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SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No.)
Filed by the Registrant [_]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement [_] Confidential, for Use of the Commission Only
(as permitted by Rule 14a- 6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Rule 14a-12
Silver Diner, Inc.
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
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[GRAPHIC SILVER DINER LOGO APPEARS HERE]
11806 Rockville Pike
Rockville, Maryland 20852
-----------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON AUGUST , 2002
-----------------
The annual meeting of shareholders of Silver Diner, Inc., a Delaware
corporation, will be held on , August , 2002 at 10:00 a.m. (Eastern
time), at the [Homewood Suites Hotel, 8130 Porter Road, Falls Church, Virginia
22042], for the following purposes:
1. To elect the company's directors;
2. To amend the company's Certificate of Incorporation, as amended, to
effectuate a reverse split (the "reverse stock split") of the outstanding
shares of the company's common stock. Pursuant to the reverse stock split,
shares of common stock held by each shareholder will be converted into a
lesser number of shares, based on a ratio of 5,000 outstanding shares being
converted into one share, with no fractional shares being issued as a result
of the reverse stock split. Each shareholder who would otherwise be entitled
to receive a fractional share post-reverse stock split shall receive in cash
$0.32 per share for each share held before the reverse stock split that
would result in a post-split fractional share.
3. To transact such other business as may properly come before the
meeting and at any adjournment thereof.
The Board of Directors has fixed the close of business on July , 2002 as
the record date to determine shareholders entitled to notice of, and to vote
at, the annual meeting and at any adjournment thereof. WHETHER OR NOT YOU
EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, SIGN AND DATE YOUR PROXY AND
MAIL IT IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED WITHIN
THE UNITED STATES OF AMERICA. IF YOU ATTEND THE MEETING, YOU MAY, IF YOU WISH,
REVOKE YOUR PROXY AND VOTE YOUR SHARES PERSONALLY.
By Order of the Board
YPE VON HENGST
Secretary
, 2002
[GRAPHIC LOGO SILVER DINER APPEAR HERE]
11806 Rockville Pike
Rockville, Maryland 20852
-----------------
PROXY STATEMENT
-----------------
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON AUGUST , 2002
This proxy statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Silver Diner, Inc., a Delaware
corporation, for use at the annual meeting of shareholders to be held on
, August , 2002 at 10:00 a.m. (Eastern time), at the [Homewood Suites
Hotel, 8130 Porter Road, Falls Church, Virginia 22042], and at any adjournment
thereof (the "Meeting").
Shareholders at the close of business on July , 2002 (the "Record Date")
are entitled to notice of, and to vote at, the Meeting. The shareholders will
be entitled to one vote for each share of common stock, par value $.00074 per
share, (the "Shares") held of record at the close of business on the Record
Date. To take action at the Meeting, a quorum which is composed of holders of a
majority of the outstanding Shares must be represented by proxy or in person at
the Meeting. On [Record Date], there were Shares outstanding.
Shares represented by valid proxies received by the company in time for the
Meeting will be voted as specified in such proxies. Any shareholder giving a
proxy has the right to revoke it at any time before it is exercised by
attending the Meeting and voting in person or by filing with the company|s
secretary an instrument of revocation or a duly executed proxy bearing a later
date.
Votes cast by proxy or in person at the Meeting will be tabulated by the
judge of elections appointed for the Meeting. The judge of elections will treat
abstentions as Shares that are present and entitled to be voted for purposes of
determining the presence of a quorum but as not voted for purposes of
determining the approval of any matter submitted to shareholders for a vote. If
a broker indicates on a proxy that such broker does not have discretionary
authority as to certain Shares, such Shares will not be considered as present
and entitled to vote with respect to that matter.
This proxy statement, the accompanying proxy, and the company|s annual
report to shareholders for the year ended December 30, 2001 and quarterly
report for the period ended April 21, 2002 were first sent or given to
shareholders on or about , 2002. ADDITIONAL COPIES OF THE ANNUAL REPORT
AND QUARTERLY REPORT, NOT INCLUDING EXHIBITS, WILL BE FURNISHED WITHOUT CHARGE
TO ANY SHAREHOLDER UPON WRITTEN REQUEST TO: SILVER DINER, INC., ATTENTION:
INVESTOR RELATIONS, 11806 ROCKVILLE PIKE, ROCKVILLE, MARYLAND 20852. EXHIBITS
TO THE ANNUAL REPORT MAY BE FURNISHED TO SHAREHOLDERS UPON THE PAYMENT OF AN
AMOUNT EQUAL TO THE REASONABLE EXPENSES INCURRED IN FURNISHING SUCH EXHIBITS. A
LIST OF THE SHAREHOLDERS OF RECORD ON THE RECORD DATE WILL BE AVAILABLE FOR
INSPECTION AT THE ABOVE ADDRESS FOR TEN (10) DAYS PRECEDING THE DATE OF THE
ANNUAL MEETING.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved the reverse stock split or the
transactions contemplated thereby or determined if this proxy statement is
truthful or complete. The Commission has not passed upon the fairness or merits
of the reverse stock split or the transactions contemplated thereby nor upon
the accuracy or adequacy of the information contained in this proxy statement.
Any representation to the contrary is a criminal offense.
This proxy statement is accompanied by (i) the annual report, which contains
the audited financial statements of the company for the three years ended
December 30, 2001, and (ii) the quarterly report on Form 10-Q which contains
the unaudited financial statements of the company for the first quarter ended
April 21, 2002. The financial statements in the annual report and in the
quarterly report should be reviewed in connection with voting for the matters
submitted to shareholders at the meeting.
This proxy statement provides you with detailed information about the
proposed amendment to the certificate of incorporation, reverse stock split and
related matters. We encourage you to read this entire document carefully.
The company makes forward-looking statements in this proxy statement that
are subject to risks and uncertainties. Forward-looking statements include
information about possible or assumed future results of the operations or the
performance of the company after the reverse stock split is accomplished. When
we use words such as "believes," "anticipates," "expects," "intends,"
"targeted," and similar expressions, we are making forward-looking statements
that are subject to risks and uncertainties. Various future events or factors
may cause our results of operations or performance to differ materially from
those expressed in our forward-looking statements. These factors include
changes in economic conditions, both nationally and in our primary market area,
development and construction activities, acceptance of the Silver Diner
concept, increased competition in the restaurant industry, weather conditions,
the quality of the company|s restaurant operations, the adequacy of operating
and management controls, dependence on discretionary consumer spending,
dependence on existing management, inflation and general economic conditions,
and changes in federal or state laws or regulations.
The words "we," "our," and "us," as used in this proxy statement, refer to
the company unless the context indicates otherwise.
2
SUMMARY TERM SHEET
This proxy statement contains information concerning the election of
directors, beneficial ownership, executive compensation and other matters that
are generally included in a proxy statement for an annual shareholders meeting.
In addition, this proxy statement contains information concerning the proposed
reverse stock split.
The following is a summary of the material terms of the proposed reverse
stock split. This summary is qualified in its entirety by reference to the more
detailed information appearing elsewhere in, or accompanying this proxy
statement, including the financial statements in the annual report and the
quarterly report. We urge you to review the entire proxy statement and
accompanying materials carefully.
. Reverse Stock Split. We are asking the company's shareholders to
approve an amendment to the company|s certificate of incorporation that
will provide for the conversion and reclassification of each outstanding
share of common stock into one five-thousandth (1/5,000) of a share of
common stock in a reverse stock split. In the reverse stock split, you
will receive one share of common stock for each 5,000 shares you hold
immediately prior to the effective date of the reverse stock split and
you will receive cash in lieu of any fractional shares to which you
would otherwise be entitled. The cash payment will be equal to $0.32 per
pre-split share.
Special Factors
. Effect of the Reverse Stock Split
As a result of the reverse stock split:
. our number of record shareholders, measured as of April 21, 2002,
will be reduced from approximately 962 to approximately 172, and the
number of outstanding shares of company common stock will decrease
from approximately 11,971,486 to approximately 1,860 (9,271,000 on a
pre-split basis), resulting in a significant decrease in the number
of shares that will be available for purchase and sale in the public
market;
. we will be entitled to terminate the registration of company common
stock under the Securities Exchange Act of 1934, as amended, which
will mean that we will no longer be required to file reports with the
Securities and Exchange Commission or be classified as a public
company;
. our common stock will no longer be traded on the OTC Bulletin Board,
and no public market will exist for our common stock;
. the market price for a single share of company common stock initially
should, assuming that there is a market for such common stock,
approximate 5,000 times the immediately pre-reverse split market
price for a single share of pre-reverse stock split common stock,
depending on market conditions;
. the book value per share of company common stock as of April 21, 2002
will be changed from approximately $ per share on an historical
basis to approximately $ (pre-split) per share on a pro forma
basis, after giving effect to the cash payment for fractional shares;
. the percentage ownership of company common stock beneficially owned
by our executive officers and directors as a group will increase from
approximately 40% at April 21, 2002 to approximately %
immediately following the reverse stock split.
. our cash and equivalents will be reduced from approximately
$2,560,000 at April 21, 2002 to approximately $1,520,000 on a pro
forma basis as of April 21, 2002, with a corresponding reduction in
our net stockholders' equity.
3
. Purposes of and Reasons for the Reverse Stock Split
The principal purposes of, and our reasons for, effecting the reverse stock
split are:
. the cost savings of approximately $150,000 per year that we expect to
realize as a result of the deregistration of our common stock under
the Securities Exchange Act of 1934, as amended, and the resulting
decrease in expenses relating to servicing a relatively large number
of shareholders holding small positions in our common stock;
. the additional savings in terms of management's and employees' time
that will no longer be spent preparing the periodic reporting
required of publicly-traded companies under the Securities Exchange
Act of 1934 and managing shareholder relations and communications
with approximately 4,000 shareholders as compared to less than 300
post reverse stock split;
. the fact that we have not realized many of the benefits associated
with being a publicly traded company, such as enhanced shareholder
value, access to capital and business credibility, due to the limited
liquidity and low market price of our common stock in comparison to
our peers;
. the fact that the poor performance of our common stock in the public
market has been a detriment to attracting and retaining high quality
employees, in particular restaurant managers because of the perceived
negative image that a low stock price creates; and
. our belief that our shareholders have not benefited proportionately
from the costs of registration and OTC Bulletin Board listing of our
stock, principally as a result of the thin trading market for our
stock, which we believe has resulted in:
. depressed market prices for our stock; and
. a limitation of our shareholders' abilities to sell relatively
large blocks of their shares in the open market without
significantly decreasing the market price.
. Alternatives Considered: We considered a cash-out merger of the company
or a tender offer as alternatives to the reverse stock split. We
determined that we did not have sufficient cash to pay the larger number
of shareholders who would be cashed out in a merger. Further, the tender
offer option gave no guarantee that the number of shareholders would be
reduced sufficiently and thus there would be no guarantee that we would
no longer be a public company. We did not consider a sale of the company.
. Fairness of the Reverse Stock Split: We believe that the reverse stock
split is fair to, and in the best interest of, our shareholders,
including unaffiliated shareholders as a group. The board of directors
has unanimously approved the reverse stock split. The board of
directors, based on financial analysis completed by a special committee
of directors, has determined that the price to be paid for the
fractional shares is fair both to the company and to the shareholders
for their fractional interests. The board|s opinion is based on the
following factors:
. Historical Market Prices of Company Common Stock: Although the
company's common stock is quoted on the OTC Bulletin Board, there is
a limited trading market for the stock. The high and low sale prices
for the common stock from January 1, 2000 to April 21, 2002 ranged
from a high of $1.125 in January, 2000, to a low of $0.19 per share
in April 2002. The last sale price of the common stock on May 9,
2002, which was the last day on which the common stock was traded
before we announced the proposed reverse stock split, was $0.25 per
share.
. Comparison of Implied Valuation Multiple to Multiples of Comparable
Publicly-Traded Companies. The implied enterprise value to earnings
before interest, taxes, depreciation and amortization ("EBITDA")
multiple at which the transaction is being proposed compares
favorably to the median enterprise value to EBITDA trading multiples
of 21 comparable publicly-traded restaurant companies.
4
. Comparison of Implied Valuation Multiple to Acquisition Multiples
from Recent Merger and Acquisition Transactions Involving Comparable
Publicly-Traded Companies. The implied enterprise value to EBITDA
multiple at which the transaction is being proposed compares
favorably to the median enterprise value to EBITDA purchase price
multiples paid for five comparable publicly-traded companies that
were parties to remaining interest purchase transactions since
January 1, 2001.
. Premium over Market Prices: The price to be paid for fractional
shares in the reverse stock split on a pre-split basis represents a
28% premium over the closing trading price for our common stock on
May 9, 2002, the day prior to announcement of the split, a 28%
premium over the average closing trading price for the 30 calendar
days prior to May 2, 2002, and a 33% premium over the average closing
trading price for the first four months of 2002 through May 2, 2002.
. Premium over Discounted Cash Flow Value: The price to be paid for
fractional shares in the reverse stock split represents a 14.3%
premium over the highest per share valuation and 88.2% premium over
the lowest per share valuation of the company reached through a
discounted cash flow analysis.
. Premium Over Liquidation Value: The price to be paid for a
fractional share in the reverse stock split represents a 68.4%
premium over the per share value of the company reached through a
liquidation analysis.
. Based on its financial analysis and considering the above factors,
the board determined that the cash price of $0.32 per pre-split share
is fair to all shareholders, both those who would be eliminated
because they own less than 5,000 shares and who will receive only
cash in lieu of fractional shares in the reverse stock split, and
those who will remain shareholders.
. Opportunity to Liquidate or Acquire Shares of Common Stock: The reverse
stock split will present an opportunity for shareholders to liquidate
their holdings without incurring brokerage costs, particularly given the
limited liquidity for shares of the company's common stock. Conversely,
shareholders who wish to increase their holdings in order to avoid being
cashed out may do so by purchasing shares of common stock on the open
market prior to the effective time of the reverse stock split, which is
expected to be , 2002.
. Effectiveness of the Reverse Stock Split; Conditions: The reverse stock
split will not be effected unless and until the company's shareholders
approve the reverse stock split and the board of directors determines
that: (i) the company has available funds necessary to pay for the
fractional shares resulting from the transaction; (ii) the company has
sufficient cash reserves to continue to operate its business and; (iii)
no event has occurred or is likely to arise that might have a materially
adverse effect on the company. Assuming these conditions are satisfied,
the company, as promptly as possible, will file the amendment to its
certificate of incorporation with the Delaware Secretary of State and
thereby effect the reverse stock split. We anticipate that the reverse
stock split will be effected on , 2002.
. Effect of Reverse Stock Split on Outstanding Options: As a result of
the reverse stock split, the exercise price of each outstanding option
will automatically increase by a factor of 5,000 and the number of
underlying shares will decrease by a factor of 5,000. When existing
options are exercised, the exercise will cover underlying fractional
shares of common stock resulting from the reverse stock split, but the
company will not issue fractional shares upon exercise of an option.
Instead, we will pay the optionee cash for any fractional shares in an
amount equal to the difference between the exercise price of the option
and the fair market value per share of the common stock, determined
annually by the board of directors, multiplied by the fraction of a
share represented by the option.
. Financing for the Reverse Stock Split: We estimate that approximately
$865,000 will be required to pay for the fractional shares of company
common stock exchanged for cash in the reverse stock split. We intend to
finance the purchase through cash and cash equivalents on hand, a
portion of which was borrowed under our loan agreement with our bank.
5
. Dissenters' Rights: Under the Delaware General Corporation Law and the
company's certificate of incorporation and bylaws, the company's
shareholders are not entitled to dissenters' appraisal rights in
connection with the reverse stock split.
Questions and Answers Regarding Stock Split
Q: What is the vote required?
A: The proposal must receive the affirmative vote of the holders of a majority
of the shares of the company's common stock entitled to vote at the meeting.
If you do not vote your shares, either in person or by proxy, or if you
abstain from voting on the proposal, it has the same effect as if you voted
against the proposal. If your shares are held in a brokerage account and you
do not instruct your broker on how to vote on the proposal, your broker will
not be able to vote for you. This will have the same effect as a vote
against the proposal. The company's directors intend to vote their shares in
favor of the reverse stock split. Because the directors collectively hold
approximately 40% of the outstanding shares of common stock, the affirmative
vote of other shareholders who hold an additional 11% of the outstanding
shares is sufficient to approve the reverse stock split.
Q: What is the recommendation of our board of directors regarding the proposal?
A: Our board of directors has determined that the reverse stock split is fair
to our shareholders, including unaffiliated shareholders, and that the
reverse stock split is advisable and in the best interests of the company
and its shareholders. Our board of directors has therefore unanimously
approved the proposed amendment to the certificate of incorporation that
will effect the reverse stock split, and recommends that you vote "FOR"
approval of the proposed amendment at the annual meeting.
Q: Should I send in my stock certificates now?
A: No. After the effective date of the reverse stock split we will send
instructions on how to receive any cash payments or shares of company common
stock that you may be entitled to receive.
Q: Will I have dissenters' rights in connection with the reverse stock split?
A: No. Delaware law does not provide you with dissenters' or appraisal rights
in connection with the reverse stock split.
Q: Will I be able to sell my shares following the reverse stock split?
A: That is uncertain. Because the number of outstanding shares of company
common stock will be reduced to approximately 1,860, a very limited market
for those shares may exist. Nonetheless, the company common stock will have
no restrictions on transfer. Please note that the board of directors will
implement a limited liquidity plan to buy common stock from our shareholders
at the end of the two fiscal quarters following this transaction, as
described in more detail in "Description of the Reverse Split--Termination
of Securities Exchange Act Registration."
Q: Will I continue to receive information about the company if I remain a
shareholder?
A: Yes. We will continue to publicly release our unaudited quarterly financial
statements as soon as practicable following each quarter and audited annual
financial statements as soon as practicable following each fiscal year via
our web page. Our web page will also be used to periodically communicate
with shareholders. Our web page address is www.silverdiner.com. Copies of
any materials released on our web page will also be provided to shareholders
on request.
6
Q. Will there be any information provided by the company that will assist me in
valuing my common shares once the reverse stock split has been completed?
A. In addition to making the company's financial statements available for
shareholders, it is also contemplated that the board will periodically
establish a price for the company's common shares for use in connection with
the company's limited liquidity plan and outstanding stock options. Such
price should not be viewed as establishing a market value of your common
stock, but may assist in making your assessment of market value.
Q. Are the company's officers and members of the board of directors selling
their common shares in this transaction?
A. No. Fractional shares held by the company's officers and directors resulting
from the reverse stock split will be cashed out on the same basis as
fractional shares held by all shareholders who own more than 5,000 shares.
The cashed-out portion will amount to less than 0.5% (less than one-half of
one percent) of the common shares owned by those persons.
Q. Does the company have any plans for growth and will the reverse stock split
enhance the value of the company|s common stock?
A. In order to keep its focus on continuing to achieve and maintain improved
operating performance of its existing restaurants, the company does not
intend to open any new restaurants during 2002 or 2003. Historically,
opening a new restaurant has had a negative financial impact on the company
in the year in which it was opened. However, the company may resume growth
and open restaurants in 2004 and beyond, depending on the board|s evaluation
of the company's 2002 operating performance and its ongoing estimates of
operating performance, future cash flow and capital. The company hopes that
going private, together with improved operations, will provide an
opportunity to enhance the value of the company's common stock through cost
savings and improved use of management and employees' time.
Q. How may I obtain additional information concerning this transaction after
you have mailed the proxy statement to me?
A. In the interests of insuring that all shareholders get equal access to
information in an efficient way, we will post, when permitted, Frequently
Asked Questions (FAQs) concerning the proposed reverse stock split on our
web site.
7
TABLE OF CONTENTS
Page
----
BENEFICIAL OWNERSHIP OF SHARES........ 9
ELECTION OF DIRECTORS................. 11
EXECUTIVE COMPENSATION................ 14
DESCRIPTION OF THE REVERSE STOCK SPLIT 24
SPECIAL FACTORS....................... 26
ANALYSIS OF THE SPECIAL COMMITTEE..... 39
INDEPENDENT ACCOUNTANTS............... 44
OTHER MATTERS......................... 44
SHAREHOLDER PROPOSALS................. 44
METHOD OF PROXY SOLICITATION.......... 44
APPENDICES
8
BENEFICIAL OWNERSHIP OF THE SHARES
As of April 21, 2002, the company had 11,971,486 shares of commons stock
issued and outstanding. The following table sets forth, to the company's
knowledge as of April 21, 2002, the beneficial ownership of shares by each
person or entity beneficially owning more than 5% of the common stock, each
director, each nominee, and certain executive officers, individually, and all
directors and executive officers as a group.
Amount and
Nature of
Beneficial
Name and Address(1) of Beneficial Owner Ownership(2) Percent(3)
- --------------------------------------- -------------- ----------
Catherine Britton.......................................... 2,463,612(4) 20.58
Michael Collier............................................ 79,926(5) *
Robert T. Giaimo........................................... 409,065(6) 3.42
Ype Von Hengst............................................. 183,881(7) 1.54
Edward H. Kaplan........................................... 1,002,000(8) 8.37
Patrick Meskell............................................ 72,574(9) *
Louis P. Neeb.............................................. 14,572(10) *
Charles M. Steiner......................................... 566,729(11) 4.73
All directors and executive officers as a group (8 persons) 4,792,359(12) 39.88
- --------
* means less than 1%
(1) The address for each beneficial owner listed above is Silver Diner, Inc.,
11806 Rockville Pike, Rockville, Maryland 20852.
(2) Unless otherwise stated in Notes 4 through 12 below, all references to
options are to options exercisable currently and within 60 days of April
21, 2002.
(3) Each percentage of beneficial ownership is calculated using a different
denominator, consisting of the total number of shares outstanding
(11,971,486), increased by the number of options owned by the beneficial
owner that are exercisable within 60 days of April 21, 2002. The
denominator used to calculate the percentage of beneficial ownership of
all directors and executive officers as a group is the sum of the total
number of shares outstanding (11,971,486) and all outstanding options held
by directors and executive officers that are exercisable within 60 days of
April 21, 2002.
(4) Includes: (a) 2,443,609 directly owned shares; (b) options to purchase
2,000 shares granted under the 1996 Stock Option Plan, 1,000 of which have
an exercise price of $0.8125 per share, and 1,000 of which have an
exercise price of $0.938 per share; and (c) 20,003 shares assigned to Ms.
Britton by Robert T. Giaimo which are subject to an option held by Mr.
Clinton A. Clark, a former director of the company, at an exercise price
of $3.60 per share through April 5, 2004. Does not include 409,065 shares
beneficially owned by Mr. Giaimo, Ms. Britton's spouse. Ms. Britton
disclaims beneficial ownership of the shares beneficially owned by Mr.
Giaimo.
9
(5) Includes: (a) 78,926 directly owned shares; and (b) options to purchase
1,000 shares granted under the 1996 Stock Option Plan at an exercise price
of $0.938 per share.
(6) Includes 409,065 directly owned shares. Does not include any shares
beneficially owned by Catherine Britton, Mr. Giaimo's spouse. Mr. Giaimo
disclaims any beneficial ownership of shares beneficially owned by
Catherine Britton
(7) Includes 183,881 directly owned shares.
(8) Includes: (a) 1,000,000 directly owned shares; and (b) options to purchase
2,000 shares granted under the 1996 Stock Option Plan, 1,000 of which have
an exercise price of $0.8125 per share, and 1,000 of which have an
exercise price of $0.938 per share.
(9) Includes: (a) 47,570 directly owned shares; and (b) options to purchase
25,004 shares granted under the Earned Ownership Plan at an exercise price
of $.0003 per share.
(10) Includes: (a) options to purchase 12,572 shares granted under the 1991
Stock Option Plan at the exercise price of $.003 per share; and (b)
options to purchase 2,000 shares granted under the 1996 Stock Option Plan,
1,000 of which have an exercise price of $0.8125 per share, and 1,000 of
which have an exercise price of $0.938 per share.
(11) Includes: (a) 564,729 shares held of record by the Steiner Family
Partnership (Mr. Steiner owns a 25% interest in, and is the managing
partner of, The Steiner Family Partnership and, therefore, may be deemed
to beneficially own all shares held of record by such partnership. Except
for the 141,182 shares resulting from his 25% ownership interest in The
Steiner Family Partnership, Mr. Steiner disclaims beneficial ownership of
all such shares); and (b) options to purchase 2,000 shares under the 1996
Stock Option Plan, 1,000 of which have an exercise price of $0.8125 per
share, and 1,000 of which have an exercise price of $0.938 per share.
(12) The total shares beneficially owned by all directors and executive
officers as a group was calculated by taking the sum of all shares
beneficially-owned by each director and executive officer, as reflected in
the table.
10
ELECTION OF DIRECTORS
DIRECTORS
The board currently consists of eight directors whose terms continue until
the next annual meeting of shareholders, or until their respective successors
are elected and have qualified. At each annual meeting, directors are elected
for a term of one year to succeed those directors whose term expires.
The election of each director requires the affirmative vote by holders of a
plurality of the outstanding shares present and entitled to be voted at the
Meeting. The persons named in the proxy solicited by the board will vote,
unless the proxy is marked otherwise, to elect the persons identified in the
table below. If a nominee is unable to serve as a director, the persons acting
under the proxy may vote the proxy for the election of a substitute. It is not
currently contemplated that any nominee will be unable to serve. The board
recommends that shareholders vote FOR the nominees listed below.
Director
Name Age Since Position
---- --- -------- --------
Robert T. Giaimo.. 50 1996 Chairman of the Board, President, Chief
Executive Officer, and Treasurer
Catherine Britton. 48 1996 Director
Michael Collier... 47 1999 Director
Ype Von Hengst.... 51 1996 Director, Vice President, Executive Chef, and
Secretary
Edward H. Kaplan.. 63 1996 Director
Patrick Meskell... 49 2002 Director, Executive Vice President,
Operations
Louis P. Neeb..... 63 1996 Director
Charles M. Steiner 60 1996 Director
Robert T. Giaimo has been the company's Chairman of the Board, President,
Chief Executive Officer and Treasurer since March 1996. In 1987 Mr. Giaimo
developed and popularized the Silver Diner concept with Ype Von Hengst after
conducting a one-year national tour of diner-style restaurants. Mr. Giaimo has
been the Co-Founder, Director, President, Chief Executive Officer and Treasurer
of Silver Diner Development, Inc. since its inception in 1987. Mr. Giaimo was
president, chief executive officer and director of Monolith Enterprises, Inc.
("Monolith") from 1971 to January 1987. From 1972 through 1976, Mr. Giaimo
co-founded and operated, through Monolith, Blimpies Restaurant in Georgetown.
In 1977, Mr. Giaimo co-founded and operated, through Monolith, The American
Cafe restaurant, an innovative, award-winning restaurant chain that was one of
the first restaurants to promote "American cuisine" and helped popularize the
croissant sandwich. In 1985, Mr. Giaimo sold The American Cafe to W.R. Grace &
Co. Mr. Giaimo graduated from the Business School of Georgetown University in
1974 and Harvard University's Smaller Company Management Program in 1982. He is
a member of the Young President's Organization and serves as a Director and
Co-chairman of Development. In 1993, Mr. Giaimo received an "Entrepreneur of
the Year" award from Inc. Magazine in conjunction with Ernst & Young and
Merrill Lynch. Mr. Giaimo is married to Catherine Britton. Mr. Giaimo currently
serves on the board of directors of Panera Bread Co., a publicly traded company
headquartered in St. Louis, Missouri, with annual sales in excess of $200
million.
Catherine Britton has been a Director since March 1996 and was a director of
Silver Diner Development, Inc. from July 1995 until March 1996. She assisted
with marketing and design of Silver Diner restaurants and has been involved
with menu development and concept evolution since Silver Diner Development,
Inc.'s inception. She also participated extensively in the development of
Silver Diner restaurants. Ms. Britton graduated from Georgetown University in
1975, receiving a Bachelor of Arts degree in Philosophy. Ms. Britton earned a
Masters Degree in Special Education from George Washington University in 1978.
Ms. Britton is married to Robert T. Giaimo.
11
Michael Collier has been a Director since March 1999. Mr. Collier is the
President of Uniwest Group, Inc. and Uniwest Construction, Inc., companies
which are in the real estate development and general contracting business and
serve as the developer and general contractor for the company's diners. He is
also President of Atlantic Environmental Services, Incorporated, a full-service
environmental company.
Ype Von Hengst has been a Director, Vice President, Executive Chef and
Secretary since March 1996 and co-founder, director, vice president of culinary
operations, and executive chef of Silver Diner Development, Inc. since 1987.
Mr. Hengst was a director of operations of "Dominiques" restaurant in
Washington, D.C. from May through September 1987. From 1984 to 1987, Mr. Hengst
was corporate executive chef and director for Food Service for The American
Cafe and was responsible for the central kitchen and bakeshop, menu changes,
and food preparation for all seven American Cafe restaurants. From 1981 to
1984, Mr. Hengst was corporate executive chef for Restaurant Associates in New
York, New York, where he supervised over fifteen diverse full-service
restaurants. From 1976 to 1981, Mr. Hengst held executive chef positions in
Charlotte, North Carolina, Cleveland, Ohio, Houston, Texas, and New York, New
York. Prior to 1976, Mr. Hengst worked as a chef in Europe.
Edward H. Kaplan has been Director since March 1996 and was a director of
Silver Diner Development, Inc. from 1987 until March 1996. He is a real estate
developer and investor and has served since 1983 as a Director of Palmer
National Bank, Washington, D.C. and subsequently, its successor, George Mason
Bankshares until April 2, 1998, when George Mason merged into United Bankshares
and now serves on the board of directors of United Bank of Virginia. Mr. Kaplan
received his B.A. from the University of Pennsylvania, Wharton School in 1961.
He currently is a member of the Maryland Public Television Commission and the
Maryland Public Television Foundation board of directors.
Patrick Meskell has been a Director since May, 2002, and has been Executive
Vice President, Operations, since May 2001. From January 1996 to May 2001 he
held the position of Senior Vice President, Human Resources. Mr. Meskell was an
independent consultant to institutions, specializing in the areas of risk
management system design and implementation from 1988 to 1992 and Director of
Organizational Development & Management & Operations Training for the Student
Loan Marketing Association from 1992 to 1995. Mr. Meskell graduated with a
degree in European studies from the University of Limerick in 1977 and owned
and managed software companies in Ireland.
Louis P. Neeb has been a Director since March 1996 and was a director of
Silver Diner Development, Inc. from 1994 until March 1996. Mr. Neeb is
currently President of Neeb Enterprises, Inc., a corporation that provides
management consulting services and Chairman of the Board of Mexican
Restaurants, Inc. He was the president and chief executive officer of The
Spaghetti Warehouse, Inc. from July 1991 until January 1994 and of Geest Food
USA from 1989 until 1991. From 1982 until 1987, he served as president and
chief executive officer of Creative Food N Fun, a subsidiary of W.R. Grace &
Co. From 1985 until 1987, he served as president and chief executive officer of
a W.R. Grace & Co., affiliate; Taco Villa, Inc. Mr. Neeb was employed by The
Pillsbury Company from 1973 until 1982. From 1980 to 1982, he served as an
executive vice president of The Pillsbury Company and as chairman and chief
executive officer of its affiliate, Burger King Corporation. In 1973, he was
director of operations at Steak & Ale Restaurants, Inc., another affiliate of
The Pillsbury Company. His leadership role with Steak & Ale Restaurants, Inc.
continued until 1980, after serving as vice president of operations and
eventually president and chief operating officer. Currently, Mr. Neeb serves as
a director of CEC Entertainment, a publicly-traded company. He was previously a
director of Franchise Finance Corporation of America, Inc., a publicly-traded
company, until its sale in 2001 to GE Capital. Mr. Neeb received a BBA in
marketing from the University of Notre Dame in 1961 and an MBA from George
Washington University in 1969.
Charles M. Steiner has been a Director since March 1996. Mr. Steiner was a
director of Silver Diner Development, Inc. from 1987 until March 1996. He was
the chief executive officer of Branch Group, Inc., an electric parts
distributor. In 1975, Mr. Steiner founded IMARK, an electric cooperative, and
in 1991 founded
12
EDIC, a distribution insurance company. He is a former director and officer of
the National Association of Electric Distributors (NAED). He received a B.B.A.
in Accounting from the University of Pittsburgh in 1963. Mr. Steiner is
currently a private investor.
There is no family relationship between any of the company's directors or
officers except that Catherine Britton is the wife of Robert T. Giaimo. There
are no arrangements between any director of the company and any other person
pursuant to which he was selected as a director. Except for Patrick Meskell,
who is a citizen of Ireland, each of the directors is a citizen of the United
States. None of the directors has been convicted in a criminal proceeding in
the past five years, and none of the directors has been subject to a civil
proceeding during the past five years that has resulted in any enjoinments or
prohibitions regarding federal or state securities laws.
Meetings of the Board of Directors
The board held three (3) meetings (including telephonic meetings) during the
year ended December 31, 2001. During the year ended December 31, 2001, each
director attended at least 75% of the aggregate of the total number of meetings
of the board (held during the period for which he/she was a director) and the
total number of meetings held by all board committees on which he/she served
(during the periods that he/she served as a member). The board has a standing
audit committee, and a standing compensation committee, but it does not have a
standing nominating committee.
Audit Committee
The audit committee is composed of Messrs. Steiner, Chairman, Neeb and
Kaplan, each of whom is independent as defined in Rule 4310(c)(26)(B)(i) of the
National Association of Securities Dealers' listing standards. The audit
committee had three (3) meetings (as defined in the Audit Committee Charter)
during the year ended December 30, 2001. The principal functions of the audit
committee are to make recommendations to the board regarding the selection of
the company's independent accountants, to consult with the company's
independent accountants and financial and accounting staff, to review and
report to the board with respect to the scope of audit procedures, accounting
practices, and internal accounting and financial controls, to review all
quarterly and annual financial statements prior to filing them with the
Securities and Exchange Commission and to discuss such statements, together
with the annual auditor report, with management.
Audit Committee Report
The following constitutes the report of the audit committee:
The audit committee oversees the company's financial process on behalf of
the board. Management is responsible for the company's financial reporting
process including its system of internal control, and for the preparation of
consolidated financial statements in accordance with generally accepted
accounting principles. The company's independent auditors are responsible for
auditing those financial statements. Our responsibility is to monitor and
review these processes. It is not our duty or our responsibility to conduct
auditing or accounting reviews or procedures. We are not employees of the
company and we may not be, and we may not represent ourselves to be or to serve
as, accountants or auditors by profession or experts in the fields of
accounting or auditing. Therefore, we have relied, without independent
verification, on management|s representation that the financial statements have
been prepared with integrity and objectivity and in conformity with accounting
principles generally accepted in the United States of America and on the
representations of the independent auditors included in their report on the
company's financial statements. Our oversight does not provide us with an
independent basis to determine that management has maintained appropriate
accounting and financial reporting principles or policies, or appropriate
internal controls and procedures designed to assure compliance with accounting
standards and applicable laws and regulations. Furthermore, our considerations
and discussions with management and the independent auditors do not assure that
the company's financial statements are presented in accordance with generally
accepted accounting principles, that the audit or our company's financial
statements has been carried out in accordance with generally accepted auditing
standards or that our company's independent accountants are in fact
"independent."
13
The audit committee discussed with the company's independent auditor the
overall scope and plans for the audit. The audit committee met with the
independent auditor, with and without management present, to discuss the
results of the auditor's examination, the auditor evaluation of the company's
internal controls and the overall quality of the company's financial reporting.
The audit committee reviewed with the independent auditor the quality, and
not just the acceptability, of the company's accounting principles and such
other matters as are required to be discussed with the audit committee under
generally accepted auditing standards. In addition, the audit committee has
discussed with the independent auditor the auditor's independence from
management and the company.
In reliance on the reviews and discussions referred to above, the audit
committee recommended to the board (and the board has approved) that the
audited financial statements be included in the company's Annual Report on Form
10-K for the year ended December 30, 2001 for filing with the Securities and
Exchange Commission.
AUDIT COMMITTEE
Charles M. Steiner, Chairman
Louis P. Neeb, Audit Committee
Member
Edward H. Kaplan, Audit Committee
Member
Compensation Committee
The compensation committee, composed of Messrs. Steiner, Chairman, Collier
and Neeb, held one (1) meeting during the year ended December 31, 2001. The
principal functions of the compensation committee are to review and make
recommendations to the board on all compensation and hiring issues that relate
to officers and senior staff members.
Section 16(a) Beneficial Ownership Compliance
To the company's knowledge, based solely upon a review of reports and other
information furnished to it by its directors, officers, greater than 10%
beneficial owners of the company, and other persons subject to the reporting
requirements (collectively, the "Reporting Persons"), all reports required to
be filed by such Reporting Persons under Section 16(a) of the Securities
Exchange Act of 1934, as amended, were duly filed during the year ended
December 31, 2001, with one exception. Michael Collier, a director, exercised
an option for 8,861 shares on August 6, 2001 but did not file a Form 4 during
September 2001 reporting such exercise. A Form 4 covering this transaction was
filed on February 15, 2002.
EXECUTIVE COMPENSATION
The following table sets forth summary information concerning compensation
paid by the company to each of the company's executive officers whose aggregate
annual cash compensation exceeded $100,000 for fiscal year 2001.
14
Summary Compensation Table
Annual Compensation Long-Term Compensation
------------------------------------- -----------------------------------------------
Awards Payouts
--------------------- ----------------------
Securities
Restricted Underlying
Name and Principal Other Annual Stock Options/ LTIP All Other
Position Year Salary($) Bonus($) Compensation($) Award(s)($) SARS($) Payouts($) Compensation($)
- --------------------------- ---- --------- -------- --------------- ----------- ---------- ---------- ---------------
Robert T. Giaimo............ 2001 278,043 0 18,000 0 0 (1) 0 67,842(2)
Chairman of the Board, 2000 268,697 0 18,000 0 0 0 57,827(2)
President, Chief Executive 1999 258,315 0 18,000 0 0 0 57,061(2)
Officer and Treasurer
Ype Von Hengst.............. 2001 158,495 0 26,000 0 0 (3) 0 32,135(5)
Director, Vice President, 2000 153,029 0 26,000 0 0 0 27,535(5)
Executive Chief and 1999 145,173 0 26,000 0 150,000(4) 0 27,535(5)
Secretary
Patrick Meskell............. 2001 140,857 0 6,000 0 0(6) 0 0
Executive VP, Operations 2000 109,769 0 6,000 0 0 0 0
1999 101,769 5,000 6,000 0 200,000(7) 0 0
Jon Abbott.................. 2001 138,481(11) 0 2,500 0 0 0 32,500(10)
Vice President, 2000 103,846 0 4,500 100,000(8) 100,000(9) 0 0
Operations 1999 0 0 0 0 0 0 0
- --------
(1) Pursuant to resolutions unanimously approved by the company's Board of
Directors on December 13, 2001, Mr. Giaimo agreed to surrender for
cancellation options for 400,000 shares exercisable at $1.2375 per share,
expiring on December 14, 2003 and which would have become 100% exercisable
at December 29, 2001. The Board agreed to grant Mr. Giaimo new options for
400,000 shares on July 31, 2002, which options will (i) have an exercise
price equal to 110% of the fair market value of the shares on July 31,
2002 (or February 1, 2003, as applicable), (ii) be 100% vested on July 31,
2002 (or February 1, 2003, as applicable) and (iii) expire on July 30,
2007, provided that Mr. Giaimo has the right at any time prior to July 31,
2002 to elect, for federal income tax purposes, to delay until February 1,
2003 issuance of a portion of the new options to be issued to him.
(2) Represents the annual premiums the company paid on a $3,000,000 split
dollar life insurance policy on the life of Mr. Giaimo.
(3) Pursuant to resolutions unanimously approved by the board on December 13,
2001, Mr. Von Hengst agreed to surrender for cancellation options for an
aggregate of 355,000 shares, as follows: (i) an option for 150,000 shares,
which would have become 100% exercisable at $1.125 per share on December
29, 2001 and expiring on December 28, 2007: (ii) an option for 55,000
shares, exercisable at $0.625 per share on December 31, 2005 and expiring
on December 15, 2008; and (iii) an option for 150,000 shares, exercisable
at $1.00 per share, with 60% becoming exercisable on January 1, 2002, 80%
on January 1, 2003 and 100% on January 1, 2004, and expiring on December
7, 2009. The board agreed to grant Mr. Von Hengst new options for an
aggregate 355,000 shares on July 31, 2002, which options will (i) have an
exercise price equal to the fair market value of the shares on July 31,
2002 (or February 1, 2003, as applicable) and (ii) vest on the same dates
and expire on the same dates as would have the previously-described
canceled options, provided that Mr. Von Hengst has the right at any time
prior to July 31, 2002 to elect, for federal income tax purposes, to delay
until February 1, 2003 issuance of a portion of the new options to be
issued to him.
(4) Option was canceled pursuant to resolutions approved by the board on
December 13, 2001, as described in Note 3.
(5) Represents the annual premiums the company paid on a $1,500,000 split
dollar life insurance policy on the life of Mr. Von Hengst.
(6) Pursuant to resolutions unanimously approved by the board on December 13,
2001, Mr. Meskell agreed to surrender for cancellation options for an
aggregate of 430,012 shares as follows: (i) an option for 100,000 shares,
which would have become 100% exercisable at $1.125 per share on December
29, 2001 and
15
expiring on December 28, 2007; (ii) an option for 55,000 shares,
exercisable at $0.625 per share on December 31, 2005 and expiring on
December 15, 2008; (iii) an option for 200,000 shares, exercisable at $1.00
per share, with 60% becoming exercisable on January 1, 2002, 80% on January
1, 2003 and 100% on January 1, 2004 and expiring on December 7, 2009; and
(iv) an option for 75,012 shares exercisable at $4.05 per share on the date
of cancellation and expiring on December 30, 2005. The board agreed to
grant Mr. Meskell new options for an aggregate 430,012 shares on July 31,
2002, which options will (i) have an exercise price equal to the fair
market value of the shares on July 31, 2002 (or February 1, 2003, as
applicable) and (ii) vest on the same dates and expire on the same dates as
would have the previously-described canceled options, provided that Mr.
Meskell has the right at any time prior to July 31, 2002 to elect, for
federal income tax purposes, to delay until February 1, 2003 issuance of a
portion of the new options to be issued to him.
(7) Option was canceled pursuant to resolutions approved by the board on
December 13, 2001 as described in Note 6.
(8) Mr. Abbott acquired 100,000 shares in connection with his initial
employment in March of 2000 by the company, for an aggregate purchase
price of $50,000, representing 50% of the fair market value of the shares
on March 24, 2000, i.e. 50% of $1.00 per share. Under the terms of Mr.
Abbott's employment agreement, the company had the right to buy back the
shares at their purchase price within 60 days if Mr. Abbott terminated his
employment with the company during the first three years. Also, the
company had the right to apply up to 55,000 of the shares purchased by Mr.
Abbott from the company, at the original purchase price of $0.50 per
share, to repay the outstanding balance on a non-interest bearing
promissory note from Mr. Abbott to the company in the amount of $32,500,
if Mr. Abbott terminated his employment with the company prior to December
31, 2001. The proceeds of the promissory note were used by Mr. Abbott to
defray moving expenses. Following the termination of Mr. Abbott's
employment by the company on May 24, 2001, the company elected not to
purchase any of the foregoing shares and waived repayment by Mr. Abbott of
any outstanding balance due under the foregoing promissory note.
(9) Consists of an option to purchase 100,000 shares at $1.00 per share
through March 23, 2010, which vested as follows: 30,000 shares on December
31, 2001, 20,000 shares on December 31, 2002, 20,000 shares on December
31, 2003, and 30,000 shares on December 31, 2004. The option expired on
May 24, 2001, upon the termination of Mr. Abbott's employment on that date.
(10) Upon the termination of Mr. Abbott's employment on May 24, 2001, the
company forgave the $32,500 promissory note referenced in note 8 above.
(11) Mr. Abbott's employment terminated on May 24, 2001. Per the terms of his
employment contract, Mr. Abbott's salary was continued until November 18,
2001. $72,115 of his salary was paid after the May 24, 2001 termination.
Stock Options
No stock appreciation rights have been granted or are outstanding. No stock
options were granted to the company's executive officers during the year ended
December 31, 2001.
Pursuant to resolutions unanimously adopted by the board as of December 13,
2001, the company has agreed to grant options to the following individuals on
July 31, 2002, or on February 1, 2003, if the individual elects to defer the
grant date of a portion of the options to enable the options to qualify for
federal income tax purposes as incentive stock options, for the following
numbers of shares: (i) Robert T. Giaimo: 400,000 shares; (ii) Ype Von Hengst:
355,000 shares; and (iii) Patrick Meskell: 430,012 shares. The company agreed
to grant these options, which are more fully described in Notes 1, 3 and 6 of
the Summary Compensation Table included in this Proxy Statement, in connection
with the cancellation of equal numbers of options held by the foregoing
individuals. The following table provides information as to the outstanding
options at December 31, 2001 held by the following executive officers. No stock
appreciation rights are outstanding.
16
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year End Option/SAR Values
Number of Securities Underlying Value of Unexercised
Unexercised Options/SARS at In-the-money Options/SARs
Shares Fiscal Year End at Fiscal Year End (*)
Acquired --------------------------------- -----------------------------
On Value Exercisable
Name Exercise (#) Realized ($) Exercisable (#) Unexercisable (#) ($) Unexercisable ($)
---- ------------ ------------ --------------- ----------------- ----------- -----------------
Robert T. Giaimo 0 0 0 0 0 0
Ype Von Hengst.. 0 0 0 0 0 0
Patrick Meskell. 0 0 25,004 0 4,993 0
- --------
(*) Represents the difference between the fair market value of the shares
subject to the options, based on the closing price of $0.20 for the shares
on December 28, 2001 (the final trading day for the fiscal year ended
December 30, 2001), and the exercise prices of the options.
Benefit Plans
The company provides insurance benefits to its officers and other employees,
including health, dental, and life insurance, subject to certain deductibles
and co-payments by employees.
Employment Agreements
Founder's Employment Agreement. The company and Robert T. Giaimo entered
into a Founder|s Employment Agreement on August 28, 1995, effective as of March
27, 1996, and amended on November 9, 1998. The base compensation under the
Founder's Employment Agreement is $240,000 per annum, increased annually at a
minimum amount equal to the increase in the Consumer Price Index for the
Washington, D.C., Maryland, and Virginia metropolitan area (the "Base
Compensation"). Benefits under the agreement include four weeks paid vacation,
health and dental insurance, life and disability insurance, director and
officer liability insurance and a $3,000,000 "split-dollar" life insurance
agreement. Perquisites include an up to $500 per month car allowance, an
education fee of $1,000 per month, and free shift meals.
The Founder's Employment Agreement had an initial term of five years and,
starting on its first anniversary, was renewable for five years from each
anniversary. If at any such anniversary the Board does not renew, the agreement
will expire five years from such anniversary (the five-year period beginning on
such anniversary is referred to as the "Expiration Term"). The Founder|s
Employment Agreement was renewed on December 15, 1999 and, as renewed, expires
in March 2005.
During the Expiration Term, Mr. Giaimo may, upon at least sixty days prior
written notice, terminate the Founder's Employment Agreement immediately and
such termination shall be an "Involuntary Resignation." If an Involuntary
Resignation occurs, Mr. Giaimo shall be entitled to a severance amount equal
to: (i) his base compensation, including all bonuses, for the immediately
preceding fiscal year (the "Annual Amount"), (ii) divided by 365, and (iii)
multiplied by the number of days remaining in the Expiration Term, provided
that the severance amount paid to Mr. Giaimo due to an Involuntary Resignation
shall not exceed three times the Annual Amount.
Mr. Giaimo may also terminate the agreement by reason of a material breach
by the company (as specified in the Founder's Employment Agreement). If Mr.
Giaimo terminates the Founder's Employment Agreement within the first five
years of the agreement for a material breach by the company, he shall be
entitled to receive the Annual Amount multiplied by ten. If the material breach
occurs after the first five years of the agreement, the Annual Amount shall be
multiplied by five. Additionally, if a termination for a material breach occurs
prior to the earlier of (i) the end of the first five years of the agreement,
or (ii) the completion of an underwritten public offering of the company's
shares from which it realizes $15,000,000, then the company shall be obligated,
at the employee's option, to purchase all of Mr. Giaimo's shares at fair market
value.
17
The company may terminate the agreement upon the death or disability of Mr.
Giaimo or for cause. If terminated for death, the Mr. Giaimo's estate shall be
entitled to receive all accrued compensation plus a severance amount equal to
one year's Base Compensation (as adjusted to the date of death). The decedent's
family will also be provided health insurance for one year from date of death.
If terminated for disability, Mr. Giaimo shall be entitled to receive all
accrued compensation plus a severance amount equal to his then current Base
Compensation for a period of five years, but reduced dollar for dollar by all
amounts received by the employee under disability insurance. If terminated for
cause, Mr. Giaimo shall be entitled to receive all accrued compensation.
Executive Employment Agreement. The company and Ype Von Hengst entered into
an Employment Agreement effective as of November 9, 1998. The base salary under
the Employment Agreement is $125,000 per annum through December 31, 1998,
$150,000 per annum from January 1, 1999 through December 31, 1999, and
increased annually at a minimum amount equal to the increase in the Consumer
Price Index for the Washington, D.C., Maryland, and Virginia metropolitan area
beginning January 1, 2000 (the "Base Salary"). Benefits under the agreement
include health and dental insurance, life and disability insurance, and
participation in stock options, bonus plans and other benefit plans customarily
made available to executive employees of the company.
In consideration of Mr. Von Hengst entering into the agreement, the company
extended a $100,000 non-recourse loan (the "Loan") to Mr. Von Hengst, subject
to his execution of a promissory note and secured by his 182,881 shares in the
company (the "Collateral"). Beginning December 31, 1999, Mr. Von Hengst is also
entitled to an annual bonus of an amount equal to $20,000 plus accrued and
unpaid interest on the Loan (the "Bonus"). The Bonus is not paid directly to
Mr. Von Hengst, but is applied to repay the outstanding principal and interest
under the Loan. The term of the Employment Agreement is from November 9, 1998
to December 31, 2003.
Under the Employment Agreement, Mr. Von Hengst agrees, except as required by
the performance of his duties, not to disclose or use any Confidential
Information of the company or its affiliates, which is defined as all
information disclosed to him or known by him as a consequence of or through his
employment with the company where such information is not generally known in
the trade or industry and where such information refers or relates in any
manner to the business activities of the company. During the term of the
Employment Agreement and for a period of twelve consecutive months after the
termination of the Employment Agreement, Mr. Von Hengst agrees, except as
required by the performance of his duties, not to induce, attempt to induce,
counsel, advise, solicit or encourage any person to leave the employ of the
company or, with respect to any person who had left the employ of the company
within the previous six months, not to engage in any of the above activities in
connection with such former employee's acceptance of employment with any person
or entity other than the company. For a period of twelve consecutive months
after the termination of the Employment Agreement for any reason other than a
termination without cause, Mr. Von Hengst agrees not to (i) engage in the
"diner business" anywhere in the United States; (ii) engage in competition with
the company within a 10 mile radius of any company owned or franchised facility
or planned facility; or (iii) directly or indirectly, either individually or in
any other capacity, work for, consult with or otherwise assist Movenpick, its
parent corporation, affiliates and subsidiaries, in the development of "diners."
Mr. Von Hengst may terminate his Employment Agreement at any time upon sixty
days written notice ("Voluntary Resignation"). Upon receipt of such notice, the
company may elect to relieve Mr. Von Hengst of any or all of his duties or
terminate him immediately. The company may terminate the agreement for cause
(as that term is defined in the Employment Agreement), upon the death or
disability of Mr. Von Hengst, or without cause. If the agreement is terminated
by Voluntary Resignation or for cause, (i) the company's obligation to pay the
Base Salary, Bonus and medical benefits shall cease immediately on the date of
termination; and (ii) the principal balance under the Loan shall be
extinguished, and all right, title and interest in the Collateral shall vest
immediately with the company. If the agreement is terminated for death (i) the
company's obligation to pay the Base Salary, Bonus and medical benefits shall
cease immediately on the date of termination; and (ii) the principal balance
under the Loan shall be extinguished, and all right, title and interest in the
Collateral shall vest with Mr.
18
Von Hengst (or his estate or heirs). If terminated for disability, defined as
the inability to perform the essential function of the job, with or without
accommodation, for at least 180 consecutive days, (i) Mr. Von Hengst's right to
the Base Salary and Bonus shall cease on the date of termination, (ii) the
company shall make the medical benefits available to Mr. Von Hengst for a
period of eighteen months following termination, the costs of which shall be
paid by the company for the first twelve months of such period; and (iii) the
principal balance under the Loan shall be extinguished, and all right, title
and interest in the Collateral shall vest with Mr. Von Hengst (or his estate or
heirs). If terminated without cause, (i) Mr. Von Hengst shall be entitled to
the Base Salary, Bonus, and medical benefits for a one year period commencing
with the date of termination; and (ii) the principal balance under the Loan
shall be extinguished, and all right, title and interest in the Collateral
shall vest with Mr. Von Hengst (or his estate or heirs).
Officer Employment Agreements. The company has an employment agreement with
Patrick Meskell through March 4, 2004. Although the agreement was not amended,
Mr. Meskell was promoted from Senior Vice President, Human Resources, to
Executive Vice President, Operations with an increase in his base salary to
$150,000, with future adjustments to his base salary to be determined by the
board. In addition, he is entitled to (i) participate in bonus and stock option
plans made available to executive employees of the company; (ii) receive a $500
per month car allowance, (iii) receive life insurance coverage of $500,000;
(iv) participate in group health and dental plans generally offered to
employees of the company; (v) receive long term disability insurance coverage
in amount of approximately 60% of the employee's base salary per month, subject
to a 90 day initial waiting period; (vi) receive three weeks paid vacation that
does not accrue or carry over from one year to the next; and (vii) receive sick
leave and other benefits, in accordance with the company's policies for its
executives. The employee has a confidentiality and non-competition agreement
with the company.
The agreement is terminable at any time by either party thereto. However, if
the company terminates the agreement, the company will pay the employee all
base salary earned but unpaid on the date of resignation plus three months base
salary. If the employee resigns and provides at least three months notice, the
company will pay the employee all base salary earned but unpaid on the date of
resignation plus three months base salary payable after resignation on the same
schedule as the salary that was paid before resignation. If the employee
resigns without providing at least three months prior notice, (i) all stock
options and all stock purchase rights granted under the Stock Option Plan to
the employee (a) subsequent to March 1, 1999, (b) on December 15, 1997, and
(c) to Mr. Meskell on December 29, 1997 will be terminated on the date of
resignation; and (ii) the employee will sell and the company will purchase all
shares of the company acquired by the employee pursuant to stock options or
stock purchase rights within six months prior to the date of resignation at a
purchase price equal to the price paid for the shares.
Non-Employee Director Compensation
During the year ended December 31, 2001, each of the company's non-employee
directors received an option to purchase 4,000 shares on June 15, 2001 under
the 1996 Non-Employee Director Stock Option Plan Such options were exercisable
at a price equal to 100% of the fair market value on the date of grant, and
were to vest at any time, in whole or in part for period of ten years beginning
one year after the date of the grant. Pursuant to resolutions unanimously
approved by the company's Board of Directors on December 13, 2001, each
non-employee director agreed to surrender for cancellation options for an
aggregate of 12,000 shares under the 1996 Non-Employee Director Stock Option
Plan, including the foregoing options, as follows: (i) an option for 4,000
shares, fully vested, exercisable at $1.00 per share and expiring on June 17,
2009; (ii) an option for 4,000 shares, fully vested, exercisable at $0.844 per
share and expiring on June 15, 2010; and (iii) an option for 4,000 shares,
exercisable at $0.40 per share beginning on June 15, 2002 and expiring on June
14, 2011. In addition, Mr. Kaplan and Mr. Steiner each also agreed to surrender
for cancellation an option under the Second Amended and Restated 1991 Stock
Option Plan for 5,000 shares, fully vested, exercisable at $4.05 per share and
expiring on December 30, 2005. The board agreed to grant each non-employee
director new options under the 1996 Stock Option Plan on July 31, 2002,
exercisable for the same number of shares as those that were canceled, and
having the same vesting and termination terms as the canceled options, but
which will have exercise prices
19
equal to the fair market value of the shares on July 31, 2002. Also pursuant to
the foregoing resolutions, all non-employee directors, except for Mr. Collier,
each agreed to cancel the following options for an aggregate of 2,000 shares
under the 1996 Non-Employee Director Stock Option Plan in exchange for new
options under the 1996 Stock Option Plan with similar vesting and exercise
prices, but which do not expire until December 18, 2011: (i) a fully vested
option for 1,000 shares exercisable at $0.8125 per share and expiring December
31, 2001; and (ii) a fully vested option for 1,000 shares exercisable at $0.938
per share and expiring March 31, 2002. Mr. Collier agreed to the cancellation
of his option for 1,000 shares under the 1995 Non-Employee Director Stock
Option Plan, fully vested and exercisable at $0.938 per share and expiring
March 31, 2002, in exchange for a new option for 1,000 shares under the 1996
Stock Option Plan, fully vested on the date of grant, exercisable at $0.938 per
share and which expires on December 18, 2011.
Other than the option grants and the reimbursement of certain expenses,
non-employee directors received no other compensation for service as directors
for the year ended December 31, 2001. Mr. Louis Neeb received $2,000 in 2001 as
payment for consulting services.
Compensation Committee Report to Shareholders
The compensation committee of the board is composed solely of non-employee
directors. The compensation committee determines all aspects of the
compensation to be paid to the company's executive officers. The compensation
committee report follows:
The company's executive compensation program is designed to promote the
following objectives: (i) to provide competitive compensation that will help
attract, retain and reward highly qualified executives who contribute to the
long term success of the company; (ii) to align management's interests with the
company's by tying a portion of the executive's compensation to the company's
performance; and (iii) to align management's interests with shareholders by
including long term equity incentives as part of the executive's compensation.
The compensation of the company's executive officers includes cash
compensation, long-term incentive compensation in the form of stock options,
and participation in various benefit plans, most of which are generally
available to employees of the company.
Cash Compensation. Cash compensation of the company's executive officers
consists of a base salary and, if earned, an annual performance bonus. The
compensation committee reviews salaries recommended by the Chief Executive
Officer for executive officers other than the Chief Executive Officer. In
formulating these recommendations, the Chief Executive Officer considers the
overall performance of the company and base salaries of executive officers at
similarly situated restaurant companies, taking into consideration the
individual experience of these officers, and conducts an informal evaluation of
individual officer performance. Final decisions on any adjustments to the base
salary for executives, other than the Chief Executive Officer, are made by the
committee in conjunction with the Chief Executive Officer. The Committee's
evaluation of the recommendations by the Chief Executive Officer considers the
same factors outlined above and is subjective with no particular weight
assigned to any one factor. The committee considers the factors outlined above
in evaluating the base salary of Robert T. Giaimo, the company's Chief
Executive Officer.
The company's management, including executive officers, are eligible to
receive annual incentive awards based on the company's financial performance
and the efforts of its executives. Performance is measured based on
restaurant-level profitability, control of corporate overhead expenses and
timely achievement of store development schedule. No executive officer received
a cash bonus for the year ended December 31, 2001.
Stock Options. The executive officers, as well as other key employees, are
eligible to participate in the company's Stock Option Plan. The purpose of the
Stock Option Plan is to provide increased incentives to salaried employees, to
encourage new employees to become affiliated with the company and to align the
interests of such persons with those of the company's shareholders. The Stock
Option Plan is administered by the
20
compensation committee. The compensation committee has the authority to
determine the individuals to whom the stock options are awarded, the terms upon
which option grants shall be made and the number of shares subject to each
option, all subject to the terms and conditions of the Stock Option Plan.
In the year ended December 31, 2001, no options were granted to executive
officers. However, pursuant to resolutions unanimously adopted by the board as
of December 13, 2001, the company agreed to grant options to the following
individuals on July 31, 2002, or on February 1, 2003, if the individual elects
to defer the grant date of a portion of the options to enable the options to
qualify for federal income tax purposes as incentive stock options, for the
following numbers of shares: (i) Robert T. Giaimo: 400,0000 shares; (ii) Ype
Von Hengst: 355,000 shares; and (iii) Patrick Meskell: 430,012 shares. The
company agreed to grant these options in connection with the cancellation of
equal numbers of options held by the foregoing individuals. The exercise prices
of these options will be based on the fair market value of the underlying
shares on the dates such options are granted, except in the case of Mr. Giaimo,
whose options will have an exercise price equal to 110% of the fair market
value of the underlying shares on the date of grant.
Other Compensation. The company provides certain other benefits to the
executive officers, such as health insurance, that are generally available to
company employees. In addition, officers and key employees of the company may
be eligible to receive supplemental disability coverage, automobile allowance
and insurance benefits.
THE COMPENSATION COMMITTEE
Charles M. Steiner, Compensation
Committee Chairman
Michael Collier, Compensation
Committee Member
Louis P. Neeb, Compensation Committee
Member
21
Performance Graph
Set forth below is a line graph comparing the total cumulative return on the
shares from December 27, 1996 through December 30, 2001 with the CRSP Total
Returns Index for U.S. companies traded on the Nasdaq Stock Market (the "Market
Group") and an index group of peer companies, the CRSP Total Returns Index for
U.S. Nasdaq Stocks for (SIC 5800-5899) eating and drinking companies (the "Peer
Group"). The companies in each of the Market Group and the Peer Group were
weighted by market capitalization. Returns are based on monthly changes in
price and assume reinvested dividends. These calculations assume an initial
investment of $100 in the shares, the Market Group and the Peer Group, with the
reinvestment of all dividends paid thereafter. The company's shares were traded
on the OTC Bulletin Board under the symbol FDTR until March 27, 1996 when it
began trading on the Nasdaq National Market under the symbol SLVR. The
company's shares ceased to trade on the Nasdaq National Market on May 7, 2001
when the shares began trading, once again, on the OTC Bulletin Board under the
symbol SLVR.OB.
Comparison of Six Year
Cumulative Total Return
[GRAPH APPEARS HERE]
Total Returns Index 12/27/96 12/28/97 01/03/99 01/02/00 12/31/00 12/30/01
------------------- -------- -------- -------- -------- -------- --------
Silver Diner, Inc.. 100.00 31.89 20.73 30.93 37.17 9.52
The Market Group... 100.00 102.69 154.03 149.38 141.30 145.11
The Peer Group..... 100.00 117.76 172.43 313.73 193.11 149.06
Related Party Transactions
Silver Diner Potomac Mills, Inc. Pursuant to lease agreements dated October
14, 1991 and May 27, 1992, the company leases the Silver Diner restaurant in
Potomac Mills, Virginia (the ("Potomac Mills Restaurant") from Silver Diner
Potomac Mills, Inc ("SDPMI"), a corporation wholly owned by Robert T. Giaimo,
the Chairman and President of the company. The leases require the payment of an
annual base rent, with annual adjustments based on the Consumer Price Index,
and the payment of percentage rent based on gross receipts. The leases expire
in late 2011. For the years ended December 30, 2001, December 31, 2000 and
January 2, 2000, occupancy costs were $515,050, $356,000 and $360,000
respectively, under terms of the leases.
22
Robert Giaimo Development, Inc. On June 17, 1997, the company purchased
from Robert Giaimo Development, Inc. ("RGDI"), a corporation wholly owned by
Robert T. Giaimo, the Chairman and President of the company, an undivided 70%
interest in the parcel of land used as a parking lot for the Potomac Mills
Restaurant. The total purchase price of the land was $408,000, of which
$267,000 was borrowed from a bank, secured by the land, bearing interest at the
prime rate (4.75% at December 31, 2001), and matures in June 2003.
The company assumed a management agreement entered into between RGDI with
SDPMI (the "Management Agreement"), which provides that the company is the
exclusive manager of the Potomac Mills Restaurant, is entitled to receive all
of the net profits (as defined in the Management Agreement) from the Potomac
Mills Restaurant, and is responsible for paying all operating costs and
expenses of the restaurant, including rent. The Management Agreement is
unlimited in duration and can only be terminated by mutual agreement of the
company and SDPMI, or following notice that the company failed to meet its
management obligations and responsibilities. RGDI has granted the company an
option to purchase the Potomac Mills Restaurant for an amount equal the fair
market value, on the date of purchase, as determined by an appraisal.
Loan To Ype Von Hengst. In connection with his entering into an employment
agreement with the company on November 9, 1998, Ype Von Hengst, a Director and
officer of the company, received a $100,000 loan from the company, secured by
his 182,881 shares in the company and bearing interest at 5.25% annually. The
loan and accrued interest is to be repaid annually by applying an annual bonus
received by Mr. Von Hengst beginning December 31, 1999. At December 30, 2001
$40,000 was outstanding.
Michael Collier And Uniwest Group, Inc. And Affiliates. The company has
from time to time entered into contracts with Michael Collier, a Director, and
with Uniwest Group, Inc., a construction company and certain of its affiliates,
of which Michael Collier is President and a shareholder. The company paid
$193,191 to Uniwest Construction for miscellaneous construction and renovation
of the existing diners. The company paid Uniwest Management Inc., which manages
the real estate operations for the Merrifield diner, approximately $210,000 for
rent and real estate taxes. No consulting fees were paid to Mr. Collier in
2001. At December 30, 2001, $11,796 is payable to the Director and affiliates
of the Director.
In 1995, the company entered into a ground lease with 2909 Gallows LC,
landlord, covering the Merrifield facility. The landlord is a partnership in
which Michael Collier owns a significant limited partnership interest. The
lease provides for minimum annual rent of $110,000 in 1998 with fixed
escalations in rent payments over the lease term through 2012.
Uniwest Construction, Inc. acted as the general contractor for the
construction of the diner on the Merrifield property. Michael Collier was not a
director of the company when the lease and construction contract were entered
into.
Affiliated Stock Purchases. The company and the company|s directors have
made the following purchases since January 1, 2000.
Date of # Price Per
Name Position Pur1chase Nature of Transaction Shares Share
---- -------- --------- --------------------- ------ ---------
Michael Collier Director 8/06/01 Stock option exercise 8,801 $ 0.003
3/22/02 Stock option exercise 17,268 $ 0.003
Edward Kaplan.. Director 5/05/00 Open market 2,600 $0.9062
Edward Kaplan.. Director 5/05/00 Open market 3,400 $0.9375
Company........ N/A 1/21/00 Open market 7,000 $ 1.031
Company........ N/A 5/15/00 Open market 1,500 $ 0.936
Company........ N/A 8/25/00 Open market 6,900 $ 1.03
Company........ N/A 8/28/00 Open market 2,500 $ 1.03
Company........ N/A 8/31/00 Open market 5,000 $ 1.03
23
DESCRIPTION OF THE REVERSE STOCK SPLIT
General
Conversion of Shares. The reverse stock split will be effected upon our
filing of an amendment to our certificate of incorporation that will provide
for the conversion and reclassification of each outstanding share of our common
stock into One Five-Thousandth (1/5,000) of a share of company common stock in
a reverse stock split. In the reverse stock split, you will receive one share
of company common stock for each 5,000 shares you hold of record immediately
prior to the effective date of the reverse stock split, and you will receive
cash in lieu of any fractional shares to which you would otherwise be entitled.
The cash payment will be equal to $0.32 per pre-split share. The following
examples illustrate the effect of the reverse stock split on shareholders in
various circumstances.
Example 1: Shareholders Owning Fewer Than 5,000 Shares of Record
On the effective date of the reverse stock split, Shareholder A owns of
record 2,500 shares of company common stock. Using the ratio of one share of
common stock for each 5,000 shares outstanding immediately prior to the reverse
stock split, Shareholder A would be entitled to receive only 0.5 shares of
common stock. Because no fractional shares will be issued as a result of the
reverse stock split, Shareholder A will not receive any common stock, but will
instead receive a cash payment from the company at the rate of $0.32 per
pre-split share. In this example, Shareholder A will receive $800 in cash and
will no longer be a shareholder of the company.
Example 2: Shareholders Owning 5,000 or More Shares of Record
On the effective date of the reverse stock split, Shareholder B owns of
record 7,500 shares of company common stock. Using the ratio of one share of
common stock for each 5,000 shares outstanding immediately prior to the reverse
stock split, Shareholder B will be entitled to receive 1.5 shares of common
stock. Because fractional shares will not be issued as a result of the reverse
stock split, Shareholder B will receive one share of common stock and $800 in
cash (at the rate of $0.32 per pre-split share) for his remaining 0.5 shares of
common stock.
Legal Effectiveness and Conditions. The reverse stock split will not be
effected unless and until the company's shareholders approve the reverse stock
split and the board of directors determines that: (i) the company has available
funds necessary to pay for the fractional shares resulting from the
transaction; (ii) the company has sufficient cash reserves to continue to
operate its business; and (iii) no event has occurred or is likely to arise
that might have a materially adverse effect on the company. The company will
cause the exchange transfer agent to send a Letter of Transmittal to all record
holders of company common stock as of the effective date of the amendment. The
amendment and the reverse stock split will be effective upon filing with the
Delaware Secretary of State, which we anticipate will occur on , 2002.
On the effective date of the reverse stock split, each certificate
representing a share of company common stock outstanding immediately prior to
the reverse stock split will be deemed, for all corporate purposes and without
any further action by any person, to evidence ownership of the reduced number
of shares of common stock and/or the right to receive cash for fractional
shares. Each shareholder who owns fewer than 5,000 shares of record immediately
prior to the reverse stock split will not have any rights with respect to the
common stock and will have only the right to receive cash in lieu of the
fractional shares to which he or she would otherwise be entitled.
Exchange of Stock Certificates. The Letter of Transmittal will provide the
means by which shareholders will surrender their stock certificates and obtain
certificates evidencing the shares of company common stock or cash to which
they are entitled after the reverse stock split. If certificates evidencing
common stock have been lost or destroyed, the company may, in its full
discretion, accept in connection with the reverse stock split a duly executed
affidavit and indemnity agreement of loss or destruction in a form satisfactory
to the company in lieu of
24
the lost or destroyed certificate. If a certificate is lost or destroyed, the
shareholder must submit, in addition to other documents, a bond or other
security satisfactory to the board indemnifying the company and all other
persons against any losses occurred as a consequence of the issuance of a new
stock certificate. Shareholders whose certificates have been lost or destroyed
should contact the company. Additional instructions regarding lost or destroyed
stock certificates will be included in the Letter of Transmittal that will be
sent to shareholders after the reverse stock split becomes effective.
Except as described above with respect to lost stock certificates, there
will be no service charges or costs payable by shareholders in connection with
the exchange of their certificates or in connection with the payment of cash in
lieu of fractional shares. The company will bear these costs.
The Letter of Transmittal will be sent to shareholders promptly after the
effective date of the reverse stock split. Do not send in your stock
certificate(s) until you have received the Letter of Transmittal.
Regulatory Approvals. Aside from shareholder approval of the proposed
amendment to the certificate of incorporation, the reverse stock split is not
subject to any regulatory approvals.
Termination of Securities Exchange Act Registration. The company's common
stock is currently registered under the Securities Exchange Act and quoted on
the OTC Bulletin Board. We are permitted to terminate our registration and OTC
Bulletin Board listing if there are fewer than 300 record holders of
outstanding shares of company common stock. Upon the completion of the reverse
stock split, the company will have approximately 172 shareholders of record. We
intend to apply for termination of registration of the company's common stock
under the Securities Exchange Act and to delist our common stock from the OTC
Bulletin Board as promptly as possible after the effective date of the reverse
stock split.
Termination of registration under the Securities Exchange Act will
substantially reduce the information required to be furnished by the company to
its shareholders and to the Securities and Exchange Commission. However, the
company will continue to publicly release, via its web page
(www.silverdiner.com) quarterly unaudited financial statements as soon as
practical following each quarter, and annual audited financial statements as
soon as possible following the end of each fiscal year. The company will also
use its web page to periodically communicate with its shareholders. Copies of
any materials released through our web page will also be provided to
shareholders on request.
In addition, the reverse stock split will make many of the provisions of the
Securities Exchange Act, such as the short-swing profit provisions of Section
16, the requirement of furnishing a proxy or information statement in
connection with shareholder meetings under Section 14(a), some of the
requirements relating to tender offers under Section 14(d) and the requirements
of Rule 13e-3 regarding "going private" transactions, no longer applicable to
the company. Furthermore, the company's affiliates may be deprived of the
ability to dispose of their company common stock under Rule 144 promulgated
under the Securities Act of 1933.
We estimate that termination of registration of the company's common stock
under the Securities Exchange Act will save the company approximately $150,000
per year in legal, accounting, printing, and other expenses per year, and will
also save management time. See "Special Factors--Effects of the Reverse Stock
Split on the Company."
Source of Funds and Expenses. We estimate that approximately $865,000 will
be required to pay for the fractional shares of company common stock exchanged
for cash in the reverse stock split. We intend to use cash and other
equivalents on hand, a portion of which was borrowed under our existing loan
agreement with our bank secured by substantially all of our assets. See
description of loan agreement in Note 7 to the Consolidated Financial
Statements on page 28 of the Annual Report to Shareholders for 2001
accompanying this proxy statement. As described in Note 7, $1,000,000 is
repayable in monthly principal and interest payments through December, 2002,
and $2,500,000 is repayable interest only monthly through December 2002, at
which time monthly principal and interest payments commence and are payable
through December, 2008.
25
Additionally, the company will pay all of the expenses related to the
reverse stock split. We estimate that these expenses will amount to $175,000.
Dissenters' Rights. Under the Delaware General Corporation Law and the
company's certificate of incorporation and bylaws, the company's shareholders
do not have the right to dissent from the reverse stock split and to receive a
value for their shares in cash determined via an independent appraisal.
Dividends. The company has not previously paid dividends on its common
stock, and does not intend to do so following the reverse stock split.
Special Factors
Purpose of the Reverse Stock Split.
The primary purpose of the reverse stock split is to enable us to terminate
the registration of our common stock under Section 12(g) of the Securities
Exchange Act of 1934, as amended. The reverse stock split will result in the
elimination of the expenses related to our disclosure and reporting
requirements under the Securities Exchange Act, and as a secondary matter, it
is likely to decrease the administrative expense we incur in servicing a large
number of record shareholders who own relatively small numbers of shares. The
reverse stock split will enable the company's management and employees to
devote more time and effort to the company's operations, rather than to
completing the periodic reports required of a publicly traded company under the
Securities and Exchange Act of 1934, and to manage shareholder relations and
communications with approximately 4,000 shareholders as compared to less than
300 post reverse stock split. The company's management believes that the
reverse stock split may make the company more attractive to employees by
diminishing any negative impression of the company we believe many employees
have as a result of our being a publicly-traded company with a low market price
per share.
The company had approximately 962 record shareholders as of April 21, 2002,
but approximately 63% of the outstanding shares as of that date were held by
fewer than 100 shareholders. As a result, there is a limited market for the
company's shares and the board of directors believes there is little likelihood
that a more active market will develop in the foreseeable future. However,
because we have more than 300 shareholders of record and our common stock is
registered under Section 12(g) of the Securities Exchange Act, we are required
to comply with the disclosure and reporting requirements under the Securities
Exchange Act. The cost of complying with these requirements is substantial,
representing an estimated annual cost to us of $150,000. In light of this
expense and the limited trading market for the company's common stock, the
board of directors believes the company receives little relative benefit from
being registered under the Securities Exchange Act. We also incur printing,
postage, data entry, stock transfer and other administrative expenses related
to servicing shareholders who are record holders of relatively small numbers of
shares.
In addition to saving $150,000 in direct costs as described above, the
company's management and employees will no longer be required to devote their
time and energy to completing the periodic reports required of publicly-traded
companies under the Securities Exchange Act. Instead, they will be able to
focus their time and effort on the operation of the company's business. Given
the company's history of losses, management believes it important to realize
every opportunity to reduce overhead and focus its limited resources on
becoming profitable.
In order to keep its focus on continuing to achieve and maintain improved
operating performance of its existing restaurants, the company does not intend
to open any new restaurants during 2002 or 2003. Historically, opening a new
restaurant has had a negative financial impact on the company in the year in
which it was opened. However, the company may resume growth and open
restaurants in 2004 and beyond, depending on the board's evaluation of the
company's 2002 operating performance and its ongoing estimates of operating
performance, future cash flow and capital.
26
In becoming a publicly-traded company, we had hoped to realize enhanced
value, greater access to capital and increased business credibility for the
company. Unfortunately, market capitalization has decreased substantially since
going public, and rather than increasing access to capital, it has made capital
less available to us. Even if our financial performance improves, we believe
that currently there is little public appetite for the common stock of small
restaurant chains with low capitalization and limited current opportunity to
grow. The company further believes good performance does not necessarily
translate efficiently into an increase in the value of the company's common
stock, or to an increase in capital attracted to the company. Furthermore, the
low market price makes our business seem less credible, with stock options
becoming an ineffective method of attracting or retaining high-quality
employees. By becoming a private company, we hope to focus employees| attention
on our fundamental positive aspects, such as our busy restaurants, varied menus
and the high quality of the company's facilities, and in doing so, attract and
retain more high quality employees.
In view of the the foregoing and the negative impression created by our low
market value in comparison to our peers, particularly in light of the
relatively small benefit we believe our shareholders have received as a result
of our registration, we believe the reverse stock split will provide a more
efficient means of using our capital to benefit our shareholders.
The reverse stock split is designed to substantially reduce the number of
the company|s shareholders of record. As of April 21, 2002, the company had
approximately 790 shareholders of record who owned fewer than 5,000 shares. The
reverse stock split will allow us to pay these shareholders a fair price for
their relatively illiquid shares while eliminating the costs associated with
servicing shareholders of record who own relatively small numbers of shares.
The reverse stock split will also allow us to save significant administrative,
accounting, and legal expenses incurred in complying with the Securities
Exchange Act|s disclosure and reporting requirements.
Alternatives Considered.
In making our determination to proceed with the reverse stock split, we
considered other alternatives. We rejected these alternatives because we
believed the reverse stock split would be the simplest and most cost-effective
manner in which to achieve the purposes described above. These alternatives
included:
Merger. We considered, as a possible alternative to the reverse stock
split, a cash-out merger of the company into a newly-formed corporation, with
conversion of the outstanding shares occurring in the same general manner and
ratios as in the reverse stock split. In such a merger, the company|s principal
shareholders would receive stock in the newly-formed corporation, and the
remaining shareholders would receive cash in lieu of those shares. However, we
determined we do not have the ability to pay the cash-out price to all the
remaining shareholders, as those shareholders hold more than 7,000,000 shares.
In addition, we have determined that this alternative was more burdensome than
a reverse stock split due to constraints imposed by state and federal
securities laws. Furthermore, we did not believe that such an alternative
transaction would result in any benefit to shareholders, in terms of
consideration to be received, over that to be received in the reverse stock
split. We note, however, that the company|s shareholders would have had
dissenters' appraisal rights under Delaware law if the company had effected a
merger. However, we believe that the price determined by the board of directors
to be paid to fractional shareholders is equivalent to the price an appraisal
would have produced.
Issuer Tender Offer. We also considered an issuer tender offer to
repurchase shares of our outstanding common stock. The results of an issuer
tender offer would be unpredictable, however, due to its voluntary nature, thus
we were uncertain as to whether this alternative would result in a sufficient
number of shares being tendered so as to result in the company common stock
being held by fewer than 300 shareholders of record. In addition, similar to
the merger, the company does not have the ability to pay the purchase price for
the large number of shares it would probably have had to purchase in a tender
offer. Moreover, federal regulations impose rules regarding the treatment of
shareholders in a tender offer, including pro-rata acceptance of offers from
27
shareholders, which make it difficult to ensure that the company would be able
to reduce the number of shareholders below 300. As a result, we rejected this
alternative.
Selling the Company. We have not considered a sale of the company. At this
time, the company's principal shareholder, as well as others, are not willing
to entertain a sale of the company.
Reasons for the Reverse Stock Split.
As described above in "--Purpose of the Reverse Stock Split," the reverse
stock split will allow us to save the administrative, accounting and legal
expenses incurred in complying with the disclosure and reporting requirements
under the Securities Exchange Act and, secondarily, will eliminate the costs
associated with servicing shareholders who own relatively small numbers of
shares. We estimate that we will save approximately $150,000 per year as a
result of the reduction in the number of shareholders and the elimination of
the registration of our common stock under the Securities Exchange Act.
Eliminating the registration of our common stock under the Securities Exchange
Act will also reduce the amount of time spent by employees in preparing
periodic reports.
In addition, our common stock has historically been very thinly traded. We
believe that the absence of an efficient trading market has resulted in
depressed prices for our stock, and that as a result of our low average daily
trading volume, holders of large blocks of shares have not been able to use the
marketplace to sell those shares without significantly decreasing the market
price of our stock. The high and low closing prices for fiscal years 2001 and
2002 are set forth on page 8 of the company's annual report to shareholders
accompanying this proxy statement. The high closing price for the fiscal
quarter ending April 21, 2002 was $0.34, and the low closing price for that
period was $0.19. As a result, we do not believe that the registration of our
common stock under the Securities Exchange Act of 1934, as amended, or the
listing of our stock on the OTC Bulletin Board, has benefited our shareholders
in proportion to the costs we have incurred as a result of this registration
and listing.
Effects of the Reverse Stock Split.
The reverse stock split will have various effects on the company, its
shareholders and its directors and officers, as described below.
Reduction in the Number of Shareholders of Record and the Number of
Outstanding Shares. Based on information as of April 21, 2002, we believe that
the reverse stock split will reduce our number of record shareholders from
approximately 962 to approximately 172. We estimate that approximately
2,700,000 shares held by approximately 880 shareholders of record will be
exchanged for cash in lieu of fractional shares in the reverse stock split. The
number of outstanding shares of common stock as of April 21, 2002, will
decrease from approximately 11,971,486 to approximately 1,860 (9,271,000 on a
pre-split basis). Accordingly, the liquidity of the shares of company common
stock will substantially decrease.
Reduction in Book Value. Because (1) the price to be paid to holders of
fewer than 5,000 shares of common stock will be $0.32 per share, (2) the number
of shares of common stock expected to be cashed out as a result of the reverse
stock split is estimated to be approximately 2,700,000, (3) the total cost to
the company (including expenses) of effecting the reverse stock split is
expected to be approximately $1,040,000, and (4) at April 21, 2002, aggregate
shareholders' equity in the company was approximately $ , or $ per
share, the company expects that, as a result of the reverse stock split, the
book value per share of common stock as of April 21, 2002, will be changed from
approximately $ per share on a historical basis to approximately $
(pre-split) per share on a pro forma basis. However, it is important to note
that book value is an accounting methodology based on the historical cost of
the company's assets, and therefore does not reflect current company value.
28
Available Cash. Our cash will be reduced from approximately $2,560,000 at
April 21, 2002 to approximately $1,520,000 on a pro forma basis as of April 21,
2002, with a corresponding reduction in our net stockholders' equity.
Elimination of Securities Exchange Act Registration. Our common stock is
currently registered under the Securities Exchange Act. After the reverse stock
split, our common stock will not be registered under the Securities Exchange
Act, nor will we be subject to any reporting requirements under the Securities
Exchange Act. As a result, we expect to eliminate direct and indirect costs
associated with the Securities Exchange Act registration, which we estimate to
be approximately $150,000 on an annual basis. See "Description of the Reverse
Stock Split--Termination of Securities Exchange Act Registration" for a
discussion of the nature of the information we will no longer be required to
provide, and of the financial statements that we will continue to provide to
shareholders.
Financial Effects Of The Reverse Stock Split. We estimate that
approximately $865,000 will be required to pay for the fractional shares of the
company common stock exchanged for cash in the reverse stock split.
Additionally, we estimate that professional fees and other expenses related to
the transaction will total approximately $175,000. We do not expect that the
payment to shareholders receiving cash in the reverse stock split or the
payment of expenses will have any material adverse effect on our capital,
liquidity, operations or cash flow. However, there will be less capital
available to the Company. Because we do not currently know the actual number of
shares that will be cashed out in the reverse stock split, we do not know the
net amount of cash to be paid to shareholders in the reverse stock split. You
should read the discussion under "Description of the Reverse Stock
Split--Sources of Funds and Expenses" for a description of the sources of funds
for the reverse stock split and the fees and expenses we expect to incur in
connection with the transaction.
Effects of the Reverse Stock Split on Executive Officers and Directors. As
a result of the reverse stock split, we expect that the percentage of
beneficial ownership of the company common stock held by our executive officers
and directors as a group will increase significantly from approximately 40%
before the reverse stock split to approximately % after the reverse stock
split. If a director or executive officer exercises an option which would
result in the issuance of fractional shares, the director or executive officer
will receive cash in lieu of the fractional shares.
After the reverse stock split, the company's common stock will not be
registered under the Securities Exchange Act. As a result, the executive
officers, directors and other affiliates of the company will no longer be
subject to many of the reporting requirements and restrictions of the
Securities Exchange Act, including the reporting and short-swing profit
provisions of Section 16, and may be deprived of the ability to dispose of
their shares of the company common stock under Rule 144 under the Securities
Act of 1933.
Effect on Outstanding Employee and Director Stock Options. As a result of
the reverse stock split, the exercise price of each outstanding employee and
director stock option will automatically increase by a factor of 5,000 and the
number of underlying shares will decrease by a factor of 5,000. When existing
options are exercised, the exercise will cover underlying fractional shares of
common stock resulting from the reverse stock split, but the Company will not
be able to issue fractional shares upon exercise of an option. Instead, we will
pay the optionee cash for any fractional shares in an amount equal to the
difference between the exercise price of the option and the fair market value
per share of the common stock as determined annually or more frequently by the
board of directors, multiplied by the fraction of a share represented by the
option.
Potential Disadvantages of the Reverse Stock Split. Only a limited public
trading market currently exists for the company's common stock. The market
liquidity for shares of the company's common stock after the reverse stock
split will be even less than it is now because the common stock will no longer
be quoted on the OTC Bulletin Board and the number of shares of common stock
available to be traded will decrease to less than 1,860 as a result of the
reverse stock split.
29
In addition, the company will no longer be required to file public reports
of its financial condition and other aspects of its business with the
Securities and Exchange Commission after the reverse stock split. As a result,
shareholders will have less legally mandated access to information about the
company's business and results of operations than they had prior to the reverse
stock split. However, as discussed above in "Description of the Reverse Stock
Split--Termination of Securities Exchange Act Registration," we will continue
to provide quarterly and annual financial statements to our shareholders.
Post Reverse Stock Split Liquidity. With respect to the two quarters
beginning with the first quarter after the reverse stock split, which we expect
to be the third and fourth quarters of this fiscal year, the board has agreed
to establish a limited liquidity plan under which shareholders will have the
opportunity to tender their shares back to the company. The tender period will
be open for 30 days from the date the price is announced for the quarter or
such longer period as determined by the board. The obligation of the company to
purchase stock will be limited to an aggregate quarterly dollar amount as to
all tendering shareholders of $100,000, and there will not be any obligation if
(i) the company does not have at least $1.6 million of cash in the bank as of
the end of the applicable quarter or (ii) the redemption might violate any
creditor agreement then in place with the company. There are no provisions of
such existing agreements that would be violated. If more shares are tendered
than the company is obligated to purchase, all offers will be proportionately
reduced. The liquidity plan will be made available to all shareholders other
than the directors of the company.
For the two quarters immediately following the reverse stock split, the
redemption price of the common stock will be determined based upon the results
of operations for the trailing 12 months. For each of such quarters, the
redemption price will be the greater of the price paid for the fractional
interests resulting from the reverse stock split or the redemption price
determined by the board. The price determined by the board will be arrived at
by using an Enterprise Value to trailing twelve months EBITDA multiple of 5.7.
This is the same multiple derived when we compared the per share price paid for
fractional interests in this transaction to our prospective fiscal 2002 EBITDA.
It is anticipated that the quarterly results and the resulting stock price will
be available within 60 days after the close of each calendar quarter, other
than the final quarter of the year, which will be available within 90 days
after the close of the final quarter. The board believes that it is desirable
to continue a liquidity program after the initial two quarters and will
evaluate implementing an additional liquidity plan. No assurance can be given,
however, that the board will implement future liquidity plans or that the terms
will be the same as the initial liquidity plan. The company will distribute in
writing materials relating to its offer to purchase any shares of common stock
under such plan.
Federal Income Tax Consequences of the Reverse Stock Split. Presented below
is a general summary of the material federal income tax consequences of the
reverse stock split to the company and its shareholders. The conclusions in the
following summary are not binding on the Internal Revenue Service and no ruling
has been or will be obtained from the Internal Revenue Service in connection
with the reverse stock split.
The discussion does not address all U.S. federal income tax considerations
that may be relevant to certain the company shareholders in light of their
particular circumstances. The discussion assumes that the company shareholders
hold their shares of the company common stock as capital assets (generally for
investment). In addition, the discussion does not address any foreign, state or
local income tax consequences of the reverse stock split. The following summary
does not address all U.S. federal income tax considerations applicable to
certain classes of shareholders, including:
. financial institutions;
. insurance companies;
. tax-exempt organizations;
. dealers in securities or currencies;
. traders in securities that elect to mark-to-market;
. persons that hold the company common stock as part of a hedge, straddle
or conversion transaction;
30
. persons who are considered foreign persons for U.S. federal income tax
purposes;
. persons who acquired or acquire shares of the company common stock
pursuant to the exercise of employee stock options or otherwise as
compensation; and
. persons who do not hold their shares of the company common stock as a
capital asset.
Accordingly, you are urged to consult your own tax advisors as to the
specific tax consequences of the reverse stock split, including applicable
federal, foreign, state and local tax consequences to you of the reverse stock
split in light of your own particular circumstances.
The Company. The reverse stock split will be a tax free reorganization
described in Section 368(a)(1)(E) of the United States Internal Revenue Code of
1986, as amended (the "Code"). Accordingly, the company will not recognize
taxable income, gain or loss in connection with the reverse stock split.
Shareholders Who Receive Shares Of New Common Stock. A shareholder who
receives only shares of new common stock in the transaction (i.e., a
shareholder who owns a number of shares of old common stock equal to the
product of 5,000 multiplied by a whole number) will not recognize gain or loss,
or dividend income, as a result of the reverse stock split and the basis and
holding period of such shareholder in shares of old common stock will carry
over as the basis and holding period of such shareholder's shares of new common
stock.
A shareholder who receives both shares of new common stock and cash in the
transaction (i.e., a shareholder who owns a number of shares of old common
stock which is greater than 5,000 and is not equal to the product of 5,000
multiplied by a whole number) will be treated as having exchanged a portion of
his shares of old common stock for the shares of new common stock and as having
had the balance of his old shares redeemed by the company in exchange for the
cash payment. The portion of the transaction treated as a cash redemption of a
portion of the old stock will be a taxable transaction to such shareholder, the
consequences of which are described below (see, Shareholders Who Receive Cash).
The portion of the transaction which is treated as an exchange of shares of old
common stock for shares of new common stock will not be a taxable transaction
for the shareholder and the shareholder will, therefore, not recognize gain or
loss, or dividend income on that portion of the transaction, and the basis and
holding period of such shareholder in the portion of his shares of old common
stock exchanged for shares of new common stock will carry over as the basis and
holding period of such shareholder|s shares of new common stock.
Shareholders Who Receive Cash. The receipt by a shareholder of cash in lieu
of fractional shares of new common stock pursuant to the reverse stock split
will be treated as a redemption of stock and will be a taxable transaction for
federal income tax purposes. The tax treatment of a redemption of stock is
governed by Section 302 of the code and, depending on a shareholder's
situation, will be taxed as either:
(a) A sale or exchange of the redeemed shares, in which case the
shareholder will recognize gain or loss equal to the difference between the
cash payment and the shareholder's tax basis for the redeemed shares; or
(b) A cash distribution which is treated: (i) first, as a taxable
dividend to the extent of the company's 2002 earnings and its earnings
accumulated through December 29, 2002; (ii) then as a tax-free return of
capital to the extent of the shareholder's tax basis in the redeemed shares,
and (iii) finally, as gain from the sale or exchange of the redeemed shares.
Amounts treated as gain or loss from the sale or exchange of redeemed shares
will be capital gain or loss. Amounts treated as a taxable dividend are
ordinary income to the recipient; however, a corporate taxpayer (other than an
S corporation) is generally entitled to exclude a portion of a dividend from
its taxable income.
Under Section 302 of the Code, a redemption of shares stock from a
shareholder as part of the reverse stock split will be treated as a sale or
exchange of the redeemed shares if:
. the reverse stock split results in a "complete termination" of
shareholder's interest in the company;
31
. the receipt of cash is "substantially disproportionate" with respect to
the shareholder; or
. the receipt of cash is "not essentially equivalent to a dividend" with
respect to the shareholder.
These three tests are applied by taking into account not only shares that a
shareholder actually owns, but also shares that the shareholder constructively
owns pursuant to Section 318 of the Code. Under the constructive ownership
rules of Section 318 of the Code, a shareholder is deemed to constructively own
shares owned by certain related individuals and entities in addition to shares
directly owned by the shareholder. For example, an individual shareholder is
considered to own shares owned by or for his or her spouse and his or her
children, grandchildren and parents ("family attribution"). In addition, a
shareholder is considered to own a proportionate number of shares owned by
estates or certain trusts in which the shareholder has a beneficial interest,
by partnerships in which the shareholder is a partner, and by corporations in
which 50% or more in value of the stock is owned directly or indirectly by or
for such shareholder. Similarly, shares directly or indirectly owned by
beneficiaries of estates of certain trusts, by partners of partnerships and,
under certain circumstances, by shareholders of corporations may be considered
owned by these entities ("entity attribution"). A shareholder is also deemed to
own shares which the shareholder has the right to acquire by exercise of an
option. Constructively owned shares may be reattributed to another taxpayer.
For example, shares attributed to one taxpayer under as a result of entity
attribution may be attributed from that taxpayer to another taxpayer through
family attribution.
A shareholder who receives only cash in the reverse stock split (i.e., owns
fewer than 5,000 shares of old common stock) and does not constructively own
any shares of new common stock after the reverse stock split, will have his
interest in the company completely terminated by the reverse stock split and
will therefore receive sale or exchange treatment on his old common stock. That
is, such a shareholder will recognize gain or loss equal to the difference
between the cash payment and the shareholder|s tax basis for his old common
shares.
A shareholder who receives only cash in the reverse stock split (i.e., owns
fewer than 5,000 shares of old common stock) and would only constructively own
shares of new common stock after the reverse stock split as a result of family
attribution may be able to avoid constructive ownership of the shares of new
common stock by waiving family attribution and, thus, be treated as having had
his interest in the company completely terminated by the reverse stock split.
Among other things waiving family attribution requires (i) that the shareholder
have no interest in the company (including as an officer, director, employee,
or shareholder) other than an interest as a creditor during the ten year period
immediately following the reverse stock split and (ii) including an election to
waive family attribution in the shareholder's tax return for the year in which
the reverse stock split occurs.
A shareholder who receives cash in the reverse stock split and immediately
after the reverse stock split actually or constructively owns shares of new
common stock, must compare (X) his percentage ownership immediately before the
reverse stock split (i.e., the number of old common shares actually or
constructively owned by him immediately before the reverse stock split divided
by the number of shares of old common stock outstanding immediately before the
reverse stock split (approximately 11,971,486 shares) with (Y) his percentage
ownership immediately after the reverse stock split (i.e., the number of new
common shares actually or constructively owned by him immediately after the
reverse stock split divided by the number of shares of new common stock
outstanding immediately after the reverse stock split).
If the shareholder's post reverse stock split ownership percentage is less
than 80% of the shareholder's pre-reverse stock split ownership percentage, the
receipt of cash is "substantially disproportionate" with respect to the
shareholder and the shareholder will, therefore, receive sale or exchange
treatment on the portion of his shares of old common stock exchanged for cash
in lieu of fractional shares.
If (i) the shareholder exercises no control over the affairs of the company
(e.g., is not an officer, director or high ranking employee), (ii) the
shareholder|s relative stock interest in the company is minimal, and (iii) the
shareholder's post reverse stock split ownership percentage is less than the
shareholder's pre-reverse stock split ownership percentage, the receipt of cash
is "not essentially equivalent to a dividend" with respect to the shareholder
and the shareholder will, therefore, receive sale or exchange treatment on the
portion of his shares of
32
old common stock exchanged for cash in lieu of fractional shares. For these
purposes, actual and constructive ownership of less than 1% of the outstanding
shares is clearly a relatively minimal ownership interest and actual and
constructive ownership of less than 5% of the outstanding shares is probably a
relatively minimal ownership interest.
In all other cases, cash in lieu of fractional shares received by a
shareholder who immediately after the reverse stock split actually or
constructively owns shares of new common stock will probably be treated: (i)
first, as a taxable dividend to the extent of the company's 2002 earnings and
its earnings accumulated through December 29, 2002; (ii) then as a tax-free
return of capital to the extent of the shareholder's tax basis in the redeemed
shares, and (iii) finally, as gain from the sale or exchange of the redeemed
shares. If the amount treated as a tax free return of capital is less than the
shareholder's tax basis in the portion of his shares of old common stock
treated as redeemed for cash, the remaining tax basis is (i) added to the
shareholder's tax basis for the shares of new common stock actually owned by
the shareholder, or (ii) if the shareholder does not actually own any shares of
new common stock, added to the tax basis of the shares of new common stock
constructively owned by the shareholder.
Tax Withholding. Non-corporate shareholders of the company may be subject
to backup withholding at a rate of 30.5% on cash payments received in the
reverse stock split. Backup withholding will not apply, however, to a
shareholder who (1) furnishes a correct taxpayer identification number and
certifies that he or she is not subject to backup withholding on the substitute
Form W-9 included in the letter of transmittal, (2) who provides a certificate
of foreign status on an appropriate Form W-8, or (3) who is otherwise exempt
from backup withholding. A shareholder who fails to provide the correct
taxpayer identification number on Form W-9 may be subject to a $50 penalty
imposed by the Internal Revenue Service.
As stated above, the preceding discussion is intended only as a summary of
the material United States income tax consequences of the reverse stock split
and does not purport to be a complete analysis or discussion of all potential
tax effects relevant to the reverse stock split. Thus, you are urged to consult
your own tax advisors as to the specific tax consequences to you of the reverse
stock split, including tax return reporting requirements, the applicability and
effect of foreign, federal, state, local and other applicable tax laws and the
effect of any proposed changes in the tax laws.
Recommendation of the Board of Directors; Fairness of the Reverse Stock Split
Background. On March 15, 2002, our board of directors first met by
telephone to consider a plan of recapitalization that would enable the company
to become a private company through a reverse stock split or similar
transaction. The board discussed the purposes of the recapitalization, the form
and financial aspects of the transaction, including a range of possible split
ratios, and the procedures that it would need to follow in order to determine a
fair price to be paid to shareholders. After a lengthy discussion of the
reasons for, alternatives to, and potential nature of, the recapitalization,
the board decided to use a reverse stock split with a split ratio of between 1
to 2,000 and 1 to 5,000.
The board met again on March 25, 2002, in person, and discussed in more
detail the reverse stock split, and began to review preliminary analysis
regarding a fair price to be paid to fractional shareholders. Following the
March 25th meeting, the board decided to appoint a special committee of
directors to conduct an analysis to be presented to the board to assist it in
determining the price the company should pay for fractional shares.
The board of directors appointed two of its members, Louis P. Neeb,
chairman, and Charles M. Steiner, to the special committee to provide the
analysis of a range of fair prices to be paid to the company's shareholders.
The board appointed Mr. Neeb because of his thirty-years of experience in the
restaurant and related industries, including his participation in the purchase
and sale of a number of restaurant companies or concepts, and in particular his
experience as a director of Franchise Finance Corporation of America, Inc.
during its recent sale to GE Capital. Mr. Steiner was a certified public
accountant, and has almost thirty years of business experience,
33
including having served as chief executive officer of Branch Group, Inc., an
electrical parts distributor. Please review their biographies in "Election of
Directors" for more details. Mr. Neeb will receive $7,500 and Mr. Steiner will
receive $2,500 for serving on the special committee. As discussed below, the
special committee met informally in April and May, and formally on May 3, 2002,
May 6, 2002 and May 7, 2002.
On May 7, 2002, the board of directors met to discuss the special
committee's findings and to otherwise evaluate the fairness of the $0.32 price
to the company|s shareholders. After a discussion of the analysis provided by
the special committee, the board of directors determined that the proposed
price of $0.32 per share was fair, from a financial point of view, to the
company's shareholders, including unaffiliated shareholders as a group. After
further considering the benefits, disadvantages, and effects of the reverse
stock split described below, together with the report of the special committee
that was presented at the meeting, the board of directors, including those
directors who are not employees of the company, unanimously approved a
one-for-5,000 reverse stock split and determined that the price to be paid in
lieu of fractional shares of $0.32 was fair, from a financial point of view, to
the company's shareholders, including unaffiliated shareholders, as a group.
Determination of Fairness. The board believes that the reverse stock split
is substantively and procedurally fair to, and in the best interests of, the
company's shareholders, including unaffiliated shareholders, as a group. The
board of directors, including those directors who are not employees of the
company, has unanimously approved the reverse stock split, and the board
unanimously recommends that the shareholders vote for approval and adoption of
the proposed amendment to the certificate of incorporation that will effect the
reverse stock split.
All of the company's directors and executive officers have indicated that
they intend to vote their shares of common stock (and any shares with respect
to which they have or share voting power) in favor of the proposed amendment.
The directors and executive officers of the company beneficially owned
approximately 40% of the shares outstanding as of April 21, 2002. Although the
board as a whole recommends that the shareholders vote in favor of the proposed
amendment for the reasons set forth in "Special Factors--Purposes of the
Reverse Stock Split and--Reasons for the Reverse Stock Split," no director or
executive officer is making any recommendation to the shareholders in his or
her individual capacity.
After the reverse stock split, the company's common stock will not be
registered under the Securities Exchange Act. The board considered the views of
management regarding the cost savings to be achieved by eliminating the
reporting and disclosure requirements related to the registration of the common
stock under the Securities Exchange Act, including indirect savings resulting
from reductions in the time and effort currently required of management to
comply with the reporting and other requirements associated with continued
registration of the common stock under the Securities Exchange Act. The board
also considered the decrease in the expenses related to servicing the company's
large number of shareholders holding small positions in the company's stock
that would result from the reverse stock split. The company's management
determined that the reverse stock split would result in cost savings of
approximately $150,000 per year in direct costs, and further savings in
indirect costs through more efficient use of employees' time. The board
determined that the cost savings (direct and in the form of reduced management
time) to be achieved by terminating registration of the common stock under the
Securities Exchange Act outweighed any potential detriment from eliminating the
registration.
Additionally, the board considered the effect that terminating the
registration of the common stock would have on the market for the common stock
and the ability of shareholders to buy and sell shares. The board determined
that, even as an SEC reporting company, the company has had a limited trading
market for its common stock, especially for sales of large blocks of shares,
and that the company's shareholders derive little relative benefit from the
company's status as an SEC reporting company. The board further noted that the
reverse stock split will provide shareholders owning less than 5,000 shares
with the ability to liquidate their holdings without incurring brokerage costs,
particularly given the limited liquidity for shares of the company's common
stock. Conversely, shareholders who wish to increase their holdings in order to
avoid being cashed out may do so
34
by purchasing shares of the company common stock on the open market prior to
the effective time of the reverse stock split. Moreover, the board is adopting
a plan to provide limited liquidity following the reverse split--see discussion
in "Effects of the Reverse Stock Split--Post Reverse Stock Split Liquidity."
The board considered alternative transactions to accomplish the proposed
going-private transaction but ultimately approved the reverse stock split
proposal. Please read the discussion under "--Alternatives Considered" for a
description of these alternatives.
Substantive Fairness. In analyzing the fairness of the transaction and the
purchase price, the board of directors and the special committee sought to
determine a price that would be paid in a transaction between willing and
knowledgeable buyers and sellers to effectuate the purchase of the company or
its assets.
The board of directors and the special committee considered and reviewed the
following documentation and information:
. Annual financial statements for the company, including consolidated
audited financial statements for each of the past five years up to and
including December 30, 2001;
. Quarterly unaudited financial statements of the company for the fiscal
quarter ended April 21, 2002;
. Management projected revenue and cost budgets for the fiscal year ending
December 29, 2002;
. Management projections of operating performance for fiscal years 2003
through 2006;
. The terms of the reverse stock split and its effect on the company's
shareholders, both those whose shares will be purchased and those who
will remain as shareholders;
. Market information concerning other publicly-traded restaurant companies
that are comparable to the company in terms of size and profitability;
. Market information on interest rates;
. Market information on the recent price behavior and trading volume of
the company's common stock;
. The terms and prices, to the extent publicly available, of selected
recent merger and acquisition transactions involving comparable
companies in the restaurant industry;
. The proforma financial effects of the reverse stock split on the company
and its shareholders; and
. The tax effects of the reverse stock split on shareholders.
The board of directors and the special committee considered numerous
factors, discussed below, in reaching its conclusion as to the fairness of the
reverse stock split, both to affiliated and unaffiliated shareholders. The
board and the special committee did not assign any specific weights to the
factors listed below, and individual directors may have given differing weights
to different factors.
. Historical Market Prices of the Company Common Stock: Although the
company common stock is quoted on the OTC Bulletin Board, there is a
limited trading market for the stock. The high and low sale prices for
the common stock from January 1, 2000 to April 21, 2002, ranged from a
high of $1.125 in January 2000, to a low of $0.19 per share in April,
2002. The closing sale price of the common stock on May 9, 2002, which
was the last day on which the company common stock was traded before we
announced the proposed reverse stock split, was $0.25 per share.
. Comparison of Implied Valuation Multiple to Acquisition from Multiples
of other Comparable Publicly-Traded Companies. The implied enterprise
value to EBITDA multiple at which the transaction is being proposed
compares favorably to the median enterprise value to EBITDA trading
multiples of 21 comparable publicly-traded restaurant companies based on
their market capitalization.
. Comparison of Implied Valuation Multiple to Acquisition Multiples from
Recent Acquisitions of Comparable Publicly-Traded Companies. The
implied enterprise value to EBITDA multiple at which
35
the transaction is being proposed compares favorably to the median
enterprise value to EBITDA purchase price multiples of 5 comparable
publicly-traded companies that were parties to residual ownership
interest purchase transactions since January 1, 2001.
. Premium Over Market Price: The price to be paid for fractional shares
in the reverse stock split on a pre-split basis represents a 28% premium
over the last closing trading price for our common stock prior to the
announcement of the split, a premium of 28% over the average closing
trading price for the thirty days prior to May 2, 2002, and a 33%
premium over the average trading price for the first four months of
2002, through May 2, 2002.
. Premium over Discounted Cash Flow Value: The price to be paid for
fractional shares in the reverse stock split represents a 14.3% premium
over the highest per share valuation and an 88.2% premium over the
lowest per share valuation of the company reached through a discounted
cash flow analysis.
. Premium over Liquidation Value: The price to be paid for a fractional
share in the reserve stock split represents a 68.4% premium over the per
share value of the company reached through a liquidation analysis.
. Other Transactions. There have been no contacts, negotiations or
transactions during the preceding two years for (1) the merger or
consolidation of the company into or with another person or entity,
(2) the sale or other transfer of all or any substantial part of the
assets of the company, (3) a tender offer for any outstanding shares of
the company common stock, or (4) the election of directors to our board.
. Report of Special Committee of the Board of Directors: The board
appointed Louis P. Neeb, as chairman, and Charles M. Steiner to a
special committee to provide financial analysis as to a fair cash price
to be paid in lieu of fractional shares of the company common stock in
the reverse stock split. Please see (Election of Directors section for
further information regarding those directors' financial experience.
During April 2002, the members of the special committee worked with
management and the company's financial analyst with respect to the
preparation, compilation and review of the financial information for
comparable companies and transactions and the future operating
performance of the company. During April and on May 3, 2002, May 6,
2002, and May 7, 2002 the special committee met to discuss its analysis
and conclusions. On May 7, 2002, the special committee delivered its
analysis to the board to assist the board in determining a price that
was fair to the shareholders.
. Determination of the Board of Directors: The board of directors has
reviewed the terms of the reverse stock split and has determined that
the price to be paid for fractional shares in the reverse stock split is
fair to the company's shareholders.
After consideration of all of the foregoing information, and based upon the
recommendation of a range of prices of the special committee, the board
determined that a fair price to be paid to cashed-out shareholders in the
reverse stock split is $0.32 per share.
Questions Concerning Procedural Fairness. The vote of a majority of the
outstanding shares of the common stock entitled to vote on the reverse stock
split will be required to approve it. Approval by a majority of unaffiliated
shareholders is not required. The board determined that any such voting
requirement would usurp the power of the holders of greater than a majority of
the shares of company's common stock to consider and approve the reverse stock
split.
No unaffiliated representative acting solely on behalf of unaffiliated
shareholders for the purpose of negotiating the terms of the reverse stock
split or preparing a report covering its fairness was retained by the company
or by a majority of directors who are not employees of the company. We have not
made any provision in connection with the reverse stock split to grant
unaffiliated shareholders access to our corporate files, except as provided
under the Delaware General Corporation Law, or to obtain legal counsel or
appraisal services at our expense. With respect to unaffiliated shareholders'
access to our corporate files, the board determined that this proxy statement,
together with the company's other filings with the SEC (including the reports
provided to the
36
shareholders with this proxy statement), provide adequate information for
unaffiliated shareholders to make an informed decision with respect to the
reverse stock split. The board also considered the fact that under the Delaware
General Corporation Law and subject to specified conditions set forth under
Delaware law, shareholders have the right to review the company's relevant
books and records of account. The board did not consider it necessary to obtain
legal counsel or appraisal services for unaffiliated shareholders at the
company's expense. In deciding not to adopt these additional procedures, the
board also took into account factors such as the company's size and financial
capacity and the cost of such procedures.
The board of directors did not obtain an evaluation and fairness opinion by
an independent financial analyst to determine the purchase price to be offered
to the company's shareholders for the fractional shares that will result from
the reverse split, since it concluded that the cost and expense of such an
evaluation and opinion would be far greater than the benefits to the
shareholders of that evaluation and opinion, taking into account the size of
the transaction, the number of shares to be purchased, and the aggregate
purchase price. The board of directors was advised that the cost of an
evaluation and opinion from an independent financial analyst would range from
$100,000 to $150,000. The reverse stock split will reduce the number of
outstanding shares from approximately 11,971,000 to 9,271,000 (pre-split) and
the number of record shareholders from approximately 962 to 172, for an
aggregate purchase price of approximately $865,000. However, in its
deliberations the board did review the valuation data provided to the special
committee, prepared by the company's financial analyst in a Comparable Public
Company Analysis, a Merger and Acquisition Analysis, a Discounted Cash Flow
Analysis and a Liquidation Value Analysis.
After consideration of the factors described above, the board of directors
concluded that the reverse stock split is procedurally fair, notwithstanding
the absence of an unaffiliated shareholder approval requirement, an
unaffiliated shareholder representative, the provision of legal counsel or
appraisal services at the company's expense, and an opinion or report from a
financial advisor. Additionally, the board believes that the reverse stock
split is substantively fair to the company's shareholders, including
unaffiliated shareholders as a group. The reverse stock split was unanimously
approved by the directors of the company, including the directors who are not
employees of the company.
Financial Information. The following sets forth certain financial data for
the periods indicated and was obtained from our consolidated financial
statements which are included in our Annual Report on Form 10-K for the year
ended December 30, 2001, and in our Quarterly Report on Form 10-Q for the
quarter ended April 21, 2002, copies of which accompany this Proxy Statement.
The Annual Report and Quarterly Report also contain Management's Discussion and
Analysis of Financial Condition and Result of Operations, which should be read
in connection with the financial data set forth below.
Statements of Operation (Unaudited)
Fiscal Year Ended Period Ended
------------------------------------- ---------------------
January 2, December 31, December 30, April 22, April 21,
2000 2000 2001 2001 2002
----------- ------------ ------------ ---------- ---------
Net sales............................... $29,157,000 $31,600,000 $31,833,000 $9,378,000
Operating costs (cost of goods, labor
occupancy and other operating)........ 25,561,000 30,612,000 28,992,000 8,403,000
Restaurant depreciation and amortization 1,172,000 1,304,000 1,253,000 398,000
General and administrative.............. 3,133,000 3,380,000 2,873,000 949,000
Interest expense........................ 24,000 86,000 191,000 63,000
Other................................... 101,000 11,000 196,000 238,000
Corporate depreciation and amortization. 340,000 363,000 335,000 105,000
----------- ----------- ----------- ----------
Net loss................................ (972,000) (4,196,000) (1,899,000) (778,000)
Net loss per share...................... $ (0.08) $ (0.36) $ (0.16) $ (0.07)
37
Balance Sheet Data (unaudited)
At At
December 30, April 21,
2001 2002
------------ ---------
Total assets................................... $17,470,000
Total notes payable (including current portion) 6,011,000
Stockholders equity............................ 11,459,000
Book value per share........................... $0.97
Pro Forma Balance Sheet Data
The following pro forma balance sheet is based on historical data, adjusted
to give effect to the cash payment for fractional shares resulting from the
reverse stock split. The pro forma balance sheet data is based on the
assumption that an aggregate of 2,700,000 shares will result in fractional
shares and will be purchased by the company for $865,000. We have not included
pro forma income statement data as there will be no material change to the
statement of operations as a result of the reverse stock split.
At At
December 30, April 21,
2001 2002
------------ ---------
Total assets................................... $16,430,000
Total notes payable (including current portion) 6,912,000
Stockholders equity............................ 10,419,000
Book value per share........................... $1.12
All financial information was rounded to the nearest thousand.
The members of the special committee and the board of directors reviewed the
preliminary results of operations for the period ended April 21, 2002, and
management's estimates of the results of operations for the remaining three
fiscal quarters. In arriving at the estimates for the current fiscal year,
management considered the results of operation for the first quarter, as well
as the company's historical trends in sales and margins. The special committee
and the board of directors do not expect that the period ended April 21, 2002
will be necessarily indicative of operations for the full fiscal year 2002 for
several reasons discussed below. First, the company currently is experiencing
significant increases in management salaries, workman's compensation and
utility charges, and these expenses are now higher than reflected in the
results of operations for the first period of the current fiscal year. Second,
net revenues during the first quarter were significantly higher than normal
because of the moderate weather in the Eastern part of the United States during
January, February and March, 2002. Traditionally, this time of year results in
lower net revenues than are achieved in other periods of the year because of
winter weather conditions.
The special committee and the board recognized that the company's operating
performance for the five years ended December 30, 2001 reflected on average
negative same store customer counts and approximately flat same store sales.
For this reason, and because of the uncertainty surrounding the company's
future growth and its unpredictable operating performance, the special
committee and the board also believe that the most reasonable estimate of the
company's operating performance over the next five year period is that it will
be nearly the same as the company's combined actual and estimated performance
for the current fiscal year. The special committee and the board noted,
however, that this represents better performance than the company has
experienced over the past five years. The special committee and the board of
directors also recognized that labor costs, costs of goods (specifically food
and other restaurant consumables) could increase as a result of inflationary or
other conditions, which would result in increased operating costs and thus
increased net loss. However, the special committee and the board of directors
concluded that any increases in operating costs would most likely be offset by
increases in menu prices, with the result that net income (loss) over the
five-year period should remain relatively consistent. It should be noted that,
historically, operating and other expenses increase sooner than the company can
increase menu prices in each of its restaurants and increase at rates higher
than the company is able to pass through to customers. The result is that net
revenues generally lag behind increases in operating and other expenses since
the company is unable to pass on price increases immediately in each of its
restaurants. The special committee and the board also noted that as menu prices
increase, the number of customers can sometimes decrease as
38
customers turn to other alternative eating establishments. They finally
determined that depreciation and amortization would decline yearly as a
function of depreciation and amortization schedules used by the company in
preparing its financial statements assuming no significant future capital
expenditures which may result in annual depreciation and amortization expense.
ANALYSIS OF THE SPECIAL COMMITTEE
The board of directors appointed a special committee of board members to
determine a range of fair prices to be paid, consisting of Louis P. Neeb, as
chairman of the special committee, and Charles M. Steiner. Mr. Neeb has over
thirty years of experience in the restaurant industry and was a director of
Franchise Finance Corporation of America, Inc. a publicly-traded restaurant
finance company that was sold to GE Capital in 2001. Mr. Steiner is a certified
public accountant with almost thirty years of business experience, including
having served as chief executive officer of Branch Group, Inc. a privately held
electrical parts distributor. Please see the biographies of these directors in
the "Election of Directors" section. The special committee prepared the report
described below, in which it recommended a range of fair prices, and presented
that report to a meeting of the full Board held on May 7, 2002. At that
meeting, the Board reviewed and discussed the report and recommendation of the
special committee and determined that $0.32 per share was a fair price to be
paid in lieu of fractional shares.
In connection with its review, the special committee relied on materials
provided by the senior management of the company regarding the future
operations and financial performance of the company, and employed its business
experience in the restaurant and other industries to analyze those materials.
The special committee also consulted with the company's attorneys and financial
analyst during the process of determining a fair price. The special committee's
determination was based on economic, financial and market conditions, such as
interest rates, national and local economic conditions, the local and national
labor situation, food costs and consumer tastes, that existed at the time of
its determination, each of which is subject to change and which could be
beneficial or detrimental to the company's position.
The special committee considered a number of commonly used valuation
techniques in arriving at a range of prices to recommend to the board. The
special committee focused primarily on the advantages and disadvantages of
these various valuation methodologies and the assumptions upon which they were
based, as well as the conclusions of these methodologies.
Of the methodologies considered, the special committee concluded that a
Comparable Public Company Analysis, a Merger and Acquisition Analysis, a
Discounted Cash Flow Analysis and a Liquidation Value Analysis were the most
appropriate methodologies for the reasons discussed below. The special
committee reviewed data for each method prepared for it by the company's
financial analyst at the direction of the special committee.
Comparable Public Company Analysis--This methodology analyzes market
valuation parameters based on market and enterprise values of selected
restaurant companies that have comparable or similar business characteristics
to the company. Because this methodology can be used to compare the company to
other companies that closely resemble it in size and industry, the special
committee determined that it would use this methodology to produce a range of
prices that would be fair to be paid in the reverse stock split.
For the purposes of this methodology, the special committee first examined
whether it should review publicly-traded restaurant companies with market
capitalizations of over $1 billion, over $500 million, over $100 million, over
$25 million or under $25 million. The special committee decided to focus its
analysis on 21 publicly-traded restaurant companies having less than $25
million in market capitalization, as it believed these companies have sales
levels and overall profit margins comparable to the company. Current pricing
and financial information for these comparable companies was compiled from the
web-based Market Guide publication and from annual and quarterly reports from
10-K and 10-Q filings made by those companies with the Securities and Exchange
Commission.
39
Under this valuation methodology, various parameters of the comparable
companies were reviewed (such as revenues and book value), and a ratio of those
parameters to each company's market capitalization and enterprise value is
derived. That ratio is then applied to the company itself, and a fair price for
the company's stock is determined. The special committee considered the
following market valuation parameters to provide a comparable price for the
company: the ratio of a company's market capitalization to its revenues; the
ratio of a company's Enterprise Value (defined below) to its revenues; the
ratio of a company's market capitalization to its EBITDA (defined below); the
ratio of a company's Enterprise Value to its EBITDA; the ratio of a company's
market capitalization to its net income; the ratio of a company's Enterprise
Value to its net income; the ratio of a company's market capitalization to its
Book Value; and the ratio of a company's Enterprise Value to its book value.
For the purposes of this analysis, Enterprise Value is defined as market
capitalization plus bank debt less cash. EBITDA is earnings before interest,
taxes, depreciation and amortization. Market capitalization is market price per
common share multiplied by the number of common shares outstanding.
The special committee determined that some of these parameters were not
applicable to the company, taking into account its historical and projected
financial performance and common restaurant industry valuation methodologies.
The special committee eliminated the multiple of net income parameters, as it
noted that the company's net income has been negative in each year since its
inception. The special committee further eliminated the multiple of revenues
parameters, as it determined they are not generally accepted valuation
methodologies in the restaurant industry due to the significant capital costs
and the resulting highly sensitive margin structure associated with different
restaurant formats. The special committee also eliminated the multiple of book
value parameters, as it determined that book value in the restaurant industry
is rarely indicative of the true value of a company, as it is an accounting
methodology based on the historical cost of the company's assets, and therefore
does not reflect current value.
While the special committee calculated both the average and median multiple
for each EBITDA parameter, it determined that the average multiple could be
heavily influenced by a small number of extremely high or extremely low
results, which would produce atypical results. Although the company's
performance placed it in fact towards the lower end of the comparable companies
reviewed, the special committee relied on the median multiple as the best
measure of the central tendency of each parameter. Thus, the special committee
relied on a median Enterprise Value to trailing twelve month EBITDA multiple of
5.6 and a median market capitalization to trailing twelve month EBITDA multiple
of 3.3.
The special committee then applied these median market multiples to the
appropriate preliminary company income statement and balance sheet values for
the trailing twelve month period ended April 21, 2002, and the projected twelve
month period ending December 29, 2002. However, the special committee first
adjusted the company's income statement data for the trailing twelve-month
period ending April 21, 2002 to eliminate the impact of several non-recurring
items, such as costs relating to the abandonment of planned or existing
restaurants, in effect, increasing EBITDA for this period. This analysis
resulted in a value of $0.11 when multiples were applied to the company
trailing twelve month EBITDA and a value of $0.26 when applied to the company's
projected 2002 EBITDA. In calculating values using projected 2002 EBITDA, the
special committee discounted the historical price to trailing 12 months (April
21, 2002) EBITDA multiple by 10%. This discount was taken because "forward"
multiples are mathematically lower than trailing month multiples when the
source peer group is experiencing earnings growth.
Merger and Acquisition Analysis--This methodology is based on a review of
comparable merger and acquisition transactions, from January 1, 1999 through
March 18, 2002, in the restaurant industry. These transactions provided the
special committee with a good picture of how companies are actually valued by
market participants in light of their size, capital structure and financial
performance. The special committee decided that these companies, as active
participants in buying and selling, are likely to have received or paid fair
value in their respective transactions. Of the 78 transactions analyzed by the
special committee, six involved companies going private through the purchase of
the remaining public ownership interest by an investor group. The special
committee determined it should focus on these transactions in its analysis, as
they are most comparable to the
40
transaction proposed by the company. The special committee further determined
it should focus on transactions that occurred since January 1, 2001, as it
believed a more accurate picture of current values being paid and accepted by
restaurant companies would emerge.
The special committee first considered which of the following ratios to use:
the ratio of the implied equity purchase price (defined below) of an acquiree
to its revenue; the ratio of an acquiree's implied Enterprise Value (defined
below) to its revenue; the ratio of the implied equity purchase price of an
acquiree to its EBITDA (defined below); the ratio of an acquiree's implied
Enterprise Value to its EBITDA; the ratio of the implied equity purchase price
of an acquiree to its net income; the ratio of an acquiree's implied Enterprise
Value to its net income; the ratio of the implied equity purchase price of an
acquiree to its operating cash flow; the ratio of an acquiree's implied
Enterprise Value to its operating cash flow, the ratio of the implied equity
purchase price of an acquiree to its book value; and the ratio of an acquiree's
implied Enterprise Value to its book value. The special committee also
considered the premium of the per share purchase price paid over the market
price of an acquiree's stock one month prior to the transaction announcement.
For the purposes of this analysis, implied Enterprise Value is defined as total
cash paid in the transaction plus bank debt acquired or assumed and less any
cash or cash equivalents on hand. The implied equity purchase price is defined
as the total cash paid divided by the percentage of the company acquired.
The special committee again narrowed the valuation parameters it considered
relevant in this methodology in light of the company's historical and projected
financial performance and the special committee's restaurant industry valuation
expertise. The special committee eliminated the multiple of net income, revenue
and book value parameters for the same reasons it eliminated them in the
Comparable Public Company Analysis above. The special committee also eliminated
the multiple of operating cash flow parameters, as it noted that the company's
operating cash flow was similar to its EBITDA, because the company paid no
taxes, had few non-cash charges and had relatively low interest expense (those
factors being the primary differences between EBITDA and operating cash flow).
The special committee again relied on the median multiples as the best measure
of the central tendency of each parameter. Specifically, the special committee
relied on an implied equity value to trailing twelve months EBITDA multiple of
2.5 and an implied Enterprise Value to trailing twelve months EBITDA multiple
of 5.4. The special committee also relied on a median purchase premium over a
company's market price one month prior to the announcement of a transaction of
34.6%.
The special committee applied the median EBITDA acquisition multiples to the
appropriate preliminary company preliminary income statement and balance sheet
values for the trailing twelve month period ended April 21, 2002, and the
projected twelve month period ending December 29, 2002. The special committee
first adjusted the company's income statement data for the trailing
twelve-month period ending April 21, 2002 to eliminate the impact of several
non-recurring items, such as costs relating to the abandonment of planned or
existing restaurants, in effect, increasing EBITDA for this period. This
analysis resulted in a value of $0.08 when multiples were applied to the
company's trailing twelve months EBITDA, and values of $0.20 and $0.25 when
applied to the company's projected 2002 EBITDA. In calculating values using
projected 2002 EBITDA, the special committee discounted the historical price to
trailing 12 months (April 21, 2002) EBITDA multiple by 10%. This discount was
taken because "forward" multiples are mathematically lower than trailing month
multiples when the source peer group is experiencing earnings growth.
The special committee also applied the median one month premium to the
average closing trading price of the company's stock for the 30 days ending May
2, 2002. Based on this premium, the special committee calculated a per share
value for the company's common stock of $0.34.
Discounted Cash Flow Analysis--This analysis involves the estimation of the
current or present value of expected future cash flows for a firm or asset,
based on an estimate of the risk of those cash flows, the growth rate of those
cash flows, and the time period over which those cash flows will be received.
The basic premise of discounted cash flow analysis is that the economic value
of a firm or asset is based on the expected earnings that can be generated by
the firm or asset. Two key pieces of information are required to perform a
discounted cash
41
flow analysis, including: (i) an estimate of the company's expected earnings or
cash flow over a specified period of time; and (ii) an estimate of the
riskiness of the earnings, or the rate of return that an investor would require
to invest in this firm or asset.
Expected earnings--The management projections for operating performance in
2003 through 2006 provided the basis for an estimate of the company's free cash
flow in the future. Those projections utilized an average rate of 0.0% for the
expected annual growth of the company's comparable store sales and EBITDA. This
compares to approximately flat store sales growth rate for the last five years
(fiscal 1997 through fiscal 2001). An average annual EBITDA growth rate over
fiscal 1997 through fiscal 2001 cannot be calculated because EBITDA was
negative in three of the last five years.
Riskiness of earnings--There are various ways to estimate the rate at which
the company's earnings stream should be discounted to determine present value,
some of which are intuitive and some of which are conceptual. One conceptual
approach utilizes the Capital Asset Pricing Model ("CAPM") to calculate an
estimate of risk. CAPM requires an estimate of the risk-free rate (typically
the rate on a U.S. treasury instrument), the volatility of the firm's security,
or beta, and an estimate of the market risk premium (the difference between the
risk free rate and the rate investors expect to earn in the stock market as a
whole). The special committee used the 10-year Treasury bond rate as an
estimate of the risk-free rate, and a market premium based on the historical
returns of the S&P Small Cap Index. The special committee chose to use an
estimate of beta for the restaurant industry as a whole (as reported by Market
Guide) instead of the beta for the company's common stock, as it believes such
beta cannot be calculated accurately due to the lack of liquidity in the market
for the company's common stock. Based on this approach, the special committee
arrived at an initial discount rate of 9.52%.
On a more intuitive basis, the special committee relied on the basic premise
that thinly-traded restaurant stocks, or any thinly-traded stock, require
higher discount rates due to the lack of liquidity. In addition, the special
committee noted that the restaurant industry is subject to many factors that
make cash flow predictions relatively unreliable, such as labor and food costs
and consumer tastes, all of which are highly variable. Furthermore, the special
committee noted that the company had an unpredictable history of successful
financial performance. Thus, the special committee applied a 40% discount to
the conceptual discount rate to arrive at an adjusted discount rate of 13.33%,
which it believes is more appropriate to estimate the economic value of a share
of the company's common stock. Using this discount rate, the special committee
arrived at a per share value for the company's common stock of $0.17 when
discounting the free cash flows to the Enterprise, and a per share value of
$0.24 when discounting the free cash flows to equity. Free cash flow to the
Enterprise is after tax earnings before interest plus depreciation and
amortization less capital expenditures and changes in non-cash working capital.
Free cash flow to equity means net income plus depreciation and amortization
less capital expenditures and changes in non-cash working capital.
Liquidation Value--The company's assets consist primarily of restaurant
equipment, furniture and fixtures, buildings and leasehold improvements and
land. Restaurant equipment generally has a very limited market, and is either
so common as to have little value (such as in the case of flatware or cutlery)
or is attached to the restaurant premises. Also, the leases contain
restrictions on assignment, which reduces their value. In the special
committee's experience, buildings and leasehold improvement on specialized
buildings often realize $0.15 or less on the book value dollar and restaurant
equipment often realizes $0.05 on the book value dollar, in a liquidation sale.
The special committee thus applied these percentages to the company's balance
sheet data as of March 24, 2002, to derive an expected liquidation value for
the company. For the purposes of this analysis, and based on discussion with
management of the company, the special committee assumed that land could be
sold at book value. This analysis resulted in a liquidation value for the
company of $0.19 per share compared to the accounting book value of $ per
share as of April 21, 2002.
Other Offers and Other Transactions--The company has received no offers to
purchase the company, and has not considered a sale of the company.
Consequently, the special committee did not consider this factor in its
deliberations of what range of per share prices would be fair to the company's
shareholders. Other than the
42
merger with Food Trends Acquisition Corp. in 1996, the company has not engaged
in any discussion regarding a merger or consolidation with another company or
in the sale or other transfer of a substantial part of its assets, nor has it
considered such a merger or consolidation, so the special committee did not
consider this factor in establishing fair value. To the company's knowledge,
there have not been any purchases of the company's common stock that would
enable the holder to exercise control of the company. Therefore, the special
committee did not use this methodology.
Summary and Conclusion--The special committee independently reviewed and
discussed the materials provided to the board, and the analyses and conclusions
described above. Based on its review and discussions, the special committee
determined that the range of fair prices for a pre-split share of common stock
was $0.28 to $0.33, and that $0.32 is a fair price to be paid to the company's
shareholders for a pre-split share. The special committee's conclusion is based
on its acceptance of the following valuation results:
. Under the Comparable Public Company Analysis, the range of per share
values for the company's common stock is $0.11 to $0.26;
. Under the Merger and Acquisition Analysis, the range of per share values
for the company's common stock is $0.08 to $0.25 based on EBITDA ratios,
and a value of $0.34 based on the median premium over market price prior
to announcement;
. Under the Discounted Cash Flow Analysis, the range of per share values
for the company's common stock is $0.17 to $0.28;
. Under the Liquidation Value Analysis, a fair value for the common stock
is $0.19.
. The per share purchase price represents a 28% premium over the May 9,
2002 closing trading price of the company's common stock, a 28% premium
over the 30 days average closing trading price ending May 2, 2002, and
33% over the average closing trading price for the first four months of
2002, through May 2, 2002.
. The valuation equates to an Enterprise Value/EBITDA multiple of
approximately 5.7 times using the actual/projected fiscal 2002 numbers
provided by management, and an Enterprise Value/EBITDA multiple of 15.5
times the trailing twelve months. This compares favorably to the median
Enterprise Value/EBITDA multiple of 5.4 times for the comparable
companies reviewed under the Merger and Acquisition Analysis.
43
INDEPENDENT ACCOUNTANTS
Reznick Fedder & Silverman P.C. served as the company's independent auditors
during fiscal years 2000 and 2001. Representatives of Reznick are expected to
attend the Meeting, will be provided with an opportunity to make a statement,
should they desire to do so, and will be available to respond to appropriate
questions from the shareholders. The audit committee has recommended, and the
Board has approved, the selection of Reznick to serve as the company's
independent auditors for the year ending December 29, 2002.
The table below sets forth the aggregate fees billed to the company for the
year ended December 30, 2001 by Reznick. The audit committee has considered
whether the provision of non-audit services is compatible with maintaining
Reznick's independence, and concluded that providing such non-audit services
does not interfere with Reznick's independence.
Reznick Compensation for 2001
Amount
(approximate)
-------------
Annual Audit Fees and Quarterly Report Review................ $ 72,000
Financial Information Systems, Design and Implementation Fees 0
All Other Fees............................................... 39,000
--------
Total..................................................... $111,000
OTHER MATTERS
The Board knows of no other business which may come before the Meeting. If,
however, any other matters are properly presented to the Meeting, it is the
intention of the persons named in the accompanying proxy to vote, or otherwise
act, in accordance with their judgment on such matters.
SHAREHOLDER PROPOSALS
If shareholders approval of the reverse stock split is obtained and the
company effects the reverse stock split, the company will no longer be subject
to the proxy rules of the Securities Exchange Act of 1934. Consequently, the
company will no longer be seeking proposals pursuant to those proxy rules, and
shareholders may find it more difficult to make proposals for future annual
meetings.
However, if we do not effect the reverse stock split, any proposal of a
shareholder to be presented at the company's annual meeting of shareholders in
2003, including the nomination of persons to serve on the Board, must be
received not later than January , 2003 to be considered timely for inclusion
in the proxy materials for that meeting. Shareholders submitting proposals
should submit them in writing and direct them to the company's secretary at the
company's principal executive offices via certified mail, return receipt
requested, to ensure timely delivery.
METHOD OF PROXY SOLICITATION
The entire cost of this solicitation of proxies will be borne by the
company. The company's directors, officers, and regular employees, without
additional remuneration, may solicit proxies by telephone, telegraph and
personal interviews. The company will, if requested, reimburse banks, brokerage
houses, and other custodians, nominees and certain fiduciaries for their
reasonable out-of-pocket expenses incurred in connection with the distribution
of proxy materials to their principals.
By Order of the Board,
YPE VON HENGST
Secretary
44
SILVER DINER, INC.
FOR USE AT THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON AUGUST , 2002.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF SILVER DINER,
INC. (THE "COMPANY"). The undersigned holder of shares of Common Stock of the
company (the "Shares") hereby appoints Robert T. Giaimo, Chairman of the Board,
President, Chief Executive Officer and Treasurer, or failing him, Ype Von
Hengst, Director, Vice President, Executive Chef and Secretary, as proxy for
the undersigned to attend, vote, and act for and on behalf of the undersigned
at the annual meeting of shareholders of the company to be held on August
, 2002 at 10:00 a.m. (Eastern time), at the [Homewood Suites Hotel, 8130
Porter Road, Falls Church, Virginia 22042], and at any adjournments thereof
(the "Meeting"), and hereby revokes any proxy previously given by the
undersigned. If this proxy is not dated, it shall be deemed to be dated on the
date on which this proxy was mailed by the company.
Without limiting the general powers hereby conferred, with respect to the
following company proposals, the Shares represented by this proxy are to be
voted:
1. [_] FOR the election as directors of all nominees listed below (except as
marked to the contrary below), or
[_] WITHHELD FROM VOTING for all nominees listed below.
INSTRUCTIONS: To withhold authority to vote for any individual nominee, strike
a line through the nominee's name in the list below.
Robert T. Giaimo Catherine Britton Michael Collier Ype Von Hengst
Edward H. Kaplan Patrick Meskell Louis P. Neeb Charles M. Steiner
2. [_] FOR the proposal described below, or
[_] AGAINST the proposal described below.
To amend the company's Certificate of Incorporation, as amended, to effectuate
a reverse split (the "reverse stock split") of the outstanding shares of the
company's Common Stock (the "Shares"). Pursuant to the reverse stock split all
of the Shares held by each shareholder will be converted into a lesser number
of shares, based on a ratio of 5,000 outstanding Shares being converted into
one share, with no fractional shares being issued as a result of the reverse
stock split. Each shareholder who would otherwise be entitled to receive a
fractional share post-reverse stock split shall receive $0.32 per share for
each share held before the reverse stock split that would result in a
fractional share.
3. In their discretion on any other matters that may properly come before the
meeting or any adjournment thereof.
(CONTINUED AND TO BE SIGNED AND DATED ON REVERSE SIDE.)
(CONTINUED FROM PREVIOUS SIDE)
This proxy, when properly executed, will be voted in the manner directed herein
by the undersigned shareholder. If no direction is made, this proxy will be
voted in favor of each of the proposals set forth above.
Please sign exactly as name appears below. When Shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign in full corporate name by President or other authorized officer. If a
partnership, please sign in partnership name by authorized person.
Dated , 2002
Signature
Signature, if Held Jointly
Please Mark, Sign, Date and Return the Proxy Card Promptly Using the Enclosed
Envelope.