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. 3)
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 SEPTEMBER 27, 2002
The annual meeting of shareholders of Silver Diner, Inc., a Delaware
corporation, will be held on Friday, September 27, 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 August 26, 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
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PRELIMINARY
[GRAPHIC LOGO SILVER DINER APPEAR HERE]
11806 Rockville Pike
Rockville, Maryland 20852
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON SEPTEMBER 27, 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 Friday, September 27, 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 August 26, 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
August 30, 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/A,
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/A 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.
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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/A 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;
.. management's belief, given the company's history of losses, that it is
necessary to realize every opportunity to reduce overhead and focus our
limited resources on becoming profitable. We have reduced other operating
expenses over the past year, and the expenses we incur as a result of being
a public 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
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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.
The board of directors determined in March 2002 that the sale of the company was
not an alternative to going private by means of a reverse stock split. They
believed that by implementing the reverse stock split management would be able
to devote full time and attention to the company's business and expenses would
be significantly reduced thus enabling the company to improve its financial
performance, which could result in increased shareholder value over time. In
discussing the reverse stock split and the alternatives, the board knew that
obtaining shareholders approval would have been highly unlikely given the number
of shares beneficially owned by directors and officers. They also noted their
concern that exploring the sale of the company could create an unstable
environment for many employees, whose commitment is key to company operations,
thus potentially disrupting and adversely affecting the company's business.
During the process of analyzing the fairness of the transaction and preparing
this proxy statement each director-shareholder, who collectively own
beneficially approximately 45% of the company's common stock, concluded that it
was inappropriate to sell their shares at this time given their considerable
investment of time and money in the company. While recognizing that there is
considerable uncertainty regarding the company's future performance, they are
hopeful that the performance of the company will improve if the reverse stock
split is implemented and thus over time result in increased shareholder value.
Although the board did not actively solicit any third-party offers or attempt to
sell the company, the board, nevertheless, concluded, based on the company's
operating history, net losses and cash flow, that the company was not an
attractive candidate for acquisition. The board also believed that, even though
it had not solicited an offer from a third party and thus did not know with
certainty what a third party would be willing to pay to acquire the company, the
price to be paid for the fractional shares was fair on the basis of the analysis
prepared by the special committee. See `Analysis of the Special Committee.'
Moreover, in discussing the sale alternative, one director, Mr. Neeb, noted that
it was his experience that the price buyers were willing to pay for small
capitalization restaurant companies was decreasing, especially where there is no
proven growth vehicle, and that there were no strategic buyers in the
marketplace. Mr. Neeb was chairman of the board of Casa Ole, a restaurant
company with similar market capitalization, when it explored a sale of Casa Ole
approximately a year ago. Finally, the board concluded that maintaining the
status quo was not a viable alternative since it would be detrimental to all
shareholders for the reasons discussed above, particularly the company's
continuing operating losses.
Please see the Section "Special Factors--Alternatives Considered" for a more
detailed discussion.
.. Effects of the Reverse Stock Split
Below are the effects of the reverse stock split on the company and the
shareholders.
.. Effects of the Reverse Stock Split 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;
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.. 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 50.6% 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 $1,438,000 on a pro forma basis as of April
21, 2002, with a corresponding reduction in our net stockholders' equity.
.. Effects of the Reverse Stock Split on 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.
.. 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 by the board of directors,
multiplied by the fraction of a share represented by the option. Repriced
options were issued on July 31, 2002 to affiliated shareholders with an
exercise price of $0.22 per share.
.. Effects of the Reverse Stock Split on 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.
.. Effects of the Reverse Stock Split on 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 company has agreed to a limited
liquidity plan with the goal of providing some level of 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
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 Unaffiliated Shareholders," and "Special Factors--Effects of
the Reverse Stock Split on Unaffiliated Shareholders--Post Reverse Stock
Split Liquidity" in particular, 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 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.
Please see the section "Special Factors--Effects of the Reverse Stock Split" for
a more detailed discussion of the effects of the reverse stock split on the
company and its shareholders.
.. Fairness of the Reverse Stock Split to Unaffiliated Shareholders
We believe that the reverse stock split is fair to, and in the best interests
of, our unaffiliated shareholders, 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.
The reverse stock split is fair to unaffiliated shareholders who will be cashed
out 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--Fairness of the Reverse Stock Split to
Unaffiliated Shareholders" for a more detailed discussion.
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The transaction is fair to unaffiliated shareholders who remain shareholders
because 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. Also, there is at
present little liquidity for the company's common stock, and the company has
agreed to a limited liquidity plan with the goal of providing some level of
liquidity. Currently, the company does not have sufficient cash to effect the
plan, based on its position as of April 21, 2002, and will need to generate
sufficient cash from its operations in the remainder of this year to be able to
effect the plan.
.. Procedural Fairness. Because affiliated shareholders have sole control over
the nature and timing of the transaction and the price to be paid in lieu
of fractional shares in the reverse stock split, the board appointed a
special committee, chaired by an independent director, to determine a price
to be paid in lieu of fractional shares that was fair to all unaffiliated
shareholders. The board decided not to employ an independent appraiser or
representative for unaffiliated shareholders because the cost of such an
appraiser or representative outweighed its potential benefit in a
transaction of this size.
.. Fairness of the Price. The board of directors, based on financial analysis
completed by a special committee of directors with the assistance of a
financial advisor, Allison Steinberg, 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 unaffiliated 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.
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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. In that case, the record date for
effectuating the reverse stock split will be October 4, 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 $249,000
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 10.1% 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 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.
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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 the officers and directors.
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.
10
TABLE OF CONTENTS
Page
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SPECIAL FACTORS
DESCRIPTION OF THE REVERSE STOCK SPLIT
ANALYSIS OF THE SPECIAL COMMITTEE
BENEFICIAL OWNERSHIP OF SHARES
ELECTION OF DIRECTORS
EXECUTIVE COMPENSATION
INDEPENDENT ACCOUNTANTS
OTHER MATTERS
SHAREHOLDER PROPOSALS
METHOD OF PROXY SOLICITATION
INCORPORATION BY REFERENCE
EXHIBITS
A Certificate of Amendment
B Special Committee Report
C Projected Condensed Financial Statements
11
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 necessary 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.
12
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, the board believes that at this time there is little
public appetite for the common stock of small restaurant chains with low
capitalization, a history of operating losses and sporadic cash flow and limited
opportunity to grow. This belief is based on the board's review of the
analytical data regarding the sale or merger of comparable companies reviewed in
determining the fairness of the price to be paid for the fractional shares which
is discussed under the caption "Analysis of the Special Committee" and on the
company's consistent history of net losses and sporadic cash flow.
The company further believes good performance does not necessarily translate
efficiently into an increase in the value of the company's common stock, or to
an increase in capital attracted to the company. 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 among 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 special
committee, as discussed below in "Background of the Reverse Stock Split" and
"Analysis of the Special Committee," did not consider alternatives to the
reverse stock split because the sole purpose of the special committee was to
determine a fair price to be paid to shareholders in lieu of fractional shares.
The alternatives the board considered were:
13
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 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 in March 2002 that the
sale of the company was not an alternative to going private by means of a
reverse stock split. They believed that by implementing the reverse stock split
management would be able to devote full time and attention to the company's
business and expenses would be significantly reduced thus enabling the company
to improve its financial performance, which could result in increased
shareholder value over time. In discussing the reverse stock split and the
alternatives, the board knew that obtaining shareholders approval would have
been highly unlikely given the number of shares beneficially owned by directors
and officers. They also noted their concern that exploring the sale of the
company could create an unstable environment for many employees, whose
commitment is key to company operations, thus potentially disrupting and
adversely affecting the company's business.
During the process of analyzing the fairness of the transaction and preparing
this proxy statement each director-shareholder, who collectively own
beneficially approximately 45% of the company's common stock, concluded that it
was inappropriate to sell their shares at this time given their considerable
investment of time and money in the company. While recognizing that there is
considerable uncertainty regarding the company's future performance, they are
hopeful that the performance of the company will improve if the reverse stock
split is implemented and thus over time result in increased shareholder value,
Although the board did not actively solicit any third-party offers or attempt to
sell the company, the board, nevertheless, concluded, based on the company's
operating history, net losses and cash flow, that the company was not an
attractive candidate for acquisition. The board also believed that, even though
it had not solicited an offer from a third party and thus did not know with
certainty what a third party would be willing to pay to acquire the company, the
price to be paid for the fractional shares was fair on the basis of the analysis
prepared by the special committee. See `Analysis of the Special Committee.'
Moreover, in discussing the sale alternative, one director, Mr. Neeb, noted that
it was his experience that the price buyers were willing to pay for small
capitalization restaurant companies was decreasing, especially where there is no
proven growth vehicle, and that there were no strategic buyers in the
marketplace. Mr. Neeb was chairman of the board of Casa Ole, a restaurant
company with similar market capitalization, when it explored a sale of Casa Ole
approximately a year ago. Finally, the board concluded that maintaining the
status quo was not a viable alternative since it would be detrimental to all
shareholders for the reasons discussed above, particularly the company's
continuing operating losses.
As we noted above, the special committee did not consider the alternative of
"Selling the Company." However, the chairman of the special committee, Mr. Neeb
noted that it was his experience that the price buyers were willing to pay for
small capitalization restaurant companies was decreasing, especially where there
is no proven growth vehicle, and that there were no strategic buyers in the
marketplace. Mr. Neeb was chairman of the board of Casa Ole, a restaurant
company with similar market capitalization, when it explored a sale of Casa Ole
approximately a year ago.
14
Effects of the Reverse Stock Split.
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 $1,438,000 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 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 $249,000, as follows: SEC filing fees
will be about $200; legal and professional fees will be about $224,000;
accounting fees will be about $2,000; printing costs will be about $17,000; ADP
fees will be about $5,000 and other fees will be about $800.
15
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. The board
reviewed the effects of the reverse stock split on the company's shareholders.
In doing so, the board considered the effects on the company's affiliated
shareholders, defined as those who are directors and officers. The board also
considered the effects on unaffiliated shareholders, both those who will be
eliminated as shareholders and those who will remain shareholders after the
reverse stock split.
Effects of the Reverse Stock Split on 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:
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 50.6% 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.
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 options were issued at the market price on July 31,
2002, which was $0.22 per share. The optionees could elect to delay the issuance
of the repriced options until February 1, 2003 to ensure that the options would
be treated as incentive stock options for federal income tax purposes, which
require that the aggregate value of the repriced options for an optionee does
not exceed $100,000. None of the optionees elected to delay issuance of the
options because the aggregate exercise of the options for each optionee was
below $100,000, and thus the options were incentive stock options for federal
tax purposes. The optionee will receive, upon exercise, the difference between
the fair market value at the time of exercise and the market price on July 31,
2002, $0.22 per share. The board of directors will determine the fair market
value and thus the cash to be paid to the optionees 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.
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.
Effects of the Reverse Stock Split on 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.
16
Remaining Shareholders. Terminating the registration of the common stock will
affect the market for the common stock and the ability of shareholders who
remain to buy and sell shares. 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 the board noted that the company's shareholders derive
little relative benefit from the company's status as an SEC reporting company.
After the reverse stock split, 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. The board of directors has agreed to a limited liquidity
plan, described below in "Post Reverse Stock Split Liquidity." 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. The company does not know whether
it will generate sufficient cash flow, or that the company will have sufficient
cash available, to implement the plan.
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 remaining unaffiliated shareholders will have less control over the
company because the affiliated shareholders will increase their ownership
percentages.
Shareholders Being Cashed Out. With respect to shareholders being cashed out,
they will receive $0.32 per share and will no longer be shareholders of the
company.
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 $249,000,
the company will have approximately $1,438,000 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 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.
17
Fairness of the Reverse Stock Split to Unaffiliated Shareholders
The board determined that the reverse stock split was fair to all unaffiliated
shareholders, both those who would remain shareholders and those who would be
cashed out as a result of the reverse stock split.
Unaffiliated Shareholders 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 limited
liquidity currently for the company's common stock, and thus shareholders have
limited 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, together with the premium over market price being paid
in lieu of fractional shares, made the transaction fair, even taking into
account the lack of control over timing and price. The board noted that the
price being paid in lieu of fractional shares was at a 33% premium over average
market prices for the first four months and nine days of 2002, and the
shareholders will not be required to incur brokerage costs.
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, the board noted that maintaining the status quo would be detrimental
to all shareholders, for the reasons discussed above in "Alternatives
Considered--Maintaining the Status Quo" particularly the company's continuing
operating losses.
Additionally, shareholders who wish to increase their holdings to avoid being
cashed out may do so by purchasing shares of the company's 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.
Unaffiliated Shareholders who will Remain Shareholders. The reverse stock split
is fair to the unaffiliated shareholders who will remain shareholders following
the reverse stock split because they have 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.
Regarding the lack of liquidity, the board also noted that it had agreed to the
limited liquidity plan described above. Please note 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 22nd
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.
Regarding the increased ownership percentage for affiliated shareholders, 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.
Consideration of Procedural Fairness for Unaffiliated Shareholders. The board
considered the procedural aspects of the approval of the reverse stock split,
and determined that the procedure was fair to the unaffiliated shareholders,
both those who would be cashed out and those who would remain shareholders. The
special committee did not separately consider the issue of procedural fairness.
The vote of a majority of the outstanding shares of the common stock entitled to
vote on the reverse stock split will be required to approve it. The board
determined that approval by a majority of unaffiliated shareholders was not
required to ensure the fairness of the transaction to the unaffiliated
shareholders. The board appointed a special committee chaired by an independent
director to determine a price to be paid in lieu of fractional shares out that
was fair to all unaffiliated shareholders. To provide for approval by a majority
of the unaffiliated shareholders where not required would improperly usurp the
power of the holders of greater than a majority of the shares of the 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. Additionally, the board did not engage an unaffiliated
representative to negotiate on behalf of the unaffiliated 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
18
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 or an
unaffiliated representative to the unaffiliated shareholders was outweighed by
the costs that would be borne by all the remaining shareholders, both affiliated
and unaffiliated.
The board determined that the transaction was procedurally fair to unaffiliated
shareholders who would remain shareholders because the affiliated shareholders,
who are remaining shareholders, have the same incentives as unaffiliated
shareholders in ensuring that the price paid in lieu of fractional shares does
not adversely affect the company's capital requirements. Moreover, as discussed
above in "Fairness to Unaffiliated Shareholders who will Remain Shareholders,"
unaffiliated shareholders' interests are aligned with affiliated shareholders as
both would have the potential to benefit from any reduction in operating costs
the company would realize in going private. Although the board noted that the
unaffiliated shareholders who would remain did not have the opportunity to
liquidate their shares, unlike the shareholders who would be cashed out, the
board also noted that there is limited liquidity currently for the company's
common stock, and thus shareholders have limited choice as to timing and price,
particularly if they wish to sell a large number of shares.
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. 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.
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.
19
The board of directors and the special committee considered numerous factors,
discussed below, in reaching its conclusion as to the fairness of the price to
be paid in lieu of fractional shares arising from the reverse stock split. 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. On May 7, 2002, the board adopted the special committee's
analyses and conclusions with respect to those 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 and the special committee 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. Please see "Executive Compensation--Affiliated
Stock Purchases" for those prices.
.. Comparison of Implied Valuation Multiple to Acquisition from Multiples of
other Comparable Publicly-Traded Companies. The implied enterprise value to
EBITDA multiple at which the transaction is being proposed compares favorably to
the median enterprise value to EBITDA trading multiples of 21 comparable
publicly-traded restaurant companies based on their market capitalization.
.. Comparison of Implied Valuation Multiple to Acquisition Multiples from Recent
Acquisitions of Comparable Publicly-Traded Companies. The implied enterprise
value to EBITDA multiple at which 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 and the special committee 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 and the special committee 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 and the special committee could also not explain why the low
price of $0.19 occurred. The board and the special committee 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.
.. Book Value 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. The board and the special committee noted, however, that the book value
is substantially higher on a per share basis than the per share price to be paid
in lieu of fractional shares. Please see the section "Financial Information"
below for the book 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.
20
The financial analyst, Allison Steinberg, compiled and formatted
publicly-available financial information for those comparable companies and
transactions selected by the special committee. In addition, Ms. Steinberg
compiled and formatted the company's historical and projected financial
performance, as provided to her by company management, and the company's
historical stock price performance. Ms. Steinberg further calculated a
liquidation value for the company based on the assumptions and methodologies
established by the special committee. Ms. Steinberg also calculated the discount
rate to be used for evaluating projected future cash flows based on the
assumptions and methodologies established by the special committee, and prepared
the discounted cash flow analysis using this discount rate and the company's
projected financial statements. Finally, Ms. Steinberg prepared a compilation
that applied those valuation multiples selected by the special committee arising
from the Comparable Public Company Analysis and the Merger and Acquisition
Analysis to the appropriate company historical and projected financial
information. The special committee and the board of directors analyzed those
materials to determine a fair price to be paid to shareholders in the reverse
stock split.
The special committee provided Ms. Steinberg with the assumptions and
methodologies established by it and instructed Ms. Steinberg to prepare the
liquidation value, discount rate, cash flow and other information based on such
assumptions and methodologies. The assumptions and methodologies are fully
discussed in the section entitled "Analysis of the Special Committee." In
addition to the assumptions and methodologies provided to her by the special
committee, Ms. Steinberg relied on the projected condensed financial statements
provided to her by management and by the special committee.
The materials compiled by Ms. Steinberg will be made available for inspection
and copying at the principal executive offices of the company during normal
business hours at Silver Diner, Inc., 11806 Rockville Pike, Rockville, Maryland
20852. Those materials consist of: results of the discounted cash flow analysis,
the public comparable company analysis, the merger and acquisition analysis and
the liquidation analysis; a discounted cash flow table containing various
possible discounts; a valuation summary; a calculation of the discount rate; and
tables of publicly-available information for the merger and acquisition analysis
and the public comparable analysis. Copies of such materials will also be
provided to any shareholder or a duly authorized representative of such
shareholder who has been so designated in writing upon written request to the
company. Copies of the materials Ms. Steinberg prepared are also available at
the Securities and Exchange Commission's website, www.sec.gov
Ms. Steinberg did not provide a recommendation or opinion to the company or the
special committee regarding the reverse stock split or a fair price to be paid
therein. Rather, she collected publicly-available information and performed
mathematical calculations as requested by the special committee. For her
services, the company expects to pay Ms. Steinberg approximately $25,000, of
which approximately $13,000 has been paid to date, and has agreed to indemnify
her.
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:
.. 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;
21
.. 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:
.. 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
22
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.
23
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
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.
24
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/A 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
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 $249,000 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 $ 16,346,000 16,914,000
Total cash and cash equivalents 715,000 1,438,000
Total liabilities 6,011,000 6,735,000
Stockholders equity 10,335,000 10,179,000
Book value per share $ 1.14 $ 1.10
All financial information was rounded to the nearest thousand.
25
Projected Financial Information. The projected condensed financial statements
for the five years ended December 31, 2006 are included as Exhibit C to this
proxy statement. You should review those projected statements together with the
accompanying notes and assumptions. The assumptions disclosed are those that the
management believes are significant to the projections. As discussed below, the
projections were based in part upon historical results, as contained in our
Annual Report on Form 10-K/A for the year ended December 30, 2001, and in our
Quarterly Report on Form 10-Q for the quarter ended April 21, 2002. You should
review the Annual Report and Quarterly Report for those historical results. The
projected condensed financial information will not be revised to reflect any
changes that may have occurred during the second quarter of the current fiscal
year. In this respect, neither management nor the board of directors believes
that the results for the current fiscal quarter would materially change the
projected condensed financial statements.
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 of 2002, for the purpose of determining projected EBITDA to be
used in the Comparable Public Company Analysis and the Merger and Acquisition
Analysis described below in "Analysis of the Special Committee." 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 projected condensed financial statements for the five years ended December
31, 2006 were prepared by the management of the company to assist the board and
the special committee in its Discounted Cash Flow Analysis, described below in
"Analysis of the Special Committee," and reflect the views of the special
committee and the board. These projections were prepared by management in a
manner consistent with prior years and were prepared for internal purposes. No
consideration was given to including the projections in the proxy statement when
they were prepared and they were included only in response to the request of the
Securities and Exchange Commission. With the exception of the line item
classifications and the fact that certain items were combined in the
projections, the results reflected in the projections for the year ended
December 30, 2001 are the same as reflected in the financial statements for the
year ended December 30, 2001 filed as part of Form 10-K/A. The projections for
the succeeding years were prepared in a manner consistent with the year ended
December 30, 2001. Management uses restaurant operating margins for costs of
goods (food and supplies), labor and operating costs when preparing projections
since these costs can vary and are not easily predicted. Management's experience
is that these items tend to balance out and are reflected in restaurant
operating margins. See note 5 to the notes to projected condensed financial
statements. Changes in other line item classifications are not material.
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, as well as the company's unpredictable operating performance, the
historical failure of the company to meet management projections, and because of
the uncertainty surrounding the company's future growth, 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. Except as specifically noted below, management did not adjust
these numbers for inflation. 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.
26
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 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. If those conditions are met, 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 be October
4, 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.
27
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.
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 $249,000.
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. Robert T. Giaimo 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
30, 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."
28
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
Allison Steinberg, a financial analyst who had provided financial and analytical
services to the company and who had assisted the company in preparing its
shareholder communications to see if she could be available to prepare data and
compile publicly available information to be used by the board of directors and
the special committee in their determination of a fair price.
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 noted 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 necessarily reduce
the number of shareholders of record sufficiently to allow the company to go
private. More importantly, he noted that a tender offer for all shares or a
merger were not feasible because they would require the company to redeem all
shares held by unaffiliated shareholders for approximately $2.4 million which is
far greater than $1.4 million for the reverse stock split. For the sake of
illustrating potential costs, Mr. Giaimo used the average of the bid and ask
prices for the company's common stock as traded on the OTC Bulletin Board for
the thirty trading days prior to March 14, 2002, namely $0.25 per share, and
applied a 30% premium to such price. He, therefore, advised each director that a
reverse stock split was the only feasible transaction for going private based on
available capital. At this meeting, the board retained Ms. Steinberg to assist
the company in compiling information to be used to determine a fair price. There
were no discussions regarding valuation until the end of March, since the
information was not yet available.
The board then 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.
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 Ms. Steinberg 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 price was discussed at the March 25 board meeting.
This was followed by a further discussion of reasons for going private. Mr.
Giaimo noted that the reasons for going private were that the company has not
met public company objectives; being public under the present circumstances did
not provide the company with a source of raising capital; and no credibility was
provided to the company by being public. He also pointed out that the company
should save a minimum of $150,000 per year in costs of being a public company.
More important, he noted that the company's publicly traded stock may actually
constitute a disincentive for employees. Mr. Steiner noted that improving
relationships with employees may improve operations.
The board then discussed available cash to purchase the fractional shares that
would result from a reverse split. 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
29
the future. Messrs. Steiner and Neeb 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. 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.
Mr. Giaimo turned to Mr. Neeb to lead the discussion with respect to the
valuation analysis. Mr. Neeb pointed out that, in his view, the only real
numbers were the trailing 12 months cash flow and profit numbers. However, since
the cash flow for the trailing 12 months may be nominal, it might be necessary
to estimate performance for 2002 and apply a discount for the possibility that
the company will not meet such estimate. He observed that the company was not
being acquired, and the only real measure of value was what the company
generated in cash. He believed that enterprise value at about 3.3 times cash
flow represented about the maximum real value of the company. He also thought it
would be fair to apply a premium of approximately 25 percent to value in order
to establish a price to be paid for the fractional shares. He believed that the
company should wait until the first quarter results were available in order to
make a final decision as to price. Mr. Giaimo said that he generally agreed with
Mr. Neeb, and noted that in transactions of this sort there were always premiums
paid, although there may be differences with respect to the base number to which
the premiums are applied. He pointed out that methodologies tied to revenues
seemed to apply when there was a buyer who made its own assumptions about how
well it could operate the company and, therefore, its interest was in revenues.
He also noted that valuations keyed to book value were not relevant because many
of the company's assets that went to make up its book value were special purpose
assets and illiquid. He expressed the view that using the enterprise value
methodology was the best, since it took into account the debt of the company.
Mr. Steiner noted that he was negative about paying a premium. He also inquired
whether, if a formula is used, it would be necessary to take into account
capital replacements. There was consensus that the cost to maintain equipment
and other assets should be taken into account, as well as adjustments to reflect
one time costs in the trailing 12 month period that are non-recurring.
Mr. Neeb noted that going private provided a reasonable means of liquidity for
small investors, while larger investors for whom there would not be a public
marketplace did not have liquidity at that time. He also noted that
consideration should be given to future possibility of providing a liquidity
program for the remaining shareholders.
Mr. Kaplan asked whether there should be any attempt to sell the company at this
time. Mr. Neeb responded that, based upon his experience as chairman of the
board of Casa Ole, there were no strategic buyers in the marketplace. With
respect to financial buyers, he had seen the price that they were willing to pay
drop from 5 times cash flow to 3 1/2 times cash flow. Mr. Neeb also noted that
about a year before the meeting there were nearly 150 public restaurant
companies but at the time of the meeting there were probably less than 100
public restaurant companies, the reduction stemming from bankruptcies or the
companies going private. He noted that larger capitalized companies were doing
better today than small capitalization companies.
The board discussed the fact that it needed more time and information before
establishing a price to be paid for the fractional shares that would result from
the reverse stock split. The next quarter's financial statements should be ready
about April 30. Accordingly, it was decided that the next meeting of the board
would be held in May, the date to be determined, the purpose of which would be
to establish the price to be paid for the fractional shares resulting from a
reverse split.
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 Ms. Steinberg, 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, as described below. Copies of the information being
collected by Ms. Steinberg were being furnished to Mr. Neeb and Mr. Giaimo. Mr.
Giaimo, Ms. Steinberg and Mr. Neeb had conversations concerning the valuation
procedures and methodologies, but Mr. Neeb did not analyze all of the data he
was being provided until the special committee was formed on or around April 22,
2002. 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 believe that a discounted cash flow analysis was appropriate or necessary
given the company's sporadic cash flow and operating losses, and the consequent
uncertainty regarding future projections on which a discounted cash flow
analysis would be based. Mr. Neeb, however, believed that an analysis of
discounted cash flow was required since it was an appropriate analytical tool.
30
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 special committee's sole purpose was to determine a range of
fair prices, and it was not authorized to review alternatives to the reverse
stock split. 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, the special committee started
focusing on the data and information provided by Ms. Steinberg. Mr. Neeb noticed
that the discounted cash flow was not included and, after discussion with Mr.
Giaimo, requested that Ms. Steinberg include discounted cash flow data. Mr. Neeb
spoke to Ms. Steinberg and requested that she 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 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 her 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.
During April 2002, the members of the special committee worked with the
company's management and Ms. Steinberg, with respect to the preparation and
compilation of financial information associated with its analysis of the
proposed reverse stock split. Ms. Steinberg is a self-employed financial analyst
with experience in the valuation of companies, having spent the past four years
as an independent consultant, in which position she has provided a range of
financial consulting services to companies, including valuation analyses. Prior
to this, Ms. Steinberg spent six years as an investment banker, in which
position, among other things, she assisted in conducting valuations and
preparing fairness opinions. Ms. Steinberg has provided independent financial
consulting services to the company since 1999, including assistance in the
preparation of the company's quarterly shareholder communications.
Ms. Steinberg, compiled and formatted publicly-available financial information
for those comparable companies and transactions selected by the special
committee. In addition, Ms. Steinberg compiled and formatted the company's
historical and projected financial performance, as provided to her by company
management, and the company's historical stock price performance. Ms. Steinberg
further calculated a liquidation value for the company based on the assumptions
and methodologies established by the special committee. Ms. Steinberg also
calculated the discount rate to be used for evaluating projected future cash
flows based on the assumptions and methodologies established by the special
committee, and prepared the discounted cash flow analysis using this discount
rate and the company's projected financial statements. Finally, Ms. Steinberg
prepared a compilation that applied those valuation multiples selected by the
special committee arising from the Comparable Public Company Analysis and the
Merger and Acquisition Analysis to the appropriate company historical and
projected financial information.
The special committee provided Ms. Steinberg with the assumptions and
methodologies established by it and instructed Ms. Steinberg to prepare the
liquidation value, discount rate, cash flow and other information based on such
assumptions and methodologies. The assumptions and methodologies are fully
discussed in the section entitled "Analysis of the Special Committee." In
addition to the assumptions and methodologies provided to her by the special
committee, Ms. Steinberg relied on the projected condensed financial statements
provided to her by management and by the special committee.
The materials compiled by Ms. Steinberg will be made available for inspection
and copying at the principal executive offices of the company during normal
business hours at Silver Diner, Inc., 11806 Rockville Pike, Rockville, Maryland
20852. Those materials consist of: results of the discounted cash flow analysis,
the public comparable company analysis, the merger and
31
acquisition analysis and the liquidation analysis; a discounted cash flow table
containing various possible discounts; a valuation summary; a calculation of the
discount rate; and tables of publicly-available information for the merger and
acquisition analysis and the public comparable analysis. Copies of such
materials will also be provided to any shareholder or a duly authorized
representative of such shareholder who has been so designated in writing upon
written request to the company. Copies of the materials she prepared are also
available at the Securities and Exchange Commission's website, www.sec.gov
Ms. Steinberg did not provide a recommendation or an opinion to the company or
the special committee regarding the reverse stock split or a fair price to be
paid therein. Rather, she collected publicly-available information and performed
mathematical calculations as requested by the special committee. For her
services, the company expects to pay Ms. Steinberg approximately $25,000, of
which approximately $13,000 has been paid to date, and has agreed to indemnify
her.
At the end of April, Mr. Giaimo discussed with Mr. Neeb the idea 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 liquidity plan, so
that the company would have a minimum cash fund of $1.5 million after
implementing the limited liquidity plan. Mr. Neeb agreed with this position.
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, to be the most comparable to the results of the other companies to which
comparisons were made. 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, which accompany this
proxy statement as Exhibit C. 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." Mr. Neeb and Mr. Steiner
separately determined what they considered to be a range of fair prices to be
paid. Mr. Neeb's proposed range was $0.30-$0.34 while Mr. Steiner's range was
$0.30-$0.32. On May 3, Mr. Neeb discussed the ranges of proposed prices with Mr.
Steiner. Mr. Steiner and Mr. Neeb, and subsequently Mr. Neeb and Mr. Giaimo,
discussed whether liquidation value was relevant. Although they concluded that
such method was a less reliable valuation methodology than the others, the
special committee included the results of a liquidation analysis in the report
it gave to the board of directors.
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 Mr. Neeb and Mr. Steiner
determined that $0.32 was a fair price for the fractional shares, because the
average of the two ranges they independently determined was $0.315, which rounds
to $0.32 and because $0.32 was a 33% premium over $0.24, the average trading
price for the periods indicated in the Report of the Special Committee. 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.
32
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 $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.
33
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,
Allison Steinberg, as discussed above in "Background to the Reverse Stock
Split," during the process of determining a fair price. The special committee's
determination was based on economic, financial and market conditions, such as
interest rates, national and local economic conditions, the local and national
labor situation, food costs and consumer tastes, that existed at the time of its
determination, each of which is subject to change and which could be beneficial
or detrimental to the company's position.
The special committee considered a number of commonly used valuation techniques
in arriving at a range of prices to recommend to the board. The special
committee focused primarily on the advantages and disadvantages of these various
valuation methodologies and the assumptions upon which they were based, as well
as the conclusions of these methodologies. 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 Ms. Steinberg 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.
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.
34
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) $120,000 in expenses associated with a rent adjustment for one of
the company's restaurants that should not 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.
35
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. Except for Interfoods of
America/Management Group, which transaction had not been completed as of the
date of the special committee's report, each of the transactions considered by
the special committee were consummated between January 1, 2001 and May 7, 2002.
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.
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.
36
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.
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
37
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.
38
BENEFICIAL OWNERSHIP OF THE SHARES
As of July 16, 2002, the company had 12,032,469 shares of commons stock issued
and outstanding. The following table sets forth, to the company's knowledge as
of July 16, 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 23, this table assumes the
exercise by those persons of options that are exercisable within 60 days of July
16, 2002.
Amount and Nature of
Beneficial Ownership
Following Reverse Stock
Amount and Nature of Beneficial Split (in Pre-Reverse
Name and Address(1) of Beneficial Owner Ownership at June 17, 2002(2) Percent(3) Stock Split Shares)(15) Percent(16)
- --------------------------------------- ----------------------------- ---------- ----------------------- -----------
Catherine Britton 3,284,677(4) 26.39 3,277,003(17) 33.74
Michael Collier 91,926(5) * 90,268(18) *
Robert T. Giaimo 3,284,677(6) 26.39 3,277,003(19) 33.74
Ype Von Hengst 423,881(7) 3.45 420,000(20) 4.40
Edward H. Kaplan 1,019,000(8) 8.46 1,019,000(21) 10.94
Patrick Meskell 367,586(9) 2.98 365,016(22) 3.79
Louis P. Neeb 26,572(10) * 26,572(23) *
Charles M. Steiner 583,729(11) 4.84 579,000(24) 6.21
All directors and executive officers as a 5,797,371(12)(25) 44.31(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 July
16, 2002.
(3) Each percentage of beneficial ownership is calculated using a different
denominator, consisting of the total number of shares outstanding
(12,032,469), 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 July 16, 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
(12,032,469) 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 July 16, 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, 1,000 of which have an
exercise price of $0.938 per share and 12,000 of which have an exercise
price of $0.22 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 have an exercise
price of $0.22 per share; 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 have an exercise price of $0.22
per share.
(6) Includes: (a) 409,065 directly owned shares; (b) Executive Officer
Repriced Options (see Note 14 below) to purchase 400,000 shares which
have an exercise price of $0.242 per share; 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.
39
(7) Includes: (a) 183,881 directly owned shares; and (b) Executive Officer
Repriced Options (see Note 14 below) to purchase 240,000 shares, which
have an exercise price of $0.22 per share.
(8) Includes: (a) 1,000,000 directly owned shares; (b) options to purchase
2,000 shares granted under the 1996 Stock Option Plan, 1,000 of which
have an exercise price of $0.8125 per share, and 1,000 of which have an
exercise price of $0.938 per share; and (c) Outside Director Repriced
Options (see Note 13 below) to purchase 17,000 shares which have an
exercise price of $0.22 per share.
(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 at an exercise price of
$0.22 per share.
(10) Includes: (a) options to purchase 12,572 shares granted under the 1991
Stock Option Plan at the exercise price of $.003 per share; (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, 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 have an
exercise price of $0.22 per share.
(11) Includes: (a) 564,729 shares held of record by the Steiner Family
Partnership (Mr. Steiner owns a 25% interest in, and is the managing
partner of, The Steiner Family Partnership and, therefore, may be deemed
to beneficially own all shares held of record by such partnership. Except
for the 141,182 shares resulting from his 25% ownership interest in The
Steiner Family Partnership, Mr. Steiner disclaims beneficial ownership of
all such shares); (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 have an exercise price of $0.22 per share.
(12) The total shares beneficially owned by all directors and executive
officers as a group was calculated by taking the sum of all shares
beneficially-owned by each director and executive officer, as reflected
in the table, 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 $0.22, the 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 market value (or in the
case of Mr. Giaimo, 110% of the market value) of the shares on July 31,
2002 (or February 1, 2003, as applicable), provided that Messrs. Giaimo,
Meskell and Von Hengst each had 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.
None of Messrs. Giaimo, Meskell and Von Hengst delayed the issuance of
his Executive Officer Repriced Options, and so the market value of the
shares on July 31, 2002, namely $0.22 per share, was applied.
(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.
40
(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.
(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 July 16, 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
39.29% of the company's total shares issued and outstanding (12,032,469).
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 13, 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).
41
ELECTION OF DIRECTORS
DIRECTORS
The board currently consists of eight directors whose terms continue until the
next annual meeting of shareholders, or until their respective successors are
elected and have qualified. At each annual meeting, directors are elected for a
term of one year to succeed those directors whose term expires.
The election of each director requires the affirmative vote by holders of a
plurality of the outstanding shares present and entitled to be voted at the
Meeting. The persons named in the proxy solicited by the board will vote, unless
the proxy is marked otherwise, to elect the persons identified in the table
below. If a nominee is unable to serve as a director, the persons acting under
the proxy may vote the proxy for the election of a substitute. It is not
currently contemplated that any nominee will be unable to serve. The board
recommends that shareholders vote FOR the nominees listed below.
Director
Name Age Since Position
---- --- ----- --------
Robert T. Giaimo 50 1996 Chairman of the Board, President, Chief
Executive Officer, and Treasurer
Catherine Britton 48 1996 Director
Michael Collier 47 1999 Director
Ype Von Hengst 51 1996 Director, Vice President, Executive Chef,
and Secretary
Edward H. Kaplan 63 1996 Director
Patrick Meskell 49 2002 Director, Executive Vice President,
Operations
Louis P. Neeb 63 1996 Director
Charles M. Steiner 60 1996 Director
Robert T. Giaimo has been the company's Chairman of the Board, President, Chief
Executive Officer and Treasurer since March 1996. In 1987 Mr. Giaimo developed
and popularized the Silver Diner concept with Ype Von Hengst after conducting a
one-year national tour of diner-style restaurants. Mr. Giaimo has been the
Co-Founder, Director, President, Chief Executive Officer and Treasurer of Silver
Diner Development, Inc. since its inception in 1987. Mr. Giaimo was president,
chief executive officer and director of Monolith Enterprises, Inc. ("Monolith")
from 1971 to January 1987. From 1972 through 1976, Mr. Giaimo co-founded and
operated, through Monolith, Blimpies Restaurant in Georgetown. In 1977, Mr.
Giaimo co-founded and operated, through Monolith, The American Cafe restaurant,
an innovative, award-winning restaurant chain that was one of the first
restaurants to promote "American cuisine" and helped popularize the croissant
sandwich. In 1985, Mr. Giaimo sold The American Cafe to W.R. Grace & Co. Mr.
Giaimo graduated from the Business School of Georgetown University in 1974 and
Harvard University's Smaller Company Management Program in 1982. He is a member
of the Young President's Organization and serves as a Director and Co-chairman
of Development. In 1993, Mr. Giaimo received an "Entrepreneur of the Year" award
from Inc. Magazine in conjunction with Ernst & Young and Merrill Lynch. Mr.
Giaimo is married to Catherine Britton. Mr. Giaimo currently serves on the board
of directors of Panera Bread Co., a publicly traded company headquartered in St.
Louis, Missouri, with annual sales in excess of $200 million.
Catherine Britton has been a Director since March 1996 and was a director of
Silver Diner Development, Inc. from July 1995 until March 1996. She assisted
with marketing and design of Silver Diner restaurants and has been involved with
menu development and concept evolution since Silver Diner Development, Inc.'s
inception. She also participated extensively in the development of Silver Diner
restaurants. Ms. Britton graduated from Georgetown University in 1975, receiving
a Bachelor of Arts degree in Philosophy. Ms. Britton earned a Masters Degree in
Special Education from George Washington University in 1978. Ms. Britton is
married to Robert T. Giaimo.
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.
42
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., a
position he has held since 1995. 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 subject to a civil
proceeding during the past five years that has resulted in any enjoinments or
prohibitions regarding federal or state securities laws.
43
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.
44
AUDIT COMMITTEE
Charles M. Steiner, Chairman
Louis P. Neeb, Audit Committee
Member
Edward H. Kaplan, Audit Committee
Member
Compensation Committee
The compensation committee, composed of Messrs. Steiner, Chairman, Collier and
Neeb, held one (1) meeting during the year ended December 31, 2001. The
principal functions of the compensation committee are to review and make
recommendations to the board on all compensation and hiring issues that relate
to officers and senior staff members.
Section 16(a) Beneficial Ownership Compliance
To the company's knowledge, based solely upon a review of reports and other
information furnished to it by its directors, officers, greater than 10%
beneficial owners of the company, and other persons subject to the reporting
requirements (collectively, the "Reporting Persons"), all reports required to be
filed by such Reporting Persons under Section 16(a) of the Securities Exchange
Act of 1934, as amended, were duly filed during the year ended December 31,
2001, with one exception. Michael Collier, a director, exercised an option for
8,861 shares on August 6, 2001 but did not file a Form 4 during September 2001
reporting such exercise. A Form 4 covering this transaction was filed on
February 15, 2002.
45
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($) Compensation($) Award(s) 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,
President, Chief 1999 258,315 0 18,000(12) 0 0 0 57,061(2)
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 (i) have an exercise price
equal to 110% of the fair market value of the shares on July 31, 2002
($0.242 per share), (ii) vested 100% on July 31, 2002 and (iii) expire on
July 30, 2007.
(2) Represents the annual premiums the company paid on a $3,000,000 split
dollar life insurance policy on the life of Mr. Giaimo.
(3) Pursuant to resolutions unanimously approved by the board on December 13,
2001, Mr. Von Hengst agreed to surrender for cancellation options for an
aggregate of 355,000 shares, as follows: (i) an option for 150,000 shares,
which would have become 100% exercisable at $1.125 per share on December
29, 2001 and expiring on December 28, 2007: (ii) an option for 55,000
shares, exercisable at $0.625 per share on December 31, 2005 and expiring
on December 15, 2008; and (iii) an option for 150,000 shares, exercisable
at $1.00 per share, with 60% becoming exercisable on January 1, 2002, 80%
on January 1, 2003 and 100% on January 1, 2004, and expiring on December 7,
2009. The board agreed to grant Mr. Von Hengst new options for an aggregate
355,000 shares on July 31, 2002, which options (i) have an exercise price
equal to the fair market value of the shares on July 31, 2002 ($0.22) and
(ii) vest on the same dates and expire on the same dates as would have the
previously-described canceled options.
(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.
46
(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 (i) have an exercise price equal to the fair
market value of the shares on July 31, 2002 ($0.22 per share) and (ii) vest
on the same dates and expire on the same dates as would have the
previously-described canceled options.
(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
$12,000 of his annual expenses related to participation in local and
national chapters of a professional organization.
47
Stock Options
No stock appreciation rights have been granted or are outstanding. No stock
options were granted to the company's executive officers during the year
ended December 31, 2001.
Pursuant to resolutions unanimously adopted by the board as of December 13,
2001, the company granted options to the following individuals on July 31,
2002 for the following numbers of shares: (i) Robert T. Giaimo: 400,000
shares; (ii) Ype Von Hengst: 355,000 shares; and (iii) Patrick Meskell:
430,012 shares. The company agreed to grant these options, which are more
fully described in Notes 1, 3 and 6 of the Summary Compensation Table
included in this Proxy Statement, in connection with the cancellation of
equal numbers of options held by the foregoing individuals. The following
table provides information as to the outstanding options at December 31, 2001
held by the following executive officers. No stock appreciation rights are
outstanding.
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year End Option/SAR Values
Number of Securities Underlying Value of Unexercised
Unexercised Options/SARS at Fiscal Year In-the-money Options/SARs at
End Fiscal Year End(*)
--- ------------------
Shares
Acquired On Value
Name Exercise (#) Realized ($) 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
42
(*) 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.
48
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,
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
49
his estate or heirs). If terminated without cause, (i) Mr. Von Hengst shall be
entitled to the Base Salary, Bonus, and medical benefits for a one year period
commencing with the date of termination; and (ii) the principal balance under
the Loan shall be extinguished, and all right, title and interest in the
Collateral shall vest with Mr. Von Hengst (or his estate or heirs).
Officer Employment Agreements. The company has an employment agreement with
Patrick Meskell through March 4, 2004. Although the agreement was not amended,
Mr. Meskell was promoted from Senior Vice President, Human Resources, to
Executive Vice President, Operations with an increase in his base salary to
$150,000, with future adjustments to his base salary to be determined by the
board. In addition, he is entitled to (i) participate in bonus and stock option
plans made available to executive employees of the company; (ii) receive a $500
per month car allowance, (iii) receive life insurance coverage of $500,000; (iv)
participate in group health and dental plans generally offered to employees of
the company; (v) receive long term disability insurance coverage in amount of
approximately 60% of the employee's base salary per month, subject to a 90 day
initial waiting period; (vi) receive three weeks paid vacation that does not
accrue or carry over from one year to the next; and (vii) receive sick leave and
other benefits, in accordance with the company's policies for its executives.
The employee has a confidentiality and non-competition agreement with the
company.
The agreement is terminable at any time by either party thereto. However, if the
company terminates the agreement, the company will pay the employee all base
salary earned but unpaid on the date of resignation plus three months base
salary. If the employee resigns and provides at least three months notice, the
company will pay the employee all base salary earned but unpaid on the date of
resignation plus three months base salary payable after resignation on the same
schedule as the salary that was paid before resignation. If the employee resigns
without providing at least three months prior notice, (i) all stock options and
all stock purchase rights granted under the Stock Option Plan to the employee
(a) subsequent to March 1, 1999, (b) on December 15, 1997, and (c) to Mr.
Meskell on December 29, 1997 will be terminated on the date of resignation; and
(ii) the employee will sell and the company will purchase all shares of the
company acquired by the employee pursuant to stock options or stock purchase
rights within six months prior to the date of resignation at a purchase price
equal to the price paid for the shares.
Non-Employee Director Compensation
During the year ended December 31, 2001, each of the company's non-employee
directors received an option to purchase 4,000 shares on June 15, 2001 under the
1996 Non-Employee Director Stock Option Plan Such options were exercisable at a
price equal to 100% of the fair market value on the date of grant, and were to
vest at any time, in whole or in part for period of ten years beginning one year
after the date of the grant. Pursuant to resolutions unanimously approved by the
company's Board of Directors on December 13, 2001, each non-employee director
agreed to surrender for cancellation options for an aggregate of 12,000 shares
under the 1996 Non-Employee Director Stock Option Plan, including the foregoing
options, as follows: (i) an option for 4,000 shares, fully vested, exercisable
at $1.00 per share and expiring on June 17, 2009; (ii) an option for 4,000
shares, fully vested, exercisable at $0.844 per share and expiring on June 15,
2010; and (iii) an option for 4,000 shares, exercisable at $0.40 per share
beginning on June 15, 2002 and expiring on June 14, 2011. In addition, Mr.
Kaplan and Mr. Steiner each also agreed to surrender for cancellation an option
under the Second Amended and Restated 1991 Stock Option Plan for 5,000 shares,
fully vested, exercisable at $4.05 per share and expiring on December 30, 2005.
The board agreed to grant each non-employee director new options under the 1996
Stock Option Plan on July 31, 2002, exercisable for the same number of shares as
those that were canceled, and having the same vesting and termination terms as
the canceled options, but with exercise prices equal to the fair market value of
the shares on July 31, 2002 ($0.22 per share). 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.
50
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."
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 elected
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 was to be based on the fair market value of the underlying shares
on the dates such options were granted, except in the case of Mr. Giaimo, whose
options were to have an exercise price equal to 110% of the fair market value of
the underlying shares on the date of grant. None of the executive officers
deferred the grant date, and thus the fair market value on July 31, 2002, namely
$0.22 per share, has been used as the exercise price or, in the case of Mr.
Giaimo, as the basis for the calculation of the exercise price.
51
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 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.
52
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.
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
53
INDEPENDENT ACCOUNTANTS
Reznick Fedder & Silverman P.C. served as the company's independent auditors
during fiscal years 2000 and 2001. Representatives of Reznick are expected to
attend the Meeting, will be provided with an opportunity to make a statement,
should they desire to do so, and will be available to respond to appropriate
questions from the shareholders. The audit committee has recommended, and the
Board has approved, the selection of Reznick to serve as the company's
independent auditors for the year ending December 29, 2002.
The table below sets forth the aggregate fees billed to the company for the year
ended December 30, 2001 by Reznick. The audit committee has considered whether
the provision of non-audit services is compatible with maintaining Reznick's
independence, and concluded that providing such non-audit services does not
interfere with Reznick's independence.
Reznick Compensation for 2001
Amount
(approximate)
- -------------
Annual Audit Fees and Quarterly Report Review $ 72,000
Financial Information Systems, Design and Implementation Fees 0
All Other Fees 39,000
--------
Total $111,000
OTHER MATTERS
The Board knows of no other business which may come before the Meeting. If,
however, any other matters are properly presented to the Meeting, it is the
intention of the persons named in the accompanying proxy to vote, or otherwise
act, in accordance with their judgment on such matters.
SHAREHOLDER PROPOSALS
If shareholders approval of the reverse stock split is obtained and the company
effects the reverse stock split, the company will no longer be subject to the
proxy rules of the Securities Exchange Act of 1934. Consequently, the company
will no longer be seeking proposals pursuant to those proxy rules, and
shareholders may find it more difficult to make proposals for future annual
meetings.
However, if we do not effect the reverse stock split, any proposal of a
shareholder to be presented at the company's annual meeting of shareholders in
2003, including the nomination of persons to serve on the Board, must be
received not later than January [__], 2003 to be considered timely for inclusion
in the proxy materials for that meeting. Shareholders submitting proposals
should submit them in writing and direct them to the company's secretary at the
company's principal executive offices via certified mail, return receipt
requested, to ensure timely delivery.
METHOD OF PROXY SOLICITATION
The entire cost of this solicitation of proxies will be borne by the company.
The company's directors, officers, and regular employees, without additional
remuneration, may solicit proxies by telephone, telegraph and personal
interviews. The company will, if requested, reimburse banks, brokerage houses,
and other custodians, nominees and certain fiduciaries for their reasonable
out-of-pocket expenses incurred in connection with the distribution of proxy
materials to their principals.
INCORPORATION BY REFERENCE
The annual report on Form 10-K/A, which contains the audited financial
statements of the company for the three years ended December 30, 2001, and the
quarterly report on Form 10-Q which contains the unaudited financial statements
of the company for the first quarter ended April 21, 2002, are hereby
incorporated by reference.
By Order of the Board,
Ype Von Hengst Secretary
54
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.
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: September___, 2002 SILVER DINER, INC.
Robert T. Giamo
President and Chief Executive Officer
55
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 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
56
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 $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 prices 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.
57
EXHIBIT C
PROJECTED CONDENSED FINANCIAL STATEMENTS
The projections and the assumptions supporting the projections are based on
future events and circumstances that may or may not arise and are referred to as
forward-looking information. Such forward-looking information is based on
assumptions of the company's historical operations and changes in operating
costs, capital spending, financial sources and the effects of competition,
customer satisfaction, and inflationary and general economic conditions. Such
forward-looking information is subject to changes and variations which are not
reasonably predictable and which could significantly affect future results.
Accordingly, such results may differ from those expressed in any forward-looking
statements made by or on behalf of the company due to various factors. These
factors include changes in economic conditions, both nationally and in our
primary market area, development and construction activities, if any, 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. There
will usually be differences between projected and actual results because events
and circumstances frequently do not occur as expected and those differences may
be material.
The projections prepared by management reflect the views of the special
committee and the board. 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. The special committee and the board also recognized the
company's unpredictable operating performance and the uncertainty as to future
growth. The special committee and the board believe that the most reasonable
estimate of the company's operating performance over the next five years is that
it will be nearly the same as the company's combined actual and estimated
performance for the current fiscal year. Except as specifically noted, no
adjustments were made for inflation.
58
Silver Diner, Inc.
Five-Year Projected Condensed Balance Sheet
Fiscal Period Ending Date 2001 2002 2003 2004 2005 2006
---- ---- ---- ---- ---- ----
ASSETS
Current assets:
Cash and marketable securities $ 1,839,091 $ 2,732,704 $ 2,554,210 $ 2,262,494 $ 1,992,386 $ 1,744,266
Inventory 99,846 115,223 115,223 115,223 115,223 115,223
Prepaid expenses and other 133,281 321,153 321,153 321,153 321,153 321,153
------------ ------------ ------------ ------------ ------------ ------------
Total current assets 2,072,218 3,169,080 2,990,586 2,698,870 2,428,762 2,180,642
Property, equipment & improvements: 20,278,029 20,585,765 20,961,993 21,388,469 21,814,945 22,241,422
Less accumulated depreciation (7,036,242) (8,373,252) (9,709,508) (10,877,176) (11,960,343) (13,028,675)
------------ ------------ ------------ ------------ ------------ ------------
13,241,787 12,212,513 11,252,485 10,511,293 9,854,602 9,212,747
Due from affiliates 40,000 48,937 48,937 48,937 48,937 48,937
Goodwill, net 1,745,599 1,745,599 1,745,599 1,745,599 1,745,599 1,745,599
Deposits and other 370,778 349,791 349,791 349,791 349,791 349,791
Total assets $ 17,470,382 $ 17,525,920 $ 16,387,398 $ 15,354,490 $ 14,427,691 $ 13,537,716
============ ------------ ------------ ------------ ------------ ------------
LIABILITIES AND EQUITY
Current liabilities:
Account payable and accrued expenses $ 2,118,345 $ 2,454,184 $ 2,454,184 $ 2,454,184 $ 2,454,184 $ 2,454,184
Current maturities of long-term debt 184,466 434,467 517,800 517,800 517,800 517,800
------------ ------------ ------------ ------------ ------------ ------------
Total current liabilities 2,302,811 2,888,651 2,971,984 2,971,984 2,971,984 2,971,984
Deferred rent liability 1,150,991 1,036,799 976,799 916,799 856,799 796,799
Long-term debt, less current maturities 2,557,317 2,622,851 2,105,051 1,587,251 1,069,451 551,651
------------ ------------ ------------ ------------ ------------ ------------
Total liabilities 6,011,119 6,548,300 6,053,834 5,476,034 4,898,234 4,320,434
Stockholders' equity:
Common stock 8,687 8,739 8,739 8,739 8,739 8,739
Additional paid-in capital 30,797,207 30,742,682 30,742,682 30,742,682 30,742,682 30,742,682
Accumulated deficit (19,346,631) (19,773,801) (20,417,857) (20,872,965) (21,221,964) (21,534,139)
------------ ------------ ------------ ------------ ------------ ------------
Total stockholders' equity 11,459,263 10,977,620 10,333,564 9,878,456 9,529,457 9,217,282
Total liabilities and equity $ 17,470,382 $ 17,525,920 $ 16,387,398 $ 15,354,490 $ 14,427,691 $ 13,537,716
============ ------------ ------------ ------------ ------------ ------------
59
Silver Diner, Inc.
Five-Year Projected Condensed
Income Statement
Fiscal Period Ending Date 2001 2002 2003
---- ---- ----
Number of units, beginning 13 12 12
New units (1) - -
----------- ----------- -----------
Number of units, period end 12 12 12
Net sales $31,833,254 100.0% $31,802,858 100.0% $31,802,858 100.0%
Restaurant operating margin 6,506,304 20.4% 7,076,199 22.3% 6,837,614 21.5%
Occupancy 3,556,401 11.2% 3,361,936 10.6% 3,361,936 10.6%
Preopening 109,099 0.3% - 0.0% - 0.0%
Depreciation & amortization 1,253,410 3.9% 1,201,484 3.8% 1,222,410 3.8%
--------- --- ----------- --- ----------- ---
Restaurant operating income 1,587,394 5.0% 2,512,779 7.9% 2,253,268 7.1%
General and administrative 2,873,327 9.0% 2,684,023 8.4% 2,684,023 8.4%
--------- --- ----------- --- ----------- ---
Operating income (1,285,933) -4.0% (171,244) -0.5% (430,755) -1.4%
Interest expense, net 125,513 0.4% 135,534 0.4% 99,455 0.3%
Other 153,350 0.5% - 0.0% - 0.0%
Depreciation and amortization 334,653 1.1% 135,526 0.4% 113,846 0.4%
------- --- ----------- --- ----------- ---
Net income (loss) $(1,899,449) -6.0% $ (442,304) -1.4% $ (644,055) -2.0%
============ ---- ----------- ---- ----------- ---
Earnings per share $ (0.16) $ (0.04) $ (0.05)
=========== ----------- -----------
Weighted average shares 11,705,187 11,756,666 11,756,666
Operating cash flow $ (202,287) $ 894,706 $ 692,201
=========== ----------- -----------
Borrowing capacity $ (778,027) $ 3,441,176 $ 2,662,310
=========== ----------- -----------
Actual borrowing, period end $ 2,741,783 $ 3,057,317 $ 2,622,851
=========== ----------- -----------
Cash, period end $ 1,839,091 $ 2,732,704 $ 2,554,210
=========== ----------- -----------
Fiscal Period Ending Date 2004 2005 2006
---- ---- ----
Number of units, beginning 12 12 12
New units - - -
----------- ----------- -----------
Number of units, period end 12 12 12
Net sales $31,802,858 100.0% $31,802,858 100.0% $31,802,858 100.0%
Restaurant operating margin 6,837,614 21.5% 6,837,614 21.5% 6,837,614 21.5%
Occupancy 3,361,936 10.6% 3,361,936 10.6% 3,361,936 10.6%
Preopening - 0.0% - 0.0% - 0.0%
Depreciation & amortization 1,064,810 3.3% 984,612 3.1% 978,408 3.1%
--------- --- ------- --- ----------- ---
Restaurant operating income 2,410,868 7.6% 2,491,066 7.8% 2,497,270 7.9%
General and administrative 2,684,023 8.4% 2,684,023 8.4% 2,684,023 8.4%
--------- --- --------- --- ----------- ---
Operating income (273,155) -0.9% (192,957) 0.6% (186,753) -0.6%
Interest expense, net 79,096 0.2% 57,487 0.2% 35,499 0.1%
Other - 0.0% - 0.0% - 0.0%
Depreciation and amortization 102,858 0.3% 98,555 0.3% 89,924 0.3%
------- --- ------ --- ----------- ---
Net income (loss) $ (455,109) -1.4% $ (348,999) -1.1% $ (312,175) -1.0%
=========== ==== ----------- ---- ----------- ---
(Earnings per share) $ (0.04) $ (0.03) $ (0.03)
=========== ----------- -----------
Weighted average shares 11,756,666 11,756,666 11,756,666
Operating cash flow $ 712,559 $ 734,168 $ 756,157
=========== ----------- -----------
Borrowing capacity $ 2,740,613 $ 2,823,725 $ 2,908,294
=========== ----------- -----------
Actual borrowing, period end $ 2,105,051 $ 1,587,251 $ 1,069,451
=========== ----------- -----------
Cash, period end $ 2,262,494 $ 1,992,386 $ 1,744,266
=========== ----------- -----------
60
Silver Diner, Inc. Five-Year Projected Condensed Statement of Cash Flows
Fiscal Period 2001 2002 2003 2004 2005 2006
---- ---- ---- ---- ---- ----
Cash Flows From Operations:
Net income (loss) $ (1,899,449) $ (442,304) $ (644,055) $ (455,109) $ (348,999) $ (312,175)
Depreciation and amortization 1,588,063 1,167,668 1,083,167 1,068,332 1,083,167 1,068,332
Changes in other operating assets and
liabilities 509,429 30,448 (60,000) (60,000) (60,000) (60,000)
------------ ----------- ----------- ----------- ----------- -----------
Net cash provided by operations $ 198,043 $ 755,812 $ 379,112 $ 553,223 $ 674,168 $ 696,157
Cash Flows From Investing Activities:
Maturities of short-term investments $ - $ - $ - $ - $ - $ -
Purchases of property and equipment - new stores - - - - - -
Purchases of property and equipment - existing
stores (425,642) (347,555) (376,228) (426,476) (426,476) (426,476)
New unit cost in excess of projections - - - - - -
------------ ----------- ----------- ----------- ----------- -----------
Net cash used in investing activities $ (425,642) $ (347,555) $ (376,228) $ (426,476) $ (426,476) $ (426,476)
Cash Flows From Financing Activities
Long-term borrowings (payments) $ 1,482,200 $ 315,534 $ (434,467) $ (517,800) $ (517,800) $ (517,800)
Sale/(purchase) of common stock 39,259 - - - - -
Other - 480 - - - -
------------ ----------- ----------- ----------- ----------- -----------
Net cash provided by financing activities $ 1,521,459 $ 316,014 $ (434,467) $ (517,800) $ (517,800) $ (517,800)
Net Increase/Decrease in Cash $ 1,293,860 $ 893,613 $ (178,494) $ (291,717) $ (270,108) $ (248,120)
Cash and Marketable Securities, Beginning $ 545,231 $ 1,839,091 $ 2,732,704 $ 2,554,210 $ 2,262,494 $ 1,992,386
------------ ----------- ----------- ----------- ---------- -----------
Cash and Marketable Securities, Ending $ 1,839,091 $ 2,732,704 2,554,210 $ 2,262,494 $ 1,992,386 $ 1,744,266
============ ----------- ----------- ----------- ----------- -----------
61
Assumptions to Five-Year Projected Condensed Financial Statements
1. The projected condensed financial statements for the five years ending
December 31, 2006, were prepared by the management of the company and reflect
the views of the special committee and the board. The financial statement for
the year ended December 30, 2001, is based on the actual results of operations
for the period then ended. The audited financial statements of the company for
the three years ended December 30, 2001, and notes thereto, are contained in the
company's annual report on Form 10-K/A which accompanies this proxy statement.
Also accompanying this proxy statement is the company's quarterly report on Form
10-Q which contains the unaudited financial statements of the company for its
first quarter ended April 21, 2002.
2. The projected condensed financial statements for the year ending December
29, 2002, is based on the results of the company's operations for the first
quarter ended April 21, 2002, and projected operations for the remaining nine
months of the current fiscal year, which is based on historical trends in sales
and on margins. The period ended April 21, 2002 is not necessarily indicative of
operations for the full fiscal year 2002 for several reasons. First, the company
experienced significant increases in management salaries and workman's
compensation, and these expenses are now higher than reflected in the results of
operations for the first quarter. 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.
3. Projected net sales for the years 2003 to 2006 are projected to remain the
same and have not been adjusted to reflect price increases or inflation.
4. Labor costs and 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, it was 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. It
was also noted that as menu prices increase, the number of customers can
sometimes decrease as customers turn to other alternative eating establishments.
5. Restaurant operating margins for fiscal year 2002 are estimated to be
approximately 22.3%, which is 1.2% higher than the average results for fiscal
years 1997 through 2001. The projections assume that this margin will not
continue in subsequent years, but that it is not reasonable to assume that
restaurant operating margins will be closer to the company's historical
experience. Restaurant operating margin for fiscal years 2003 to 2006 is assumed
to be 21.5%, which reflects an improvement of 0.4% over the average results for
fiscal years 1997 through 2001.
6. Occupancy costs are assumed to remain constant. The majority of the
company's locations use a constant rent expense throughout the year. Annual
fixed or CPI invoices in our base rent are not reflected in the projected
consolidated financial projections, since these projections also do not reflect
inflationary increases, which tend to offset each other.
7. Although the company may (but has no plans at this time) open restaurants in
2004 and beyond, the company has no plans at this time to open any new
restaurants and therefore the projections do not reflect pre-opening costs or
capital expenditure related to such development.
8. Depreciation and amortization are based on actual results for the first
quarter of fiscal year 2002 and projections for the balance of the fiscal year.
Depreciation and amortization for each of the succeeding years are based on the
current asset base and estimated asset expenditures over the next four years.
9. General and administrative expenses reflect a reduction from general
administrative expenses from prior fiscal years of approximately $200,000 and
reflect management's feeling that improved efficiency and cost controls will
result in reduced expenses. General administrative expenses for the remaining
four years are projected to be approximately the same. Inflationary or other
economic conditions have not been considered. General administrative expenses do
not reflect any costs associated with the reverse stock split or any savings
that may result if the reverse stock split is implemented.
10. Interest expense assumes payment on the company's outstanding debt pursuant
to the terms of the loan agreement.
11. Earnings per share is based on the weighted average number of shares
outstanding at December 30, 2001, and does not reflect any reduction for the
reverse stock split.
62
12. Operating cash flow represents net income (loss) plus non-cash expenses,
primarily depreciation and amortization.
13. Borrowing capacity reflects the notes payable outstanding at April 21, 2002,
adjusted to reflect amortization of the loan pursuant to existing loan repayment
schedules.
63
SILVER DINER, INC.
FOR USE AT THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON SEPTEMBER 27, 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 September 27, 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.
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