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PRELIMINARY
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. 1)
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. The
amendment would also reduce the authorized capital stock from 21,000,000
shares, of which 20,000,000 are common stock and 1,000,000 are preferred
stock issuable in series, to 250,000 shares, of which 200,000 are common
stock and 50,000 are preferred stock issuable in series.
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 16, 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
PRELIMINARY
[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 16, 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 the 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 of record
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 sending an instrument of
revocation or a duly executed proxy bearing a later date to ADP at the following
address: ADP-ICS, 51 Mercedes Way, Edgewood, NY 11717, Attn: Jay Christiansen,
Sharelink Department. Any shareholder who owns shares in "street name" through a
bank, broker or other intermediary should contact his or her bank, broker or
intermediary to determine how to revoke his or her proxy.
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 on Form 10-K,
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 annual report on Form 10-K and the quarterly report on
Form 10-Q are incorporated in this proxy statement and should be reviewed in
connection with voting for the matters submitted to shareholders at the meeting.
3
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.
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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 on Form 10-K
and the quarterly report and Form 10-Q, which are incorporated in this proxy
statement by reference. 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. Please see the Section "Description of the Reverse Stock Split"
for a more detailed discussion.
The amendment will also decrease the authorized capital stock from
21,000,000 shares, of which 20,000,000 are common stock and 1,000,000 are
preferred stock issuable in series, to 250,000 shares, of which 200,000 are
common stock and 50,000 are preferred stock issuable in series.
. 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 fact that we have reduced other operating expenses over the past year,
and that the expenses we incur as a result of being a private company are the
major remaining significant expense that we can eliminate without negatively
affecting our operations;
. 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 the fact that stock options are not a viable method
of compensation; 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;
. a lack of market makers and analysts following our performance; 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.
Please see the Section "Special Factors--Purposes of and Reasons for the Reverse
Stock Split" for a more detailed discussion.
. Alternatives Considered
5
We considered a cash-out merger of the company, a tender offer, remaining a
public company and a sale of the company 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 raised similar concerns as to the cash required, 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 determined
that remaining a public company was not a viable option as we would continue to
incur the expenses involved and would have no other significant way to reduce
our expenses without affecting the service we provide our customers.
We decided that selling the company was not an alternative. The board believes
that by implementing the reverse stock split management will be able to devote
full time and attention to the company's business and expenses will be
significantly reduced thus enabling the company to improve its financial
performance, which could result in increased shareholder value over time.
Further, the board of directors noted that director-shareholders who
beneficially own approximately 45% of the company's common stock, are not
interested in selling their shares in the company at this time. The board of
directors, therefore, concluded that no purpose would be served in seeking a
buyer when it is highly unlikely that a sale would be approved by the
shareholders. The board also noted that, given the company's prior operating
history, net losses and cash flow, the company is not an attractive candidate
for acquisition and that exploring the sale of the company could create an
unstable environment for employees, thus potentially disrupting and adversely
affecting the company's business.
Please see the Section "Special Factors--Alternatives Considered" for a more
detailed discussion.
. Effects and Fairness of the Reverse Stock Split
We believe that the reverse stock split is fair to, and in the best interest of,
our shareholders, both affiliated and unaffiliated shareholders as a group, and
both for those who will be cashed out and those who will remain shareholders.
The board of directors has unanimously approved the reverse stock split. Below
are the effects of the reverse stock split on the shareholders and the company,
and the fairness of the reverse split to all the shareholders.
. Effects on the Company. The reverse stock split will have the following
effects on the company:
. 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 book value per share of company common stock as of April 21, 2002 will
be changed from approximately $0.94 per share on an historical basis as of April
21, 2002 to approximately $1.10 (pre-split) per share on a pro forma basis as of
April 21, 2002, after giving effect to the cash payment for fractional shares
and the expense occurred;
. 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; and
. our cash and equivalents will be reduced from approximately $2,562,000 at
April 21, 2002 to approximately $1,461,000 on a pro forma basis as of April 21,
2002, with a corresponding reduction in our net stockholders' equity.
Please see the sections "Special Factors--Effects of the Reverse Stock Split o
the Company" and "Description of the Reverse Stock Split" for a more detailed
discussion.
. Effects on and Fairness of the Reverse Stock Split to Affiliated
Shareholders: Affiliated shareholders are shareholders who are our directors and
officers. These shareholders will increase the percentage of shares they own
above 50% without investing more money in the company, which means that they
will control the company; they will retain their positions with the company; and
they control the timing and the price of the reverse stock split.
. 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. With respect to options that are being repriced, the
affiliated shareholders will control the market value of those options if they
are repriced in February 2003, and will value the fair market value in all cases
when the options are exercised.
6
Please see the section "Special Factors--Effects of the Reverse Stock
Split on and Fairness to Directors and Officers" for a more detailed discussion.
. Effects on and Fairness of the Reverse Stock Split to Unaffiliated
Shareholders Who will be Cashed Out: As a result of the reverse stock split,
these shareholders will receive $0.32 for each share of company common stock
they own before the reverse stock split, and will no longer be shareholders of
the company. The reverse stock split is fair because it provides them with the
opportunity to liquidate their shares for a price they could not obtain in the
marketplace, and without incurring brokerage costs. The certainty of receiving
that price outweighs the fact that they do not control the timing or price of
the transaction, and will no longer be able to participate in any improvement in
the company's performance. Please see the section "Special Factors--Effects of
the Reverse Stock Split on and Fairness to Unaffiliated Shareholders" for a more
detailed discussion.
... Effects on and Fairness of the Reverse Stock Split to Unaffiliated
Shareholders Who will Remain Shareholders: As a result of the reverse stock
split, these shareholders will remain shareholders, but unaffiliated
shareholders as a group will own a lesser percentage of shares than before, and
there will be less liquidity for those shares. The transaction is fair because
the affiliated shareholders currently have effective control over the company,
the remaining shareholders will participate in any improvement in the company's
performance resulting from the reverse stock split, and the company has agreed
to a limited liquidity plan with the goal of providing some level of liquidity.
The limited liquidity plan is subject to the condition that the Company has at
least $1.6 million of cash in the bank as of the end of the applicable quarter
and the redemption does not violate any creditor agreement then in place.
Currently, we do not have sufficient cash to effect the plan, based on our
position as of April 21, 2002. We will need to generate sufficient cash from our
operations in the remainder of this year to be able to effect the plan. Please
see the sections "Special Factors--Effects of the Reverse Stock Split on and
Fairness to Unaffiliated Shareholders," and "Special Factors--Effects of the
Reverse Stock Split on and Fairness to Unaffiliated Shareholders--Post Reverse
Stock Split Liquidity" in particular, for a more detailed discussion.
. Fairness of the Price. 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, 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.
. 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 23% premium over
the average closing trading price for the 30 calendar days through May
9, 2002, and a 33% premium over the average closing trading price for
the first four months and nine days of 2002 through May 9, 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.
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. Please see the
section "Special Factors--Fairness of the Price" for a more detailed discussion.
. Federal Income Tax Consequences of the Reverse Stock Split. As a result of
the reverse stock split, shareholders who receive only common stock will not
recognize gain or loss. Shareholders who receive cash will recognize a gain or
loss, which may be treated as income or capital gains/losses, depending on the
individual shareholder's circumstances and the amount of time the
7
shareholder held the shares. Shareholders who acquired shares of common stock as
a result of exercising stock options will likewise recognize gain or loss if
they receive cash, but the treatment of that gain or loss will depend on the
amount of time the shareholder held the shares or options. Please see the
section "Special Factors--Federal Income Tax Consequences of the Reverse Stock
Split" for a more detailed discussion.
General
. 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; (iii) no event has occurred or is likely to arise that
might have a materially adverse effect on the company; and (iv) the reverse
stock split will reduce the number of shareholders of record below 300. 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. If the Company does not effect
the reverse stock split, the Company will continue as a registered company under
the Securities Exchange Act of 1934, as amended, and the common stock will
continue to be traded on the OTC Bulletin Board.
. 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, and $236,000 for expenses.
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. Please see
the section "Description of the Reverse Stock Split--Source of Funds and
Expenses" for a more detailed discussion.
. 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 intends to
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 "Special Factors--Post Reverse Stock Split Liquidity." That
limited liquidity plan is subject to the condition that the Company has at least
$1.6 million of cash in the bank as of the end of the applicable quarter, and
the redemption does not violate any creditor agreement then in
8
place. Currently, we do not have sufficient cash to effect the plan, based on
our position as of April 21, 2002. We will need to generate sufficient cash from
our operations in the remainder of this year to be able to effect the plan.
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 even though federal securities laws will no longer require us to
provide information. We will not post information that we are currently required
by federal securities laws to provide to our shareholders, such as management's
description and analysis of our financial condition and results of operation,
disclosure of compensation for our officers and directors, and related party
transactions. 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. We may stop posting information on our website in the future.
Q. How do I vote or revoke my proxy if I hold my shares in "Street Name"?
A. Your bank, broker or other intermediary (or "intermediary") will receive a
proxy card on your behalf, and should contact you to solicit your vote. Unless
instructed, your intermediary will only vote your shares if you instruct him or
her to. Your intermediary will mail information to you that will explain how to
give those instructions, and how to revoke a proxy.
Q. How do I revoke or change my proxy if I am a shareholder of record?
A. If you wish to revoke or change your proxy, you should send a request to do
so: ADP-ICS, 51 Mercedes Way, Edgewood, NY 11717, Attn: Jay Christiansen,
Sharelink Department. Please see previous answer if you hold your shares in
"street name."
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.
9
TABLE OF CONTENTS
Page
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1. SPECIAL FACTORS
2. DESCRIPTION OF THE REVERSE STOCK SPLIT
3. ANALYSIS OF THE SPECIAL COMMITTEE
4. BENEFICIAL OWNERSHIP OF SHARES
5. ELECTION OF DIRECTORS
6. EXECUTIVE COMPENSATION
7. INDEPENDENT ACCOUNTANTS
8. OTHER MATTERS
9. SHAREHOLDER PROPOSALS
10. METHOD OF PROXY SOLICITATION
EXHIBITS
Certificate of Amendment
Special Committee Report
10
SPECIAL FACTORS
Purposes of and Reasons for 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 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 thus enable the company's management and employees to devote more time and
effort to stabilizing and improving the company's operations. The company's
management believes that the reverse stock split will also 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 is operating marginally. Our cash flow has been erratic--in
some quarters we have produced positive cash flow, but in most quarters we have
experienced negative cash flow. We have been unable financially to expand within
the past two years, and future expansion plans are on hold. Our management has
determined that the company needs to stabilize and reduce operating expenses so
that we can focus on running a successful business through the restaurants the
company currently operates, and so that we can plan with more certainty for the
future of the company. Given the company's history of losses, management
believes it important to realize every opportunity to reduce overhead and focus
our limited resources on becoming profitable. To achieve that purpose, we have
been cutting our operating expenses over the past year, but we need to ensure
that we do not negatively affect the service we provide to our customers. The
direct and indirect expenses we incur in being publicly traded are the most
significant remaining expenses that we can eliminate without negatively
affecting our operations.
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. The
company also incurs 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 going private, we will be able to save
most of those costs. We will incur minimal costs in posting quarterly and annual
financial information on our website.
In addition to the direct costs the company incurs, the company's
management and employees are required to devote their time and energy to
completing the periodic reports required of publicly-traded companies under the
Securities Exchange Act. In going private, we can eliminate many of those
indirect costs. Thus, as well as the approximately $150,000 in direct savings we
expect to realize following the reverse stock split, our management and
employees will be able to focus their time and effort on the operation of the
company's business.
Over the past year the company's management has been reducing operating
costs in an attempt to stabilize the company's financial position. For example,
in the past year we have reduced our corporate overhead expenses by more than
$125,000 through reductions in corporate staff and otherwise through monitoring
our expenses, such as administrative expenses. The company's management believes
that going private presents the only remaining opportunity for the company to
reduce expenses and focus the company on stabilizing profitability, without
cutting expenses that would have an adverse effect on the service we provide to
our customers.
In becoming a publicly-traded company on NASDAQ, 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. In May, 2001 we were delisted from NASDAQ because
our stock price went below $1.00, despite our attempts in 2000 to maintain the
common stock price above $1.00 through the repurchase of shares. Since
delisting, the market price for the company's common stock has continued to
decline. As a result, there appears to be little chance that the company will be
in a position to list again with NASDAQ, and thus the company will not benefit
from having market makers or financial analysts following the company and
reporting on its activity. In light of the expenses mentioned above 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.
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. 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
11
increase in capital attracted to the company. For example, while the company's
most recent quarterly results showed an improvement in financial performance,
this did not translate into a higher market price for our common stock. Thus,
liquidity for the company's common stock is likely to remain low. The reverse
stock split will allow the shareholders being cashed out to liquidate their
shares without having to pay brokerage or similar fees for the transaction.
Furthermore, the low market price makes our business seem less credible. It
has made stock options unattractive, and our use of stock options has not been
an effective method of attracting or retaining high-quality employees. The
company adopted numerous stock option plans and stock participation plans upon
going public, with the goal of providing incentives to our employees by giving
them the opportunity to participate as shareholders in the growth of the
company. The low market price of our common stock has meant that employees have
not taken advantage of these stock options. As a result, in the past year we
have stopped giving any awards under the various stock option plans and related
stock-based incentive plans, and have given employees cash bonuses rather than
compensation in the form of shares. 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,
while removing the negative impression of being an underperforming public
company, and in doing so attract and retain more high quality employees.
To keep its focus on continuing to achieve and maintain improved operating
performance a,omg 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.
In view of the fact that going private presents the best opportunity to
save operating costs, and 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.
Failure to Effect Reverse Stock Split.
Although the board of directors believes that the reverse stock split will
be consummated and that the company will go private, we cannot guarantee that
the reverse stock split will result in the company going private. The board of
directors will not implement the reverse stock split if it determines that the
reverse stock split would result in the number of shareholders of record
remaining 300 or more. The company's stock would continue to be listed on the
OTC Bulletin Board and the company would continue to file annual and quarterly
reports on Form 10-K and Form 10-Q. The board of directors considered the
possibility that the reverse stock split may not be implemented. The board
determined that the potential benefits of implementing the reverse stock split,
in the form of reduced operating expenses without directly affecting the
company's operations, were worth the risk that the reverse stock split might not
be implemented.
Alternatives Considered.
In making its determination to proceed with the reverse stock split, the
board of directors considered other alternatives. As discussed below it rejected
these alternatives because the company did not have the financial ability to
effect a merger or tender offer for all the shares other than those owned by
affiliates, and a sale of the company was inappropriate. The board also rejected
maintaining the status quo as a public company because the company would
continue having the same problems--incurring the costs of being a registered
company without the market, image or other benefits that being public can
provide. The board determined that providing liquidity to some shareholders was
fair to all the shareholders considering the benefits to the company of
eliminating the expenses incurred through being a public company. The
alternatives the board considered were:
Merger. The board 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,
the board determined that the company did not have the financial ability to pay
the cash-out price to all the remaining shareholders, as those shareholders hold
approximately 7,300,000 shares. The cash out price in a merger would be
approximately $2,335,000, based on a per share price of $0.32, as opposed to a
total cash out price of $865,000 for the reverse stock split plus $200,000 if
the limited liquidity plan is implemented. The board noted that the company's
shareholders would have had dissenters' appraisal rights under Delaware law if
the company had effected a merger.
Issuer Tender Offer. The board 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
the board was uncertain as to whether this alternative would result in a
sufficient number of shares being tendered. In addition, similar to the
12
merger, the total cash-out cost of tender offer would be approximately
$2,335,000, based on a per share price of $0.32, as opposed to a total cost of
approximately $1,055,000 for the reverse stock split and limited liquidity plan.
Moreover, federal regulations impose rules regarding the treatment of
shareholders in a tender offer, including pro-rata acceptance of offers from
shareholders, which make it difficult to ensure that the company would be able
to reduce the number of shareholders below 300. As a result, the board rejected
this alternative.
Maintaining the Status Quo. The board considered whether the company could
reduce operating costs while providing the same quality service to customers
without taking the company private. However, the board considered maintaining
the status quo to be detrimental to all the shareholders. The company would
continue to incur the expenses of being a public company without the benefits,
and would have no other significant way to reduce expenses and stabilize
operations other than to reduce expenses that might have a more direct negative
impact on the service the company provides to its customers. Thus, the board
considered maintaining the status quo to be detrimental to all shareholders and
rejected this alternative.
Selling the Company. The board of directors determined that the sale of
the company is not an alternative to going private by means of a reverse stock
split. They believe that by implementing the reverse stock split management will
be able to devote full time and attention to the company's business and expenses
will be significantly reduced thus enabling the company to improve its financial
performance, which could result in increased shareholder value over time.
Further, the board of directors noted that director-shareholders who
beneficially own approximately 45% of the company's common stock, are not
interested in selling their shares in the company at this time. The board of
directors, therefore, concluded that no purpose would be served in seeking a
buyer when it is highly unlikely that a sale would be approved by the
shareholders. The board also noted that, given the company's prior operating
history, net losses and cash flow, the company is not an attractive candidate
for acquisition and that exploring the sale of the company could create an
unstable environment for employees, thus potentially disrupting and adversely
affecting the company's business.
Effects of the Reverse Stock Split on the Company.
The board considered the following effects that the reverse split will
have on the company:
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.
Change 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 $11,303,000, or $0.94 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 $0.94 per share on a historical basis to approximately $1.10
(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.
Available Cash. Our cash will be reduced from approximately $2,562,000 at
April 21, 2002 to approximately $1,461,000 on a pro forma basis as of April 21,
2002, with a corresponding reduction in our net stockholders' equity.
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 plans to 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. These financial reports
will not include information that we currently are required to provide to our
shareholders under federal securities laws, including information required under
Form 10-Q or Form 10-K, such as a description of the company's business,
management discussion and analysis of financial condition and results of
operation, description of transactions with related parties, disclosure of
executive compensation and reports of beneficial ownership by our management.
The company will also
13
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.
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, as opposed to the fees we have historically incurred as part of
our annual meeting of shareholders, will total approximately $236,000, as
follows: SEC filing fees will be about $200; legal and professional fees will be
about $214,000; accounting fees will be about $2,000; printing costs will be
about $14,000; ADP fees will be about $5,000 and other fees will be about $800.
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.
As discussed above in "Purposes of and Reasons for the Reverse Stock
Split," we anticipate saving $150,000 in direct costs and an indeterminable
amount in indirect savings resulting from the reduction in the time that must be
devoted to preparing SEC reports and filings and responding to shareholder
inquiries by employees of the company.
Effects of the Reverse Stock Split on the Company's Shareholders, and
Fairness of Reverse Stock Split for Affiliated and Unaffiliated Shareholders
The board and the special committee reviewed the effects of the reverse
stock split on the company's shareholders, and the fairness of the transaction
to all its shareholders. In doing so, the board and the special committee
considered the effects on and fairness to the company's affiliated shareholders,
defined as those who are directors and officers. The board and the special
committee also considered the effects on and fairness to unaffiliated
shareholders, both those who will be eliminated as shareholders and those who
will remain shareholders after the reverse stock split. The following discussion
sets forth the benefits and detriments the board and the special committee
considered for each of the groups of shareholders.
Effects of the Reverse Stock Split on and Fairness to Directors and
Officers In reviewing the reverse stock split, the board took into account the
following effects the transaction would have on the company's directors,
officers and other affiliated shareholders, and the fairness of the transaction
to those shareholders:
Unlike the unaffiliated shareholders, our directors have control over the
timing of the reverse stock split, and play a greater role in determining the
price to be paid in lieu of fractional shares.
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. The directors will increase their ownership percentage without any
additional investment. As a result of their additional ownership, the affiliated
shareholders will be able, under Delaware law, to approve a merger or sale of
the company by majority written consent, without needing to seek or obtain the
consent of unaffiliated shareholders. Please note that the company has no plans
to sell or merge the company, nor has it had any discussions regarding the same.
No change-in-control or severance provisions of any employee's employment
agreement will be triggered by the reverse stock split. The directors and
officers will remain in the same positions in the company that they had prior to
the reverse stock split.
Also, 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.
14
In December 2001, before the company's management had considered or
notified any of the board members of an intent to effect a reverse stock split,
the board agreed to offer repriced options to some of the company's directors
and officers, as described in "Non-Employee Director Compensation" and "Stock
Options" below. The repriced option will be issued at the market price on July
31, 2002, unless the optionee delays the issuance until February 1, 2003, in
which case the market price will be determined by the board because no market
will likely exist. The optionee will receive, upon exercise, the difference
between the fair market value and the market price on July 31, 2002 or February
1, 2003, as applicable. The board of director will determine the fair market
value of the company's stock at the time of exercise. There is thus a conflict
of interest for the board of directors regarding the repriced stock options, in
that they determine the fair market value upon exercise of their options, and
the market price for their shares on February 1, 2003, if applicable.
After the reverse stock split, the company's common stock will not be
registered under the Securities Exchange Act. As a benefit, the executive
officers, directors and other affiliates of the company will no longer be
subject to many of the reporting requirements, such as reporting of related
party transactions and compensation and restrictions of the Securities Exchange
Act, including the reporting and short-swing profit provisions of Section 16.
Our directors and officers will still be subject to the fiduciary and other
obligations of Delaware law. However, our affiliates may also be deprived of the
ability to dispose of their shares of the company common stock under Rule 144
under the Securities Act of 1933.
Consideration of Procedural Fairness for All Shareholders.
The board considered the procedural aspects of the approval of the reverse
stock split, and determined that the procedure was fair to all the shareholders,
affiliated and unaffiliated, both those who would be cashed out and those who
would remain shareholders.
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 be unfair because it 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.
Moreover, the reverse stock split has been unanimously approved by the
directors, including the directors who are not employees of the company.
The board did not consider it necessary to obtain legal counsel or
appraisal services for unaffiliated shareholders at the company's expense, nor
did the board obtain an evaluation and fairness opinion by an independent
financial analyst to determine the purchase price to be offered to the company's
shareholders. In deciding not to adopt these additional procedures, the board
took into account factors such as the company's size and financial capacity, the
size of the transaction, including the number of shares to be purchased and the
aggregate purchase price, the cost of such procedures, and the fact that an
independent director was the chairman of the special committee. 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 board
determined that any benefit of an opinion of an independent analyst to the
unaffiliated shareholders was outweighed by the costs that would be borne by all
the remaining shareholders, both affiliated and unaffiliated.
The board has 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 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.
Effects of the Reverse Stock Split on and Fairness to Unaffiliated
Shareholders
The board reviewed the following effects of the reverse stock split on
unaffiliated shareholders, both those who would remain shareholders after the
transaction and those who would receive only cash and be eliminated entirely as
shareholders.
Shareholders Who Remain. 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 took into account
the fact that the company's 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.
15
The board determined that the remaining shareholders had the potential to
benefit from any reduction in operating costs the company would realize in going
private. Because those costs would not adversely affect the service the company
provides to its customers, the board determined that the improved stability of
the company's performance made the transaction fair to the remaining
shareholders, even though they were not enjoying immediate liquidity because
they would enjoy any increased value of the company that might result from
improved operations.
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 below in "Description of the Reverse Stock
Split--Termination of Securities Exchange Act Registration," we intend to
continue to provide quarterly and annual financial statements to our
shareholders.
Finally, the board noted that the remaining unaffiliated shareholders
would have less control over the company because the affiliated shareholders
would increase their ownership percentages. However, the board determined that,
even under current ownership, the affiliated shareholders have a large influence
over the company, and that the change in ownership would not greatly increase
that influence.
Shareholders Who Are Being Cashed Out The board considered the fact that
shareholders who will receive cash will have no control over the timing or price
of the sale of their shares. However, the board noted that there is very little
liquidity currently for the company's common stock, and thus shareholders have
little choice as to timing and price, particularly if they wish to sell a large
number of shares. The board determined that the certainty of liquidity through
the reverse stock split made the transaction fair, even taking into account the
lack of control over timing and price.
The board further noted that the reverse stock split will provide
shareholders being cashed out with the ability to liquidate their holdings
without incurring brokerage costs, particularly given the limited liquidity for
shares of the company's common stock. Moreover, those shareholders are receiving
a premium over current market price, which they would not be able to obtain in a
sale on the open market.
The board also took into account the fact that the company might improve
its performance sufficiently to pay remaining shareholders more for their shares
under the limited liquidity plan than the $0.32 being paid in the reverse stock
split. However, the board determined that the uncertainty as to the company's
ability to purchase shares in the future meant that the price being paid to the
shareholders being cashed out was fair.
Moreover, shareholders who wish to increase their holdings to avoid being
cashed out may do so by purchasing shares of the company'a common stock on the
open market prior to the effective time of the reverse stock split and those who
wish to be cashed out entirely can reduce their holdings below 5,000 shares of
common stock.
Post Reverse Stock Split Liquidity. With respect to the two quarters
beginning with the first quarter ending 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. Based on the April 21, 2002 balance sheet, a copy of
which is included in Form 10-Q for the period ended April 21, 2002, adjusted to
reflect the implementation of the reverse stock split and payment of
approximately $850,000 to holders of fractional shares and expenses of $236,000,
the company will have approximately $1,470,000 in cash, with the result that the
company will be unable at this point to implement the liquidity plan. The
company's ability to implement the plan will depend on operations for the period
from April 22/nd/ through the end of the fourth quarter of 2002. We do not know
whether the company will generate sufficient cash flow, or that the company will
have sufficient cash available, to implement the plan.
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
16
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.
Fairness of the Price. 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 and special committee sought to determine a price that was
fair both to those shareholders who would receive only cash in the reverse stock
split, and those shareholders who would remain shareholders after the reverse
stock split. The board and special committee sought to balance paying an
appropriate premium to the cashed-out shareholders with retaining sufficient
capital in the company to stabilize and improve future performance.
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. The board noted the high prices the company and an affiliate paid for the
company common stock in 2000, but did not consider those prices relevant to
determining fair value since the purchases were made approximately two years
ago.
... 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.
17
... 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 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 23% over the average closing trading price for the thirty
calendar days prior to May 9, 2002, and a 33% premium over the average trading
price for the first four months and nine days of 2002, through May 9, 2002. The
board noted that the high closing price for the fiscal quarter ended April 21,
2002 was $0.34, and the low closing price for that period was $0.19. The board
noted the high price of $0.34 on April 15, 2002, and did not know why the
trading price was high on that day. The board could also not explain why the low
price of $0.19 occurred. The board determined that using the average price over
a period of time was more indicative of the market price for the company's
common stock than atypical high or low prices.
... 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 nor are any contemplated 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)other than the proposed limited liquidity plan, a tender offer for any
outstanding shares of the company common stock , (4) the acquisition of another
person or entity, or (5) the election of directors to our board.
The board and the special committee did not consider book value as a
useful factor, because it is an accounting methodology based on the historical
cost of the company's assets and therefore does not reflect current company
value.
... 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. The financial analyst, who assists the company on a regular
basis in preparing shareholder communications, did not render a report or
opinion. The financial analyst collated publicly-available information and data
provided by the company, input that data into commercially-available spreadsheet
programs, and provided the results to the special committee, in each case as
directed by the special committee. The special committee and the board of
directors analyzed those results to determine a fair price to be paid to
shareholders in the reverse stock split.
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. At the May 7 board
meeting, the board of directors adopted the analysis and conclusions of the
special committee, which are described below in "Analysis of the Special
Committee," and determined that $0.32 was a fair price to be paid to
shareholders for fractional shares resulting from the reverse stock split.
Federal Income Tax Consequences of the Reverse Stock Split. The following
are the material federal income tax consequences of the reverse stock split to
the company and all 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:
18
... 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;
... persons who are considered foreign persons for U.S. federal income tax
purposes; 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. Except as described in the paragraph
captioned Certain Shares Acquired by Exercise of Incentive Stock Options, below,
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:
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... the reverse stock split results in a "complete termination" of shareholder's
interest in the company;
... 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 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
20
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.
Certain Shares Acquired by Exercise of Incentive Stock Options. If a
shareholder receives cash in lieu of fractional shares with respect to shares of
old common stock which the shareholder acquired by exercising an "incentive
stock option" within the meaning of Section 422(b) of the Code (such options are
commonly referred to as "qualified options" or "ISO's") and either (i) as of the
effective date of the reverse stock split, the shareholder has held such shares
for less than one year, or (ii) the incentive stock option pursuant to which the
shareholder acquired the shares was granted less two years before the effective
date of the reverse stock split, a portion of the cash received by the
shareholder in lieu of fractional shares will be compensation income, subject to
income tax withholding and employment taxes. Generally, the amount treated as
compensation income will be equal to the excess of (A) the fair market value at
the time the option was exercised of the shares of old common stock surrendered
for the cash in lieu of fractional shares over (B) the exercise price for such
shares of old common stock; however, if the cash received in lieu of the
fractional shares is less than the fair market value at the time the option was
exercised of the shares of old common stock surrendered for the cash in lieu of
fractional shares, the amount treated as compensation income will be limited to
the excess of (X) the cash received in lieu of the fractional shares over (Y)
the shareholder's tax basis for the shares of old common stock surrendered for
the cash in lieu of fractional shares (generally, the amount paid for the
shares). The tax treatment of the balance of the cash received in lieu of
fractional shares will be determined under the principles described in the
section captioned Shareholders Who Receive Cash, above.
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 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.
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 and
are incorporated herein by reference. 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 Operations
Fiscal Year Ended Period Ended
----------------------------------------------------- -------------------------------
January 2, December 31, December 30,
2000 2000 2001 April 22, 2001 April 21, 2002
--------------- --------------- -------------- -------------- --------------
(unaudited) (unaudited)
Net sales $ 29,157,000 $ 31,560,000 $ 31,833,000 $ 9,378,000 $ 9,691,000
Operating costs (cost of goods, labor
occupancy and other operating) 25,561,000 30,612,000 28,992,000 8,403,000 8,439,000
Restaurant depreciation and
amortization 1,172,000 1,304,000 1,253,000 398,000 366,000
General and administrative 3,133,000 3,380,000 2,873,000 949,000 935,000
Interest expense (net) (77,000) (5,000) 126,000 40,000 36,000
Other -0- 102,000 153,000 261,000 58,000
Corporate depreciation and
amortization 340,000 363,000 335,000 105,000 32,000
--------------- --------------- -------------- ------------ -----------
Net loss (972,000) (4,196,000) (1,899,000) (778,000) (175,000)
Net loss per share $ (0.08) $ (0.36) $ (0.16) $ (0.07) (0.01)
Balance Sheet Data
21
At December 30, 2001 At April 21, 2002
-------------------- -----------------
(unaudited)
Total assets $ 17,470,000 18,038,000
Total cash and cash equivalents 1,839,000 2,562,000
Total liabilities 6,011,000 6,735,000
Stockholders equity 11,459,000 11,303,000
Book value per share $ 0.97 $ 0.94
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, with $236,000 in costs
incurred. 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 December 30, 2001 At April 21, 2002
-------------------- -----------------
(unaudited) (unaudited)
Total assets $ 16,369,000 16,937,000
Total cash and cash equivalents 738,000 1,461,000
Total liabilities 6,011,000 6,735,000
Stockholders equity 10,358,000 10,202,000
Book value per share $ 1.14 $ 1.10
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 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.
DESCRIPTION OF THE REVERSE STOCK SPLIT
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
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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.
Authorized Capital Stock Following Reverse Split. The amendment to our
certificate of incorporation, a copy of which is attached as Exhibit A, will
reclassify each outstanding share of common stock and will reduce our ability to
issue any shares of capital stock from 21,000,000 shares to 250,000 shares. The
amendment will reduce the authorized common stock from 20,000,000 to 200,000
shares and the authorized preferred stock from 1,000,000 to 50,000 shares. The
board of directors currently has, and will continue to have, authority to issue
all authorized but unissued shares of capital stock at such times and for such
considerations as the board determines. This authority will continue although
the number of shares of capital stock authorized will be significantly reduced.
Other than the issuance of shares of common stock on exercise of outstanding
options, the company has no plans to issue any 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; (iii) no event has occurred or is likely to arise that might have a
materially adverse effect on the company, and (iv) the reverse stock split will
reduce the number of shareholders of record below 300. 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 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.
23
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.
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, 2007, and $1,500,000 is repayable interest only
monthly through December 2002, at which time monthly principal and interest
payments commence and are payable through December, 2008. An additional $500,000
is repayable interest only monthly through December, 2003, at which time monthly
principal and interest payments commence and are payable through December, 2009.
We have no additional borrowing capacity available under our existing loan
agreement.
Additionally, the company will pay all of the expenses related to the
reverse stock split. We estimate that these expenses will amount to $236,000.
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.
Recommendation of the Board of Directors; Background of Determination of
Fairness of the Reverse Stock Split
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 June 17, 2002.
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 decision on March 15, 2002 was initiated by Robert T. Giaimo,
who first considered having the company go private in mid-February, 2002, while
he was reviewing drafts of the company's annual report on form 10-K and the
company's financial statements for the year ended December 31, 2001. He noted
the time that he and other employees had to devote to SEC filings in light of
his belief that the company was not now obtaining any of the benefits associated
with being a public company. Such benefits are discussed in the proxy statement
under the caption, "Special Factors -- Purpose of and Reasons for the Reverse
Stock Split."
Mr. Giaimo further considered the company's status as a public company,
the low market price for the company's common stock and employee morale factors.
Mr. Giaimo's stated purpose of going private was to change the company's status
quo by reducing expenses in an attempt to generate positive net income and
positive cash flow. In mid-February, 2002, Mr. Giaimo consulted with the
company's counsel to determine what steps were available to the company to
eliminate the company's obligations to file reports with the SEC. Counsel
advised him that such steps included a tender offer for all shares held by
unaffiliated stockholders, a merger pursuant to which all non-affiliated
stockholders would be cashed out, a reverse stock split which would reduce the
number of shareholders of record below 300, or a sale of the company.
After determining what steps were available for going private, Mr.
Giaimo raised the idea with the company's directors in separate telephone
conversations. These telephone conversations occurred between late February and
mid-March 2002. At the same time that Mr. Giaimo was talking to the directors,
he spoke with an individual who had provided financial and analytical
24
services to the company and who had assisted the company in preparing its
shareholder communications, regarding her ability to assist the company in the
process.
During a telephone meeting of the board of directors on March 15, 2002,
Mr. Giaimo pointed out to each director his goal of reducing expenses by going
private and noted that the company could use up to approximately $1.5 million to
consummate a going-private transaction and still have $1 million available to
meet operating requirements. He noted that the only transaction that would
enable the company to go private and at the same time not exceed an aggregate
cost of $1.5 million was the reverse stock split which allowed the company to
fix its redemption costs by choosing a ratio that reduced the number of
stockholders and placed a cap on the number of shares to be redeemed.
Mr. Giaimo pointed out to that a tender offer would not work since a
tender offer would have to be open to all stockholders, would only allow the
company to redeem a pro rata share of the outstanding common stock and would not
reduce the number of shareholders of record. He also noted that a merger would
require the company to redeem all shares held by unaffiliated shareholders which
would cost far greater than $1.5 million. He, therefore, advised each director
that a reverse stock split was the only feasible transaction. Two of the
directors, Louis P. Neeb and Charles M. Steiner, stated that they would not
approve any transaction that would in their view negatively impact the financial
integrity and stability of the company. In their view, the company had to have
sufficient financial resources to operate following any transaction. These
directors also insisted that the company maintain a cash reserve of more than $1
million to sustain future operations, preferably $1.5 million. The other
directors discussed the company's financial ability to pay for the fractional
shares and to maintain the company's business and the price to be paid for such
fractional shares. There were no discussions regarding valuation until the end
of March since the data regarding comparable companies was not yet available.
Following the board's initial approval of the reverse stock split on
March 15, 2002, Mr. Giaimo instructed the company's employees to commence
preparation of projected financial information to be used in connection with
evaluating a transaction from the point of view of how much could be offered for
fractional shares resulting from the reverse stock split. Mr. Giaimo asked the
financial analyst to compile publicly available data relating to mergers and
acquisitions involving restaurant companies during the past five years.
The board met again on March 25, 2002, in person, to discuss in more
detail the reverse stock split, and began to review preliminary analysis
regarding a fair price to be paid to fractional shareholders. Mr. Giaimo noted
that the reverse split would have to be 5,000 to 1 since a lower ratio would not
result in reducing the number of shareholders below 300 and a higher number may
result in higher costs. No specific financial data or price were discussed at
the March 25 board meeting, although Mr. Giaimo pointed out that projections,
operating data and forecasts were being prepared. Messrs. Steiner and Neeb noted
that the company's ability to meet its business forecasts and projections was
suspect since the company had never achieved its budgets in the past. The board
members were, therefore, concerned about the company's ability to meet its
budget in the future.
Between March 25, 2002 and April 22, 2002, Mr. Giaimo had conversations
with his employees with respect to the preparation of projected financial
information and with an outside financial analyst who was obtaining and
collating publicly available data regarding companies that had been merged or
whose common stock had been acquired over the past four years. Mr. Giaimo was
focusing on the company's EBITDA, enterprise value and equity value in his early
evaluations of a fair price. Mr. Giaimo originally did not want to use a
discounted cash flow analysis. Copies of the information being collected were
being furnished to Mr. Neeb. Mr. Neeb was not consulted regarding this
information until the special committee was formed on or around April 22, 2002,
at which time the data collected by Mr. Giaimo and by his outside financial
analyst were discussed with Mr. Neeb for the first time.
On or around April 22, 2002, the board of directors appointed two of
its members, Mr. Neeb, chairman, and Mr. 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, 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.
Following the formation of the special committee, Mr. Neeb started
focusing on the data and information provided by the outside financial analyst.
Mr. Neeb noticed that the discounted cash flow was not included and, after
discussion with Mr. Giaimo, requested that the financial analysis include
discounted cash flow data. Mr. Neeb spoke to the outside financial analyst and
requested that the analyst provide the committee with analysis of the
calculation of a standard discount rate to use for evaluating projected future
cash flows. He suggested that such rate should be adjusted to reflect the lack
of stock liquidity and the inherent
25
risk of the company's cash flow. He pointed out that this was necessary given
the company's history of inconsistent cash flow in prior years. Mr. Neeb
discussed his suggestions with Mr. Steiner, and based on these discussions,
instructed the analyst to prepare calculations based on the company's trailing
12 months actual results and the actual results for the period ended April 21,
2002, combined with the projected nine months ended December 30, 2002, in
connection with the public company and merger acquisition analysis. Mr. Neeb
subsequently discussed this information with Mr. Steiner on or around April 30,
at which time they selected the comparable companies to be further examined in
connection with determining a fair price to be paid for the fractional shares.
They also discussed the relevant size of companies to be reviewed noting that
the size of company most relevant had capitalization values of $25 million or
less. Conversations related to a review of publicly available data concerning
companies which had merged or in which shares had been redeemed, which companies
were similar to the company in size, net income and cash flow and the period of
time to be looked at. The committee determined that only transactions in the
past two years were relevant given current economic conditions. The special
committee reviewed the financial forecasts and management's budgets and
questioned the company's ability to even meet these budgets given its history
and determined that any transaction would have to be fair from the point of view
of the shareholders being cashed out as well as to the shareholders who would
remain as shareholders in the company. The members of the special committee felt
that it was important to make sure that the company was able to maintain
sufficient cash to enable the company to operate for the immediate future.
At the end of April, Mr. Giaimo first suggested to Mr. Neeb that the
company introduce a limited liquidity plan to provide some liquidity to the
shareholders who would remain following the reverse stock split. Mr. Neeb said
that he would discuss the issue with Mr. Steiner.
Mr. Neeb and Mr. Steiner had a first telephonic meeting regarding the
information on May 1, during which they discussed management's preliminary
projections and the requirement that the company maintain its financial
integrity by maintaining a minimum cash fund of more than $1 million, preferably
$1.5 million. Mr. Neeb and Mr. Steiner discussed the limited liquidity plan, and
agreed that it should be implemented. On or about May 2, 2002, in a telephone
conversation Mr. Steiner added the requirement that the company must have a
minimum cash fund of $1.6 million to implement the limited liability plan.
On May 2, Mr. Neeb called Mr. Giaimo to advise him of the current
status of the special committee's decisions and provided Mr. Giaimo with a draft
of a memo that he was going to be submitting to Mr. Steiner with respect to the
special committee's evaluation. Mr. Neeb's draft of the special committee
memorandum discussed with Mr. Giaimo summarizes the results of the special
committee's review and analysis and identified its recommendation to the board.
The memorandum specified the four conventional methods to be employed in a fair
evaluation, namely, comparable market value of publicly traded companies, recent
merger and acquisition activities of similar residual valuations in the
restaurant sector, discounted cash flow analysis and liquidated valuation
analysis. Mr. Neeb pointed out to Mr. Giaimo and, subsequently to Mr. Steiner,
that, based on his experience, these four factors were the most appropriate
because of their use in the restaurant industry. He also noted that they were
appropriate given the company's five-year history of earnings and cash flow, its
lack of a proven growth vehicle and the nature of the transaction under
consideration. Mr. Neeb also stated that he considered the company's actual
results of operations for the trailing 12-month period ended April 21, 2002,
adjusted to eliminate one-time charges that would not be incurred on an ongoing
basis. The information, as well as management's projections for fiscal year
2002, which included actual results through April 21 and projections for the
remaining nine months of 2002, were prepared by management. Management also
prepared projections for the period 2003 through 2006. This information was
discussed with Mr. Steiner, who again noted that management's projections were
suspect since the company had never achieved anything near the amounts projected
in prior years.
Mr. Neeb also spoke to Mr. Steiner regarding the process and
Mr. Steiner agreed to the methodology suggested by Mr. Neeb. The information
being reviewed by Mr. Neeb was a preliminary draft of the same material that was
discussed under the caption, "Analysis of the Special Committee." On May 3, Mr.
Neeb discussed a range of proposed prices with Mr. Steiner. Mr. Neeb's proposed
ranges were $0.30-$0.34 while Mr. Steiner's ranges were $0.30-$0.32. Mr. Steiner
and Mr. Neeb, and subsequently Mr. Neeb and Mr. Giaimo, discussed whether
liquidation value was relevant. They concluded that such method was
inappropriate since liquidation value would be substantially less than book
value.
On May 6, the special committee met to review the final determinations
with respect to the value of the company and to finalize the report, a copy of
which is attached to this proxy statement. At this meeting, the range of prices
was established to be $0.28-$0.33 with a decision that $0.32 was a fair price
for the fractional shares. Michael Collier was also in attendance at the May 6
meeting since he could not attend the board meeting scheduled for May 7. Mr.
Collier listened to the discussion and made no comment with respect to the
pricing, but was generally supportive of the decision to implement the reverse
stock split and of the work of the special committee. The special committee
discussed the draft of the proxy soliciting material, and again discussed the
company's inability to devote more than $1.5 million to any transaction.
On May 7, 2002, the board of directors met to review the report of the
special committee and to discuss the special committee's findings and to
otherwise evaluate the fairness of the $0.32 price to be paid for fractional
shares. The board of directors adopted the report of the special committee for
the reasons set forth in such report and found that the proposed price of
26
$0.32 per share was fair, from a financial point of view, to the company's
shareholders, including both unaffiliated shareholders who would be cashed out
and those who would remain shareholders. 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, both those who would be cashed out and those who remain
shareholders.
A copy of the report the Special Committee adopted and delivered on May
7, 2000 is attached as Exhibit B.
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 financial analyst, who
assists the company on a regular basis in preparing shareholder communications,
did not render a report or opinion, but rather collated publicly-available
information as requested for the special committee to use in determining a fair
price. The financial analyst then input those numbers, together with the
company's projections and budgets as directed by the special committee, into
commercially available spreadsheet programs, also as directed by the special
committee, to produce ratios and multiples upon which the special committee
based its analysis of 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. The special committee used
valuation techniques designed to demonstrate the company's value as a going
concern.
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. These companies were J
Alexander's, Ark Restaurants, Furr's Restaurant Group, Diedrich Coffee, Mexican
Restaurants, Fresh Choice, Creative Host Services, Pizza Inn, Flanigan's
Enterprises, Good Times Restaurants, Grill Concepts, Elmer's Restaurants,
Eateries, Star Buffet, Briazz, Morgan's Foods, Tumbleweed, Family Steak Houses
of Florida, Roadhouse Grill, Big Buck Brewery and Steakhouse and ICH
Corporation. 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.
27
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 (equity value) 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. Specifically,
unadjusted EBITDA of $386,080 for the twelve-month period ending April 21, 2002
was calculated by taking the net loss before interest expense of $1,114,689 and
adding back depreciation of $1,500,769. Adjusted EBIDTA for the same period of
$387,592 was calculated by taking unadjusted EBITDA of $386,080 and adding back
$1,512 in non-recurring items. These non-recurring items consisted of: i)
$108,740 in expenses associated with the closing of the company's Towson Town
Center location, and ii) $6,869 in abandoned site costs associated with the
company's lease in the Pentagon Row shopping center; offset by iii) $114,097 in
insurance proceeds associated with a fire in the company's Tysons Corner
location. Unadjusted EBITDA of $1,030,720 for the twelve-month period ending
December 31, 2002 was calculated by taking the projected net operating loss
before net interest expense of $306,289 and adding back projected depreciation
of $1,337,009.
This analysis resulted in an enterprise value of $2.2 million, and equity
values of $1.3 million and $(0.1) million, when multiples were applied to the
company's trailing twelve month EBITDA. This analysis resulted in an enterprise
value of $5.2 million, and an equity value of $3.1 million when multiples were
applied to the company's projected 2002 EBITDA. On a per share basis, this
analysis resulted in an equity value of $0.11 when multiples were applied to the
company's trailing twelve month EBITDA, and an equity value of $0.26 when
applied to the company's projected 2002 EBITDA. Excluding the add-back of the
$1,512 in non-recurring charges discussed above, this analysis would still have
resulted in an equity value of $0.11 per share when multiples were applied to
the company's trailing twelve-month 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 revenue and earnings growth. The special committee noted that the
source peer group had experienced average revenue and earnings growth of 27.0%
and 12.9%, respectively, over the past five years, and thus determined that a
10% discount to forward multiples was appropriate given the company's historical
operating performance and production of future operating results.
On July 2, 2002, the special committee discovered that it had failed to
account for two items when it calculated the non-recurring charges to be added
back to EBITDA for the twelve-month period ending April 21, 2002. These two
items included: i)
28
$120,000 in expenses associated with a rent adjustment for one of the company's
restaurants that should have been included in the calculation; and ii) $30,000
in insurance proceeds associated with the fire in the company's Tysons Corner
location that should not have been included in the calculation. The special
committee noted that total non-recurring items should have consisted of: i)
$108,740 in expenses associated with the closing of the company's Towson Town
Center location, ii) $6,869 in abandoned site costs associated with the
company's lease in the Pentagon Row shopping center; iii) $84,000 in insurance
proceeds associated with a fire in the company's Tysons Corner location; and iv)
$120,000 in expenses associated with a rent adjustment for one of the company's
restaurants. Thus, adjusted EBIDTA for the twelve-month period ending April 21,
2002 of $537,689 should have been calculated by taking unadjusted EBITDA of
$386,080 and adding back $151,609 in non-recurring items. Furthermore, the
comparable public company analysis should have resulted in an enterprise value
of $3.0 million, and equity values of $1.8 million and $0.7 million, when
multiples were applied to the company's trailing twelve-month EBITDA. On a per
share basis, this analysis should have resulted in equity values of $0.06 and
$0.15 when multiples were applied to the company's trailing twelve month EBITDA.
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, five 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 transaction proposed by the company. The
resulting five transactions analyzed by the special committee were Uno
Restaurant Group/Management Group, NPC International/Management Group, PJ
America/Management Group, Quizno's Corporation/Schaden Acquisition Corporation,
and Interfoods of America/Management Group. 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. Similar to the
Comparable Public Company Analysis, unadjusted EBITDA of $386,080 for the twelve
month period ending April 21, 2002 was calculated by taking the net loss before
interest expense of $1,114,689 and adding back depreciation of $1,500,769.
Adjusted EBIDTA for the same period of $387,592 was calculated by taking
unadjusted EBITDA of $386,080 and adding back $1,512 in non-recurring items.
Unadjusted EBITDA of $1,030,720 for the twelve-month period ending December 31,
2002 was calculated by taking the projected net operating loss before net
interest expense of $306,289 and adding back projected depreciation of
$1,337,009.
29
This analysis resulted in an enterprise value of $2.1 million, and equity
values of $1.0 million and $(0.2) million, when multiples were applied to the
company's trailing twelve month EBITDA. This analysis resulted in an enterprise
value of $4.9 million, and equity values of $2.3 million and $2.9 million when
multiples were applied to the company's projected 2002 EBITDA. On a per share
basis, this analysis resulted in an equity value of $0.08 when multiples were
applied to the company's trailing twelve months EBITDA, and equity values of
$0.20 and $0.25 when applied to the company's projected 2002 EBITDA. Excluding
the add-back of the $1,512 in non-recurring charges discussed above, this
analysis would still have resulted in an equity value of $0.08 per share when
multiples were applied to the company's trailing twelve month EBITDA. In
calculating values using projected 2002 EBITDA, the special committee again
discounted the historical price to trailing twelve months (April 21, 2002)
EBITDA multiple by 10% for the reasons discussed under "Comparable Public
Company Analysis" above.
As noted under "Comparable Public Company Analysis" above, on July 2,
2002, the special committee discovered that it had failed to account for two
items when it calculated the non-recurring charges to be added back to EBITDA
for the twelve-month period ending April 21, 2002. As discussed above, the
impact of these items was to under-account for non-recurring charges by
$150,097. Thus, adjusted EBIDTA for the twelve-month period ending April 21,
2002 of $537,689 should have been calculated by taking unadjusted EBITDA of
$386,080 and adding back $151,609 in non-recurring items. Furthermore, the
merger and acquisition analysis should have resulted in an enterprise value of
$2.9 million, and equity values of $1.3 million and $0.6 million, when multiples
were applied to the company's trailing twelve-month EBITDA. On a per share
basis, this analysis should have resulted in equity values of $0.05 and $0.11
when multiples were applied to the company's trailing twelve month EBITDA.
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 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 an enterprise value of $3.8 million, an equity value of
$2.0 million, and a per share equity value for the company's common stock of
$0.17 when discounting the free cash flows to the Enterprise. Using the same
discount rate, the special committee arrived at an equity value of $2.8 million
and a per share equity 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.
30
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 $0.94 per share as of April 21, 2002. The value of
the company as a going concern is discussed above. The assets of the company
have little value other than as operating restaurants.
Other Offers and Other Transactions--The company has received no offers to
purchase the company, and has not considered a sale of the company or an
acquisition of another person or entity. 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 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 as originally calculated, and
$0.06 to $0.26 as corrected;
. 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 as
originally calculated ($0.05 to $0.25 as corrected), 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 23% premium over the 30
days average closing trading price ending May 9, 2002, and 33% over the average
closing trading price for the first four months and nine days of 2002, through
May 9, 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 15.6 times (11.3
times as corrected) the trailing twelve months adjusted to eliminate certain
charges as discussed above. 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.
31
BENEFICIAL OWNERSHIP OF THE SHARES
As of June 17, 2002, the company had 11,983,523 shares of commons stock
issued and outstanding. The following table sets forth, to the company's
knowledge as of June 17, 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. As noted in footnote 25, this table assumes
the exercise by those persons of options that are exercisable within 60 days of
June 17, 2002.
Amount and Nature of
Beneficial Ownership
Following Reverse
Stock Split (in
Amount and Nature of Beneficial Pre-Reverse Stock
Name and Address(1) of Beneficial Owner Ownership at June 17, 2002(2) Percent (3) Split Shares) (15) Percent (16)
- ----------------------------------------------------------------------------------------------------------------------------
Catherine Britton 3,284,677 (4) 26.49 3,277,003 (17) 33.74
Michael Collier 91,926 (5) * 90,268 (18) *
Robert T. Giaimo 3,284,677 (6) 26.49 3,277,003 (19) 33.74
Ype Von Hengst 423,881 (7) 3.47 420,000 (20) 4.40
Edward H. Kaplan 1,019,000 (8) 8.49 1,019,000 (21) 10.94
Patrick Meskell 367,586 (9) 2.99 365,016 (22) 3.79
Louis P. Neeb 26,572 (10) * 26,572 (23) *
Charles M. Steiner 583,729 (11) 4.86 579,000 (24) 6.21
All directors and executive officers as a 5,797,371 (12)(25) 44.48 (25) 5,776,859 (25) 55.81 (25)
group (8 persons)
_______________
* 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 24 below, all references to
options are to options exercisable currently and within 60 days of June 17,
2002.
(3) Each percentage of beneficial ownership is calculated using a different
denominator, consisting of the total number of shares outstanding (11,983,523),
increased by the number of options, Outside Director Repriced Options (see Note
13) and Executive Officer Repriced Options (see Note 14) owned by the beneficial
owners that are exercisable within 60 days of June 17, 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 (11,983,523) and all outstanding options, Outside Director Repriced
Options (see Note 13) and Executive Officer Repriced Options (see Note 14) held
by directors and executive officers that are exercisable within 60 days of June
17, 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; (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; (d) Outside Director Repriced Options (see Note 13 below) to purchase
12,000 shares, which will have an exercise price based on the fair market value
of the shares on July 31, 2002; and (e) 809,065 shares beneficially owned by Mr.
Giaimo, Ms. Britton's spouse. Ms. Britton disclaims beneficial ownership of the
shares beneficially owned by Mr. Giaimo.
(5) Includes: (a) 78,926 directly owned shares; (b) options to purchase
1,000 shares granted under the 1996 Stock Option Plan at an exercise price of
$0.938 per share; and (c) Outside Director Repriced Options (see Note 13 below)
to purchase 12,000 shares, which will have an exercise price based on the fair
market value of the shares on July 31, 2002.
(6) Includes: (a) 409,065 directly owned shares; (b) Executive Officer
Repriced Options (see Note 14 below) to purchase 400,000 shares, which will have
an exercise price based on 110% of the fair market value of the shares on July
31, 2002 (or February 1, 2003, as applicable); and (c) 2,475,612 shares
beneficially owned by Ms. Britton, Mr. Giaimo's spouse. Mr. Giaimo disclaims any
beneficial ownership of shares beneficially owned by Catherine Britton.
(7) Includes: (a) 183,881 directly owned shares; and (b) Executive Officer
Repriced Options (see Note 14 below) to purchase 240,000 shares, which will have
an exercise price based on the fair market value of the shares on July 31, 2002
(or February 1, 2003, as applicable).
32
(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; and (c) Outside Director Repriced Options (see Note
13 below) to purchase 17,000 shares, which will have an exercise price based on
the fair market value of the shares on July 31, 2002.
(9) Includes: (a) 47,570 directly owned shares; (b) options to purchase
25,004 shares granted under the Earned Ownership Plan at an exercise price of
$.0003 per share; and (c) Executive Officer Repriced Options (see Note 14 below)
to purchase 295,012 shares, which will have an exercise price based on the fair
market value of the shares on July 31, 2002 (or February 1, 2003, as
applicable).
(10) Includes: (a) options to purchase 12,572 shares granted under the 1991
Stock Option Plan at the exercise price of $.003 per share; (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) Outside Director Repriced Options (see Note
13 below) to purchase 12,000 shares, which will have an exercise price based on
the fair market value of the shares on July 31, 2002. (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); (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; and (c)
Outside Director Repriced Options (see Note 13 below) to purchase 17,000 shares,
which will have an exercise price based on the fair market value of the shares
on July 31, 2002.
(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, except for the shares beneficially owned by Catherine Britton and Robert
T. Giaimo. In order not to double-count the shares beneficially owned by Ms.
Britton and Mr. Giaimo, Ms. Britton was attributed 2,475,612 beneficially owned
shares for the purpose of totaling all shares (excludes 809,065 shares
beneficially owned by Mr. Giaimo) and Mr. Giaimo was attributed 809,065
beneficially owned shares (excludes 2,475,612 shares beneficially owned by Ms.
Britton).
(13) Pursuant to resolutions unanimously approved by the company's Board of
Directors on December 13, 2001, certain option holders, including Ms. Britton
and Messrs. Collier, Kaplan, Neeb and Steiner, agreed to surrender for
cancellation certain options and the board agreed to grant to each such
individual new options (the "Outside Director Repriced 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 dates as
the canceled options, but with exercise prices equal to the fair market value of
the shares on July 31, 2002.
(14) Pursuant to resolutions unanimously approved by the company's Board of
Directors on December 13, 2001, certain option holders, including Messrs.
Giaimo, Meskell and Von Hengst, agreed to surrender for cancellation certain
options and the board agreed to grant to each such individual new options (the
"Executive Officer Repriced Options") under the 1996 Stock Option Plan on July
31, 2002 (or February 1, 2003, as applicable), exercisable for the same number
of shares as those that were canceled, and having the same vesting and
termination dates as the canceled options, but with exercise prices equal to the
fair market value (or in the case of Mr. Giaimo, 110% of the fair market value)
of the shares on July 31, 2002 (or February 1, 2003, as applicable), provided
that Messrs. Giaimo, Meskell and Von Hengst each 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 his Executive Officer Repriced
Options.
(15) Same assumptions made as in Note 2, except Beneficial Ownership of each
Beneficial Owner was reduced by the number of pre-reverse stock split shares
each Beneficial Owner is anticipated to receive cash for in lieu of any
fractional post-reverse stock split shares.
(16) Same assumptions made as in Note 3, except that the total number of
shares outstanding used in calculating the denominator was adjusted from that
used in Note 3 by subtracting from such denominator the number of shares that
are anticipated to be cashed out following the reverse stock split, which
cashed-out shares are anticipated to aggregate 2,684,102 pre-reverse stock split
shares.
(17) Assumes 3,609 shares directly held by Ms. Britton and 4,065 shares
directly held by Mr. Giaimo will be cashed out following the reverse stock
split.
(18) Assumes 1,658 shares directly held by Mr. Collier will be cashed out
following the reverse stock split.
(19) Assumes 3,609 shares directly held by Ms. Britton and 4,065 shares
directly held by Mr. Giaimo will be cashed out following the reverse stock
split.
33
(20) Assumes 3,881 shares directly held by Mr. Von Hengst will be cashed out
following the reverse stock split.
(21) Assumes no shares directly held by Mr. Kaplan will be cashed out
following the reverse stock split.
(22) Assumes 2,570 shares directly held by Mr. Meskell will be cashed out
following the reverse stock split.
(23) Assumes no shares directly held by Mr. Neeb will be cashed out following
the reverse stock split.
(24) Assumes 4,729 shares held by the Steiner Family Partnership will be cashed
out following the reverse stock split.
(25) As of June 17, 2002, all directors and executive officers as a group
directly held an aggregate of 4,727,810 shares, excluding any options
exercisable within 60 days of such date, which 4,727,810 shares represent 39.45%
of the company's total shares issued and outstanding (11,983,523). Following the
reverse stock split, such officers and directors as a group are anticipated to
directly hold an aggregate of 4,705,000 shares in pre-reverse stock split
shares, excluding any options owned by such group, after making adjustments for
any cashed-out shares as described in footnote 15, which 4,705,000 shares
represent 50.59% of the company's total shares anticipated to be issued and
outstanding following the reverse stock split (see footnote 16).
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.
34
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.
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 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
35
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."
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
36
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 $100,000 for fiscal year 2001.
Summary Compensation Table
Annual Compensation Long-Term Compensation
---------------------------------------- ----------------------------------------------------------
Awards Payouts
------------------------- ---------------------------
Securities
Restricted Underlying
Name and Principal Other Annual Stock Options LTIP All Other
Position Year Salary($) Bonus($) Compensation($) Awards($) SARS($) Payouts($) Compensation($)
- ------------------ ---- --------- -------- --------------- --------- --------- ---------- ---------------
Robert T. Giaimo 2001 278,043 0 18,000(12) 0 0(1) 0 67,842(2)
Chairman of the 2000 268,697 0 18,000(12) 0 0 0 57,827(2)
Board, 1999 258,315 0 18,000(12) 0 0 0 57,061(2)
President, Chief
Executive Officer
and Treasurer
Ype Von Hengst 2001 158,495 20,000 6,000(12) 0 0(3) 0 32,135(5)
Director, Vice 2000 153,029 20,000 6,000(12) 0 0 0 27,535(5)
President,
Executive Chef 1999 145,173 20,000 6,000(12) 0 150,000(4) 0 27,535(5)
and Secretary
Patrick Meskell 2001 140,857 0 6,000(12) 0 0(6) 0 0
Executive VP, 2000 109,769 0 6,000(12) 0 0 0 0
Operations 1999 101,769 5,000 6,000(12) 0 200,000(7) 0 0
Jon Abbott 2001 138,481(11) 0 2,500(12) 0 0 0 32,500(10)
Vice President, 2000 103,846 0 4,500(12) 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
37
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
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.
(12) Each of these executives is required, as part of his or her job, to
visit each of the restaurants. The Company provides compensation of $500.00 per
month ($6,000 per annum) to meet the expenses associated with their travel. In
addition, Mr. Giaimo receives an education allowance of $1,000.00 per month
($12,000 per annum). This allowance covers reimbursements of up to $12,000 of
his annual expenses related to participation in local and national chapters of a
professional organization.
Stock Options
No stock appreciation rights have been granted or are outstanding. No
stock options were granted to the company's executive officers during the year
ended December 31, 2001.
Pursuant to resolutions unanimously adopted by the board as of December
13, 2001, the company has agreed to grant options to the following individuals
on July 31, 2002, or on February 1, 2003, if the individual elects to defer the
grant date of a portion of the options to enable the options to qualify for
federal income tax purposes as incentive stock options, for the following
numbers of shares: (i) Robert T. Giaimo: 400,000 shares; (ii) Ype Von Hengst:
355,000 shares; and (iii) Patrick Meskell: 430,012 shares. The company agreed to
grant these options, which are more fully described in Notes 1, 3 and 6 of the
Summary Compensation Table included in this Proxy Statement, in connection with
the cancellation of equal numbers of options held by the foregoing individuals.
The following table provides information as to the outstanding options at
December 31, 2001 held by the following executive officers. No stock
appreciation rights are outstanding.
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year End Option/SAR Values
38
Number of Securities Underlying Value of Unexercised
Unexercised Options/SARS at Fiscal In-the-money Options/SARs at
Year End Fiscal Year End (*)
---------------------------------- ---------------------------------
Shares
Acquired On Value
Name Exercise(#) Realized($) Exercisable(#) Unexercisable(#) Exercisable($) Unexercisable($)
- ------------------------- ----------- ----------- -------------- ---------------- -------------- ----------------
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"). Mr. Giaimo's 2001 base salary was $278,075 per annum, and
increased to $286,417 in 2002. 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.
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,
39
2000 (the "Base Salary"). Mr. Von Hengst's base salary for 2001 was $158,375 per
annum, and increased to $163,126 in 2002. 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. 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
40
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 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. A total of 70,000 options were surrendered for
repricing by non-employee directors.
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, other than Ype Von Hengst who received a bonus
which is applied to repay outstanding principal and interest on a loan made by
the company to Mr. Hengst in 1999. See "Executive Compensation."
41
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 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
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.
Percentage rent is calculated by multiplying the gross receipts by eight percent
and subtracting the quotient obtained by dividing the annual base rent by
thirteen percent. Any positive difference is payable as percentage rent. To
date, the Company has not paid any percentage rent and is unlikely to do so in
the foreseeable future. The
42
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. Current annual base rent is $384,362.
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 is obligated under a management agreement originally entered
into between Silver Diner Limited Partnership ("SDLP"), an entity in which the
Company was and currently is the sole General Partner and now holds 100% of the
partnership interest, and SDPMI (the "Management Agreement"). The Management
Agreement provides that the company is the exclusive manager of the Potomac
Mills Restaurant is entitled to receive all of the revenues, subject to all of
the expenses from the operations of such restaurant. The Management Agreement
was entered into prior to the construction of the Potomac Mills restaurant, and
was entered into to provide SDLP with the opportunity to operate the Potomac
Mills restaurant, the acquisition of which was financed by RGDI, since SDLP did
not have the financial ability to acquire land and to construct the restaurant.
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. In 2001, the company
paid $193,191 to Uniwest Construction for miscellaneous construction and
renovation of the existing diners and, in 2000, approximately $1,050,000 for the
construction of the Virginia Beach, Virginia and Gaithersburg, Maryland
locations and for miscellaneous construction and renovation to 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 in 2001, and in 2000 approximately $189,500 as rent on the
Merrifield lease. No consulting fees were paid to Mr. Collier in 2001, but in
2000 the company paid approximately $5,400 for real estate consulting services
provided to the Company during fiscal year 2000. At December 30, 2001, $11,796
was 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. Rent payments in 2001 were
$186,667. Annual rent payments in 2002 will be $206,667.
In January 2000, as an agent for Interface Properties, Inc., the landlord,
the company entered into a construction contract with Uniwest Construction, Inc.
for the construction of the Virginia Beach, VA Silver Diner. The contract was a
fixed fee contract in the amount of $800,000. Pursuant to the lease agreement,
the landlord is liable for all payments and terms under the construction
contract agreement.
In February 2000, the company entered into a construction contract with
Uniwest Construction, Inc. for the construction of the Lakeforest Mall Silver
Diner. The contract was a fixed fee contract in the amount of $735,000. Uniwest
Construction, Inc. acted as the general contractor and was paid a fee for
coordinating and supervising the development of both facilities. All work and
materials were provided by subcontractors whose prices are subject to bid.
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.
43
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 Purchase 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
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
44
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
45
EXHIBIT A
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
SILVER DINER, INC.
Silver Diner, Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify the following:
FIRST: The Certificate of Incorporation is hereby amended by deleting the
first paragraph of Article FOURTH and inserting the following three new
paragraphs in lieu thereof, which three paragraphs shall precede the current
subparagraph A of Article FOURTH:
Upon the filing of this amendment with the office of the Secretary of
State of the State of Delaware (the "Effective Date"), each Five Thousand
shares of Common Stock then issued, which are the only voting securities of
the Corporation issued and outstanding, shall be automatically reclassified
into one share of Common Stock. For each holder that would be entitled to
receive a fraction of one share of Common Stock after such
reclassification, the Corporation shall pay cash in an amount equal to the
fractional amount of the share multiplied by $0.32 per share.
From and after the Effective Date, the amount of capital represented
by the Common Stock immediately after the Effective Date shall be the same
as the amount of capital represented by such shares immediately prior to
the Effective Date, until thereafter reduced or increased in accordance
with applicable law. The par value of a share of Common Stock shall remain
unchanged after the reverse Stock Split at $0.00074 per share.
From and after the Effective Date, the total number of shares of all
classes of capital stock which the Corporation shall have authority to
issue is 250,000, of which 200,000 shares shall be Common Stock of the par
value of $0.00074 and 50,000 shares shall be Preferred Stock of the par
value of $0.001 per share.
SECOND: The Corporation's directors adopted resolutions which set forth
the foregoing amendment, declared that this amendment is advisable and directed
that this amendment be submitted for action by the Corporation's stockholders.
THIRD: In accordance with Section 222 of the General Corporation Law of
the State of Delaware, an annual meeting was called and a majority of
outstanding stock entitled to vote thereon, and a majority of the outstanding
stock of each class entitled to vote thereon as a class, approved the foregoing
amendment.
FOURTH: The foregoing amendment has been duly adopted in accordance with
Section 242 of the General Corporation Law of the State of Delaware.
46
IN WITNESS WHEREOF, Silver Diner, Inc. has caused this Certificate of
Amendment to be signed and executed in its name and behalf by its duly
authorized President in accordance with Section 103(a)(2) of the General
Corporation Law of the State of Delaware.
DATED: June___, 2002 SILVER DINER, INC.
-------------------------------------
Robert T. Giamo
President and Chief Executive Officer
47
EXHIBIT B
MEMORANDUM
TO: Silver Diner Board of Directors
From: Special Committee
Subject: Range of Fair Prices
The Committee was established for the purpose of recommending to the board a
range of fair prices to be paid for shares to be acquired as a part of the
reverse split of the outstanding shares of the Company's common stock. This
memorandum summarizes the results of our review, the analysis performed, and
includes a recommendation for the full Board's consideration.
For analysis, the Committee selected four conventional methods for determining a
fair valuation. The four considered were those most prevalent in the industry,
and deemed most appropriate for use in accomplishing the independent valuation
objective. They included:
1. Comparable market value of publicly traded companies
2. Recent merger and acquisition activity for similar residual values in
the restaurant sector
3. Discounted Cash Flow analysis
4. Liquidation value analysis
As stated these four were deemed appropriate because of their use in the
restaurant industry. They are also appropriate for the Company given its'
five-year history of earnings and cash flow, its' lack of a proven growth
vehicle, and the nature of the transaction under consideration.
To determine value using the four methods, management was asked to provide the
actual results of the company for a trailing 12 month period ended April 21,
2002 (TTM). These numbers were adjusted to remove one- time charges that would
not be incurred on an ongoing basis. In addition, management was asked to
provide their projections for fiscal year 2002 (FY 2002) with actual results
through April 21 and their projections for the remaining nine periods of 2002.
Finally, management was asked to provide projections through fiscal 2006. These
later projections were standardized beginning in 2003 to remove the effects of
inflation on sales and costs. For purposes of the discounted cash flow analysis,
the projections were then straight lined to 2011.
Attached to this report under Tab 3, is a five-page valuation summary covering
each of the above methods and showing the result of that analysis. We have also
provided the actual results and projections provided by management. In addition,
under Tab 11 we have provided the stock trading history between January 1, 2002
and May 3, 2002. Finally, we have included under Tabs 7,8,9, and the first two
pages under Tab 3, the actual detailed analysis behind each of the four
valuation methods.
For the discounted cash flow analysis we asked the Company's analyst to provide
an analysis of the calculation of the appropriate standard discount rate to use
for evaluating projected future cash flows. We then asked that the result be
adjusted to reflect the lack of liquidity in the stock and the inherent risk in
the Company's cash flow. This was necessary given the Company's history of
inconsistent cash flow in prior
48
years. This resulted in both a conceptual and a more realistic rate evaluation
result. The range of per share values was $ 0.17 to $0.28 with an average of
$0.23 per share.
For both the public company analysis, and merger and acquisition analysis, we
asked for calculations to be prepared by the analyst based on both the trailing
12 months actual results of the Company, and the actual/projected management
fiscal 2002 projections. For calculations using the actual/projected management
fiscal year 2002 numbers we applied a 10 percent discount to the historical
industry numbers to reflect the projected use of Company numbers against actual
industry numbers. Calculations were then prepared on the enterprise value (cash
paid plus debt less cash) method. We also reviewed the equity value method
(stock times cash price per share), but discounted it due to the lack of
consideration of the effect of debt on company valuations. After reviewing the
enterprise value calculations, we then had the analyst compute valuations on the
two sets of Company numbers by multiplying the resulting EBITDA by the median
multiple from the respective comparable groupings under the respective survey
results. For the public company grouping we used market values of less than $25
million. The public company analysis resulted in a per share value of $0.11
using the trailing 12 months on the equity method, and a per share value of
$0.26 on both the equity and the enterprise value using fiscal year 2002
projections.
For the merger and acquisition grouping we asked that calculations be based on
residual interest acquisitions since January 1, 2001. Using this date provided a
degree of comfort that we were using current real valuations for purposes of
comparison. To test it we also asked to see if going back to January 1, 1999
would change the resulting calculations. There was only one comparable
transaction prior to January 1, 2001, and including it did not make a material
change in the resulting analysis. For valuation purposes, the committee again
placed emphasis on the total enterprise valuation since it reflects the most
complete evaluation of the actual total price paid by a buyer, and is not
distorted by the effects of different degrees of debt leverage on prices paid
for companies. The merger and acquisition calculation resulted in a per share
value of $0.08 using the trailing 12 months on the equity method, and a range of
per share values of $0.20 to $0.25 using fiscal year 2002 projections.
During the review of actual merger and acquisition results the Committee also
reviewed the premium paid over market in actual comparable transactions. For
this analysis we asked for calculations based on applying the average premium
paid one month prior to announcement to the actual 30-day average trading price
of the company's stock. Again this was calculated for comparable transactions in
the more recent period (since January 1, 2001), the longer period (since January
1, 1999), and for all transactions and remaining interest transactions. There
was no material difference in the median under any of the categories. The value
for our company using a closing price of $0.24 and applying an actual purchase
price premium of 35% was $0.33 per share. We feel the average premium over the
30 day period one month prior to announcement is the appropriate comparable
because it avoids any market distortions leading up to the announcement of a
transition.
For the liquidation value analysis we asked that the analyst begin with the
Company financial asset book values as of March 24, 2002. These were then
adjusted by asset category to reflect industry experience on the residual values
that would occur in the event of a liquidation of the Company. For this analysis
the assumption was made that the Company could be liquidated without regard to
restrictions that exist in the current leases for the majority of the. Company
properties. To the extent that a landlord such as Rockville refused a lease
assignment, this liquidation value projection would be significantly reduced.
Also, the values calculated were reduced by bank debt (which takes priority in
any liquidation) and increased by available cash.
The liquidation value calculated was $0.19 per share. We have asked that this
analysis be updated when the April 21, 2002 balance sheet is completed. The
committee was aware that the accounting book value was
49
$0.98 per share as of April 21, 2002. However, the committee felt this was only
an accounting convention, and did not reflect an actual liquidation valuation of
the company.
Based on the various analysis used, the stock price on May 3, 2002, and the
Committee judgment, we recommend to the Board a range of price between $0.28 and
$0.33 per share. A price of $0.32 per share is approximately 33% over the 30 day
ended April 19, 2002 average trading price of the Company stock of $0.24, and
33% over the $0.24 per share closing price on May 3, 2002. This 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 TTM. Finally, these compare
to the actual median Enterprise Value/EBITDA multiple of 5.4 times for the
comparable companies reviewed under the merger and acquisition analysis.
50
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,
[_] AGAINST the proposal described below, or
[_] ABSTAIN
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. The
amendment will also reduce the authorized capital stock from 21,000,000 shares,
of which 20,000,000 are common stock and 1,000,000 are preferred stock issuable
in series, to 200,000 shares of common stock and 50,000 shares of preferred
stock issuable in series.
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.