereof.

 

9.7           Successors and Assigns.  This Agreement is intended to bind and inure
to the benefit of and be enforceable by Executive and the Company and their
respective successors, assigns, heirs, executors and administrators, except
that Executive may not assign any of his duties hereunder or thereunder and he
may not assign any of his rights hereunder or thereunder without the written
consent of the Company.

 

9.8           Attorney Fees.  If either party hereto brings any action to
enforce his or its rights hereunder, the prevailing party in any such action
shall be entitled to recover his or its reasonable attorneys’ fees and costs
incurred in connection with such action.

 

9.9           Arbitration.  To provide a mechanism for rapid and
economical dispute resolution, Executive and the Company agree that any and all
disputes, claims, or causes of action, in law or equity, arising from or
relating to this Agreement (including the Release) and the Memorandum of Option
Grant or their respective enforcement, performance, breach, or interpretation,
will be resolved, to the fullest extent permitted by law, by final, binding,
and confidential arbitration before a single arbitrator held in Irvine,
California and conducted by Judicial Arbitration & Mediation
Services/Endispute (“JAMS”), under its then-existing Rules

 

8

 

and Procedures.  The parties shall be entitled to conduct adequate discovery, and
they may obtain all remedies available to the parties as if the matter had been
tried in court.  The arbitrator shall issue
a written decision which specifies the findings of fact and conclusions of law
on which the arbitrator’s decision is based. 
Judgment upon the award rendered by the arbitrator may be entered by any
court having jurisdiction thereof. 
Unless otherwise required by law, the arbitrator will award reasonable
expenses (including reimbursement of the assigned arbitration costs) to the
prevailing party.  Nothing in this
Section 9.9 or in this Agreement or the Memorandum of Option Grant is intended
to prevent either Executive or the Company from obtaining injunctive relief in
court to prevent irreparable harm pending the conclusion of any such
arbitration.

 

9.10         Governing Law.  All questions concerning the construction,
validity and interpretation of this Agreement will be governed by the law of
the State of California as applied to contracts made and to be performed
entirely within California, excluding the rules on conflicts of law.

 

9

 

IN WITNESS
WHEREOF, the parties have executed this Agreement on the day and year first
above written.

 

 

	
  DIEDRICH COFFEE,
  INC.

  	
  EXECUTIVE

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
  /s/ Roger M. Laverty

  	
   

  	
  /s/ Martin A. Lynch

  	
   

  
	
   

  	
  Roger M. Laverty

  	
  Martin A. Lynch

  
	
   

  	
  Chief Executive Officer

  	
   

  
					

 

10

 

EXHIBIT A

 

RELEASE AGREEMENT

 

I understand that my position with Diedrich
Coffee, Inc. (the “Company”) terminated effective
                            ,
20      (the “Separation Date”).  The Company has agreed that if I choose to sign
this Agreement, the Company will pay me severance benefits (minus the standard
withholdings and deductions) pursuant to the terms of the Employment Agreement
entered into as of the 26 day of March 2004 between myself and the Company.  I understand that I am not entitled to this
severance payment unless I sign this Agreement.  I understand that in addition to this severance, the Company will
pay me all of my accrued salary and vacation, to which I am entitled by law
regardless of whether I sign this release.

 

In consideration for the severance payment I
am receiving under this Agreement, I agree not to use or disclose any of the
Company’s proprietary information without written authorization from the
Company, to immediately return all Company property and documents (including
all embodiments of proprietary information) and all copies thereof in my
possession or control, and to release the Company and its current and former
officers, directors, agents, attorneys, employees, shareholders, and affiliates
from any and all claims, liabilities, demands, causes of action, attorneys’
fees, damages, or obligations of every kind and nature, whether they are known
or unknown, arising at any time prior to the date I sign this Agreement.  This general release includes, but is not
limited to: all federal and state statutory and common law claims, claims
related to my employment or the termination of my employment or related to
breach of contract, tort, wrongful termination, discrimination, wages or
benefits, or claims for any form of compensation.  This release is not intended to release any claims I have or may
have against any of the released parties for (a) indemnification as a director,
officer, agent or employee under applicable law, charter document or agreement,
(b) severance and other termination benefits specifically provided for in my
Employment Agreement and the Memorandum of Option Grant which constitute a part
of the consideration for this release, (c) health or other insurance benefits
based on claims already submitted or which are covered claims properly
submitted in the future, (d) vested rights under pension, retirement or other
benefit plans, or (e) in respect of events, acts or omissions occurring after
the date of this Release Agreement.  In
releasing claims unknown to me at present, I am waiving all rights and benefits
under Section 1542 of the California Civil Code, and any law or legal principle
of similar effect in any jurisdiction: 
“A general release does not extend to claims which the creditor does not
know or suspect to exist in his favor at the time of executing the release,
which if known by him must have materially affected his settlement with the
debtor.”

 

I acknowledge that I am knowingly and
voluntarily waiving and releasing any rights I may have under the federal Age
Discrimination in Employment Act of 1967, as amended (“ADEA”).  I also acknowledge that the consideration
given for the waiver in the above paragraph is in addition to anything of value
to which I was already entitled.  I have
been advised by this writing, as required by the ADEA that: (a) my waiver and
release do not apply to any claims that may arise after my signing of this
Agreement; (b) I should consult with an attorney prior to executing this
release, (c) I have twenty-one (21) days within which to consider this release
(although I may choose to voluntarily execute this release earlier); (d) I have
seven (7) days following the execution of this release to revoke the Agreement;
and (e) this Agreement will not

 

11

 

be effective until the eighth day after this
Agreement has been signed both by me and by the Company.

 

This Agreement constitutes the complete,
final and exclusive embodiment of the entire agreement between the Company and
me with regard to the subject matter hereof. 
I am not relying on any promise or representation by the Company that is
not expressly stated herein.  This
Agreement may only be modified by a writing signed by both me and a duly
authorized officer of the Company.

 

I accept and agree to the terms and
conditions stated above:

 

 

	
  /s/ Martin
  A. Lynch

  	
   

  	
   

  
	
  Martin A.
  Lynch

  	
   

  	
   

  

 

12

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