-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EtPw4uxPGHrHo9gBqVLwusoS94+MaV/dpy5GaMGeFOeyhV6JNeqPoLwwexOv4vo1 oSh/ifAliZwMT8hbgbJ3uQ== 0000928385-99-001148.txt : 19990406 0000928385-99-001148.hdr.sgml : 19990406 ACCESSION NUMBER: 0000928385-99-001148 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19990103 FILED AS OF DATE: 19990405 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SILVER DINER INC /DE/ CENTRAL INDEX KEY: 0000923134 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 043234411 STATE OF INCORPORATION: DE FISCAL YEAR END: 1229 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-24982 FILM NUMBER: 99587242 BUSINESS ADDRESS: STREET 1: 11806 ROCKVILLE PIKE CITY: ROCKVILLE STATE: MD ZIP: 20852 BUSINESS PHONE: 6176304400 MAIL ADDRESS: STREET 1: 11806 ROCKVILLE PIKE CITY: ROCKVILLE STATE: MD ZIP: 20852 FORMER COMPANY: FORMER CONFORMED NAME: SILVER DINER DEVELOPMENT INC /MD/ DATE OF NAME CHANGE: 19960509 FORMER COMPANY: FORMER CONFORMED NAME: FOOD TRENDS ACQUISITION CORP DATE OF NAME CHANGE: 19941114 10-K 1 FORM 10-K U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 3, 1999 Commission file number 0-24982 SILVER DINER, INC. (Exact name of the registrant as specified in its charter) DELAWARE (State or other jurisdiction of incorporation or organization) 04-3234411 (I.R.S. employer identification no.) 11806 ROCKVILLE PIKE ROCKVILLE, MARYLAND 20852 301-770-0333 (Address and telephone number of the registrant's principal executive offices) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- None None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.00074 Par Value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] At March 15, 1999, the registrant had 11,809,146 shares of common stock (the "Common Stock") outstanding, and the aggregate market value of the Common Stock held by non-affiliates of the registrant was approximately $8,669,061. The aggregate market value was determined based on the closing price of the Common Stock on the NASDAQ Stock Market(SM) on March 15, 1999. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Proxy Statement for its Annual Meeting of Shareholders in 1999 are incorporated by reference into Part III. PART I ITEM 1. BUSINESS. GENERAL Silver Diner, Inc. (the "Company" or "Silver Diner") was incorporated in Delaware in April 1994 under the name Food Trends Acquisition Corporation ("FTAC"). In March 1996, a subsidiary of the Company merged with Silver Diner Development, Inc., a Virginia corporation ("SDDI"). Silver Diner Limited Partnership ("SDLP"), of which the Company was the general partner, operated the first three Silver Diner restaurants. In June 1996, the Company acquired all of the limited partner interests in SDLP for a purchase price of $2.472 million and 84,000 warrants to purchase shares of the Common Stock at $8.00 per share and, subsequently, liquidated SDLP into SDDI. The warrants were exercisable at any time on or before the earlier of January 31, 1998 or 30 days following the first public offering of Common Stock on or after June 30, 1997. Unless the context otherwise requires, references to the Company or Silver Diner also include FTAC, SDDI and their wholly owned subsidiaries. The Company's executive offices are located at 11806 Rockville Pike, Rockville, Maryland 20852 and its telephone number is (301) 770-0333. The Company's Common Stock trades on The Nasdaq Stock Market/SM/ under the symbol "SLVR." BUSINESS The Company currently operates 11 Silver Diner restaurants, 10 in the Washington/Baltimore Metropolitan Area and one in Cherry Hill, New Jersey, serving breakfast, lunch, dinner and late night meals. The Company targets the growing number of customers tired of traditional fast food whose need for a quick, high-quality, reasonably priced meal is not being adequately served by existing family or casual theme restaurants; the Company capitalizes on the timeless diner theme to uniquely address this need. By attracting a broad range of customer segments, and maintaining extended operating hours, a diverse menu and convenient locations, the Company is able to compete effectively in the fast food, family and casual dining segments of the restaurant industry, contributing to the significant sales volumes of its units. The Company also offers Silver Diner To Go, which features a range of carry out/delivery options targeting the growing "home meal replacement" market, as well as specialty coffee drinks and expanded bakery selections. The restaurants typically are open for business from 7:00 a.m. to midnight on weekdays and from 7:00 a.m. to 3:00 a.m. on weekends. The Silver Diner menu strategy is to serve generous portions of made-from-scratch cooking at prices competitive with traditional family dining restaurants. The average check per customer is approximately $7.50 and the average dining time is approximately 40 minutes. For the last fiscal year the Silver Diner restaurants had sales ranging from $2.0 million to $4.1 million with average unit sales of $2.6 million on an average of 222 seats. Management attributes the significant sales volumes of its units to its ability to attract a broad range of customer segments, extended operating hours, diverse menu and convenient locations. Management believes it has established a strong company mission and culture by emphasizing a sense of ownership and entrepreneurship in its employees and by providing frequent training, recognition and development of its management. Diners have been indigenous to the United States for more than 100 years. Since opening the first Silver Diner restaurant in 1989, the Company has capitalized on the diner restaurant theme to uniquely address the customers' need of where to go for quick, high quality meals at reasonable prices. Key elements that differentiate Silver Diner restaurants from other restaurants include: . BROAD AND DIVERSE MENU COMBINING "TRADITIONAL DINER" ITEMS WITH CONTEMPORARY REGIONAL SPECIALTIES - The menu includes a broad range of made- from-scratch meal choices featuring traditional home-style diner fare and all- day breakfast, as well as more contemporary "heart healthy" selections and regional specialty items. Each Silver Diner restaurant bakes all of its cakes on the premises and features a carryout section offering its full menu. 1 . CLASSIC, READILY RECOGNIZABLE DINER EXTERIOR, IN COMBINATION WITH A COMFORTABLE DINER INTERIOR DECOR AND ATMOSPHERE - The visually striking exterior of the Silver Diner restaurants is both familiar and distinctive, combining polished stainless steel, glass block and neon lighting traditional to old-style diners with more contemporary tile, accent colors and a 25-foot clock tower. Similarly, the Silver Diner restaurants' interior combines traditional diner motifs such as a counter area with seating, booths and tabletop old style juke boxes with a contemporary open kitchen and ambient dining room lighting. The result of these contrasting elements produces a high energy, fun, nostalgic atmosphere which is also comfortable. . EXTENDED OPERATING HOURS WITH FOUR MEAL PERIODS - Silver Diner's breadth of entree selection, its beer and wine service and night time ambiance allow it to generate close to 50% of its business at dinner and late night, the most profitable meal periods. Additionally, the Silver Diner's extended hours and diverse menu affords it two extra meal periods - breakfast and late night. Together, these four meal periods provide the Silver Diner the opportunity to generate significantly greater customer counts per facility than traditional two- or three-meal period full-service restaurants. . RAPID MEAL SERVICE RESULTING IN A TABLE TURNOVER RATE SIGNIFICANTLY ABOVE INDUSTRY AVERAGES FOR FULL SERVICE RESTAURANTS - Silver Diner's menu, food preparation techniques and kitchen engineering account for its rapid meal service. The Silver Diner's physical plant and kitchen layout allow it to serve the majority of meals in approximately 10 minutes, providing quick turnover and further improving productivity. The Silver Diner employs a food preparation and storage process which incorporates a type of "sous vide" production technique enabling it to efficiently make a wide range of scratch-cooking recipes with reduced labor hours, kitchen preparation and raw ingredient storage area. As a result, Silver Diner restaurants are able to achieve high quality, consistency and excellent productivity despite the broad menu. . GENEROUS PORTIONS AND MODERATE PRICES WITH ENTREES FROM $5.99 AND UP - Management believes the Silver Diner delivers outstanding value by providing generous portions of fresh, high quality food at affordable prices. Appetizers range from $3.99 to $6.99, entrees range from $5.99 to $12.99, and full meals are available at moderate prices including a 10% senior citizen discount and "blue plate specials" at $5.99 to $7.99. 2 RESTAURANTS. The following sets forth certain information regarding the Company's existing restaurants. APPROXIMATE APPROXIMATE NUMBER OPERATING LOCATIONS DATE OPENED SQUARE FEET OF SEATS - ------------------- ----------- ----------- -------- Rockville, Maryland February 1989 5,500 256 Laurel, Maryland September 1990 4,680 153 Potomac Mills, Virginia October 1991 4,675 164 Towson, Maryland September 1992 5,250 194 Fair Oaks, Virginia April 1995 5,675 240 Tysons Corner, Virginia December 1995 5,675 240 Clarendon, Virginia December 1996 5,675 240 Merrifield, Virginia February 1997 5,675 240 Springfield, Virginia April 1997 5,675 240 Reston, Virginia June 1997 5,675 240 Cherry Hill, New Jersey November 1997 5,675 240 The Company leases its corporate offices at 11806 Rockville Pike, Rockville, Maryland, which is the location of the original Silver Diner restaurant, as well as the majority of its operating units. The Company owns the Reston, Virginia location. Management believes the greater Washington/Baltimore area can support twelve to fifteen Silver Diner restaurants and it will continue to penetrate this market area while avoiding market overlap in order to take advantage of increased name recognition and economies of scale in advertising, management and overhead. Management believes that there are numerous other major metropolitan areas throughout the United States that can support a similar concentration of Silver Diner restaurants and intends to pursue expansion in these markets in a manner similar to Washington/Baltimore. The Company opened its first restaurant in a new geographical market, specifically the Philadelphia-Southern New Jersey area in November 1997. The Company is anticipating opening the first of its latest generation of prototype restaurants in late 1999 and expects that the Silver Diner restaurants opened in the next two years will continue to be company-owned; however, expansion into any markets outside of the Mid-Atlantic region may include area joint-ventures or franchises. There is no assurance that the Company's expansion plans will be realized or that future Silver Diner restaurants will be favorably received. MARKETING. Management focuses on providing its customers with superior food quality, service and perceived value in a distinctive atmosphere and has relied primarily on its eye-catching appearance, customer satisfaction and word of mouth to obtain repeat customers as well as to attract new clientele. Since 1998, the Company has focused its marketing efforts on direct marketing, which allows the Company to target customers and create a relationship in the neighborhoods surrounding each restaurant. The Company's penetration in its core Washington Metro market has generated economies of scale and shown significant results as measured by increased comparable store sales. 3 MENU. The Silver Diner menu includes a broad range of dining alternatives featuring traditional diner fare, including soups, sandwiches, hamburgers, "blue plate specials" as well as more contemporary "heart healthy" items, salads, grilled chicken, seafood, pasta and regional specialties. Silver Diner's full breakfast menu, including omelets, pancakes and waffles, is available throughout the day and night. The menu includes numerous entrees that rotate on a seasonal basis, as well as signature homemade pies and cakes baked on premises. High- quality ingredients are used for all menu items, including Silver Diner's own unique gravies, sauces and dressings. Silver Diner's recipes are prepared for the way management believes people eat today with an emphasis on fresh ingredients, low salt and cholesterol-free oil. In addition, Silver Diner's "heart healthy" menu features A DOZEN low-fat popular items formulated to exceed USDA "heart healthy" dietary guidelines. Silver Diner restaurants also serve beer and wine in all locations except Cherry Hill, New Jersey, and non-alcoholic specialty beverages. The Company is currently test marketing frozen alcoholic specialty beverages. PURCHASING. The Company purchases items on a centralized basis and negotiates directly with suppliers for food and beverage products to ensure consistent quality and freshness of products as well as to obtain competitive prices. Food and supplies are shipped directly to the Silver Diner restaurants. All shipments are inspected for quality and freshness by a kitchen manager or supervisor upon receipt. The Company does not maintain a central product warehouse or commissary. The Company's food and supplies are available from a wide number of suppliers. Therefore, Silver Diner is not dependent on any particular source of supplies. CUSTOMER SATISFACTION/QUALITY CONTROL. The Company has a variety of programs to measure its customer satisfaction, including comment cards, a mystery shopper program, exit interviews, and frequent visits by supervisory management. Through the use of these techniques, senior management receives valuable feedback from customers and through prompt action, demonstrates a continued interest in meeting customer needs and desires. In addition, Silver Diner staff perform a variety of quality checks and are authorized to not serve any products which do not meet Silver Diner's quality standards. COMPETITION The restaurant industry is intensely competitive with respect to price, service, location and food quality. With respect to quality and cost of food, size of food portions, decor and quality service, Silver Diner restaurants compete with fast food and family style restaurants with ready to cook food and take-out. Silver Diner restaurants are located in areas of high concentration of such restaurants. There are many well-established food service competitors with substantially greater financial and other resources than the Company and with substantially longer operating histories. These competitors will also compete with the Company in obtaining premium locations for restaurants (e.g., shopping malls and strip shopping centers) and in attracting and retaining employees. In addition, one or more national food service chains or other companies could introduce a multi-unit chain of food service establishments that use one or more food service concepts which resemble one or more of the food service concepts used by the Company. The restaurant business is also affected by changes in consumer tastes and eating patterns of the general public; national, regional or local economic conditions; demographic trends; traffic patterns; as well as the type, number and location of competitors. In addition, factors such as inflation, increased food, labor and benefit costs and a lack of experienced management and hourly employees may adversely affect the restaurant industry in general and the Company in particular. The Company believes that its distinctive diner concept, attractive price- value relationship and quality of food and service enable it to differentiate itself from its competitors. While the Company believes that its restaurants are distinctive in design and operating concept, it is aware of restaurants that operate with similar concepts. The Company believes that its ability to compete effectively will continue to depend upon its ability to offer high-quality, moderately priced food in a full-service distinctive dining environment. 4 EMPLOYEES As of January 3, 1999, the Company had 775 employees, 12 of whom are corporate personnel, 55 of whom are restaurant management personnel (including 8 managers-in-training), and the remainder of whom are hourly restaurant personnel. None of the Company's employees are covered by a collective bargaining agreement. The Company considers its employee relations to be good. The management staff of a typical Silver Diner restaurant consists of one Operating Partner (general manager) and four assistant managers, including a kitchen manager and a service manager. Each Silver Diner restaurant also employs approximately 65 associates on a part-time and full-time basis. RESTAURANT PERSONNEL. The Company has established a strong company mission focusing on culture and values and emphasizing a sense of ownership and entrepreneurship that empowers its people to achieve professional and personal excellence. Management believes that its people are its most valuable asset and has a variety of programs to provide training, recognition and development of its management and associates to their full potential. Non-management employees' performance is tracked daily through productivity measurements that are established as an integral part of a system of frequent incentive awards. RESTAURANT OPERATING PARTNER PROGRAM. To attract and retain talented management, the Company's compensation program is very competitive. Management believes that a key component for long-term success is for each restaurant to be led by a general manager who lives in the community and has a long-term commitment to that restaurant's success. Accordingly, management has established a Restaurant Operating Partner Program. Under the Program, the Operating Partner receives an annual salary and a periodic, profit based, cash bonus award which equals a percentage of the restaurant's operating income. In addition, each general manager is required to purchase 8,000 shares of Common Stock at market value and can potentially receive an annual award up to $10,000 of Common Stock, dependent upon achievement of performance criteria as established and evaluated by the Board. This Program is the successor to the Restaurant Owner Operator Plan and contains similar plan elements. Also, all assistant managers received an annual grant of 500 Common Stock options with a market exercise price at the grant date. The stock awards under these plans are awarded at the discretion of the Company's Board of Directors. SELECTION, TRAINING AND SUPERVISION. Management has developed specific profiles and protocols used to interview and select its management and associate staff. Management personnel are required to participate in an 8- to 12-week training program emphasizing the Company's operating procedures as well as management development programs. Each associate also participates in a standardized training program ranging from two to five days (depending on position) which utilizes testing results to ensure all associates achieve a specified standard of performance. GOVERNMENT REGULATIONS The Company is subject to numerous federal, state and local laws affecting health, sanitation and safety standards as well as to state and local licensing regulation of the sale of alcoholic beverages. The Company has appropriate licenses from regulatory authorities allowing it to sell beer and wine (except in Cherry Hill, New Jersey where the Company does not sell beer or wine), and has food service licenses from local health authorities. The Company's licenses to sell alcoholic beverages must be renewed annually and may be suspended or revoked at any time for cause, including violation by the Company or its employees of any law or regulation pertaining to alcoholic beverage control, such as those regulating the minimum age of patrons or employees, advertising, wholesale purchasing and inventory control. The Company's failure to obtain or retain liquor or food service licenses would have a material adverse effect on its operation. To reduce this risk, each restaurant is operated with procedures in accordance with complete compliance with applicable code and regulations. There can be no assurance, however, that such approvals and licenses for new restaurants will be obtained and, if obtained, will be renewed or not revoked. 5 The Company is subject in certain states to "dram-shop" statutes, which generally provide a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person. The Company carries liquor liability coverage as part of its existing comprehensive general liability insurance. The Company has never been named as a defendant in a lawsuit involving "dram-shop" statutes. The development and construction of additional restaurants will be subject to compliance with applicable zoning, land use and environmental regulations. The Company's operations are also subject to federal and state minimum wage laws governing such matters as working conditions, overtime and tip credits and other employee matters. Management believes it is in compliance with all current applicable regulations relating to restaurant accommodations for the disabled including the Federal Americans With Disabilities Act of 1992. TRADEMARKS Management believes that its trademarks and servicemarks are valuable to the marketing of its restaurants and that it has substantial rights in such trademarks and servicemarks for the Silver Diner name, based upon the Company's actual usage and constructive usage derived from its U.S. trademark. The Company intends to aggressively protect its marks from infringement and competing claims. However, there can be no assurance that the Company's marks, even as, and if, registered do not or will not violate the proprietary rights of others, that the marks will be upheld if challenged, or that the Company will not be prevented from using the marks, any of which could have a material adverse effect on the Company. Management's policy is to pursue registration of its marks whenever possible and to oppose vigorously any infringements of its marks, the success of which cannot be assured. EXECUTIVE OFFICERS OF THE COMPANY The name, age, period of service and position held of each of the executive officers of the Company are as follows: Name Age Served Since/(1)/ Position(s) Held - ------------------------------------------------------------------------------- Robert T. Giaimo 47 1987 Chairman of the Board, President and Chief Executive Officer Ype Hengst 48 1987 Director, Vice President, Executive Chef and Corporate Secretary Patrick Meskell 45 1996 Senior Vice President, Human Resources Craig Kendall 47 1998 Vice President, Finance Timothy Cusick 33 1996 Area Director of Operations /(1)/ Includes service with SDDI. All of the officers have had the principal occupation indicated under "Position(s) Held" for the previous five years except as follows: Mr. Meskell was an independent consultant to financial institutions, specializing in the areas of risk management systems 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; and Mr. Kendall who joined the Silver Diner management team in November of 1998. Previously, from 1988 to 1998, Mr. Kendall was corporate controller for Team Washington, Inc., one of the largest Domino Pizza franchises, which operates in the Washington, D.C. metropolitan, area with annual sales exceeding $40 million. Mr. Cusick was a general manager for the Company from 1994 to 1996. 6 ITEM 2. PROPERTY. Information concerning the registrant's property is set forth under "Restaurants" in Item 1 of Part I. ITEM 3. LEGAL PROCEEDINGS. On May 20, 1996, the Company was named as a defendant in a proceeding instituted in the Circuit Court for Prince George's County, Maryland captioned Laura Reese v. Roger Richardson and Silver Diner Development, Inc. The plaintiff alleges that she was sexually assaulted by Roger Richardson, who was the general manager of the Laurel Silver Diner restaurant. Mr. Richardson was terminated promptly following the occurrence of the event in November 1994. Plaintiff sought recovery of $500,000 for each count. It was not clear if the counts were in the alternative or cumulative. The Company's insurance carrier was defending the claim with reservation of rights. The Company is insured up to $1,000,000 with respect to the above mentioned claims. In September 1998 the court granted summary judgement in favor of the Company as to all claims brought against them in this case. No final judgement can be entered at this time due to a Suggestion of Bankruptcy filed by Mr. Richardson, the co-defendant in the case, prior to the decision of the court to grant summary judgement on behalf of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS. Not Applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. MARKET INFORMATION. Since March 27, 1996, the Common Stock has been listed on The NASDAQ Stock Market/SM/ under the symbol SLVR. Before that date, the Common Stock was quoted on the OTC Bulletin Board under the symbol FDTR. The following table sets forth the high and low closing prices for the Common Stock for the periods indicated: QUARTER HIGH LOW ------- ---- --- 1997 First $4-7/8 $3-1/4 Second $3-19/32 $2-7/8 Third $3-1/8 $2 Fourth $2-5/16 $1 1998 First $2-9/16 $1-1/8 Second $1-15/32 $1 Third $1-7/8 $7/8 Fourth $1-1/16 $5/8 DIVIDENDS. Since the Company's inception, no dividends have been paid on the Common Stock. HOLDERS. As of January 3, 1999, there were approximately 489 record holders of the Common Stock. 7 ITEM 6. SELECTED FINANCIAL DATA.
Fiscal Years Ended/(I)/ ----------------------------------------------------------------------------------------- January 3, December 28, December 29, December 31, January 1, 1999 1997 1996 1995 1995 STATEMENT OF OPERATIONS DATA: Net sales $ 28,561,422 $ 24,259,156 $ 16,550,468 $ 13,350,255 $ 10,896,682 Restaurant costs and expenses: Cost of sales 7,920,808 6,929,221 4,526,286 3,655,254 3,036,995 Labor 9,449,685 7,999,812 5,464,896 4,452,134 3,525,472 Operating 5,211,704 4,037,198 2,536,609 2,015,668 1,642,039 Occupancy 2,777,932 2,534,210 1,931,866 1,588,527 1,293,842 Depreciation and amortization 1,648,134 1,499,125 882,843 715,426 382,082 -------------- ------------ ------------ ------------ ------------ Total restaurant costs and expenses 27,008,263 22,999,566 15,342,500 12,427,009 9,880,430 -------------- ------------ ------------ ------------ ------------ Restaurant operating income 1,553,159 1,259,590 1,207,968 923,246 1,016,252 General and administrative expenses 2,921,299 3,065,436 2,705,940 2,077,735 1,877,774 Depreciation and amortization 267,171 263,484 183,928 97,351 61,042 Write off of abandoned site costs 32,455 172,618 - - 98,637 -------------- ------------ ------------ ------------ ------------ Operating loss (1,667,766) (2,241,948) (1,681,900) (1,251,840) (1,021,201) -------------- ------------ ------------ ------------ ------------ Interest expense 40,639 10,702 180,293 334,086 254,810 Investment income, net (151,967) (294,231) (432,721) (83,021) 3,599 -------------- ------------ ------------ ------------ ------------ Net loss before minority interest and cumulative effect of a change in accounting principle (1,556,438) (1,958,419) (1,429,472) (1,502,905) (1,279,610) Minority interest in net loss of SDLP - - - 180,175 332,977 -------------- ------------ ------------ ------------ ------------ Net loss before cumulative effect of a change in accounting principle (1,556,438) (1,958,419) (1,429,472) (1,322,730) (946,633) Cumulative effect of a change in accounting principle (326,868) - - - - -------------- ------------ ------------ ------------ ------------ NET LOSS $ (1,883,306) $ (1,958,419) $ (1,429,472) $ (1,322,730) $ (946,633) ============== ============ ============ ============ ============ Basic and diluted net loss per common share before cumulative effect of a change in accounting principle $ (0.13) $ (0.17) $ (0.15) $ (0.26) $ (0.19) Cumulative effect of a change in accounting principle (0.03) - - - - -------------- ------------ ------------ ------------ ------------ Net loss per common share $ (0.16) $ (0.17) $ (0.15) $ (0.26) $ (0.19) ============== ============ ============ ============ ============ Weighted average common shares outstanding 11,591,822 11,609,400 9,545,681 5,013,319 4,982,414 ============== ============ ============ ============ ============
8
As of/(I)/ --------------------------------------------------------------------------------------------- January 3, December 28, December 29, December 31, January 1, 1995 1999 1997 1996 1995 BALANCE SHEET DATA: Working capital (deficiency) $ 625,043 $ 1,332,141 $ 6,669,761 $ (4,961,352) $ (560,972) Total assets 21,638,497 23,646,765 25,864,375 10,794,469 7,078,679 Current liabilities 2,227,222 2,207,891 3,174,262 6,975,363 2,580,329 Long-term liabilities 1,173,280 1,317,667 749,396 2,584,832 2,205,695 Stockholders' equity 18,237,995 20,121,207 21,940,717 1,234,274 2,112,480
/(I)/ Selected financial data as of and for the years ended January 3, 1999, December 28, 1997 and December 29, 1996 were obtained from the Company's audited financial statements. Selected financial data as of and for the years ended December 31, 1995 and January 1, 1995 were obtained from the Company's financial statements audited by another accounting firm whose opinion was unqualified. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. FORWARD LOOKING DISCLOSURE Certain information included herein contains statements that are forward-looking, such as statements relating to plans for future expansion and other business development activities as well as operating costs, capital spending, financial sources and the effects of competition. 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. These changes and variations which could significantly affect future results include, but are not limited to, those relating to development and construction activities, including delays in opening new diners, 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. GENERAL The following discussion includes comments and data relating to the Company's financial condition and results of operations for the three-year period ended January 3, 1999. As of this date, the Company operates 11 diners, 10 in the Washington/Baltimore metropolitan area and one in Cherry Hill, New Jersey. Currently, there are no additional Silver Diners under construction. The Company is pursuing additional locations in the Philadelphia/Southern New Jersey market and throughout the Mid-Atlantic region for restaurant openings commencing in late 1999. Longer term, the Company plans to expand the Silver Diner chain nationwide through additional openings of Company-owned restaurants and possibly through the development of franchise or joint venture relationships. The following table reflects the growth in number of restaurants over the three-year period. RESTAURANTS 1996 1997 1998 ----------- ---- ---- ---- In operation, beginning of year 6 7 11 Newly opened 1 4 0 ---- ---- ---- In operation, end of year 7 11 11 ==== ==== ==== Under construction, end of year 3 0 0 ==== ==== ==== 9 On March 27, 1996, FTAC Transition Corporation, a wholly owned subsidiary of FTAC, merged with and into Silver Diner Development, Inc., a Virginia Corporation, with SDDI surviving as a wholly owned subsidiary of FTAC. In connection with the Merger, FTAC changed its name to Silver Diner Development, Inc., then subsequently to Silver Diner, Inc. Pursuant to the merger agreement, each outstanding share of SDDI common stock converted into 33.339 shares of the common stock of FTAC. Upon consummation of the Merger, the stockholders of SDDI became the owners in the aggregate of approximately 57% of the outstanding common stock of FTAC and the directors and officers of SDDI became directors and officers of FTAC. For accounting and financial reporting purposes, the Merger was treated as a recapitalization of SDDI and as an issuance of SDDI common shares for monetary assets and liabilities. The Company has reflected in its consolidated financial statements the assets, liabilities and equity of SDDI and its subsidiary Silver Diner Limited Partnership at their historical book values. Accordingly, the consolidated results of operations and financial position of the Company for periods and dates prior to the Merger are the consolidated historical results of operations and financial position of SDDI and SDLP for such periods and dates. All historical shares of common stock and per share amounts for periods prior to the Merger have been retroactively adjusted to reflect the FTAC shares issued to the SDDI shareholders at the time of the Merger. In connection with the Merger, on April 2, 1996, notes payable to related parties totaling $1,236,811 were repaid by the offset of amounts due from affiliates of $355,023 and the net outstanding balance was paid in full by the Company. On April 1, 1996, the Company terminated its capital lease obligation with a related party by purchasing the leased equipment at the remaining lease obligation balance of approximately $148,000. In addition, the Company repaid certain bank notes of SDDI in the approximate amount of $904,000 on April 4, 1996. On June 13, 1996, the Company completed its purchase of the minority interest in SDLP from the original investors for $2,472,000 in cash and 84,000 warrants to purchase common stock exercisable at $8.00 per share until the earlier of 30 days following a public offering or January 31, 1998. The offer was accepted by 100% of the limited partners. Because SDLP's financial statements are included in the consolidated financial statements of the Company, acquisition of the minority interest will not result in any change in the Company's future reported net sales, restaurant costs and expenses or restaurant operating income. The acquisition has been accounted for under the purchase method and the entire cost of the transaction, totaling $2.8 million, has been recorded as goodwill and is being amortized on a straight-line basis over 15 years. On July 11, 1996, the Company completed a $8,250,000 private placement of common stock through the sale of 1.5 million shares at $5.50 per share. Of the $7.6 million net proceeds of the sale, $2.5 million was used to replace the funds used for the acquisition of the minority interests in SDLP, approximately $400,000 was used to repay the bank debt of SDLP and the remainder was available to fund expansion. On August 7, 1996, the Company registered the shares with the Securities and Exchange Commission pursuant to a Form S-3 Registration Statement filed under the Securities and Exchange Act of 1933, as amended. Effective January 1, 1994, the Company adopted a 52 or 53-week fiscal year that ends on the Sunday nearest December 31. Fiscal quarters consist of accounting periods of 16, 12, 12 and 12 or 13 weeks, respectively. Fiscal years 1998, 1997 and 1996 were comprised of 53, 52 and 52 weeks, respectively and ended on January 3, 1999, December 28, 1997 and December 29, 1996, respectively. 10 RESULTS OF OPERATIONS The following table sets forth the percentage relationship to net sales of items included in the consolidated statements of operations for the periods indicated:
Fiscal Years Ended --------------------------------------------- January 3, December 28, December 29, 1999 1997 1996 ---------- ------------ ------------ Net sales 100.0% 100.0% 100.0% Restaurant costs and expenses: Cost of sales 27.7% 28.6% 27.4% Labor 33.1% 33.0% 33.0% Operating 18.3% 16.6% 15.3% ---------- ------------ ----------- Restaurant operating margin 20.9% 21.8% 24.3% Occupancy 9.7% 10.4% 11.7% Depreciation and amortization 5.8% 6.2% 5.3% ---------- ------------ ----------- Restaurant operating income 5.4% 5.2% 7.3% General and administrative expenses 10.2% 12.6% 16.3% Depreciation and amortization 0.9% 1.1% 1.1% Write off of abandoned site costs 0.1% 0.7% 0.0% ---------- ------------ ----------- Operating loss (5.8%) (9.2%) (10.1%) Interest expense 0.0% 0.0% 1.1% Investment income, net (0.5%) (1.1%) (2.6%) ---------- ------------ ----------- Net loss before cumulative effect of a change in accounting principle (5.3%) (8.1%) (8.6%) Cumulative effect of a change in accounting principle (1.2%) - - ---------- ------------ ----------- Net loss (6.5%) (8.1%) (8.6%) ========== ============ ===========
YEAR ENDED JANUARY 3, 1999 COMPARED TO THE YEAR ENDED DECEMBER 28, 1997 Net sales for the fiscal year ended January 3, 1999 ("Fiscal 1998") of $28,561,422 increased $4.3 million compared to the fiscal year ended December 28, 1997. Silver Diners opened during Fiscal 1997 in Northern Virginia and Cherry Hill, New Jersey contributed significantly to the incremental sales. Additionally, Fiscal 1998 included 53 weeks, adding approximately $591,000 to net sales. 11 Comparable Company sales (sales for Silver Diner restaurants open throughout both periods being compared, excluding the initial six months of operations during which sales are typically higher than normal) increased 3.6% (1.5% exclusive of the 53rd week sales). Same store customer counts were up 1.4%, while average guest check increased 2.0%. The Company believes the increase in same store sales was generated through continued focus and improvement in operational excellence as measured by exit interviews with customers, which have improved by approximately 50% from year-end 1997 to year- end 1998. The vehicle to achieve this was the development, implementation and continued focus on the Company's 110% guarantee program. The 110% guarantee initiative provides for a 10% discount on the customer's current meal and a coupon for a free entree if not completely satisfied with the dining experience. Additionally, a direct mail campaign increased customer traffic. Average unit sales, measured on an effective restaurants open basis, decreased 3.9% from $2,651,274 in fiscal 1997 to $2,547,852 in Fiscal 1998; primarily as the result of the "honeymoon sales period" of four new unit openings throughout Fiscal 1997 and increased penetration of the Northern Virginia market reducing the trade area of existing diners. Cost of Sales, consisting primarily of food and beverage costs, decreased from 28.6% of net sales in Fiscal 1997 to 27.7% of net sales in Fiscal 1998 due primarily to operational improvements, purchasing efficiencies on high cost, high turnover items and a significant menu re-engineering, that included recipe reformulation as well as basic menu redesign and layout. The maturation of new units also contributed favorably to improved cost of sales performance. Labor, which consists of restaurant management and hourly employee wages and bonuses, payroll taxes, workers' compensation insurance, group health insurance and other benefits increased 0.1% to 33.1% of net sales for Fiscal 1998, resulting from a decrease in average unit volume. An analysis of this dollar cost element indicates an overall per unit dollar expenditure decrease in effective unit direct labor of 3.6%, driven by a 5.6% decrease in hourly wages, a 26.2% reduction in training labor and partially offset by modest increases in unit management compensation and escalating benefit costs. Operating expenses, which consists of all restaurant operating costs other than cost of sales, labor, occupancy and depreciation, including supplies, utilities repairs and maintenance and advertising increased 1.6% to 18.3% of net sales for Fiscal 1998, compared to 16.6% for Fiscal 1997. All but .2% of the increase was attributable to the higher marketing costs associated with the 110% guarantee program and the related direct mail campaign. Fiscal 1998 expenditures for these initiatives totaled $410,000. The remainder of the margin variance resulted from increased supply and maintenance costs reflecting management's commitment under the 110% guarantee to ensure a quality dining experience to its customers. Occupancy, which is composed primarily of rent, property taxes and property insurance, increased $243,722 for Fiscal 1998 compared to Fiscal 1997, principally due to a full year of expense recognition on units opened in Fiscal 1997. As a percentage of net sales occupancy expenses decreased 0.7% in Fiscal 1998 to 9.7% compared to 10.4% in Fiscal 1997. Additionally, the Company owns the Reston, Virginia site and consequently does not absorb any rent expense on this location. Restaurant depreciation and amortization increased $149,009 to $1,648,134 for Fiscal 1998. The increase was the result of depreciation associated with the new unit openings throughout Fiscal 1997 totaling $112,000, plus $372,734 in depreciation and amortization incurred in connection with an evaluation of unit operational processes, menu engineering, and a comprehensive unit equipment assessment resulting in the Company writing off equipment in the fourth quarter of 1998. This increase in restaurant depreciation and amortization was offset by a $326,886 reduction for the expensing of all preopening costs capitalized as of December 28, 1997 and recording of a cumulative effect of a change in accounting principle in the first quarter of 1998. During the First Quarter of 1998, the company elected early adoption of SOP No. 98-5, "Reporting on the Costs of Start-Up Activities." SOP No. 98-5 requires that costs associated with start-up activities, such as opening a new restaurant, be expensed as incurred. Prior to the First Quarter 1998, the Company had capitalized all preopening expenses and amortized these costs over a 12-month period. 12 General and administrative expenses include the cost of corporate administrative personnel and functions, multi-unit management and restaurant management recruitment and initial training. Such expenses were $2,921,299 for Fiscal 1998, a decrease of $144,137, or 4.7%, compared to Fiscal 1997. As a percentage of net sales, general and administrative expenses decreased to 10.2% for Fiscal 1998 from 12.6% for Fiscal 1997. The decrease was a direct result of management's efforts to reduce overhead and leverage increased sales to improve overall margin performance. The Company's administrative overhead as a percentage of net sales remains above the industry average primarily due to the cost of the corporate management team required to support the Company's intermediate and long-term growth plans. Write off of abandoned site costs decreased from $172,618 in Fiscal 1997 to $32,455 in Fiscal 1998. The Fiscal 1998 write off related to a suburban Maryland site, which was abandoned during the fourth quarter. The Company earned $151,967 in investment income for Fiscal 1998, compared to investment income of $294,231 for Fiscal 1997. The decrease is a direct result of cash being used to construct and open four Silver Diners since Fiscal 1996. Interest expense was $40,639 for Fiscal 1998 and $10,702 for Fiscal 1997. The issuance of debt in the second quarter of 1997 and interest charges on non- financing transactions caused interest expense to increase to $40,639 from $10,702 in the prior year. Net loss for Fiscal 1998 was $1,883,306 or $0.16 per share, compared to a loss of $1,958,419 or $0.17 per share in Fiscal 1997. Weighted average shares outstanding remained substantially unchanged at 11,591,822 in 1998 versus 11,609,400 at December 28, 1997. Management expects that the Company will continue to incur quarterly losses until such time as revenue generation from increased market penetration is sufficient to absorb new unit start-up costs and the increased general and administrative infrastructure costs currently in place to support the Company's growth plans. YEAR ENDED DECEMBER 28, 1997 COMPARED TO THE YEAR ENDED DECEMBER 29, 1996. Net sales for the fiscal year ended December 28, 1997 ("Fiscal 1997") increased $7.7 million to $24,259,156 compared to $16,550,468 for the fiscal year ended December 29, 1996 ("Fiscal 1996"). Silver Diner restaurants opened during Fiscal 1996 and Fiscal 1997 in Arlington, Merrifield, Springfield, and Reston, Virginia and Cherry Hill, New Jersey added $8.4 million to net sales. Comparable Company sales (sales for Silver Diner restaurants open throughout both periods being compared, excluding the initial six months of operations during which sales are typically higher than normal) decreased 2.1%. Same store customer counts were down 4.3% for Fiscal 1997, but price increases in mid-June 1997 helped raise average sales per customer and offset a portion of that decline. Average net sales for the seven restaurants open throughout Fiscal 1997 was $2.6 million compared to $2.7 million for the six restaurants open throughout 1996. Cost of sales, primarily food and beverage cost, was 28.6% of net sales for Fiscal 1997, an increase of 1.2% from 27.4% in Fiscal 1996. The increase was primarily the result of the Company's adoption of a new menu in 1997. Additionally, cost of sales was unfavorably impacted by stores opened in late 1996 and throughout 1997, which incurred anticipated higher cost of goods as well as labor and operating expenses in their initial months of operation. Labor, which consists of restaurant management and hourly employee wages and bonuses, payroll taxes, workers' compensation insurance, group health insurance and other benefits, was unchanged at 33.0% of net sales for Fiscal 1997 compared to Fiscal 1996. Increases in hourly employee wages as a result of increased minimum wage and higher labor expenses in new stores was offset by lower workers' compensation costs in all stores and lower health and vacation benefit costs in the Company's new stores where most hourly employees have not worked for the Company long enough to qualify for these benefits. 13 Operating expenses, which consist of all restaurant operating costs other than cost of sales, labor, occupancy, and depreciation, including supplies, utilities, repairs and maintenance and advertising, increased to 16.6% of net sales for Fiscal 1997, compared to 15.3% for Fiscal 1996. Higher marketing costs primarily related to the Company's summer radio advertising campaign and coupon mailings to prospective customers accounted for 0.9% of the increase in operating expenses. The remainder of the increase as a percentage of sales was caused by higher administrative expenses driven by lower comparable store sales, combined with slightly above average operating expenses in new stores. Restaurant operating margin, which consists of net sales minus cost of sales, labor and operating expenses exclusive of occupancy, decreased to 21.8% of net sales for Fiscal 1997 from 24.3% for Fiscal 1996. Management believes restaurant operating margin is the most consistent measure of store level operating results because it focuses on unit level performance. Restaurant operating margin was unfavorably impacted by the five stores opened between December 1996 and November 1997, which incurred anticipated higher cost of sales, labor and operating expenses in their initial months of operation. As these stores mature, management expects their restaurant operating margin to be similar to the Company's comparable stores. The table below illustrates the components of restaurant operating margin as a percentage of sales (New stores include all stores that are not comparable stores as defined above):
NEW COMPARABLE TOTAL --- ---------- ----- STORES STORES COMPANY ------ ------ ------- Sales 100% 100% 100% Cost of sales 29.1% 28.1% 28.6% Labor 34.2% 32.0% 33.0% Operating Expenses 16.8% 16.4% 16.6% --------------- --------------- --------------- Restaurant Operating Margin 19.9% 23.5% 21.8% =============== =============== ===============
Additionally, the decrease in restaurant operating margin was driven by an approximately 0.7% increase in food cost related to the Company's new menu platform and a 0.9% increase in marketing expenses. Occupancy, which is composed primarily of rent, property taxes and property insurance, increased $602,344 for Fiscal 1997 compared to Fiscal 1996, due primarily to the opening of new restaurants during 1996 and 1997. As a percentage of sales, occupancy expenses decreased from 11.7% in Fiscal 1996 to 10.4% in Fiscal 1997 due to lower rent expense in the new stores. Also, the Company owns the property for the Reston store that opened in June 1997. Restaurant depreciation and amortization increased $616,282 from $882,843 for fiscal 1996 to $1,499,125 for Fiscal 1997, primarily due to new restaurant openings. Fiscal 1997 and Fiscal 1996 include approximately $461,000 and $240,000, respectively, of preopening amortization. Preopening costs are amortized on a straight-line basis over twelve months from the date of each new restaurant opening. General and administrative expenses include the cost of corporate administrative personnel and functions, multi-unit management and restaurant management recruitment and initial training. Such expenses were $3,065,436 for Fiscal 1997; an increase of $359,496 compared to Fiscal 1996. As a percentage of net sales, general and administrative expenses decreased to 12.6% in Fiscal 1997 from 16.3% in Fiscal 1996. Increased corporate salary costs and higher restaurant management and recruitment costs accounted for approximately $140,000 of the increase. Also, higher professional fees during the first two quarters of 1997 related to preparation of the Company's first annual report, 10-K and annual proxy statement plus costs of implementing various compensation and benefit plans added approximately $160,000. In addition, the Company is paying premiums for three life insurance policies owned respectively by two officers. In 1996, the Company recorded notes receivable from the two officers which were payable in full upon demand, were collateralized by the life insurance policies and were equal to the amount of premiums paid by the Company on such life insurance policies. The notes receivable were non-interest 14 bearing. During 1997, the Company terminated these note receivable agreements and recorded the full amount of premiums paid in 1996 and 1997, less the cash surrender value of the policies, as expense. As such, the Company recorded $123,000 of expense for these insurance policies for the year ended December 28, 1997. The Company's administrative overhead as a percentage of net sales remains above the industry average primarily due to the cost of the corporate management team and infrastructure necessary to support the Company's intermediate and long-term growth plans. As revenues increase in 1998, general and administrative expenses are expected to decrease in absolute dollars and as a percentage of net sales. The increase in depreciation and amortization of approximately $80,000 for Fiscal 1997 is a result of additional goodwill amortization related to the acquisition of the SDLP minority interest in June 1996. Total goodwill amortization related to this transaction in Fiscal 1996 was approximately $100,000 and in Fiscal 1997 was approximately $184,000. Write off of abandoned site costs increased from zero in Fiscal 1996 to $172,618 in Fiscal 1997. These costs relate to deferred site costs including legal, design and development costs for potential restaurant sites that the Company is no longer pursuing due to unanticipated non-fulfillment of landlord contingencies and sites that did not meet the Company's unit economic criteria. The decrease in interest expense from $180,293 in 1996 to $10,702 in 1997 is nearly entirely the result of the consummation of the Merger with FTAC in March 1996 at which time the majority of the outstanding debt of the Company was either repaid or converted to equity. The bank debt of SDLP was subsequently repaid in late July 1996 following acquisition of the SDLP minority interest. Interest expense and amortization of deferred loan costs were eliminated for the remainder of Fiscal 1996 due to the repayment of debt. The interest expense incurred in Fiscal 1997 relates to debt incurred by the Company in the purchase of a piece of property adjacent to the Potomac Mills Silver Diner from a related party. Interest income decreased significantly in Fiscal 1997 due to use of the proceeds of the Merger and private placement proceeds to fund operating losses and construct new Silver Diners. Net loss for Fiscal 1997 was $1,958,419, or $0.17 per share, compared to the net loss of $1,429,472, or $0.15 per share, for Fiscal 1996. Average shares outstanding increased from 9,545,681 for Fiscal 1996 to 11,609,400 for Fiscal 1997. The increase in shares resulted from the Merger and the private placement in Fiscal 1996. Management expects that the Company will continue incurring quarterly losses until sufficient revenue is generated from new units to absorb start-up expenses and the increased overhead put in place to support the Company's growth plans. INCOME TAXES. No current or deferred income tax benefit has been provided in the Company's consolidated financial statements due to the Company's history of net operating losses for income tax purposes. At January 3, 1999, the Company has a net operating loss carryforward of approximately $6 million for income tax purposes that expires in 2008 through 2013, which may be used to reduce future income tax expense and tax liabilities. NEW ACCOUNTING PRONOUNCEMENTS. In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," and in February 1998, FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits -- an amendment of FASB Statements No. 87, 88, and 106." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. SFAS No. 131 establishes standards for the way public business enterprises report information about operating segments and the related disclosures about products and services, geographic areas and major customers. SFAS No. 132 revises employers' disclosures about pension and other postretirement benefit plans. These standards are effective for financial statements issued for fiscal years beginning after December 15, 1997. Adoption of SFAS Nos. 130, 131 and 132 did not have a material impact on the Company's financial statement presentation or disclosures. 15 On April 3, 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) No. 98-5, "Reporting on the Cost of Start-Up Activities." SOP No. 98-5 requires that costs associated with start-up activities, such as opening a new facility, be expensed as incurred. This SOP is effective for financial statements for fiscal years beginning after December 15, 1998; however, early application is encouraged. Prior to 1998, the Company capitalized preopening costs, including payroll, employee recruitment and advertising, incurred in the restaurant start-up and training period prior to the opening of each restaurant, and amortized these costs over 12 months from the date of opening. The Company elected early application of SOP 98-5 during the first quarter of 1998. As a result of the early application, all preopening costs capitalized as of December 28, 1997 were expensed and recorded as a cumulative effect of a change in accounting principle in the first quarter of 1998. In June, 1998 the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company has not yet determined the impact of adopting SFAS No. 133 on its financial statement presentations or disclosures. LIQUIDITY AND CAPITAL RESOURCES At January 3, 1999, cash and cash equivalents were $1.6 million, short-term investments were $.7 million, working capital was $.6 million, the Company had no long-term debt and stockholders' equity was $18.2 million. Short-term investments decreased $.5 million during Fiscal 1998, due primarily to cash used to finance the Fiscal 1998 purchases of property and equipment, including construction payables associated with the Cherry Hill diner which opened in late November 1997 and the purchase of computer systems. The Company's principal future capital requirement is expected to be the development of restaurants. The Company is anticipating opening one to three Company-owned restaurants in 1999; however, the location of these sites has not been determined. Currently, the typical building, equipment (including smallwares) and site development cost of a new Silver Diner prototype is expected to be approximately $1.3 to $1.5 million. However, due to above average site costs and architectural and design costs, the five Silver Diner locations opened since December 1995 have averaged approximately $1.8 million for building, equipment and site costs. The Company is currently endeavoring to decrease the cost of the Silver Diner prototype for the next restaurant. There is no assurance that the Company's prototype redesign plans will produce significant savings in the prototype costs. Land generally will be leased. When land is purchased, management may pursue a sale-leaseback or debt financing strategy following the restaurant's opening. At January 3, 1999, the Company did not have any restaurants under construction. The Company has been pursuing locations in a new geographical market, specifically in the Mid-Atlantic area from Richmond to Southern New Jersey. To that end, the Company opened a new store in Cherry Hill, New Jersey in November 1997, and is aggressively pursuing several locations in that market for new store openings beginning in late 1999. Management is continuing to negotiate to obtain other sites throughout the Mid-Atlantic region. Management believes that the Company's current capital resources and expected 1999 cash flow will be adequate to construct up to two units in 1999. Additional financing will be required to finance growth in 2000 beyond the next two diners. The Company has entered into a loan commitment with its lead bank to extend a $3.0 million line of credit that, if obtained, would be sufficient to fund at least two additional diners. Should the Company be unable to close on the financing commitment, management may be forced to limit unit growth in 2000. 16 SEASONALITY AND QUARTERLY RESULTS Although the Company's limited operating history, geographic concentration and small number of existing Silver Diners make future trends difficult to predict, Silver Diner restaurants have generally experienced higher average weekly net sales in the second and third quarters. The timing of new Silver Diner restaurant openings and extreme weather, especially during the winter months, may also affect sales and quarterly results. Accordingly, quarter-to- quarter comparisons of the Company's results of operations may not be meaningful, and results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year. The first fiscal quarter includes 16 weeks of operations as compared to 12, 12 and 12 or 13 weeks for each of the subsequent three-quarters, respectively. As a result, despite higher average weekly sales, net sales from comparable Silver Diners can be expected to be lower in the second quarter as compared to the first quarter of each year. YEAR 2000 ISSUE AND COMPLIANCE The Year 2000 issue is the result of software programs being written using two digits rather than four to define the applicable year, and some computers (and other date-sensitive equipment including credit card processing machines) may incorrectly recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions or engage in similar business activities both at the restaurant and corporate level. The Company is continually evaluating its risk and the related costs of updating its computer hardware and software to properly process Year 2000 and later dates. Included in this process is the upgrade of its point of sale systems mentioned above which has been assessed by the vendor as being Year 2000 compliant. The Company has identified the other areas which may be potentially affected by the Year 2000 issue: credit card processing machines, and the Year 2000 compliance of those entities on which the Company relies for goods and services, such as its suppliers and bank. The Company expects the cost related to the Year 2000 issue to be between $10,000 and $50,000. In the event that the Company's systems fail as a result of the Year 2000 issue, management believes that the Company's restaurants will remain operating on a manual basis. The risks associated with this contingency plan involve the decreased level of operational controls and the inability to process credit card transactions. The Company cannot currently estimate the potential cost of this contingency plan, but does not anticipate a material impact on its business activities. IMPACT OF INFLATION Management does not believe that inflation has materially affected the Company's operating results. Substantial increases in costs and expenses, particularly food, supplies, labor and operating expenses, could have a significant impact on the Company's operating results to the extent that such increases cannot be passed along to customers. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable. 17 ITEM 8. FINANCIAL STATEMENTS SILVER DINER, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS
Page Report of Independent Auditors 19 Consolidated Financial Statements: Consolidated Balance Sheets as of January 3, 1999 and December 28, 1997. 20 Consolidated Statements of Operations for the Fiscal Years Ended January 3, 1999, December 28, 1997 and December 29, 1996. 21 Consolidated Statements of Stockholders' Equity for the Fiscal Years Ended January 3, 1999, December 28, 1997 and December 29, 1996. 22 Consolidated Statements of Cash Flows for the Fiscal Years Ended January 3, 1999, December 28, 1997 and December 29, 1996. 23 Notes to Consolidated Financial Statements. 25
18 INDEPENDENT AUDITORS' REPORT To the Stockholders of Silver Diner, Inc.: We have audited the accompanying consolidated balance sheets of Silver Diner, Inc. and subsidiaries (the "Company") as of January 3, 1999 and December 28, 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for years ended January 3, 1999, December 28, 1997 and December 29, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Silver Diner, Inc. and subsidiaries as of January 3, 1999 and December 28, 1997, and the results of their operations and their cash flows for the years ended January 3, 1999, December 28, 1997 and December 29, 1996 in conformity with generally accepted accounting principles. As discussed in Note 1 to the financial statements, the Company changed its method of accounting for preopening costs during the year ended January 3, 1999 to conform with the American Institute of Certified Public Accountants Statement of Position No. 98-5. /s/ Deloitte & Touche LLP Washington, DC March 8, 1999 19 SILVER DINER, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
January 3, December 28, 1999 1997 --------------------- -------------------- ASSETS Current assets: Cash and cash equivalents $ 1,611,757 $ 1,597,430 Marketable securities available for sale 746,597 1,222,083 Inventory 139,039 196,443 Prepaid rent 182,796 - Incentive rebates 61,410 79,033 Prepaid and other current assets 110,666 118,175 Preopening costs, net - 326,868 --------------------- -------------------- Total current assets 2,852,265 3,540,032 Property, equipment and improvements, net 16,117,417 17,384,019 Due from related parties 126,516 10,600 Goodwill, net 2,299,082 2,482,833 Deposits and other 243,217 229,281 --------------------- -------------------- Total assets $ 21,638,497 $ 23,646,765 ===================== ==================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 1,960,222 $ 2,207,891 Note payable, current maturity 267,000 - --------------------- -------------------- 2,227,222 2,207,891 Long term liabilities: Note payable - 267,000 Deferred rent liability 1,173,280 1,050,667 --------------------- -------------------- Total liabilities 3,400,502 3,525,558 Commitments and contingencies (Note 10) - - Stockholders' equity: Preferred stock, $.001 par value, 1,000,000 shares authorized, none issued - - Common stock, $.00074 par value, 20,000,000 shares authorized; at January 3, 1999, 11,585,510 shares issued and outstanding; at December 28, 1997, 11,602,403 shares issued and outstanding 8,558 8,586 Additional paid-in capital 30,688,714 31,604,937 Unearned compensation (252,453) (1,168,798) Accumulated deficit (12,206,824) (10,323,518) --------------------- --------------------- Total stockholders' equity 18,237,995 20,121,207 --------------------- --------------------- Total liabilities and stockholders' equity $ 21,638,497 $ 23,646,765 ===================== =====================
Accompanying notes are an integral part of these financial statements. 20 SILVER DINER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Years Ended ------------------------------------------------------------------------- January 3, December 28, December 29, 1999 1997 1996 ---------------------- --------------------- --------------------- Net sales $ 28,561,422 $ 24,259,156 $ 16,550,468 ====================== ==================== ===================== Restaurant costs and expenses: Cost of sales 7,920,808 6,929,221 4,526,286 Labor 9,449,685 7,999,812 5,464,896 Operating 5,211,704 4,037,198 2,536,609 Occupancy 2,777,932 2,534,210 1,931,866 Depreciation and amortization 1,648,134 1,499,125 882,843 ---------------------- --------------------- --------------------- Total restaurant costs and expenses 27,008,263 22,999,566 15,342,500 ---------------------- --------------------- --------------------- Restaurant operating income 1,553,159 1,259,590 1,207,968 General and administrative expenses 2,921,299 3,065,436 2,705,940 Depreciation and amortization 267,171 263,484 183,928 Write off of abandoned site costs 32,455 172,618 - ---------------------- --------------------- --------------------- Operating loss (1,667,766) (2,241,948) (1,681,900) Interest expense 40,639 10,702 180,293 Investment income, net (151,967) (294,231) (432,721) ---------------------- --------------------- --------------------- Net loss before cumulative effect of a change in (1,556,438) (1,958,419) (1,429,472) accounting principle Cumulative effect of a change in accounting principle (326,868) - - ---------------------- --------------------- --------------------- NET LOSS $ (1,883,306) $ (1,958,419) $ (1,429,472) ====================== ===================== ===================== Basic and diluted net loss per common share Loss per common share before cumulative effect of a $ (0.13) $ (0.17) $ (0.15) change in accounting principle Cumulative effect of a change in accounting principle (0.03) - - ---------------------- --------------------- --------------------- Net loss per common share $ (0.16) $ (0.17) $ (0.15) ====================== ===================== ===================== Weighted average common shares outstanding 11,591,822 11,609,400 9,545,681 ====================== ===================== =====================
Accompanying notes are an integral part of these financial statements. 21 SILVER DINER, INC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Fiscal Years Ended January 3, 1999, December 28, 1997 and December 29, 1996
Common Stock Additional ------------ Paid-in Unearned Accumulated Shares Amount Capital Compensation Deficit Total ------------------------ -------------- ------------ -------------- ----------- Balance at January 1, 1996 150,947 $ 15,095 $ 8,351,243 $ (196,437) $ (6,935,627) $ 1,234,274 Issuance of common stock in connection with Food Trends merger 9,227,857 (8,155) 11,739,775 - - Debenture conversion 625,000 463 2,654,140 - - 2,654,603 Common stock offering 1,500,000 1,111 7,555,427 - - 7,556,538 Payments on stockholders' notes receivable - - 41,669 - - 41,669 Stock options exercised 16,669 12 38 - - 50 Repurchase of outstanding options - - (60,691) 30,343 - (30,348) Amortization of unearned compensation - - - 39,823 - 39,823 Warrants issued - - 141,960 - - 141,960 Net loss - - - - (1,429,472) (1,429,472) ---------- ---------- -------------- ------------ -------------- ----------- Balance at December 29, 1996 11,520,473 8,526 30,423,561 (126,271) (8,365,099) 21,940,717 Issuance of common stock 130,117 96 467,404 (315,000) - 152,500 Issuance of stock awards - - 920,000 (920,000) - - Common stock purchased (83,606) (62) (186,938) 52,500 - (134,500) Stock options exercised 35,419 26 15 - - 41 Stock options issued - - 61,865 - - 61,865 Repurchase of outstanding options - - (40,500) 20,250 - (20,250) Cancellation of outstanding options - - (40,470) 40,470 - - Amortization of unearned compensation - - - 79,253 - 79,253 Net loss - - - - (1,958,419) (1,958,419) ---------- ---------- -------------- ------------ -------------- ----------- Balance at December 28, 1997 11,602,403 8,586 31,604,937 (1,168,798) (10,323,518) 20,121,207 Issuance of common stock 17,392 13 24,987 (12,500) - 12,500 Issuance of stock awards - - 206,250 (206,250) - - Common stock purchased (42,746) (47) (93,801) 43,753 - (50,095) Stock options exercised 8,461 6 79 - - 85 Cancellation of outstanding options - - (1,053,738) 1,026,757 - (26,981) Amortization of unearned compensation - - - 64,585 - 64,585 Net loss - - - - (1,883,306) (1,883,306) ---------- ---------- -------------- ------------ -------------- ----------- Balance at January 3, 1999 11,585,510 $ 8,558 $ 30,688,714 $ (252,453) $ (12,206,824) $18,237,995 ========== ========== ============== ============ ============== ===========
Accompanying notes are an integral part of these financial statements. 22 SILVER DINER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended ----------------------------------------------------------------- January 3, December 28, December 29, 1999 1997 1996 -------------------- ------------------ ----------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (1,883,306) $ (1,958,419) $ (1,429,472) Adjustments to reconcile net loss to net cash provided by (used in) operating activities Depreciation and amortization 1,915,305 1,762,609 1,066,771 Development and abandoned site costs 32,455 172,618 - Compensation expense - stock options and deferred compensation 37,604 141,118 81,489 Termination of note receivable - 123,329 - Changes in operating assets and liabilities Inventory 57,404 (48,462) (30,588) Prepaid rent (182,796) - - Incentive rebates 17,623 - - Prepaid expenses and other assets 7,509 4,873 (73,972) Preopening expenses 326,868 (660,325) (128,287) Deposits and other (13,936) 100,585 (78,696) Accounts payable and accrued expenses (247,669) (262,323) (284,195) Deferred rent liability 122,613 301,271 174,575 Advances to officer and employees (115,916) - - ---------------- ----------------- ----------------- Net cash provided by (used in) operating activities 73,758 (323,126) (702,375) ---------------- ----------------- ----------------- CASH FLOWS USED IN INVESTING ACTIVITIES Purchases of property and equipment (497,407) (6,421,329) (5,729,378) Maturities of short-term investments 2,900,000 4,030,907 - Purchase of short term investments (2,424,514) (4,171,974) (1,081,015) Advances to affiliates - (67,372) (55,957) ---------------- ----------------- ----------------- Net cash used in investing activities (21,921) (6,629,768) (6,866,350) ---------------- ----------------- -----------------
(continued) Accompanying notes are an integral part of these financial statements. 23 SILVER DINER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Fiscal Years Ended --------------------------------------------------------------- January 3, December 28, December 29, 1999 1997 1996 -------------------- ------------------ -------------- CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from merger - - 11,916,868 Net proceeds from sale of stock 12,500 152,500 7,556,538 Exercise of options 85 41 50 Acquisition of outstanding interest in Silver Diner Limited Partnership - - (2,625,453) Purchase of common stock (50,095) (134,500) - Proceeds from notes payable - 267,000 - Payments of principal - notes payable - - (1,666,325) Payments of principal - notes payable - related party - - (881,788) Repurchase of employee stock options - (20,250) (30,348) -------------------- ------------------ -------------- Net cash (used in) provided by financing activities (37,510) 264,791 14,269,542 -------------------- ------------------ -------------- Net increase (decrease) in cash and cash equivalents 14,327 (6,688,103) 6,700,817 Cash and cash equivalents at beginning of the year 1,597,430 8,285,533 1,584,716 -------------------- ------------------ -------------- Cash and cash equivalents at end of the year $ 1,611,757 $ 1,597,430 $ 8,285,533 ==================== ================== ============== Supplemental disclosure of cash flow information: Interest paid $ 25,523 $ 10,702 $ 137,300 ==================== ================== ============== Noncash investing and financing activities: Construction payables included in accounts payable and accrued expenses $ - $ 350,604 $ 1,054,652 ==================== ================== ============== Repayment of notes payable - related party by offset of amounts due from affiliates $ - $ - $ 355,023 ==================== ================== ============== Conversion of senior subordinated convertible promissory notes to 625,000 shares of common stock $ - $ - $ 2,500,000 =================== ================= ============== Issuance of 84,000 warrants in conjunction with SDLP purchase $ - $ - $ 141,960 ==================== ================== ==============
(concluded) Accompanying notes are an integral part of these financial statements. 24 SILVER DINER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 3, 1999 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Silver Diner, Inc., (the Company) and its subsidiaries develop and operate the Silver Diner restaurant chain. At January 3, 1999, the Company owned and operated ten diners in the Washington/Baltimore metropolitan area and one in Cherry Hill, New Jersey. Basis of Presentation The consolidated financial statements include the accounts and operations of the Company and its subsidiaries, Silver Diner Development, Inc. (SDDI) and Silver Diner Limited Partnership (SDLP). All significant intercompany balances and transactions have been eliminated in consolidation. During 1996, the Company acquired the minority interest in SDLP (see Note 3), liquidated SDLP into SDDI and began presenting results on a consolidated basis. Because SDLP's financial statements were previously combined with the Company's, the change to a consolidated basis did not have a material impact on the Company's financial statements. Fiscal Year The Company operates on a 52 or 53-week fiscal year that ends on the Sunday nearest December 31. The fiscal quarters for the Company consist of accounting periods of 16, 12, 12 and 12 or 13 weeks, respectively. Fiscal years 1998, 1997 and 1996 were comprised of 53, 52 and 52 weeks, respectively and ended on January 3, 1999, December 28, 1997 and December 29, 1996, respectively. Cash and Cash Equivalents and Marketable Securities All short-term investments are classified as available-for-sale. Those investments that are part of the Company's cash management portfolio with a remaining maturity of three months or less when purchased are reported as cash equivalents. The balance of the short-term investments are classified as marketable securities. At January 3, 1999, marketable securities consists of investment grade commercial paper. Cash and cash equivalents and marketable securities are stated at cost plus accrued interest, which approximates fair value. Inventory Inventory consists of food and supplies and is valued at the lower of cost (first-in, first-out) or market. Property, Equipment and Improvements Property, equipment and improvements are stated at cost. Buildings and leasehold improvements are depreciated over the shorter of the estimated useful lives of the assets or the respective anticipated lease period including renewal options, ranging from 20 to 35 years, with a provision for salvage value for the Rockville building. Furniture and equipment are depreciated over the estimated useful lives of the related assets, ranging from 2 to 10 years. Depreciation is computed using the straight-line method. Change in Accounting Principle On April 3, 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) No. 98-5, "Reporting on the Cost of Start-Up Activities." SOP No. 98-5 requires that costs associated with start-up activities, such as opening a new facility, be expensed as incurred. This SOP is effective for financial statements for fiscal years beginning after December 15, 1998, however, early application is encouraged. 25 Prior to 1998, the Company capitalized preopening costs, including payroll, employee recruitment and advertising, incurred in the restaurant start-up and training period prior to the opening of each restaurant, and amortized these costs over twelve months from the date of opening. The Company elected early application of SOP 98-5 during the first quarter of 1998. As a result of the early application, all preopening costs capitalized as of December 28, 1997 were expensed and recorded as a cumulative effect of a change in accounting principle in the first quarter of 1998. Had preopening costs been accounted for in accordance with SOP No. 98-5 in prior fiscal years, the Company's net loss and net loss per share would have been the proforma amounts indicated below:
Fiscal Years Ended ------------------------------------------------ December 28, December 29, 1997 1996 -------------------- --------------------- Net loss: As reported $ (1,958,419) $ (1,429,472) Pro forma $ (2,157,873) $ (1,556,885) Net loss per common share: As reported $ (0.17) $ (0.15) Pro forma $ (0.19) $ (0.16)
Goodwill Cost in excess of fair value of net assets acquired related to the acquisition of the minority interest in SDLP (see Note 3) is being amortized on a straight-line basis over 15 years. Deferred Rent Deferred rent is recorded and amortized to the extent the total minimum rental payments allocated to the current period on a straight-line basis exceed or are less than the cash payments required. Income Taxes The provision for income taxes is based on earnings reported in the financial statements. Deferred income taxes are provided for temporary differences between financial assets and liabilities and those reported for income tax purposes. Taxable losses reported by SDLP passed through to, and were reportable by, its partners. Net Loss Per Common Share Net loss per common share is computed based upon the weighted average number of common shares outstanding during the period. The Company implemented Statement of Financial Accounting Standards (SFAS) No. 128 which requires presentation of basic and diluted earnings per share amounts and a reconciliation of the respective calculations. The Company incurred a net loss for the years ended January 3, 1999, December 28, 1997 and December 29, 1996; therefore, all potential common shares are anitdilutive and not included in the calculation of diluted net loss per share. Evaluation of Long-Lived Assets The Company evaluates the potential impairment of long-lived assets, including goodwill, based upon projections of undiscounted cash flows whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. During 1998 and 1997, the Company wrote off $32,455 and $172,618, respectively, of deferred site costs including legal, design and development costs for potential restaurant sites that the Company is no longer pursuing or that the Company believes the probability of the site being procured is unlikely. During the fourth quarter of 1998, in connection with an evaluation of unit operational processes, menu engineering, and a comprehensive unit equipment assessment, the Company wrote off equipment with a net book value of $372,734, which is included in depreciation and amortization within the Fiscal Year 1998 Statement of Operations. Management believes no additional material impairment of these assets exists at January 3, 1999. The write-off resulted from the elimination of the operational usefulness for certain equipment and the identification of obsolete or no longer in service equipment. 26 Stock-Based Compensation Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, requires expanded disclosures of stock-based compensation arrangements with employees and encourages (but does not require) compensation cost to be measured based on fair value of the equity instrument awarded (see Note 12). The Company has chosen to continue to account for employee stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. Accordingly, compensation costs for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount the employee must pay to acquire the stock. Reclassification Certain prior year balances have been reclassified to conform to the 1998 presentation. Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. New Accounting Pronouncements In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," and in February 1998, FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits -- an amendment of FASB Statements No. 87, 88, and 106." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. SFAS No. 131 establishes standards for the way public business enterprises report information about operating segments and the related disclosures about products and services, geographic areas and major customers. SFAS No. 132 revises employers' disclosures about pension and other postretirement benefit plans. These standards are effective for financial statements issued for fiscal years beginning after December 15, 1997. Adoption of SFAS Nos. 130, 131 and 132 did not have a material impact on the Company's financial statement presentation or disclosures. In June, 1998 the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company has not yet determined the impact of adopting SFAS No. 133 on its financial statement presentations or disclosures. 2. MERGER On March 27, 1996, FTAC Transition Corporation, a wholly owned subsidiary of Food Trends Acquisition Corporation (FTAC) merged (the Merger) with and into SDDI with SDDI surviving as a wholly owned subsidiary of FTAC. In connection with the Merger, FTAC changed its name to Silver Diner Development, Inc., and in June 1996, to Silver Diner, Inc. Pursuant to the Merger agreement, each outstanding share of SDDI common stock converted into 33.339 shares of the common stock of FTAC. Upon consummation of the Merger, the stockholders of SDDI became the owners in the aggregate of approximately 57% of the outstanding common stock of FTAC and the directors and officers of SDDI became directors and officers of FTAC. Prior to the Merger, FTAC had no operating activities. 27 For accounting and financial reporting purposes, the Merger was treated as a recapitalization of SDDI and as an issuance of SDDI common shares for monetary assets and liabilities. The transaction was in essence a reverse acquisition with SDDI retaining the majority voting interest in the merged entity. The reverse acquisition is a business combination accounted for by the purchase method in which the continuing entity is not assumed to be the acquirer. The substance of the reverse acquisition is that of an initial public offering and the acquisition costs incurred by the Company have therefore been treated as a reduction in paid-in capital. The Company has reflected in its consolidated financial statements the assets, liabilities and equity of SDDI at their historical book values. Accordingly, the consolidated results of operations and financial position of the Company for periods and dates prior to the Merger are the consolidated historical results of operations and financial position of SDDI for such periods and dates. All historical shares of common stock and per share amounts for periods prior to the Merger have been retroactively adjusted to reflect the FTAC shares issued to the SDDI shareholders at the time of the Merger. 3. ACQUISITION OF MINORITY INTEREST IN SILVER DINER LIMITED PARTNERSHIP On June 13, 1996, the Company completed its purchase of all of the limited partnership interests in SDLP from the original investors for $2,472,000 in cash and 84,000 warrants (New Warrants) to purchase common stock exercisable at $8.00 per share. The New Warrants were exercisable until the earlier of 30 days following a public offering of common stock or January 31, 1998. The offer was unanimously accepted by all of the limited partners. The acquisition was accounted for under the purchase method and the entire cost of the transaction, totaling $2.8 million, has been allocated to goodwill based on the Company's estimate that the fair value of the tangible assets acquired approximates book value. The goodwill is being amortized on a straight-line basis over 15 years and as a result, amortization expense related to goodwill totaled $183,751, $184,977 and $99,603 in fiscal years 1998, 1997 and 1996, respectively. 4. PROPERTY, EQUIPMENT AND IMPROVEMENTS The major components of property, equipment and improvements are as follows:
January 3, 1999 December 28, 1997 ------------------ ------------------ Land $ 1,737,655 $ 1,647,655 Buildings and leasehold improvements 12,645,160 12,605,754 Furniture, fixtures and equipment 5,918,067 6,465,211 Deferred lease costs 607,107 572,549 Construction in progress - 101,916 ------------------ ------------------ 20,907,989 21,393,085 Less accumulated depreciation and amortization (4,790,572) (4,009,066) ------------------ ------------------ $16,117,417 $17,384,019 ================== ==================
Deferred lease costs represent brokerage commissions, legal fees and zoning related costs primarily related to leases on the land upon which the Company constructed its restaurants. 5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of the following:
January 3, December 28, 1999 1997 ------------------ ------------------ Trade payables $1,381,805 $1,442,913 Payroll and related taxes 443,623 622,013 Sales and use taxes 134,794 142,965 ------------------ ------------------ $1,960,222 $2,207,891 ================== ==================
28 6. LONG-TERM OBLIGATIONS In June, 1997 the Company was issued a $267,000 note payable to a bank to purchase a parcel of land from the Company's president (see Note 9). The principal of the note is due in June, 1999, and interest is paid monthly at an annual rate of 9.25%. The note is collateralized by the land purchased. The Company incurred $25,523 and $10,702 in interest expense related to the note for the years ended January 3, 1999 and December 28, 1997, respectively. 7. NOTES RECEIVABLE During 1997, the Company issued notes receivable totaling $132,000 to an outside party which owns and maintains the jukeboxes in four Silver Diner units. The Company receives principal and interest payments on these notes on a monthly basis. The outstanding balance, classified as deposits and other, was $113,729 for 1998 and $123,035 for 1997. Interest is calculated at an annual rate of 9% and the principal payments are based on the amount of monthly cash flow generated by the jukeboxes. For the years ended January 3, 1999 and December 28, 1997, the Company has received $9,300 and $9,000 in principal payments, respectively and $11,000 and $6,000 in interest income, respectively. 8. PRIVATE PLACEMENT On July 11, 1996, the Company completed a $8,250,000 private placement of common stock through the sale of 1.5 million shares at $5.50 per share. Approximately $2.5 million of the approximately $7.6 million net proceeds of the sale were used to replace the funds used for the acquisition of the minority interests in SDLP, and the remainder was available to fund expansion. In connection with the sale, the Company registered the shares with the Securities and Exchange Commission. 9. RELATED PARTY TRANSACTIONS Robert Giaimo Development, Inc. ------------------------------- On June 17, 1997, the Company purchased from Robert Giaimo Development, Inc., a corporation wholly-owned by the president of the Company, an undivided parcel of land representing a parking lot adjacent to the Silver Diner restaurant in Potomac Mills, Virginia. The total cost of the land was $408,000. The Company received a loan from a bank in the amount of $267,000 to purchase the property. The note, bearing interest of 9.25% annually, is fully collateralized by the land and is due in June, 1999. Silver Diner Potomac Mills, Inc. -------------------------------- The Company leases the diner at Potomac Mills pursuant to two lease agreements with Silver Diner Potomac Mills, Inc., a corporation wholly- owned by the president of the Company. The leases expire October 14, 2011 and include annual CPI adjustments to base rent and percentage rent based on gross receipts. The amount of property leased was reduced in 1997 by the land purchase described above. For the years ending January 3, 1999, December 28, 1997 and December 29, 1996, occupancy costs include $355,000, $350,000 and $389,000, respectively, in rent and related pass through costs associated with the leases. Keyman Life Insurance --------------------- The Company is paying premiums for three life insurance policies owned respectively by two officers. In 1996, the Company recorded notes receivable from the two officers which were payable in full upon demand, were collateralized by the life insurance policies and were equal to the amount of premiums paid by the Company on such life insurance policies. The notes receivable were non-interest bearing. During 1997, the Company terminated these note receivable agreements and recorded the full amount of premiums paid in 1996 and 1997, less the cash surrender value of the policies, as expense. In 1998, the Company recorded the full amount of premiums paid in 1998, less the cash surrender value of the policies, as expense. As such, the Company recorded $92,000 and $123,000 of expense for these insurance policies for the years ended January 3, 1999 and December 28, 1997, respectively. 29 Due from Related Parties ------------------------ In connection with entering into an employment continuity agreement during 1998, the Company made a $100,000 loan to an officer of the Company. The note, bearing interest at a rate of 5.25%, is secured by the Company's common stock holding of the officer. The loan and accrued interest is to be repaid by the officer through the application of annual bonuses in the amount of $20,000, plus accrued interest, to the officer over a five year period. 10. COMMITMENTS AND CONTINGENCIES Operating Leases ---------------- The Company leases restaurant land and buildings under various noncancellable operating leases with terms expiring at various dates through 2017. Certain of these leases are with related parties (see Note 9). These leases include minimum lease payments, reimbursable operating costs and real estate taxes. Also, certain of these leases contain renewal options for a maximum of 20 years beyond the original term, have provisions for additional rent based on sales at the individual locations and annual increases based on the consumer price index. The leases provide for certain rent holidays and escalations in payments over the lease terms. The effect of the holidays and escalations have been reflected in rent expense on a straight-line basis over the initial lease terms. The excess of expense over cash payments has been reflected in the consolidated financial statements as deferred rent. Future minimum annual lease payments as of January 3, 1999 are: 1999 2,121,000 2000 2,204,000 2001 2,248,000 2002 2,290,000 2003 2,319,000 Thereafter 18,390,000 Rent expense under the leases for fiscal 1998, 1997 and 1996 was approximately $2,236,000, $2,033,000, and $1,622,000, respectively. Legal Proceedings ----------------- On May 20, 1996, the Company was named as a defendant in a proceeding instituted in the Circuit Court for Prince George's County, Maryland, captioned Laura Reese v. Roger Richardson and Silver Diner Development, Inc. The plaintiff alleges that she was sexually assaulted by Roger Richardson, who was the general manager of the Laurel Silver Diner restaurant. Mr. Richardson was terminated promptly following the occurrence of the event in November 1994. Plaintiff sought recovery of $500,000 for each count. It was not clear if the counts were in the alternative or cumulative. The Company's insurance carrier was defending the claim with reservation of rights. The Company is insured up to $1,000,000 with respect to the above mentioned claims. In September 1998, the court granted summary judgement in favor of the Company as to all claims brought against them in this case. No final judgement can be entered at this time due to a Suggestion of Bankruptcy filed by Mr. Richardson, the co-defendant in the case, prior to the decision of the court to grant summary judgement on behalf of the Company. Employment Continuity Agreements -------------------------------- SDDI has entered into employment continuity agreements with certain executives. The agreements are for one to five years in length and provide for minimum salary levels, as adjusted for minimum percentage increases and include incentive bonuses based on specified management goals. The aggregate minimum commitment for future salaries, excluding bonuses, as of January 3, 1999 is approximately $1.2 million. 11. INCOME TAXES At January 3, 1999, the Company has a net operating loss carryforward of approximately $6 million for income tax purposes, that expires in 2008 through 2013, which may be used to reduce future income tax expense and tax liabilities. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts reported for income tax purposes. 30 Significant components of the Company's deferred tax assets and liabilities are as follows:
January 3, 1999 December 28, 1997 ------------------ ------------------- Net operating loss carryforwards $ 2,420,534 $ 2,219,298 Book over (under) tax depreciation/amortization (83,841) 238,197 Deferred rent 466,653 422,475 ------------------ ------------------- Deferred tax assets 2,803,346 2,879,970 Less: valuation allowance (2,803,346) (2,879,970) ------------------ ------------------- Net deferred tax asset $ - $ - ================== ===================
As a result of the Company's history of cumulative losses, a valuation allowance equal to the calculated deferred tax benefit has been recorded at January 3, 1999 and December 28, 1997, respectively. 12. STOCK COMPENSATION PLANS The Company has the following stock-based compensation plans: 1996 Employee Stock Purchase Plan The 1996 Employee Stock Purchase Plan was adopted in September 1996 by the Company's board of directors and approved by shareholders in June 1997, and continues in effect for a term of 10 years. The Company is authorized to issue 300,000 shares under the plan to employees who customarily work at least 20 hours per week and more than five months in a calendar year, and who have been continuously employed by the Company for six months. Under the terms of the plan, employees can choose each quarter to have up to 10 percent of their base earnings (not to exceed $21,250 annually) withheld to purchase the Company's common stock. The purchase price of the stock is 85% of the lower of its beginning-of-quarter or end-of-quarter market price. The Company implemented the plan in August of 1998. 1996 Stock Option Plan The 1996 Stock Option Plan was adopted by the Company's board of directors in September 1996 and approved by shareholders in June 1997, and continues in effect for 10 years. The plan provides for incentive stock options and nonqualified stock options. Options may be granted to any director, officer, key employee or outside consultant of the Company. Terms of the options are set by the Company's board of directors and range from seven to ten years, with the ability to accelerate vesting upon the Company achieving certain performance measurements, as predetermined by the Board. The Company has reserved 1,200,000 shares of common stock for issuance under the plan. A total of 1,143,500 options were granted under this plan during Fiscal 1998. Restaurant Operating Partner Program The Restaurant Operating Partner Program, which was adopted by the Company's board of directors in December 1996 for implementation in fiscal year 1997, provides for the general manager (Operating Partner) and the store manager team (Store Managers) of each of the Company's restaurants to share in the profits of their restaurant and to participate as equity owners of the Company. To participate in the program, employees who became Operating Partners prior to January 4, 1999 were required to make an initial investment in discounted Company common stock, which may not be sold or otherwise transferred by the Operating Partner for a period of five years from the date of purchase. Should the Operating Partner's employment terminate for any reason other than death or disability, the Company has the right to repurchase the stock from the Operating Partner for the amount of his or her investment. Employees who become Operating Partners beginning January 4, 1999 and thereafter are required to purchase 8,000 shares of Company common stock at market value and can potentially receive an annual award up to $10,000 of Common Stock, dependent upon achievement of performance criteria as established and evaluated by the Board. The plan also provides for annual restricted common stock awards to Store Managers; however, the Company has determined that no further stock awards will be provided to Store Managers subsequent to January 3, 1999. For employees who became Operating Partners and Store Managers prior to January 4, 1999, stock awarded at the end of the first year generally vests after the fourth anniversary of the award date. For each year thereafter, stock awards generally vest after the third anniversary of the award date. For employees who became Operating Partners beginning January 4, 1999 and thereafter, stock awarded at the end of the first year vests 31 after the fifth anniversary of the award date, stock awarded at the end of the second year vests after the fourth anniversary of the award date, and stock awarded in each subsequent year vests after the third anniversary of each award date. The stock awards under these plans are awarded at the discretion of the Company's Board of Directors. The Company has reserved 415,000 shares of common stock for issuance under the plan. During Fiscal 1998, 17,391 shares were issued under the plan. 1996 Consultant Stock Option and Stock Purchase Plan The 1996 Consultant Stock Option and Stock Purchase Plan was adopted by the Company's board of directors in September 1996, and continues in effect for a term of 10 years. The plan provides for the Company's consultants to purchase (i) options to purchase shares of common stock in the Company or (ii) shares of common stock in the Company, and apply a portion of the fees otherwise payable to them by the Company to pay the purchase price for such options or common stock. Options under the plan are granted with an exercise price at the fair market value of the common stock on the first day of each calendar quarter, and are exercisable at any time in whole or in part for a period of three years from date of grant and vest immediately. The Company records the transactions at the fair value of the options granted to the consultant, using the Black-Sholes methodology. The Company has reserved 100,000 shares of common stock for issuance under the plan. During Fiscal 1998, no options were issued to consultants under this plan. 1996 Non-Employee Director Stock Option Plan The 1996 Non-Employee Director Stock Option Plan was adopted by the Company's board of directors in September 1996 and approved by shareholders in June 1997, and continues in effect for 10 years. Under the plan, each non-employee director shall be granted an option to purchase 1,000 shares of the Company's common stock at fair market value on the first day of each calendar quarter. Options granted under the plan are exercisable at any time in whole or in part for a period of three years from date of grant, and vest immediately. The Company has reserved 150,000 shares of common stock for issuance under the plan. A total of 35,000 options were granted under this plan during Fiscal 1998. Second Amended and Restated 1991 Stock Option Plan The Second Amended and Restated 1991 Stock Option Plan for directors, officers, key employees and consultants provides for incentive and non- qualified stock options. The options generally expire 10 years from the date of grant and are exercisable over the period stated in each option. The board of directors determines the option price (not to be less than fair market value for incentive options) at the date of grant. Excluding the effect of the Merger (see Note 2), options under the plan are exercisable in full if the Company executes a merger agreement or consolidates with another company, if more than 50% of the Company's voting stock is acquired by another person or group in an other than capital stock transaction, or if Robert T. Giaimo ceases to be President of the Company. The plan expires in 2001. At January 3, 1999, no options were available for future grant under the plan. Second Amended and Restated Earned Ownership Plan The Second Amended and Restated Earned Ownership Plan for key employees provides for non-qualified stock options. The options generally expire 10 years from the date of grant, have an option price of $0.0003 and vest 20% at date of grant and 20% on each of the next four anniversaries following the grant date. Excluding the effect of the Merger (see Note 2), options under the plan are exercisable in full if the Company executes a merger agreement or consolidates with another company, if more than 50% of the Company's voting stock is acquired by another person or group in an other than capital stock transaction, or if Robert T. Giaimo ceases to be President of the Company. The plan has no fixed expiration date. At January 3, 1999, no options were available for future grant under the plan. 32 The Company applies APB Opinion No. 25 and related Interpretations in accounting for its plans. The compensation cost that has been charged against income under the Company's plans was approximately $10,000, $141,118 and $39,823 for the years ended January 3, 1999, December 28, 1997 and December 29, 1996, respectively. Had compensation cost been determined in accordance with FASB Statement No. 123, the Company's net loss and net loss per share would have been the pro forma amounts indicated below:
Fiscal Years Ended ---------------------------------------------------------------------------- January 3, December 28, December 29, 1999 1997 1996 ---------------------- ---------------------- ---------------------- Net loss: As reported $ (1,883,306) $ (1,958,419) $ (1,429,472) Pro forma $ (1,995,021) $ (2,030,469) $ (1,469,539) Net loss per common share: As reported $ (0.16) $ (0.17) $ (0.15) Pro forma $ (0.17) $ (0.17) $ (0.15)
Options granted during the year ended January 3, 1999 were issued pursuant to the 1996 Non-Employee Director Stock Option Plan and the 1996 Stock Option Plan. The fair value of each option grant under these plans is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: dividend yield of 0.0% and expected volatility of 50%. In addition, in estimating the fair value of the options granted under the 1996 Non-Employee Director Stock Option Plan and the 1996 Stock Option Plan, the following weighted average assumptions were used: risk free interest rate of 5.5% and an expected life of 6 years. Options granted during the year ended December 28, 1997 were issued pursuant to the 1996 Non-Employee Director Stock Option Plan, the 1996 Consultant Stock Option and Stock Purchase Plan and the 1996 Stock Option Plan. The fair value of each option grant under these plans is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: dividend yield of 0.0% and expected volatility of 49%. In addition, in estimating the fair value of the options granted under the 1996 Non-Employee Director Stock Option Plan and the 1996 Consultant Stock Option and Stock Purchase Plan, the following weighted average assumptions were used: risk free interest rate of 5.7% and an expected life of 2 years. The fair value of options granted under the Incentive Stock Option Plan was estimated assuming a risk free interest rate of 6.2% and an expected life of seven years. All options granted during the year ended December 29, 1996 were issued pursuant to the 1996 Non-Employee Director Stock Option Plan. The fair value of each option grant under this plan is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: dividend yield of 0.0%, expected volatility of 27%, risk free interest rate of 6.2% and an expected life of two years. 33 A summary of the status of the Company's stock option plans as of January 3, 1999, December 28, 1997 and December 29, 1996 and changes during the years ended on these dates is:
1998 1997 1996 --------------------------- ------------------------- ------------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Options outstanding, Beginning of year 583,327 $ 2.55 689,220 $ 2.52 784,959 $ 2.50 Granted 1,178,500 $ 1.09 89,387 $ 3.54 18,000 $ 5.83 Exercised (8,461) $ 0.00 (35,421) $ 0.00 (16,669) $ 0.00 Forfeited (62,075) $ 3.45 (149,858) $ 3.78 (82,081) $ 4.05 Repurchased - $ - (10,001) $ 0.00 (14,989) $ 0.00 ---------- --------- --------- Options outstanding, End of year 1,691,291 $ 1.51 583,327 $ 2.55 689,220 $ 2.52 ========== ========= ========= Options exercisable at Year end 687,954 396,809 313,260 Weighted-average fair Value of options Granted during the $ 0.41 $ 1.41 $ 1.21 Year
The following table summarizes information about stock options outstanding at January 3, 1999:
Options Options Outstanding Exercisable ----------------------------------------------------- --------------------------------- Range Number Weighted-Avg. Weighted-Avg. Number Weighted-Avg. of Outstanding Remaining Exercise Exercisable Exercise Exercise Prices at 1/03/99 Contractual Life Price at 1/03/99 Price Less than $0.01 192,865 5.4 years $ 0.00 177,175 $ 0.00 $0.63 to $1.25 1,178,500 5.9 years $ 1.09 270,000 $ 1.27 $2.13 to $3.82 79,054 1.5 years $ 3.30 79,054 $ 3.30 $4.05 to $6.50 240,872 3.5 years $ 4.21 161,725 $ 4.28 ------------ ----------- $0.0003 to $6.50 1,691,291 2.3 years $ 1.51 687,954 $ 1.88 ============ ===========
13. NET LOSS PER COMMON SHARE SFAS 128, "Earnings per Share", requires the disclosure of a reconciliation between the numerators and the denominators of the basic and diluted per-share computations for income from continuing operations. For the years ended January 3, 1999, December 28, 1997 and December 29, 1996, the Company incurred a net loss; therefore, all potential common shares are antidilutive and are not included in the calculation of the diluted net loss per common share. At January 3, 1999, December 28, 1997 and December 29, 1996, there were options to purchase 1,691,291, 583,327, and 689,220 shares, respectively at the weighted average price of $1.51, $2.55, and $2.52, respectively. These options are antidilutive and, thus, not included in the computation of diluted net loss per share for the years ended January 3, 1999, December 28, 1997 and December 29, 1996. In addition, at January 3, 1999 and December 28, 1997, there were 25,919 and 8,528, respectively, restricted shares of common stock outstanding. These shares, which were issued during 1997 and 1998 pursuant to the Restaurant Operating Partner Program, are antidilutive and are not included in the computation of net loss per share for the years ended January 3, 1999 and December 28, 1997. 34 14. EMPLOYEE BENEFIT PLAN The Company sponsors a plan to provide retirement benefits under the provision of Section 401(k) of the Internal Revenue Code (the 401(k) Plan) for all employees who have completed one year of service. Company contributions may range from 0% to 100% of employee contributions, up to a maximum 6% of eligible employee compensation, as defined. Employees may elect to contribute up to 20% of their eligible compensation on a pretax basis. Benefits under the 401(k) Plan are limited to the assets of the 401(k) Plan. During the years ended January 3, 1999, December 28, 1997 and December 29, 1996, respectively, the Company made no contributions to the 401(k) Plan. 35 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY. The information under "Election of Directors" in the Proxy Statement for the Annual Meeting of Shareholders in 1998 is incorporated herein by reference. Information concerning executive officers is set forth under "Executive Officers of the Registrant" in Part I. ITEM 11. EXECUTIVE COMPENSATION. The information under "Executive Compensation" in the Proxy Statement for the Annual Meeting of Shareholders in 1998 is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information under "Ownership of Common Stock by Directors and Executive Officers" and "Election of Directors" in the Proxy Statement for the Annual Meeting of Shareholders in 1999 is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information under "Election of Directors" and "Executive Compensation" in the Proxy Statement for the Annual Meeting of Shareholders in 1999 is incorporated herein by reference. 36 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) Lists of Documents Filed as Part of this Report 1. Financial Statements
Page Report of Independent Auditors................................................ 19 Consolidated Financial Statements: Consolidated Balance Sheets as of January 3, 1999 and December 28, 1997......................................... 20 Consolidated Statements of Operations for the Fiscal Years Ended January 3, 1999, December 28, 1997 and December 29, 1996... 21 Consolidated Statements of Stockholders' Equity for the Fiscal Years Ended January 3, 1999, December 28, 1997 and December 29, 1996... 22 Consolidated Statements of Cash Flows for the Fiscal Years Ended January 3, 1999, December 28, 1997 and December 29, 1996... 23 Notes to Consolidated Financial Statements.................................... 25
2. Schedules All Schedules are omitted because the required information is inapplicable or it is presented in the Consolidated Financial Statements or the notes thereto. 3. Exhibits Exhibit Number Description of Document - -------------- ----------------------- 3 Articles of incorporation and bylaws 3.1 Registrant's Certificate of Incorporation as amended by Certificates of Amendment incorporated by reference to Exhibit 3.01 of the registrant's Form 8-K dated March 27, 1996. 3.2 Registrant's Bylaws incorporated by reference to Exhibit 3.3 of the registrant's Form S-4 (File No. 33-98844). 9 Form of Voting and Lockup Agreement with respect to Stock Option Agreements incorporated by reference to Exhibit 9.01 of the registrant's Form 8-K dated March 27, 1996. 9.1 Form of SDDI Voting and Lockup Agreement among SDDI, Robert T. Giaimo and certain shareholders of SDDI, together with Schedule of executed Voting and Lockup Agreements incorporated by reference to Exhibit 9.04 of the registrant's Form 8-K dated March 27, 1996. 37 9.2 FTAC Voting and Lockup Agreement dated as of September 15, 1995 by and among the registrant and George A. Naddaff, Douglas M. Suliman, Jr., Ralph J. Guarino and Charles A. Cocotas incorporated by reference to Exhibit 9.05 of the registrant's Form 8-K dated March 27, 1996. 9.3 Assumption of SDDI Voting and Lockup Agreement, SDDI Affiliate Lockup Agreement and Stockholder Lockup Agreement dated March 27, 1996, pursuant to Section 5.14(c) of merger agreement by and among FTAC, FTAC Transition Corporation and SDDI, incorporated by reference to Exhibit 9.06 of the registrant's Form 8-K dated March 27, 1996. 9.4 GKN Voting and Lockup Agreement dated as of September 15, 1995 by and among the registrant, Robert T. Giaimo, GKN Securities Corp., and certain additional signatories thereto incorporated by reference to Exhibit 9.07 of the registrant's Form 8-K dated March 27, 1996. 10 Material Contracts Material Contracts - Real Property Rockville, Maryland 10.1 Lease Agreement between Federal Realty Investment Trust (Landlord) and SDLP (Tenant) dated July 13, 1988 as amended by Lease Modification dated August 17, 1988, Second Lease Modification dated February 3, 1989, Third Amendment to Lease dated January 20, 1993, and Fourth Lease Modification Agreement dated October 17, 1994 incorporated by reference to Exhibit 10.01 of the registrant's Form 8-K dated March 27, 1996. Laurel, Maryland 10.2 Lease between CG Beltsville Limited Partnership (Landlord) and SDLP (Tenant) dated January 26, 1990, as amended by Letter Agreement dated October 28, 1995 incorporated by reference to Exhibit 10.02 of the registrant's Form 8-K dated March 27, 1996. Dale City, Virginia (Potomac Mills) 10.3 Lease between RGDI (Landlord) and SDPMI (Tenant), dated June 10, 1991, as amended by First Amendment to Lease, dated October 14, 1991, as amended by Second Amendment to Lease dated October 30, 1995 incorporated by reference to Exhibit 10.03 of the registrant's Form 8-K dated March 27, 1996. Parking Lot (parcel 11-B-1A), Dale City, Virginia (located adjacent to Silver Diner Restaurant at Potomac Mills) 38 10.4 Lease between Robert Giaimo Development, Inc. ("RGDI") (Landlord) and SDPMI (Tenant) dated May 27, 1992, as amended by Amendment to Lease dated October 30, 1995 incorporated by reference to Exhibit 10.04 of the registrant's Form 8-K dated March 27, 1996. Towson, Maryland 10.5 Lease Agreement between Towson Town Center Associates (Landlord) and the registrant (Tenant) effective January 30, 1992 incorporated by reference to Exhibit 10.05 of the registrant's Form 8-K dated March 27, 1996. Fair Lakes, Virginia (Fair Oaks) 10.6 Ground Lease Agreement between F.L. Promenade L.P. (Landlord) and the registrant (Tenant) dated July 12, 1994, as amended by First Amendment to Ground Lease Agreement dated February 15, 1995, and Second Amendment to Ground Lease Agreement dated April 4, 1995 incorporated by reference to Exhibit 10.06 of the registrant's Form 8-K dated March 27, 1996. Tysons Corner, Virginia 10.7 Ground Lease between Lehndorff Tysons Joint Venture (Landlord) and the registrant (Tenant) dated December 29, 1994), as amended by First Amendment to Lease dated May 14, 1995 incorporated by reference to Exhibit 10.07 of the registrant's Form 8-K dated March 27, 1996. Springfield, Virginia 10.8 Springfield Mall Lease between Franconia Associates (Landlord) and the registrant (Tenant) effective May 1, 1996 incorporated by reference to Exhibit 10.08 of the registrant's Form 8-K dated March 27, 1996. Merrifield, Virginia 10.9 Agreement of Lease dated September 14, 1995 by and between 2909 Gallows LC (Landlord) and the registrant (Tenant) incorporated by reference to Exhibit 10.09 of the registrant's Form 8-K dated March 27, 1996. Reston, Virginia 10.10 Purchase and Sale Agreement dated December 29, 1995 by and between Reston Land Corporation (Seller) and the registrant (Buyer) incorporated by reference to Exhibit 10.10 of the registrant's Form 8-K dated March 27, 1996. Clarendon, Virginia 39 10.11 Lease dated February 12, 1996 between Wilson Limited Partnership (Landlord) and the registrant (Tenant) incorporated by reference to Exhibit 10.11 of the registrant's Form 8-K dated March 27, 1996. Kendall, Florida 10.12 Purchase Agreement dated October 4, 1996 by and between Documentation Corp. And Bersin Development Corp. (Sellers) and the registrant (Buyer). Exhibit 10.12 to the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 1996, is incorporated herein by reference. Cherry Hill, New Jersey 10.13 Lease Agreement dated September 30, 1996 by and between Cherry Hill Associates L.P. (Landlord) and the registrant (Tenant). Exhibit 10.13 to the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 1996 is incorporated herein by reference. Material Contracts - Stock Plans 10.14 SDDI Second Amended and Restated 1991 Stock Option Plan, together with forms of incentive stock option agreement and non- qualified stock option agreement incorporated by reference to Exhibit 10.14 of the registrant's Form 8-K dated March 27, 1996. 10.15 SDDI Second Amended and Restated Earned Ownership Plan, together with form of non-qualified stock option agreement incorporated by reference to Exhibit 10.15 of the registrant's Form 8-K dated March 27, 1996. 10.16 Silver Diner, Inc. 1996 Non-employee Director Stock Option Plan together with form of stock option agreement incorporated by reference to Exhibit 4(a) of the registrant's Form S-8 filed December 20, 1996. 10.17 Silver Diner, Inc. 1996 Consultant Stock Option and Stock Purchase Plan together with form of stock option agreement, form of stock purchase agreement, form of election to purchase common stock and form of election to purchase options, incorporated by reference to Exhibit 4(b) of the registrant's Form S-8 filed December 20, 1996. 10.18 Certificate and Agreement of Participation, Silver Diner, Inc. Restaurant Operating Partner Program and Addenda incorporated by reference to Exhibit 4 of the registrant's Form S-8 filed February 14, 1997. 10.19 Silver Diner, Inc. Stock Option Plan together with form of Stock Option Agreement. Exhibit 10.19 to the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 1996, is incorporated herein by reference. 40 10.20 Silver Diner, Inc. Employee Stock Purchase Plan together with form of Subscription Agreement and Notice of Withdrawal. Exhibit 10.20 to the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 1996, is incorporated herein by reference. Material Contracts - Agreements with Executive Officers/Directors 10.21 Letter Agreement dated December 31, 1995 between the registrant and Daniel Brannan regarding terms of employment, as amended by Letter Agreement dated March 26, 1996 incorporated by reference to Exhibit 10.18 of the registrant's Form 8-K dated March 27, 1996. 10.22 Letter Agreement dated December 4, 1996 between the registrant and Patrick Meskell regarding terms of employment, as amended by Letter Agreement dated March 26, 1996 incorporated by reference to Exhibit 10.19 of the registrant's Form 8-K dated March 27, 1996. 10.23 Founder's Employment Agreement dated August 28, 1995 by and between the registrant and Robert T. Giaimo incorporated by reference to Exhibit 10.20 of the registrant's Form 8-K dated March 27, 1996. 10.24 Assumption of Founder's Employment Agreement dated March 27, 1996 pursuant to Section 5.14(b) of merger agreement by and among FTAC, FTAC Transition Corporation and SDDI, incorporated by reference to Exhibit 10.21 of the registrant's Form 8-K dated March 27, 1996. 10.25 Indemnity Agreement dated August 29, 1995 by and between Robert T. Giaimo, as indemnitee, and the registrant incorporated by reference to Exhibit 10.22 of the registrant's Form 8-K dated March 27, 1996. Material Contracts - Miscellaneous 10.26 Option to Purchase dated January 26, 1990 between CG Beltsville Limited Partnership (Optionor), and SDLP (Optionee) regarding land parcel on which the Silver Diner Restaurant in Laurel, Maryland, is located incorporated by reference to Exhibit 10.36 of the registrant's Form 8-K dated March 27, 1996. 10.27 Amendment No. 1 to the Stock Escrow Agreement dated as of March 26, 1996 among the Registrant, George A. Naddaff, Douglas M. Suliman, Jr., Ralph J. Guarino, Charles A. Cocotas and Continental Stock Transfer & Trust Company, together with letter dated March 27, 1996 from the Registrant to Continental Stock Transfer & Trust Company incorporated by reference to Exhibit 10.37 of the registrant's Form 8-K dated March 27, 1996. 41 10.28 Affiliate Warrant Exchange and Custodial Agreement dated September 15, 1996, by and among George A. Naddaff, Douglas M. Suliman, Jr. and Charles A. Cocotas, as Warrant Holders, SDDI and Douglas M. Suliman, Jr., as Custodian incorporated by reference to Exhibit 10.38 of the registrant's Form 8-K dated March 27, 1996. 10.29 Escrow Agreement dated as of February 1, 1996 by and between GKN Securities Corp., certain affiliates thereof, the SDDI and Arent Fox, as Escrow Agent incorporated by reference to Exhibit 10.39 of the registrant's Form 8-K dated March 27, 1996. 10.30 Option Agreement dated March 27, 1996 by and between RGDI and SDDI granting option to SDDI for the purchase of Potomac Mills real estate parcels incorporated by reference to Exhibit 10.34 of the registrant's Form 8-K dated March 27, 1996. 10.31 Form of Certificate and Agreement of Participation-Restaurant Operating Partner Program, as approved by the Board on December 15, 1998* 10.32 Form of Addendum to a Certain Certificate and Agreement of Participation in the Silver Diner, Inc. Restaurant Operating Partner Program (Version for 1997 Certificates issued after January 1, 1997), as approved by the Board on December 15, 1998* 10.33 Form of Addendum to a Certain Certificate and Agreement of Participation in the Silver Diner, Inc. Restaurant Operating Partner Program (Version for 1997 Certificates issued on January 1, 1997), as approved by the Board on December 15, 1998* 10.34 Silver Diner, Inc. Stock Option Plan (as amended March 4, 1998)* 10.35 Stock Option Plan Agreement between Silver Diner, Inc. and Robert T. Giaimo for grant of 150,000 Shares on December 15, 1998* 10.36 Form of Stock Option Plan Agreement between Silver Diner, Inc. and certain Executive Officers, Date of Grant: December 15, 1998, together with Performance Criteria for each of: Craig Kendall; Patrick Meskell; Timothy Cusick; and Ype Von Hengst* 10.37 Stock Option Plan Agreement between Silver Diner, Inc. and Robert T. Giaimo for grant of 400,000 Shares on December 15, 1998* 10.38 Form of Restated Stock Option Plan Agreement between Silver Diner, Inc. and Certain Executive Officers Granting Shares on December 29, 1997* 10.39 Employment Agreement dated November 9, 1998, between Silver Diner, Inc. and Ype Von Hengst, including Promissory Note in principal amount of $100,000* 10.40 Letter Agreement dated November 9, 1998 between Robert T. Giaimo and Silver Diner, Inc. Re: Founder's Employment Agreement* 42 10.41 1996 Non-Employee Director Stock Option Plan, as amended March 4, 1998 and incorporated by reference to registrant's Form S-8 dated July 21, 1998* 21 Subsidiaries of the Registrant. (a) Silver Diner Development, Inc., a Virginia corporation 23 Accountants Consents 23.1 Consent of Deloitte & Touche LLP.* 27 Financial Data Schedule (b) Reports on Form 8-K There were no Reports on Form 8-K filed during the last fiscal quarter of the period covered by this report. * Filed herewith. All other exhibits have been previously filed as indicated. 43 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Silver Diner, Inc. By: Robert T. Giaimo --------------------- Robert T. Giaimo President and Chief Executive Officer April 5, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signatures Title Date /s/ Robert T. Giaimo President, Chief Executive April 5, 1999 - -------------------- Officer and Director Robert T. Giaimo /s/ Craig Kendall Vice President, Finance April 5, 1999 - ----------------- Craig Kendall /s/ Catherine Britton Director April 5, 1999 - --------------------- Catherine Britton /s/ Ype Hengst Director April 5, 1999 - -------------- Ype Hengst /s/ Edward H. Kaplan Director April 5, 1999 - -------------------- Edward H. Kaplan /s/ George A. Naddaff Director April 5, 1999 - --------------------- George A. Naddaff /s/ Louis P. Neeb Director April 5, 1999 - ----------------- Louis P. Neeb /s/ Charles Steiner Director April 5, 1999 - ------------------- Charles Steiner /s/ Douglas M. Suliman Director April 5, 1999 - ---------------------- Douglas M. Suliman 44 EX-10.31 2 CERTIFICATE AND AGREEMENT OF PARTICIPATION EXHIBIT 10.31 NOVEMBER 13, 1998 ----------------- CERTIFICATE AND AGREEMENT OF PARTICIPATION SILVER DINER, INC. RESTAURANT OPERATING PARTNER PROGRAM This Certificate and Agreement of Participation ("Certificate of Participation") is entered into as of this ____ day of __________, 199__, by and between Silver Diner, Inc., a Delaware corporation ("SDI") and its wholly-owned subsidiary Silver Diner Development, Inc., a Virginia corporation (both corporations being collectively referred to herein, unless the context otherwise requires, as "Silver Diner") and _______________ ("Operating Partner"). 1. OPERATING PARTNER; DUTIES AND PERFORMANCE; EFFECTIVE DATE. Silver Diner hereby retains the Operating Partner to serve as the general manager for the Silver Diner Restaurant located at _________________ (the "Restaurant") on the terms and conditions set forth herein. (A) DUTIES. The Operating Partner's duties shall include (i) managing the day-to-day business, operations and affairs of the Restaurant; (ii) assuming responsibility for efficiently and effectively operating the Restaurant so as to achieve high levels of customer satisfaction, (iii) assuming responsibility for the supervision, retention, and development of Restaurant employees and operating personnel, (iv) using his/her best efforts to promote the Restaurant's image in the community that it serves, and (v) carrying out such other duties as may be delegated from time to time by the officers of Silver Diner. (B) FULL TIME. The Operating Partner shall devote his/her full time and attention to operating the Restaurant. (C) EFFECTIVE DATE. The date the Operating Partner tenders to SDI full payment for the mandatory Common Stock investment described in Section 4(a). (D) PROXIMITY OF RESIDENCE. In order to maximize the effectiveness of the Operating Partner's performance, the Operating Partner agrees to establish his/her primary residence within ________________( ) miles of the Restaurant and to maintain his/her primary residence within such proximity to the Restaurant for the duration of this Certificate and Agreement unless a modification is approved by the Board of Directors of SDI. If the primary residence of the Operating Partner does not currently meet this proximity requirement, the Operating Partner agrees to relocate his/her primary residence on or before ______________ in order to meet such proximity requirement and acknowledges that Profit-Sharing distributions hereunder will be suspended in the event of a failure to so relocate by such date. 2. BASE SALARY; BENEFITS; PROFIT SHARING. In consideration of the Operating Partner's services, commencing on the Effective Date the Operating Partner shall (i) receive from Silver Diner the Base Salary and benefits described below and (ii) be entitled to participate and share in the Restaurant's operating income described below. (A) BASE SALARY AND BENEFITS. The annual Base Salary of the Operating Partner shall be $45,000 payable bi-weekly. Silver Diner shall also provide such benefits as may generally be provided to other management employees, (which may change from time to time) including health and dental insurance for the Operating Partner and eligible members of his/her family, and two weeks of vacation per year, with scheduling approved by Silver Diner. (B) MONTHLY PROFIT SHARING. The Operating Partner shall be entitled to receive in cash five percent (5%) of the monthly Restaurant Operating Income (as defined below) of the Restaurant, which amount shall be paid to the Operating Partner within thirty (30) days of the close of the month, subject to the terms and conditions of this paragraph. As used in this Certificate of Participation: . A month shall mean that period of time as reflective of the monthly accounting period then being used by Silver Diner for financial reporting purposes, which period now consists of four weeks or 28 days, and . Restaurant Operating Income shall mean the net sales of the Restaurant determined by SDI in accordance with generally accepted accounting principles consistently applied ("GAAP") for the month less (i) cost of sales, (ii) labor (including all salary and cash or stock bonus payments other than Monthly Profit-Sharing and Quarterly Profit-Sharing payments made to the Operating Partner under this Section 2), (iii) operating expenses of the Restaurant (including allocated corporate expenses on behalf of the Restaurant, such as advertising and menu costs not to exceed 5% on an annual basis), and (iv) a deemed annual occupancy cost of $295,000 with respect to all facilities other than the Rockville facility (the occupancy costs of which shall be separately determined). SDI will establish targeted margins for the Restaurant. If the actual margin experience with respect to any month falls below the targeted margin for such month by two percent (2%) or more, then no payment of the above-referenced five percent (5%) profit-sharing amount will be paid until a determination is made of the actual margin experience for the quarter in which such month occurred. If the actual margin for the Restaurant with respect to such quarter does not fall below the targeted margin for the quarter by two percent (2%) or more, than any prior deferred monthly payments of the profit-sharing amount will be paid over to the Operating Partner within thirty (30) days of the close of the quarter. If the actual margin for the Restaurant falls below the targeted margin for the quarter by two percent (2%) or more, then no monthly profit- sharing payments will be made to the Operating Partner with respect to such quarter and any monthly profit-sharing payments previously made to such Operating Partner during the quarter will be treated as unearned payments which will reduce, on a dollar for dollar basis, profit-sharing payments otherwise payable to such Operating Partner with respect to future months of operation. (C) QUARTERLY POSITIVE SALES PROFIT SHARING. The Operating Partner shall be entitled to receive in cash two percent (2%) of the Restaurant Operating Income for each fiscal quarter if his/her Restaurant has positive same store sales for the quarter. Appendix I attached hereto sets forth the methods to be used in determining whether there are positive same store sales. (D) QUARTERLY OPERATIONAL GOAL PROFIT-SHARING. The Operating Partner shall be entitled to receive in cash two percent (2%) of the Restaurant Operating Income for each fiscal quarter if his/her Restaurant achieves its operational goal for such quarter. For these purposes, SDI will establish on a periodic basis the criteria (such as favorable exit interviews) to be used to target and measure operational goals for each quarter. Such measurement methodology shall be communicated to the Operating Partner prior to the commencement of the time period to which the standard of measurement will apply. 3. RESTRICTED STOCK AWARDS. Silver Diner will issue to the Operating Partner at the times and in the amounts specified below that number of fully paid and non-assessable shares of SDI Common Stock ("Common Stock") as provided below. (A) ANNUAL AWARDS. Subject to the terms of Section 5 and prior to any termination under Section 6 and subject to the annual approval of the Board of Directors of SDI, the Operating Partner shall be awarded on a calendar basis that number of shares of Common Stock as shall be determined by dividing (i) the closing price of the shares of Common Stock on the NASDAQ National Market System on the day immediately preceding each Award Date into (ii) the Award Amount, as defined below. For these purposes, the Board of Directors of SDI has specifically reserved the right to review performance on an annual basis and, in its sole discretion, to reduce or eliminate the maximum Award Amount otherwise payable to an Operating Partner pursuant to the following schedule if appropriate. For these purposes, the first Award Date shall constitute the December 31 immediately following the Effective Date. Subsequent Award Dates shall occur on the December 31 of each subsequent calendar year commencing on and after the Effective Date. The Award Amount with respect to the first Award Date (consisting of the first December 31 following the Effective Date) shall be computed by multiplying (i) an amount of up to a maximum of $5,000 by (ii) a fraction, the numerator of which is the number of days occurring between the Effective Date and December 31 of the calendar year in which the Effective Date occurs and the denominator of which is 365. The Award Amount with respect to future Award Dates, together with the Vesting Date for each Award, as described in Section 5(c), is set forth below: END OF RESTRICTION PERIOD AND AWARD AMOUNT AWARD DATE VESTING DATE - ------------ ---------- ------------ Stock acquired pursuant Effective Date Sixth December 31 to 4(a) (Mandatory occurring after the Investment) and Effective Date Section 4 (b) (Optional (12/31/__) Investment) Pro-Rata portion of 1st December 31 Fifth December 31 up to a maximum of following date of following date of the $5,000, as described hire (12/31/__) the Award (12/31/__) Up to a maximum of 2nd December 31 follow- Fourth December 31 $5,000 ing date of hire - following date of the (12/31 ) Award - (12/31/ ) Up to a maximum of 3rd December 31 follow- Third December 31 $7,500 ing Effective Date - following date of the (12/31/ ) Award - (12/31/ ) Up to a maximum of 4th December 31 follow- Third December 31 $7,500 ing Effective Date - following date of the (12/31/ ) Award - (12/31/ ) Up to a maximum of 5th December 31 follow- Third December 31 $10,000 ing Effective Date - following date of the (12/31/ ) Award - (12/31/ ) Up to a maximum of 6th December 31 follow- Third December 31 $10,000 ing Effective Date - following date of the (12/31/ ) Award - (12/31/ ) (B) RESTRICTIONS. The shares of Common Stock awarded to the Operating Partner shall be subject to each of the restrictions and limitations contained in Section 5. 4. SILVER DINER STOCK INVESTMENT. The Operating Partner shall be obligated on the Effective Date to invest $12,500 in Silver Diner and shall have the option to invest an additional $12,500 as follows: (A) MANDATORY INVESTMENT. The Operating Partner shall be required to purchase for cash 8,000 shares of Common Stock at a price equal to the closing price of the shares of Common Stock on the NASDAQ National Market System on the day immediately preceding the date that the Operating Partner pays for such shares (the "Closing Price"), which date must be on or before sixty (60) days following the date of the execution of this Agreement. (B) OPTIONAL INVESTMENT. The Operating Partner shall also have the option, but not the obligation, to invest an additional $12,500 in SDI by purchasing shares of Common Stock at a price equal to 50% of the Closing Price. (C) PAYMENT. The Operating Partner shall pay the purchase price for the shares of Common Stock in cash on or before the Effective Date. The Operating Partner understands that failure to do so will result in no payment or accrual of monthly profit sharing or quarterly positive sales profit sharing and in no stock awards being granted or accrued until the purchase price is paid. (D) SILVER DINER REPURCHASE RIGHT. Silver Diner shall have the option, but not the obligation, to purchase the shares of Common Stock acquired by the Operating Partner pursuant to Sections 4(a) and 4(b) at any time during the ninety (90) day period following Termination of this Certification of Participation (except if Termination is by reason of death or disability as provided below) if Termination occurs at any time prior to the sixth (6th) December 31 following the Effective Date (12/31/ ) on payment to the Operating Partner in case of the amount originally paid by the Operating Partner to SDI to acquire such shares from SDI without payment of any premium or interest. (E) BANK LOAN DEFAULT. If the Operating Partner borrows money from a bank for all or part of the purchase price for his/her purchase of common shares of Silver Diner pursuant to the mandatory or optional investment provisions set forth above, which bank loan is secured by a pledge of all of such purchased shares, then the repayment of such loan shall be effectuated through a payroll withholding mechanism established between Silver Diner and the applicable bank. If the Operating Partner nevertheless defaults on such bank loan, the bank shall have the right to send notice of such default to Silver Diner and request that Silver Diner repurchase the pledged shares. Silver Diner shall have the right, but not the obligation, during the ten (10) day period following receipt of such notice and request from the bank to repurchase the pledged shares in cash of the amount originally paid by the Operating Partner to SDI, without payment of any premium or interest. If Silver Diner does not exercise such repurchase right, the bank may dispose of the pledged shares free of any restrictions on transferability other than under applicable federal and state securities laws. (F) TRANSFER RESTRICTIONS; LIENS. All shares of Common Stock acquired by the Operating Partner pursuant to Sections 4(a) (Mandatory Investment) and 4(b) (Optional Investment) shall be subject to the provisions of Sections 4(d) (Silver Diner Repurchase Right), 4(e) (Bank Loan Default), 5(a) (Stock Transfer Restrictions), 5(b) (Stock Dividends, etc.), and 5(d) (Legends) and 5(e) (Escrow of Shares of Common Stock) for a period of five years following the Effective Date. 5. STOCK TRANSFER RESTRICTIONS, VESTING; LEGENDS. (A) STOCK TRANSFER RESTRICTIONS. The Operating Partner agrees that until the Vesting Date occurs with respect to the Common Stock acquired pursuant to Section 3 or 4 (which Vesting Date appears in the chart contained in Section 3(a)), he/she shall not, directly or indirectly, sell, assign, transfer, convey, give, bequeath, grant a security interest in, otherwise encumber, make a short sale of, loan, grant any option for the purchase of, or otherwise dispose of, voluntarily or involuntarily, the Common Stock acquired pursuant to Section 3 or 4 to which the restriction period relates and any such transfer or attempted transfer shall be void; provided, however, that all provisions of this Section -------- ------- 5(a) shall terminate (i) immediately in the event of the Operating Partner's death and (ii) on Termination by SDI in the event of the Operating Partner's disability. (B) STOCK DIVIDENDS, SPLITS, RECLASSIFICATIONS AND SUBDIVISIONS. In the event that SDI, or any successor entity, declares a dividend or makes a distribution on the Common Stock payable in securities or subdivides or reclassifies the Common Stock or reorganizes, consolidates, or merges with or into any other legal entity, then any securities issues as a result of any such event shall be deemed to constitute part of the shares of Common Stock sold or Awarded to the Operating Partner and shall be deemed to constitute part of the shares of Common Stock sold or Awarded to the Operating Partner and shall be subject to Sections 3, 4 and 5. (C) VESTING. Each share of Common Stock awarded to the Operating Partner pursuant to Section 3 (i) shall, except for death or disability, as determined by SDI, be forfeited and canceled without payment of any consideration to the Operating Partner if this Certificate of Participation is Terminated (as defined below) during the Restriction Period applicable to such share of Common Stock or described in Paragraph (a) of Section 5 and (ii) shall become fully vested upon the expiration of such Restriction Period (the "Vesting Date"). For purposes of convenience the Vesting Date is shown in the Chart contained in Section 3(a). (D) LEGENDS. Each certificate representing shares of Common Stock issued pursuant to this Certificate of Participation shall conspicuously bear a legend in substantially the following form: "The transfer of the Common Stock (by sales, transfer, conveyance, gift, bequest, hypothecation, pledge or otherwise) represented by this certificate is restricted and the shares of Common Stock are, pursuant to the terms of an agreement to which the Corporation is a party, as such agreement may be amended, supplemented, or otherwise modified from time to time, subject either (i) to the right of the corporation to redeem such shares for cash at a price substantially less than the price at which the shares of Common Stock may be trading, or (ii) to forfeiture without payment of any consideration and the Corporation has a lien on the Common Stock represented by this certificate to ensure payment and performance of all obligations thereunder. A copy of the Agreement is on file at the Corporation's office." (E) ESCROW OF SHARES OF COMMON STOCK. Each share of Common Stock issued to the Operating Partner as an Award under Section 3 and each share of Common Stock acquired by the Operating Partner pursuant to Section 4(a) (Mandatory Investment) and Section 4(b) (Optional Investment) will be held in escrow for the benefit of the Operating Partner by the law firm of Arent Fox Kintner Plotkin & Kahn, PLLC or such other escrow agent as may be designated by SDI from time to time, until the restrictions relating to such share of Common Stock have been eliminated. If any shares of Common Stock are pledged as collateral for a loan used to purchase such shares of Common Stock and if such shares of Common Stock are released from collateral during the restriction period relating to such shares, then upon their release from collateral, such shares shall be delivered to the escrow agent described above for the duration of such restriction period. In the event that a forfeiture of a share of Common Stock arises under Section 6(b), the forfeited share shall be released from escrow and delivered to SDI. In the event the restriction period with respect to a share of Common Stock lapses prior to any forfeiture of such share, the share of Common Stock shall be released from escrow and delivered directly to the Operating Partner. 6. TERMINATION. (A) TERMINATION BY SILVER DINER OR BY THE OPERATING PARTNER. Silver Diner reserves the right to terminate the services of the Operating Partner and, except as provided in Section 6(c), all obligations and liabilities under this Certificate of Participation at any time for any reason in its sole and absolute discretion and with or without cause. The Operating Partner reserves the right to resign and terminate, except as provided in Section 6(c), all obligations and liabilities under this Certificate of Participation at any time for any reason in his/her sole and absolute discretion and with or without cause. (B) EFFECTS OF TERMINATION. As used in this Certificate of Participation, "Termination" shall mean termination pursuant to this Section 6. (I) Following Termination for any reason, other than death or the determination by Silver Diner of disability, the Operating Partner shall be entitled to receive the Base Salary which has accrued prior to the date of Termination, the Profit Participation which has accrued for the month or quarter preceding the month or quarter in which Termination occurs and that number of shares of Common Stock acquired by the Operating Partner pursuant to Section 3 (the Award Shares) which shall have been held for the periods of time required by Section 5 and the Operating Partner's right to the shares of Common Stock which have not been held for the period of time required by Section 5 shall be forfeited. In addition, the shares of Common Stock purchased by the Operating Partner pursuant to Section 4 shall be subject to Silver Diner's option, but not obligation, to purchase or redeem such shares as provided in Section 4(c) (Termination) and 4(d) (Bank Loan Default). (II) Following Termination for death or the determination by Silver Diner of disability, the Operating Partner, and in the event of death, the representative of the Operating Partner, shall be entitled to receive the Base Salary which has accrued prior to the date of Termination, the Profit Participation which has accrued for the month or quarter preceding the month or quarter in which Termination occurs and all shares of SDI Common Stock issued to the Operating Partner pursuant to Sections 3 and 4 shall become fully vested and free and clear of any and all liens, claims or restrictions arising under or by virtue of this Certificate of Participation. (III) Following Termination for any reason, the provisions of Sections 7 through 20 shall remain in full force and effect. (C) EMPLOYMENT AT WILL. Nothing contained in this Certificate of Participation shall constitute or be evidence of any agreement or understanding, express or implied, on the part of Silver Diner to employ the Operating Partner for any specific period of time or create any obligation or liability other than as specifically set forth herein and employment of the Operating Partner is and shall remain an employment at will. 7. CONFIDENTIAL INFORMATION. The Operating Partner agrees that all Confidential information (as defined below) relating to Silver Diner or to its business and affairs, including without limitation, any information whatsoever concerning its organization, management or finances, shall at all times and notwithstanding that Termination shall have occurred, be treated as confidential and shall not be used, disclosed, divulged or otherwise placed at the disposal of any person or entity except to the extent that (i) the parties hereto may otherwise agree in writing, (ii) such information is required to be disclosed by law, (iii) such information is otherwise publicly available other than by reason of a breach by such party of this Section 7 or (iv) such information is submitted into evidence in any legal proceedings between or among the parties. "CONFIDENTIAL INFORMATION" means all information, records, documents, accounts and correspondence of every description regarding past, current or future business activities, interests, methodology or affairs whether written, recorded or stored by electronic, magnetic, electro-magnetic or other form or process or otherwise in machine or computer readable form including without limitation: (A) business plans, research, know-how, development and survey information, (B) customer, staff, and all other training manuals and product policy manuals, recipes, and (C) planning and marketing strategies, procedures, techniques and information. 8. NON-COMPETITION. The Operating Partner agrees that during the period of time that he/she is providing services hereunder and for a period ending on the first anniversary of any Termination: (A) The Operating Partner will not engage, without first obtaining Silver Diner's prior written consent, directly or indirectly within 25 miles of a then existing Silver Diner Restaurant, in any restaurant business (x) with the word "Diner" in its name or logo or which is commonly understood to be a diner or (y) whose menu, trade dress and pricing are substantially similar to that employed in the Silver Diner Restaurants, whether as employee, officer, director, partner, joint venture, stockholder (other than the holder of less than 5% of the stock of a corporation, the securities of which are traded on a national securities exchange or in the over-the-counter market), consultant or agent. (B) The Operating Partner will not engage, without first obtaining Silver Diner's prior written consent, directly or indirectly, within the United States, in any restaurant business with the word "Diner" in its name or logo or which is commonly understood to be a diner, whether as employee, officer, director, partner, joint venturer, stockholder (other than the holder of less than 5% of the stock of a corporation, the securities of which are traded on a national securities exchange or in the over-the-counter market), consultant or agent. (C) The Operating Partner will not induce or attempt to persuade any employee of Silver Diner to terminate his or her employment relationship in order to enter into employment which is competitive with Silver Diner. (D) It is the intent and understanding of each party hereto that if, in any action before any court or agency legally empowered to enforce the covenants contained in this Section 8 any term, any restriction, covenant or promise contained therein is found to be unreasonable and for that reason unenforceable, then such term, restriction, covenant or promise shall be deemed modified to the extent necessary to make it enforceable by such court or agency, and such finding shall not, in any event, affect the enforceability of any other term, restriction, covenant, or promise herein. 9. ENFORCEMENT COSTS. If any legal action or other proceeding is brought for the enforcement of any right provided for in this Certificate of Participation, or because of an alleged dispute or breach in connection with any provisions of any right provided for in this Certificate of Participation, the party who shall substantially prevail shall be entitled to recover from the other party all reasonable attorneys' fees, court costs and all expenses (even if not taxable as court costs), including, without limitation, all such fees, costs and expenses incident to appeals, incurred in connection with such action or proceeding, in addition to any other relief to which the party may be entitled. 10. WITHHOLDING OF TAXES. Silver Diner shall, to the extent permitted or required by law, have the right to deduct from any payment of any kind otherwise due to the Operating Partner any federal, state or local taxes of any kind required by law to be withheld, including any withholding required on expiration of the restrictions imposed on the shares of Common Stock awarded or sold to the Operating Partner pursuant to the provisions of this Certificate of Participation. 11. TERM. The Term of this Certificate of Participation shall be five (5) years from the Effective Date except that the provisions of Sections 5-20 shall survive the Term. 12. APPLICABLE LAW AND VENUE. This Certificate of Participation shall be governed by and construed in accordance with the laws of the State of Maryland. In the event of any legal or equitable action arising under this Certificate of Participation, the parties agree that the jurisdiction and venue of such action shall lie exclusively within either the state courts of Maryland located in Montgomery County or the United States District Court for the District of Maryland in Prince George's County, Maryland, and the parties do hereby waive any other jurisdiction and venue. 13. ASSIGNMENT PROHIBITED. This Certificate of Participation is personal to the Operating Partner and he/she may not assign or alienate any of his/her obligations under this Certificate of Participation without the written consent of Silver Diner. This Certificate of Participation shall be binding upon Silver Diner and its successors and assigns. 14. SEVERABILITY. If any part of this Certificate of Participation is contrary to, prohibited by, or deemed invalid under applicable law or regulations, such provision shall be inapplicable and deemed omitted to the extent so contrary, prohibited or invalid, but the remainder of this Certificate of Participation shall not be invalid and shall be given full force and effect so far as possible. 15. WAIVERS. The failure or delay of either party at any time to require performance by the other of any provision of this Certificate of Participation, even if known, shall not affect the right of such party to require performance of that provision or to exercise any right, power or remedy hereunder, and any waiver by either party of any breach of any provision of this Certificate of Participation shall not be construed as a waiver of any continuing or succeeding breach of such provision, a waiver of the provision itself, or a waiver of any right, power or remedy under this Certificate of Participation. No notice to or demand on either party in any case shall, of itself, entitle such party to any other or further notice or demand in similar or other circumstances. 16. REMEDIES CUMULATIVE. No remedy conferred upon any party pursuant to this Certificate of Participation is intended to be exclusive of any other remedy, and each and every such remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law, in equity, by statute or otherwise. No single or partial exercise by any party of any right, power or remedy hereunder shall preclude any other or further exercise thereof. 17. WAIVER OF JURY TRIAL. The parties hereto hereby irrevocably covenant and agree not to elect a trial by jury of any issues triable by a jury and waive any right to trial by jury fully to the extent any such right should now or hereafter exist. This waiver of right to a trial by jury is separately given, knowingly and voluntarily but the Operating Partner and Silver Diner and this waiver is intended to incorporate individually each instance and each issue as to which the right to a trial by jury would otherwise occur. 18. ENTIRE AGREEMENT; AMENDMENTS. This Certificate of Participation incorporates the entire agreement between the parties with respect to the subject matter of the Certificate of Participation, and supersedes all other prior or contemporaneous agreements, negotiations or discussions between the parties with respect to employment, compensation and benefits and no change or modification shall be valid unless made in writing and signed by both the parties. 19. NOTICES. All notices, consents, approvals and other communications given or made pursuant hereto shall be in writing and shall be (a) delivered personally, (b) by overnight courier, (c) transmitted by telecopier, or (d) by registered or certified mail (postage prepaid, return receipt requested), in each case to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (A) if to Silver Diner: Silver Diner, Inc. 11806 Rockville Pike Rockville, Maryland 20852 Attention: President (B) if to the Operating Partner at the address maintained by Silver Diner for the Operating Partner. 20. This Certificate of Participation may be executed in counterparts, all of which shall be considered one and the same agreement, it being understood that all parties hereto need not sign the same counterpart. IN WITNESS WHEREOF, the parties have executed this Certificate of Participation as of the date first set forth above. Silver Diner, Inc. Silver Diner Development, Inc. Date:__________________ By:_______________________________ Robert T. Giaimo, President Date:__________________ By:_______________________________ , Operating Partner By his or her signature above, the Operating Partner agrees to make the $12,500 minimum investment in Silver Diner pursuant to Section 4(a) and the Operating Partner agrees to make an optional investment in Silver Diner of $______________ pursuant to Section 4(b). CONFIRMATION OF PURCHASE ------------------------ By the execution of this Confirmation of Purchase, the Operating Partner and Silver Diner, Inc. acknowledge that the Operating Partner has completed the purchase of Silver Diner, Inc. stock in accordance with the provisions of Section 4(a) as of the _____ day of _________, 199__. Silver Diner, Inc. Silver Diner Development, Inc. Date:__________________ By:_______________________________ Robert T. Giaimo, President Date:__________________ By:_______________________________ , Operating Partner APPENDIX I to Certificate and Agreement of Participation OPERATING PARTNER QUARTERLY POSITIVE SALES PROFIT SHARING --------------------------------------------------------- 1. If there are positive same Store sales for the quarter in question (sales exceed target), the Operating Partner's share of the Restaurant Income will be two percent (2%). 2. For existing Stores, the quarter sales target will be based upon sales in the corresponding fiscal quarter for the prior fiscal year. 3. For new Stores, the quarterly sales target will be based upon a budget to be established by Silver Diner for the fiscal quarter in which the Store is opened and for the next four quarters. Such budget will be based upon an estimate of the market for each particular location and Silver Diner's investment in the Diner at each location. A sales target for the next two quarters (5th and 6th) will be based upon the 3rd and 4th quarters (seasonally adjusted). It is anticipated that this method will factor out the "honeymoon" performance of a new Store from opening through the 1st and 2nd full quarters. Commencing with the 7th full quarter after the Store opening, the sales target will be based upon the sales in the corresponding quarter of the prior fiscal year. 4. Recognizing that circumstances could occasionally cause a Store's sales for any quarter to be less than the corresponding quarter of the prior fiscal year, the Quarterly Positive Sales Profit Sharing will be paid if the Store's year-to-date sales equal or exceed targeted year-to-date sales. 5. In preparing sales targets and in comparing quarterly sales with sales in prior periods, Silver Diner will take into account the occasional impact of 53-week fiscal years. * * * EX-10.32 3 RESTAURANT OPERATING PARTNER PROGRAM EXHIBIT 10.32 VERSION FOR 1997 CERTIFICATES ----------------------------- ISSUED AFTER 1/1/97 ------------------- RESTAURANT OPERATING PARTNER PROGRAM ------------------------------------ ADDENDUM NO. _______ TO A CERTAIN CERTIFICATE AND AGREEMENT OF PARTICIPATION IN THE SILVER DINER, INC. RESTAURANT OPERATING PARTNER PROGRAM (THE "CERTIFICATE OF PARTICIPATION") This Addendum No. ______ to that certain Certificate and Agreement of Participation ("Certificate of Participation") by and between Silver Diner, Inc. and its wholly-owned subsidiary Silver Diner Development, Inc. and ____________________________ is made as of this ____ day of _______________, 1998. RECITALS R-1. All defined terms in the Certificate of Participation shall have the same meanings as in this Addendum No. ______. R-2. Silver Diner has introduced a restaurant operating partner program originally designated as the "Silver Diner, Inc. Restaurant Owner Operator Program" but now designated as the "Silver Diner, Inc. Restaurant Operating Partner Program" (the "Operating Partner Program") to be implemented in part through this Certificate of Participation. R-3. Silver Diner wishes to make certain refinements to the Operating Partner Program as it relates to existing and future managers who desire to become operating partners under the Operating Partner Program. It is mutually agreed that notwithstanding anything to the contrary in the Certificate of Participation, the following shall apply: (1) All references in the Certificate of Participation to "Owner Operator" shall be modified so as to constitute references to "Operating Partner". (2) Paragraph (b) of Section 2 is hereby amended and restated in its entirety to read as follows: (b) MONTHLY PROFIT SHARING. The Operating Partner shall be entitled to receive in cash five percent (5%) of the monthly Restaurant Operating Income (as defined below) of the Restaurant, which amount shall be paid to the Operating Partner within thirty (30) days of the close of the month, subject to the terms and conditions of this paragraph. As used in this Certificate of Participation: . A month shall mean that period of time as reflective of the monthly accounting period then being used by Silver Diner for financial reporting purposes, which period now consists of four weeks or 28 days, and . Restaurant Operating Income shall mean the net sales of the Restaurant determined by SDI in accordance with generally accepted accounting principles consistently applied ("GAAP") for the month less (i) cost of sales, (ii) labor (including all salary and cash or stock bonus payments other than Monthly Profit-Sharing and Quarterly Profit-Sharing payments made to the Operating Partner under this Section 2), (iii) operating expenses of the Restaurant (including allocated corporate expenses on behalf of the Restaurant, such as advertising and menu costs not to exceed 5% on an annual basis), and (iv) a deemed annual occupancy cost of $295,000 with respect to all facilities other than the Rockville facility (the occupancy costs of which shall be separately determined). SDI will establish targeted margins for the Restaurant. If the actual margin experience with respect to any month falls below the targeted margin for such month by two percent (2%) or more, then no payment of the above-referenced five percent (5%) profit- sharing amount will be paid until a determination is made of the actual margin experience for the quarter in which such month occurred. If the actual margin for the Restaurant with respect to such quarter does not fall below the targeted margin for the quarter by two percent (2%) or more, than any prior deferred monthly payments of the profit-sharing amount will be paid over to the Operating Partner within thirty (30) days of the close of the quarter. If the actual margin for the Restaurant falls below the targeted margin for the quarter by two percent (2%) or more, then no monthly profit-sharing payments will be made to the Operating Partner with respect to such quarter and any monthly profit- sharing payments previously made to such Operating Partner during the quarter will be treated as unearned payments which will reduce, on a dollar for dollar basis, profit-sharing payments otherwise payable to such Operating Partner with respect to future months of operation. (3) A new Paragraph (d) is added to Section 2 to read as follows: (D) QUARTERLY OPERATIONAL GOAL PROFIT-SHARING. The Operating Partner shall be entitled to receive in cash two percent (2%) of the Restaurant Operating Income for each fiscal quarter if his/her Restaurant achieves its operational goal for such quarter. For these purposes, SDI will establish on a periodic basis the criteria (such as favorable exit interviews) to be used to target and measure operational goals for each quarter. Such measurement methodology shall be communicated to the Operating Partner prior to the commencement of the time period to which the standard of measurement will apply." (4) Paragraph (a) of Section 3 is amended and restated in its entirety to read as follows: (A) ANNUAL AWARDS. Subject to the terms of Section 5 and prior to any termination under Section 6 and subject to the annual approval of the Board of Directors of SDI, the Operating Partner shall be awarded on a calendar basis that number of shares of Common Stock as shall be determined by dividing (i) the closing price of the shares of Common Stock on the NASDAQ National Market System on the day immediately preceding each Award Date into (ii) the Award Amount, as defined below. The Board of Directors has specifically reserved the right to review performance on an annual basis and, in its sole discretion, to reduce or eliminate the maximum Award Amount otherwise payable to the Operating Partner pursuant to the following schedule, if appropriate. For these purposes, the first Award Date constituted the first anniversary of the Effective Date. The Award Amount with respect to the first Award Date was $5,000. Subsequent Award Dates shall occur on the December 31 of each subsequent calendar year commencing on and after January 1, 1998. The Award Amount with respect to the second Award Date (consisting of December 31, 1998) shall be computed by multiplying (i) an amount of up to a maximum of $7,500 by (ii) a fraction, the numerator of which is the number of days occurring between the first anniversary of the Effective Date and December 31, 1998 and the denominator of which is 365. The Award Amount with respect to future Award Dates, together with the Vesting Date, as described in Section 5(c), for each Award and the Vesting Date for the Silver Diner Stock Investment is set forth below:
END OF RESTRICTION PERIOD AND AWARD AMOUNT AWARD DATE VESTING DATE ------------ ---------- ------------ Stock acquired pursuant Effective Date Sixth December 31 to Section 4(a) (Mandatory occurring after the Investment) and Section Effective Date (12/31/__) 4(b) (Optional Investment) $5,000 First Anniversary of the Fifth December 31 Effective Date following date of the (__/__/__) Award (12/31/__) Pro-rata portion of 2nd December 31 following Fourth December 31 up to a maximum of Effective Date (12/31/__) following date of the $7,500 as described Award (12/31/__) above Up to a maximum of 3rd December 31 follow- Third December 31 $7,500 ing Effective Date - following date of the (12/31/ ) Award - (12/31/ )
Up to a maximum of 4th December 31 follow- Third December 31 $7,500 ing Effective Date - following date of the (12/31/ ) Award - (12/31/ ) Up to a maximum of 5th December 31 follow- Third December 31 $10,000 ing Effective Date - following date of the (12/31/ ) Award - (12/31/ ) Up to a maximum of 6th December 31 follow- Third December 31 $10,000 ing Effective Date - following date of the (12/31/ ) Award - (12/31/ )
(5) Paragraphs (d) and (e) of Section 4 are amended and restated to read as follows: (D) SILVER DINER REPURCHASE RIGHT. Silver Diner shall have the option, but not the obligation, to purchase the shares of Common Stock acquired by the Operating Partner pursuant to Sections 4(a) and 4(b) at any time during the ninety (90) day period following Termination of this Certification of Participation (except if Termination is by reason of death or disability as provided below) if Termination occurs at any time prior to the sixth (6th) December 31 following the Effective Date (12/31/ ) on payment to the Operating Partner in case of the amount originally paid by the Operating Partner to SDI to acquire such shares from SDI without payment of any premium or interest. (E) BANK LOAN DEFAULT. If the Operating Partner borrows money from a bank for all or part of the purchase price for his/her purchase of common shares of Silver Diner pursuant to the mandatory or optional investment provisions set forth above, which bank loan is secured by a pledge of all of such purchased shares, then the repayment of such loan shall be effectuated through a payroll withholding mechanism established between Silver Diner and the applicable bank. If the Operating Partner nevertheless defaults on such bank loan, the bank shall have the right to send notice of such default to Silver Diner and request that Silver Diner repurchase the pledged shares. Silver Diner shall have the right, but not the obligation, during the ten (10) day period following receipt of such notice and request from the bank to repurchase the pledged shares in cash of the amount originally paid by the Operating Partner to SDI, without payment of any premium or interest. If Silver Diner does not exercise such repurchase right, the bank may dispose of the pledged shares free of any restrictions on transferability other than under applicable federal and state securities laws. (6) Paragraph (a) of Section 5 is amended and restated to read as follows: (A) STOCK TRANSFER RESTRICTIONS. The Operating Partner agrees that until the Vesting Date occurs with respect to the Common Stock acquired pursuant to Section 3 or 4 (which Vesting Date appears in the chart contained in Section 3(a)), he/she shall not, directly or indirectly, sell, assign, transfer, convey, give, bequeath, grant a security interest in, otherwise encumber, make a short sale of, loan, grant any option for the purchase of, or otherwise dispose of, voluntarily or involuntarily, the Common Stock acquired pursuant to Section 3 or 4 to which the restriction period relates and any such transfer or attempted transfer shall be void; provided, however, that -------- ------- all provisions of this Section 5(a) shall terminate (i) immediately in the event of the Operating Partner's death and (ii) on Termination by SDI in the event of the Operating Partner's disability. (7) Paragraph (c) of Section 5 is hereby amended and restated to read as follows: (C) VESTING. Each share of Common Stock awarded to the Operating Partner pursuant to Section 3(i) shall, except for death or disability, as determined by SDI, be forfeited and canceled without payment of any consideration to the Operating Partner if this Certificate of Participation is Terminated (as defined below) during the Restriction Period applicable to such share of Common Stock as described in Paragraph (a) of Section 5 and (ii) shall become fully vested upon the expiration of such Restriction Period (the "Vesting Date"). For purposes of convenience the Vesting Date is shown in the Chart contained in Section 3(a). (8) A new Paragraph (e) is hereby added to Section 5 to read as follows: (E) ESCROW OF SHARES OF COMMON STOCK. Each share of Common Stock issued to the Operating Partner as an Award under Section 3 and each share of Common Stock acquired by the Operating Partner pursuant to Section 4(a) (Mandatory Investment) and Section 4(b) (Optional Investment) will be held in escrow for the benefit of the Operating Partner by the law firm of Arent Fox Kintner Plotkin & Kahn, PLLC or such other escrow agent as may be designated by SDI from time to time, until the restrictions relating to such share of Common Stock have been eliminated. If any shares of Common Stock are pledged as collateral for a loan used to purchase such shares of Common Stock and if such shares of Common Stock are released from collateral during the restriction period relating to such shares, then upon their release from collateral, such shares shall be delivered to the escrow agent described above for the duration of such restriction period. In the event that a forfeiture of a share of Common Stock arises under Section 6(b), the forfeited share shall be released from escrow and delivered to SDI. In the event the restriction period with respect to a share of Common Stock lapses prior to any forfeiture of such share, the share of Common Stock shall be released from escrow and delivered directly to the Operating Partner. Silver Diner, Inc. Silver Diner Development, Inc. Date: __________________ By: _____________________________ Robert T. Giaimo, President Date: __________________ _________________________________ _____________, Operating Partner EX-10.33 4 RESTAURANT OPERATING PARTNER PROGRAM Exhibit 10.33 VERSION FOR 1997 CERTIFICATES ----------------------------- ISSUED ON 1/1/97 ---------------- RESTAURANT OPERATING PARTNER PROGRAM ------------------------------------ ADDENDUM NO. _______ TO A CERTAIN CERTIFICATE AND AGREEMENT OF PARTICIPATION IN THE SILVER DINER, INC. RESTAURANT OPERATING PARTNER PROGRAM (THE "CERTIFICATE OF PARTICIPATION") This Addendum No. ______ to that certain Certificate and Agreement of Participation ("Certificate of Participation") by and between Silver Diner, Inc. and its wholly-owned subsidiary Silver Diner Development, Inc. and ____________________________ is made as of this ____ day of _______________, 1998. RECITALS R-1. All defined terms in the Certificate of Participation shall have the same meanings as in this Addendum No. ______. R-2. Silver Diner has introduced a restaurant operating partner program originally designated as the "Silver Diner, Inc. Restaurant Owner Operator Program" but now designated as the "Silver Diner, Inc. Restaurant Operating Partner Program" (the "Operating Partner Program") to be implemented in part through this Certificate of Participation. R-3. Silver Diner wishes to make certain refinements to the Operating Partner Program as it relates to existing and future managers who desire to become operating partners under the Operating Partner Program. It is mutually agreed that notwithstanding anything to the contrary in the Certificate of Participation, the following shall apply: (1) All references in the Certificate of Participation to "Owner Operator" shall be modified so as to constitute references to "Operating Partner". (2) Paragraph (b) of Section 2 is hereby amended and restated in its entirety to read as follows: (B) MONTHLY PROFIT SHARING. The Operating Partner shall be entitled to receive in cash five percent (5%) of the monthly Restaurant Operating Income (as defined below) of the Restaurant, which amount shall be paid to the Operating Partner within thirty (30) days of the close of the month, subject to the terms and conditions of this paragraph. As used in this Certificate of Participation: . A month shall mean that period of time as reflective of the monthly accounting period then being used by Silver Diner for financial reporting purposes, which period now consists of four weeks or 28 days, and . Restaurant Operating Income shall mean the net sales of the Restaurant determined by SDI in accordance with generally accepted accounting principles consistently applied ("GAAP") for the month less (i) cost of sales, (ii) labor (including ---- all salary and cash or stock bonus payments other than Monthly Profit-Sharing and Quarterly Profit-Sharing payments made to the Operating Partner under this Section 2), (iii) operating expenses of the Restaurant (including allocated corporate expenses on behalf of the Restaurant, such as advertising and menu costs not to exceed 5% on an annual basis), and (iv) a deemed annual occupancy cost of $295,000 with respect to all facilities other than the Rockville facility (the occupancy costs of which shall be separately determined). SDI will establish targeted margins for the Restaurant. If the actual margin experience with respect to any month falls below the targeted margin for such month by two percent (2%) or more, then no payment of the above-referenced five percent (5%) profit-sharing amount will be paid until a determination is made of the actual margin experience for the quarter in which such month occurred. If the actual margin for the Restaurant with respect to such quarter does not fall below the targeted margin for the quarter by two percent (2%) or more, than any prior deferred monthly payments of the profit-sharing amount will be paid over to the Operating Partner within thirty (30) days of the close of the quarter. If the actual margin for the Restaurant falls below the targeted margin for the quarter by two percent (2%) or more, then no monthly profit-sharing payments will be made to the Operating Partner with respect to such quarter and any monthly profit-sharing payments previously made to such Operating Partner during the quarter will be treated as unearned payments which will reduce, on a dollar for dollar basis, profit-sharing payments otherwise payable to such Operating Partner with respect to future months of operation. (3) A new Paragraph (d) is added to Section 2 to read as follows: (D) QUARTERLY OPERATIONAL GOAL PROFIT-SHARING. The Operating Partner shall be entitled to receive in cash two percent (2%) of the Restaurant Operating Income for each fiscal quarter if his/her Restaurant achieves its operational goal for such quarter. For these purposes, SDI will establish on a periodic basis the criteria (such as favorable exit interviews) to be used to target and measure operational goals for each quarter. Such measurement methodology shall be communicated to the Operating Partner prior to the commencement of the time period to which the standard of measurement will apply. (4) Paragraph (a) of Section 3 is hereby amended and restated to read as follows: (A) ANNUAL AWARDS. Subject to the terms of Section 5 and prior to any Termination under Section 6 and subject to the annual approval of the Board of Directors of SDI, the Owner Operator shall be awarded on the 365th day following commencement of the quarter occurring immediately after the quarter in which the Effective Date occurs and on each subsequent anniversary of such commencement (each such date being referred to as the "Award Date") that number of shares of Common Stock as determined by dividing the closing price of the shares of Common Stock on the NASDAQ National Market System on the day immediately preceding each Award Date into: . Up to a maximum of $5,000 for the first anniversary following the Award Date . Up to a maximum of $7,500 for each of the second and third anniversaries following the Award Date, and . Up to a maximum of $10,000 for the fourth and fifth anniversaries following the Award Date. For these purposes, the Board of Directors of Silver Diner has specifically reserved the right to review performance on an annual basis and, in its sole discretion, to reduce or eliminate the amount of the Annual Award otherwise payable to the Operating Partner pursuant to the above schedule, if appropriate. (5) A new Paragraph (e) is added to Section 4 to read as follows: (E) BANK LOAN DEFAULT. If the Operating Partner borrows money from a bank for all or part of the purchase price for his/her purchase of common shares of Silver Diner pursuant to the mandatory or optional investment provisions set forth above, which bank loan is secured by a pledge of all of such purchased shares, then the repayment of such loan shall be effectuated through a payroll withholding mechanism established between Silver Diner and the applicable bank. If the Operating Partner nevertheless defaults on such bank loan, the bank shall have the right to send notice of such default to Silver Diner and request that Silver Diner repurchase the pledged shares. Silver Diner shall have the right, but not the obligation, during the ten (10) day period following receipt of such notice and request from the bank to repurchase the pledged shares in cash of the amount originally paid by the Operating Partner to SDI, without payment of any premium or interest. If Silver Diner does not exercise such repurchase right, the bank may dispose of the pledged shares free of any restrictions on transferability other than under applicable federal and state securities laws. (6) A new Paragraph (e) is added to Section 5 to read as follows: (E) ESCROW OF SHARES OF COMMON STOCK. Each share of Common Stock issued to the Operating Partner as an Award under Section 3 and each share of Common Stock acquired by the Operating Partner pursuant to Section 4(a) (Mandatory Investment) and Section 4(b) (Optional Investment) will be held in escrow for the benefit of the Operating Partner by the law firm of Arent Fox Kintner Plotkin & Kahn, PLLC or such other escrow agent as may be designated by SDI from time to time, until the restrictions relating to such share of Common Stock have been eliminated. If any shares of Common Stock are pledged as collateral for a loan used to purchase such shares of Common Stock and if such shares of Common Stock are released from collateral during the restriction period relating to such shares, then upon their release from collateral, such shares shall be delivered to the escrow agent described above for the duration of such restriction period. In the event that a forfeiture of a share of Common Stock arises under Section 6(b), the forfeited share shall be released from escrow and delivered to SDI. In the event the restriction period with respect to a share of Common Stock lapses prior to any forfeiture of such share, the share of Common Stock shall be released from escrow and delivered directly to the Operating Partner. Silver Diner, Inc. Silver Diner Development, Inc. Date: __________________ By: ____________________________ Robert T. Giaimo, President Date: __________________ _______________________________ ____________, Operating Partner EX-10.34 5 STOCK OPTION PLAN Exhibit 10.34 SILVER DINER, INC. STOCK OPTION PLAN (AS AMENDED MARCH 4, 1998) 1. PURPOSE This Stock Option Plan (the "Plan") for Silver Diner, Inc. (the "Company") is intended to provide incentive to officers and other key employees of the Company by providing those persons with opportunities to purchase shares of the Company's Common Stock under (a) incentive stock options ("Incentive Stock Options") as such term is defined under Section 422 of the Internal Revenue Code of 1986, as amended and (b) other stock options ("Non-Qualified Options"). 2. DEFINITIONS As used in this Plan, the following words and phrases shall have the meanings indicated: (a) "Board" shall mean the Board of Directors of the Company. (b) "Code" shall mean the Internal Revenue Code of 1986, as amended. (c) "Common Stock" shall mean the Common Stock, $0.01 par value, of the Company. (d) "Company" shall mean Silver Diner, Inc., a Delaware corporation. (e) "Disability" shall mean an Optionee's inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve (12) months. (f) "Fair Market Value" per share as of a particular date shall mean (i) the closing sales price per share of Common Stock on the principal national securities exchange, if any, on which the shares of Common Stock shall then be listed for the last preceding date on which there was a sale of such Common Stock on such exchange, or (ii) if the shares of Common Stock are not then listed on a national securities exchange, the last sales price per share of Common Stock entered on a national inter-dealer quotation system for the last preceding date on which there was a sale of such Common Stock on such national inter-dealer quotation system, or (iii) if no closing or last sales price per share of Common Stock is entered on a national inter-dealer quotation system, the average of the closing bid and asked prices for the shares of Common Stock in the over-the-counter market for the last preceding date on which there was a quotation for such Common Stock in such market, or (iv) if no price can be determined under the preceding alternatives, then the price per share as most recently determined by the Board, which shall make such determinations of value at least once annually. (g) "Incentive Stock Option" means one or more options to purchase Common Stock which, at the time such options are granted under this Plan or any other such plan of the Company, qualify as incentive stock options under Section 422 of the Code. (h) "Non-Qualified Option" shall mean any Option that is not an Incentive Stock Option. (i) "Option Price" shall mean the purchase price of shares of Common Stock covered by an Option. (j) "Parent" shall mean any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if, at the time of granting an Option, each of the corporations other than the Company owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. (k) "Plan" shall mean this Stock Option Plan. (l) "Option" shall mean any option issued pursuant to this Plan. (m) "Optionee" shall mean any person to whom an Option is granted under this Plan. (n) "Subsidiary" shall mean any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if, at the time of granting an Option, each of the corporations other than the last corporation in the unbroken chain owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. (o) "Ten Percent Shareholder" shall mean an Optionee who, at the time an Option is granted, owns directly or indirectly (within the meaning of section 425(d) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company, its Parent or a Subsidiary. 3. GENERAL ADMINISTRATION. (a) The Plan shall be administered by the Board or a committee consisting of three or more members of the Board (the "Committee") as shall be established by the Board. (b) The Board (or Committee, if applicable), shall have the authority in its discretion, subject to and not inconsistent with the express provisions of the Plan, to administer the Plan and to exercise all the powers and authorities either specifically granted to the Board (or Committee, if applicable) under the Plan or necessary or advisable in the administration of the Plan, including, without limitation, the authority to grant Options; to determine the Option Price; to determine the persons to whom, and the time or times at which, Options shall be granted; to determine the number of shares to be covered by each Option; to interpret the Plan; to prescribe, amend and rescind rules and regulations relating to the Plan; to determine the terms and provisions of the Option Agreements (which need not be identical) entered into in connection with Options granted under the Plan; and to make all other determinations deemed necessary or advisable for the administration of the Plan. All powers granted to the Board under the Plan shall be deemed granted to the Committee if the Committee is established. (c) No member of the Board or Committee shall be liable for any action taken or determination made in good faith with respect to the Plan or any Option granted hereunder. 4. GRANTING OF OPTIONS Options may be granted under the Plan at any time prior to September 11, 2006. 5. ELIGIBILITY (a) Options may be granted to any director, officer key employee or outside consultant of the Company. In determining from time to time the officers and employees to whom Options shall be granted and the number of shares to be covered by each Option, the Board shall take into account the duties of the respective officers and employees, their present and potential contributions to the success of the Company and such other factors as the Board shall deem relevant in connection with accomplishing the purposes of the Plan. (b) At the time of the grant of each Option under the Plan, the Board shall determine whether such Option is to be designated an Incentive Stock Option. Incentive Stock Options shall not be granted to a director who is not an employee of the Company. The length of the exercise period of Incentive Stock Options shall be governed by Section 7(e)(1) of the Plan; the exercise period of all other Options will be governed by Section 7(e)(2). (c) An Option designated an Incentive Stock Option can, prior to its exercise, be changed to a Non-Qualified Option if the Optionee consents to amend his Option Agreement to provide that the exercise period of such Option will be governed by Section 7(e)(2) of the Plan. 6. STOCK (a) The stock subject to the Options shall be shares of the Common Stock. Such shares may, in whole or in part, be authorized but unissued shares contributed directly by the Company or shares which shall have been or which may be acquired by the Company. The aggregate number of shares of Common Stock as to which Options may be granted from time to time under the Plan shall be 1,200 shares. The limitation established by the preceding sentence shall be subject to adjustment as provided in Section 7(i) hereof. (b) If any outstanding Option under the Plan for any reason expires or is terminated without having been exercised in full, the shares of Common Stock allocable to the unexercised portion of such Option shall (unless the Plan shall have been terminated) become available for subsequent grants of Options under the Plan. 7. TERMS AND CONDITIONS OF OPTIONS Each Option granted pursuant to the Plan shall be evidenced by Option Agreements in such forms as the Board may from time to time approve. Options shall comply with and be subject to the following terms and conditions: (a) Option Price. Each Option shall state the Option Price, which in the ------------ case of Incentive Stock Options shall be not less than one hundred percent (100%) of the Fair Market Value of the shares of Common Stock on the date of grant of the Option; provided, however, that in the case of an Incentive Stock Option granted to a Ten Percent Shareholder, the Option Price shall not be less than one hundred ten percent (110%) of such fair market value. The Option Price per share for Non-Qualified Options shall not be less than the par value of a share of Common Stock on the date of grant of the Option. The Option Price shall be subject to adjustment as provided in Section 7 (i) hereof. The date on which the Board adopts a resolution expressly granting an Option shall be considered the day on which such Option is granted. (b) Restrictions. Any Common Stock issued under the Plan may contain ------------ restrictions including, but not limited to, limitations on transferability that may constitute substantial risks of forfeiture, as the Board may determine. (c) Value of Shares. Options may be granted to any eligible person for --------------- shares of Common Stock of any value, provided that the aggregate Fair Market Value (determined at the time the Option is granted) of the stock with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year (under all the plans of the Company, its Parent and its Subsidiaries) shall not exceed $100,000. (d) Medium and Time of Payment. The Option Price shall be paid in full, at -------------------------- the time of exercise, in cash or, with the approval of the Board, in shares of Common Stock having a fair market value in the aggregate equal to such Option Price or in a combination of cash and such shares. (e) Term and Exercise of Options. ---------------------------- (1) Unless the applicable Option Agreement otherwise provides, each Option shall become vested and first exercisable in the following installments:
Year Percentage Exercisable ---- ---------------------- Less than Two Years 0% Two Years 20% Three Years 20% Four Years 25% Five Years 35%
(2) Incentive Stock Options shall be exercisable over the exercise period specified by the Board in the Option Agreement, but in no event shall such period exceed ten (10) years from the date of the grant of each such Incentive Stock Option; provided, however, that in the case of an Incentive Stock Option granted to a Ten Percent Shareholder, the exercise period shall not exceed five (5) years from the date of grant of such Option. The exercise period shall be subject to earlier termination as provided in Section 7(f) and 7(g) hereof. An Incentive Stock Option may be exercised, as to any or all full shares of Common Stock as to which the Incentive Stock Option has become exercisable, by giving written notice of such exercise to the Board; provided that an Incentive Stock Option may not be exercised at any one time as to less than 100 shares (or such number of shares as to which the Incentive Stock Option is then exercisable if such number of shares is less than 100). (3) Non-Qualified Options shall be exercisable over a period not to exceed ten (10) years. (f) Termination of Employment. Except as provided in this Section 7(f) and ------------------------- Section 7(g) hereof, an Option may not be exercised by persons who are not outside consultants to the Company unless the Optionee is then a director of or in the employ of the Company or any Parent or Subsidiary of the Company (or a corporation or a Parent or Subsidiary of such corporation issuing or assuming the Option in a transaction to which Section 425(a) of the Code applies), and unless the Optionee has remained continuously a director or so employed since the date of grant of the Option. In the event all association of an Optionee (other than an outside consultant) with the Company (as an employee, or director or both) shall terminate (other than by reason of death or Disability), all Options or unexercised portions thereof granted to such Optionee which are then exercisable may, unless earlier terminated in accordance with their terms, be exercised within thirty (30) days after such termination; provided, however, that if the association of the Optionee with the Company shall terminate for "cause" (as determined by the Board), all Options theretofore granted to such Optionee shall, to the extent not theretofore exercised, terminate forthwith. A bona fide leave of absence shall not be considered a termination or break in continuity of employment for any purpose of the Plan so long as the period of such leave does not exceed ninety (90) days or such longer period during which the Optionee's right to reemployment is guaranteed by statute or by contract. Where the period of such leave exceeds ninety (90) days and the Optionee's right to reemployment is not guaranteed, the Optionee's employment will be deemed to have terminated on the ninety-first (91st) day of such leave. Nothing in the Plan or in any Option granted pursuant hereto shall confer upon an employee any right to continue in the employ of the Company or any of its divisions or Parent or Subsidiaries or interfere in any way with the right of the Company or any such divisions or Parent or Subsidiary to terminate or change the terms of such employment at any time. (g) Death or Disability of Optionee. If an Optionee who was an outside ------------------------------- consultant when his Option was granted shall die or if an Optionee shall die while a director of or employed by the Company or any Parent or Subsidiary of the Company, or if the Optionee's employment shall terminate by reason of Disability, all Options theretofore granted to such Optionee may, unless earlier terminated in accordance with their terms, be exercised by the Optionee or by the personal representative of the Optionee's estate or by a person who acquired the right to exercise such Option by bequest or inheritance or otherwise by reason of death of the Optionee, at any time within nine (9) months after the date of death or Disability of the Optionee, but in no event later than the date of expiration of the Option, provided that during the lifetime of the Optionee any Option granted to him may be exercised only by the Optionee. (h) Nontransferability of Options. Options granted under the Plan shall ----------------------------- not be transferable other than by will or by the laws of descent and distribution, and Options may be exercised, during the lifetime of the Optionee, only by the Optionee. Notwithstanding the preceding sentence, the Board, in its sole discretion, permit the assignment or transfer of a Non-Qualified Option and the exercise thereof by a person other than an Optionee, on such terms and conditions as the Board in its sole discretion may determine. Any such terms shall be determined at the time the Non-Qualified Option is granted, and shall be set forth in the Option Agreement. (i) Effect of Certain Changes. ------------------------- (1) If there is any change in the number of shares of Common Stock through the declaration of stock dividends, recapitalization resulting in stock splits, or combinations or exchanges of such shares, then the number of shares of Common Stock available for Options, the number of such shares covered by outstanding Options, and the price per share of such Options shall be proportionately adjusted to reflect any increase or decrease in the number of issued shares of Common Stock; provided, however, that any fractional shares resulting from such adjustment shall be eliminated. (2) In the event of a proposed dissolution or liquidation of the Company, or in the event of any corporate separation or division, including but not limited to, a split-up, a split-off or spin-off, the Board may provide that the holder of each Option then exercisable shall have the right to exercise such Option (at its then Option Price) solely for the kind and amount of shares of stock and other securities, property, cash or any combination thereof receivable upon such dissolutions or liquidation, or corporate separation or division; or the Board may provide, in the alternative, that each Option granted under the Plan shall terminate as of a date to be fixed by the Board, provided, however, that no less than thirty (30) days' written notice of the date so fixed shall be given to each Optionee, who shall have the right, during the period of thirty (30) days preceding such termination, to exercise the Options as to all or any part of the shares of Common Stock covered thereby, including shares as to which such Options would not otherwise be exercisable. (3) If while unexercised Options remain outstanding under the Plan (i) the Company executes a definitive agreement to merge or consolidate with or into another corporation or to sell or otherwise dispose of substantially all its assets, (ii) more than 50% of the Company's then outstanding voting stock is acquired by any person or group or (iii) Robert T. Giaimo ceases to be President of the Company (any such event being an "Accelerating Event") then from and after the date of any such agreement or the date on which public announcement of the acquisition of such percentage shall have been made or the date on which Mr. Giaimo ceases to be President of the Company (any such date being referred to herein as the "Acceleration Date"), all Options shall be exercisable in full, whether or not otherwise exercisable. Following the Acceleration Date, (a) the Board shall, in the case of a merger, consolidation or sale or disposition of assets, promptly make an appropriate adjustment to the number and class of shares of Common Stock available for Options, and to the amount and kind of shares or other securities or property receivable upon exercise of any outstanding Options after the effective date of such transaction, and the price thereof, and (b) the Board may, in its discretion, permit the cancellation of outstanding Options in exchange for a cash payment in an amount per share subject to any such option determined by the Board in its sole discretion, but not less than the difference between the Option Price per share and the Fair Market Value per share of Common stock on the Acceleration Date. (4) Paragraphs (2) and (3) of this Section 7(i) shall not apply to a merger or consolidation in which the Company is the surviving corporation and shares of Common Stock are not converted into or exchanged for stock, securities or any other corporation, cash or any other thing of value. Notwithstanding the preceding sentence, in case of any consolidation or merger of another corporation into the Company in which the Company is the continuing corporation and in which there is a reclassification or change (including a change to the right to receive cash or other property) of the shares of Common Stock (other than a change in par value, or from par value to no par value, or as a result of a subdivision or combination, but including any change in such shares into two or more classes or series of shares), the Board may provide that the holder of each Option then exercisable shall have the right to exercise such Option solely for the kind and amount of shares of stock and other securities (including those of any new direct or indirect parent of the Company), property, cash or any combination thereof receivable by the holder of the number of shares of Common Stock for which such Option might have been exercised upon such reclassification, change, consolidation or merger. (5) In the event of a change in the Common Stock as presently constituted, which is limited to a change of all of its authorized shares with par value into the same number of shares with a different par value or without par value, the shares resulting from any such change shall be deemed to be the Common Stock within the meaning of the Plan. (6) To the extent that the foregoing adjustments relate to stock or securities of the Company, such adjustments shall be made by the Board, whose determination in that respect shall be final, binding and conclusive, provided that each Option granted pursuant to this Plan and designated an Incentive Stock Option shall not be adjusted in a manner that causes the Option to fail to continue to qualify as an Incentive Stock Option within the meaning of Section 422 of the Code. (7) Except as hereinbefore expressly provided in this Section 7(i), the Optionee shall have no rights by reason of any subdivision or consolidation of shares of stock of any class or the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class or by reason of any dissolution, liquidation, merger, or consolidation, and any issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or Option Price of shares of Common Stock subject to an Option. The grant of an Option pursuant to the Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge or to consolidate or to dissolve, liquidate or sell, or transfer all or any part of its business or assets. (j) Rights as a Shareholder. An Optionee or a transferee of an Option ----------------------- shall have no rights as a shareholder with respect to any shares covered by his Option until the date of the issuance of a stock certificate to him for such shares. No adjustments shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the date such stock certificate is issued, except as provided in Section 7(i) hereof. (k) Other Provisions. The Option Agreements authorized under the Plan ---------------- shall contain such other provisions, including, without limitation, (i) the imposition of restrictions upon the exercise of an Option and (ii) the inclusion of any condition not inconsistent with an Option designated by the Board as an Incentive Stock Option qualifying as an Incentive Stock Option, as the Board shall deem advisable, including provisions with respect to compliance with federal and applicable state securities laws. 8. AGREEMENT BY OPTIONEE REGARDING WITHHOLDING TAXES (a) No later than the date of exercise of any Option granted hereunder, the Optionee will pay to the Company or make arrangements satisfactory to the Board regarding payment of any federal, state or local taxes of any kind required by law to be withheld upon the exercise of such Option, and (b) The Company shall, to the extent permitted or required by law, have the right to deduct from any payment of any kind otherwise due to the Optionee any federal, state or local taxes of any kind required by law to be withheld upon the exercise of such Option. 9. TERM OF PLAN Options may be granted pursuant to the Plan from time to time within a period of ten (10) years from the date on which the Plan is adopted by the Board, provided that no Options granted under the Plan shall become exercisable unless and until the Plan shall have been approved by the Company's shareholders. 10. SAVINGS CLAUSE Notwithstanding any other provision hereof, this Plan is intended to qualify as a plan pursuant to which Incentive Stock Options may be issued under Section 422 of the Code. If this Plan or any provision of this Plan shall be held to be invalid or to fail to meet the requirements of Section 422 of the Code or the regulations promulgated thereunder, such invalidity or failure shall not affect the remaining parts of this Plan, but rather it shall be construed and enforced as if the Plan or the affected provision thereof, as the case may be, complied in all respects with the requirements of Section 422 of the Code. 11. AMENDMENT AND TERMINATION OF THE PLAN The Board may at any time and from time to time suspend, terminate, modify or amend the Plan, provided that any amendment that would materially increase the aggregate number of shares of Common Stock as to which Options may be granted under the Plan, materially increase the benefits accruing to participants under the Plan, or materially modify the requirements as to eligibility for participation in the Plan shall be subject to the approval of the holders of a majority of the Common Stock voting at a meeting at which a quorum is present, except that any such increase or modification that may result from adjustments authorized by Section 7 (i) hereof shall not require such approval. Except as provided in Section 7 hereof, no suspension, termination, modification or amendment of the Plan may adversely affect any Option previously granted unless the written consent of the Optionee is obtained. 12. NONEXCLUSIVITY OF THE PLAN Neither the adoption of the Plan by the Board nor the submission of the Plan to stockholders of the Company for approval shall be construed as creating any limitations on the power or authority of the Board to adopt such other or additional incentive or other compensation arrangements of whatever nature as the Board may deem necessary or desirable or preclude or limit the continuation of any other plan, practice or arrangement for the payment of compensation or fringe benefits to employees generally, or to any class or group of employees, which the Company or any Subsidiary now has lawfully put into effect, including, without limitation, any retirement, pension, savings and stock purchase plan, insurance, death and disability benefits and executive short-term incentive plans. 13. NATURE OF PAYMENTS (a) All Options granted shall be in consideration of services performed for the Company by the Optionee. (b) All Options granted shall constitute a special incentive benefit to the Optionee and shall not be taken into account in computing the amount of salary or compensation of the Optionee for the purpose of determining any benefits under any pension, retirement, profit-sharing, bonus, life insurance or other benefit plan of the Company or under any agreement between the Company and the Optionee, unless such plan or agreement specifically otherwise provides. 14. NONUNIFORM DETERMINATIONS The Board's determinations under this Plan need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, Options (whether or not such persons are similarly situated). Without limiting the generality of the foregoing, the Board shall be entitled, among other things, to make nonuniform and selective determinations which may, INTER ALIA, reflect the specific terms of individual employment agreements, and to enter into nonuniform and selective Option Agreements, as to the persons to receive Options and the terms and conditions of Options. 15. SECTION HEADINGS The section headings contained herein are for the purpose of convenience only and are not intended to define or limit the contents of said sections. Adopted by the Board of Directors on September 11, 1996. Attest: ________________________________ _______________________________________ Secretary Date:_____________ EX-10.35 6 STOCK OPTION PLAN AGREEMENT Exhibit 10.35 SILVER DINER, INC. STOCK OPTION PLAN AGREEMENT A Stock Option award is hereby granted by Silver Diner, Inc., a Delaware corporation ("Company"), to the Key Employee named below ("Optionee"), for and with respect to common stock of the Company, par value $0.00074 per share ("Common Stock"), subject to the following terms and conditions: 1. Subject to the provisions set forth herein and the provisions of the Stock Option Plan ("Plan"), the provisions of which are hereby incorporated by reference, and in consideration of the agreements of Optionee herein provided, the Company hereby grants to Optionee a Stock Option to purchase from the Company the number of shares of Common Stock, at the purchase price per share ("Option Exercise Price"), and on the schedule, all as set forth below. Such Stock Option is sometimes referred to herein as the "Award". Name of Optionee: Bob Giaimo Number of Shares Subject 150,000 to Stock Option: Option Exercise Price $ 0.625 Per Share (100% of the closing price of the Common Stock on the date of the grant of the Stock Option by the Board of Directors at the Board of Director's meeting on December 15, 1998): Date of Grant: December 15, 1998 Exercise Schedule: Optionee has been granted a Stock Option Award to purchase 150,000 shares of Common Stock. The Stock Option Award shall be one-hundred percent (100%) vested on September 15, 2008. Prior to September 15, 2008, the Stock Option Award shall be zero percent (0%) vested. Any nonexercised options shall expire on December 14, 2008. The Compensation Committee may establish performance criteria at any time, and from time to time, to allow for the acceleration of vesting for some or all of the Stock Option Award granted hereunder. 2. The exercise of all or any portion of the Award is conditioned upon the acceptance by Optionee of the terms hereof as evidenced by his execution of this Option Agreement in the space provided therefor at the end hereof and the return of an executed copy to the Secretary of the Company. Written notice of an election to exercise any portion of the Award, in a form substantially identical to that attached as an Exhibit hereto and specifying the portion thereof being exercised and the exercise date, shall be given by Optionee, or his legal representative, (a) by delivering such notice at the principal executive offices of the Company no later than the exercise date, or (b) by mailing such notice, postage prepaid, addressed to the Secretary of the Company at the Company's principal executive offices at least three business days prior to the exercise date. 3. Neither Optionee nor any other person entitled to exercise the Stock Option under the terms hereof shall be, or have any of the rights or privileges of, a shareholder of the Company in respect of any Common Stock issuable on exercise of the Stock Option, until the date of the issuance of a stock certificate for such Common Stock. 4. If the Award shall be exercised in whole, this Option Agreement shall be surrendered to the Company for cancellation. If the Award shall be exercised in part, or a change in the number or designation of the Common Stock shall be made, this Option Agreement shall be delivered by Optionee to the Company for the purpose of making appropriate notation thereon, or of otherwise reflecting, in such manner as the Company shall determine, the partial exercise or the change in the number or designation of the Common Stock. 5. Optionee represents, warrants and agrees that Optionee will acquire and hold the shares purchased on exercise of the Option for his own account for investment and not with the view to the resale or distribution thereof, except for resales or distributions in accordance with applicable securities laws, and that Optionee will not, at any time or times, directly or indirectly, offer, sell, distribute, pledge, or otherwise grant a security interest in or otherwise dispose of or transfer all, any portion of or any interest in, any shares purchased on exercise of the Option (or solicit an offer to buy, take in pledge or otherwise acquire or receive, all or any portion thereof). Optionee acknowledges that Optionee has received and reviewed a description of the Common Stock of the Company and a copy of the Plan. Optionee further acknowledges that Optionee has had the opportunity to ask questions of, and receive answer from, the officers and representatives of the Company concerning all material information concerning the Company and the terms and conditions of the transactions in which Optionee is acquiring the Option and may subsequently acquire shares of the Common Stock. Optionee further acknowledges that Optionee understands that the Company may use the proceeds from the exercise of the Option for general corporate purposes. 6. The grant of the Award hereunder shall not be deemed to give the Optionee the right to be retained in the employ of the Company or to affect the right of the Company to discharge the Optionee at any time. 7. The Award shall be exercised in accordance with such administrative regulations as the Board shall from time to time adopt. 8. The Award and this Option Agreement shall be construed, administered and governed in all respects under and by the laws of the State of Maryland, without giving effect to principles of conflict of laws. SILVER DINER, INC., a Delaware corporation By: _____________________________________________ The undersigned hereby accepts the foregoing Award and the terms and conditions hereof. ________________________________________________ Key Employee PROFIT PERFORMANCE CRITERIA BOB GIAIMO . The profit performance goal may be achieved in the year 1999 or the year 2000 if the Company's actual net income from either January 1, 1999 through December 31, 1999 or from January 1, 2000 through December 31, 2000 is a positive number, after adjusting net income for GAAP purposes by eliminating therefrom any preopening expenses attributable to new stores opened in the applicable year (1999 or 2000) and exclusive of the income and expenses of all new stores for the first six months of each new store's operation. Profitability shall be determined by the Compensation Committee, and shall be adjusted to reflect changes in accounting principles (e.g. depreciable life of assets) or other nonoperating effects such as write- offs of fixed assets. In addition, the preopening budgets of each new store must be met. . If the profit performance goals are achieved, the Stock Option shall become 100% vested immediately and exercisable as to the 150,000 shares. . If the Company's actual net income from both January 1, 1999 through December 31, 1999 and January 1, 2000 through December 31, 2000 is a negative number, after making the appropriate adjustments outlined in the above paragraph, the Stock Option Award's vesting schedule shall not be accelerated and the Stock Option Award shall become 100% percent vested on September 15, 2008. EX-10.36 7 STOCK OPTION PLAN AGREEMENT Exhibit 10.36 SILVER DINER, INC. STOCK OPTION PLAN AGREEMENT A Stock Option award is hereby granted by Silver Diner, Inc., a Delaware corporation ("Company"), to the Key Employee named below ("Optionee"), for and with respect to common stock of the Company, par value $0.00074 per share ("Common Stock"), subject to the following terms and conditions: 1. Subject to the provisions set forth herein and the provisions of the Stock Option Plan ("Plan"), the provisions of which are hereby incorporated by reference, and in consideration of the agreements of Optionee herein provided, the Company hereby grants to Optionee a Stock Option to purchase from the Company the number of shares of Common Stock, at the purchase price per share ("Option Exercise Price"), and on the schedule, all as set forth below. Such Stock Option is sometimes referred to herein as the "Award". Name of Optionee: Craig Kendall Number of Shares Subject 55,000 to Stock Option: Option Exercise Price $0.625 Per Share (closing price of Common Stock on the date of the grant of the Stock Option by the Board of Directors at the Board of Director's meeting on December 15, 1998): Date of Grant: December 15, 1998 Exercise Schedule: Optionee has been granted a Stock Option Award to purchase 55,000 shares of Common Stock. The Stock Option Award shall be one-hundred percent (100%) vested on December 31, 2005. Prior to December 31, 2005, the Stock Option Award shall be zero percent (0%) vested. Any nonexercised options shall expire on December 14, 2008. The Compensation Committee may establish performance criteria at any time, and from time to time, to allow for the acceleration of vesting for some or all of the Stock Option Award granted hereunder. 2. The exercise of all or any portion of the Award is conditioned upon the acceptance by Optionee of the terms hereof as evidenced by his execution of this Option Agreement in the space provided therefor at the end hereof and the return of an executed copy to the Secretary of the Company. Written notice of an election to exercise any portion of the Award, in a form substantially identical to that attached as an Exhibit hereto and specifying the portion thereof being exercised and the exercise date, shall be given by Optionee, or his legal representative, (a) by delivering such notice at the principal executive offices of the Company no later than the exercise date, or (b) by mailing such notice, postage prepaid, addressed to the Secretary of the Company at the Company's principal executive offices at least three business days prior to the exercise date. 3. Neither Optionee nor any other person entitled to exercise the Stock Option under the terms hereof shall be, or have any of the rights or privileges of, a shareholder of the Company in respect of any Common Stock issuable on exercise of the Stock Option, until the date of the issuance of a stock certificate for such Common Stock. 4. If the Award shall be exercised in whole, this Option Agreement shall be surrendered to the Company for cancellation. If the Award shall be exercised in part, or a change in the number or designation of the Common Stock shall be made, this Option Agreement shall be delivered by Optionee to the Company for the purpose of making appropriate notation thereon, or of otherwise reflecting, in such manner as the Company shall determine, the partial exercise or the change in the number or designation of the Common Stock. 5. Optionee represents, warrants and agrees that Optionee will acquire and hold the shares purchased on exercise of the Option for his own account for investment and not with the view to the resale or distribution thereof, except for resales or distributions in accordance with applicable securities laws, and that Optionee will not, at any time or times, directly or indirectly, offer, sell, distribute, pledge, or otherwise grant a security interest in or otherwise dispose of or transfer all, any portion of or any interest in, any shares purchased on exercise of the Option (or solicit an offer to buy, take in pledge or otherwise acquire or receive, all or any portion thereof). Optionee acknowledges that Optionee has received and reviewed a description of the Common Stock of the Company and a copy of the Plan. Optionee further acknowledges that Optionee has had the opportunity to ask questions of, and receive answer from, the officers and representatives of the Company concerning all material information concerning the Company and the terms and conditions of the transactions in which Optionee is acquiring the Option and may subsequently acquire shares of the Common Stock. Optionee further acknowledges that Optionee understands that the Company may use the proceeds from the exercise of the Option for general corporate purposes. 6. The grant of the Award hereunder shall not be deemed to give the Optionee the right to be retained in the employ of the Company or to affect the right of the Company to discharge the Optionee at any time. 7. The Award shall be exercised in accordance with such administrative regulations, as the Board shall from time to time adopt. 8. The Award and this Option Agreement shall be construed, administered and governed in all respects under and by the laws of the State of Maryland, without giving effect to principles of conflict of laws. SILVER DINER, INC., a Delaware corporation By: ____________________________________ The undersigned hereby accepts the foregoing Award and the terms and conditions hereof. ________________________________________ Key Employee PERFORMANCE CRITERIA CRAIG KENDALL In the event that the Company's actual net income from January 1, 1999 through December 31, 1999 exceeds the Company's budgeted net income, as described in the attachment hereto, by at least $300,000, the Stock Option shall become immediately vested and exercisable with respect to 25,000 shares of Common Stock. If the Company's actual net income during the period specified does not exceed the Company's budgeted net income by at least $300,000, the Stock Option shall vest immediately in part in accordance with the following schedule: If the Company's actual net income for 1999: . exceeds budgeted net income by $200,000 or more but less than $300,000, the right to purchase 20,000 shares of Common Stock under the Stock Option shall become immediate and the remaining shares of the Stock Option shall become vested on December 31, 2005; . exceeds budgeted net income by $100,000 or more but less than $200,000, the right to purchase 15,000 shares of Common Stock under the Stock Option shall become immediate and the remaining shares of the Stock Option shall become vested on December 31, 2005; . exceeds budgeted net income by less than $100,000, the right to purchase 10,000 shares of Common Stock under the Stock Option shall become immediate and the remaining shares of the Stock Option shall become vested on December 31, 2005; . does not exceed budgeted net income, all shares of Common Stock under the Stock Option shall become vested on December 31, 2005. PERFORMANCE CRITERIA TIMOTHY CUSICK In the event that the Company's actual net income from January 1, 1999 through December 31, 1999 exceeds the Company's budgeted net income, as described in the attachment hereto, by at least $300,000, the Stock Option shall become immediately vested and exercisable with respect to 25,000 shares of Common Stock. If the Company's actual net income during the period specified does not exceed the Company's budgeted net income by at least $300,000, the Stock Option shall vest immediately in part in accordance with the following schedule: If the Company's actual net income for 1999: . exceeds budgeted net income by $200,000 or more but less than $300,000, the right to purchase 20,000 shares of Common Stock under the Stock Option shall become immediate and the remaining shares of the Stock Option shall become vested on December 31, 2005; . exceeds budgeted net income by $100,000 or more but less than $200,000, the right to purchase 15,000 shares of Common Stock under the Stock Option shall become immediate and the remaining shares of the Stock Option shall become vested on December 31, 2005; . exceeds budgeted net income by less than $100,000, the right to purchase 10,000 shares of Common Stock under the Stock Option shall become immediate and the remaining shares of the Stock Option shall become vested on December 31, 2005; . does not exceed budgeted net income, all shares of Common Stock under the Stock Option shall become vested on December 31, 2005. PERFORMANCE CRITERIA YPE VON HENGST In the event that the Company's actual net income from January 1, 1999 through December 31, 1999 exceeds the Company's budgeted net income, as described in the attachment hereto, by at least $300,000, the Stock Option shall become immediately vested and exercisable with respect to 25,000 shares of Common Stock. If the Company's actual net income during the period specified does not exceed the Company's budgeted net income by at least $300,000, the Stock Option shall vest immediately in part in accordance with the following schedule: If the Company's actual net income for 1999: . exceeds budgeted net income by $200,000 or more but less than $300,000, the right to purchase 20,000 shares of Common Stock under the Stock Option shall become immediate and the remaining shares of the Stock Option shall become vested on December 31, 2005; . exceeds budgeted net income by $100,000 or more but less than $200,000, the right to purchase 15,000 shares of Common Stock under the Stock Option shall become immediate and the remaining shares of the Stock Option shall become vested on December 31, 2005; . exceeds budgeted net income by less than $100,000, the right to purchase 10,000 shares of Common Stock under the Stock Option shall become immediate and the remaining shares of the Stock Option shall become vested on December 31, 2005; . does not exceed budgeted net income, all shares of Common Stock under the Stock Option shall become vested on December 31, 2005. PERFORMANCE CRITERIA PATRICK MESKELL In the event that the Company's actual net income from January 1, 1999 through December 31, 1999 exceeds the Company's budgeted net income, as described in the attachment hereto, by at least $300,000, the Stock Option shall become immediately vested and exercisable with respect to 25,000 shares of Common Stock. If the Company's actual net income during the period specified does not exceed the Company's budgeted net income by at least $300,000, the Stock Option shall vest immediately in part in accordance with the following schedule: If the Company's actual net income for 1999: . exceeds budgeted net income by $200,000 or more but less than $300,000, the right to purchase 20,000 shares of Common Stock under the Stock Option shall become immediate and the remaining shares of the Stock Option shall become vested on December 31, 2005; . exceeds budgeted net income by $100,000 or more but less than $200,000, the right to purchase 15,000 shares of Common Stock under the Stock Option shall become immediate and the remaining shares of the Stock Option shall become vested on December 31, 2005; . exceeds budgeted net income by less than $100,000, the right to purchase 10,000 shares of Common Stock under the Stock Option shall become immediate and the remaining shares of the Stock Option shall become vested on December 31, 2005; . does not exceed budgeted net income, all shares of Common Stock under the Stock Option shall become vested on December 31, 2005. EX-10.37 8 STOCK OPTION PLAN AGREEMENT Exhibit 10.37 SILVER DINER, INC. STOCK OPTION PLAN AGREEMENT A Stock Option award is hereby granted by Silver Diner, Inc., a Delaware corporation ("Company"), to the Key Employee named below ("Optionee"), for and with respect to common stock of the Company, par value $0.00074 per share ("Common Stock"), subject to the following terms and conditions: 1. Subject to the provisions set forth herein and the provisions of the Stock Option Plan ("Plan"), the provisions of which are hereby incorporated by reference, and in consideration of the agreements of Optionee herein provided, the Company hereby grants to Optionee a Stock Option to purchase from the Company the number of shares of Common Stock, at the purchase price per share ("Option Exercise Price"), and on the schedule, all as set forth below. Such Stock Option is sometimes referred to herein as the "Award". Name of Optionee: Robert T. Giaimo Number of Shares Subject 400,000 to Stock Option: Option Exercise Price $1.375 Per Share: Date of Grant: 12/15/98 Exercise Schedule:
Number of Shares Exercise Period Date(*) Subject to Stock Option Date First Exercisable Expiration ------- ----------------------- ---------------------- ---------- 12/29/98 120,000 12/29/98 12/14/03 12/29/99 80,000 12/29/99 12/14/03 12/29/00 80,000 12/29/00 12/14/03 12/29/01 120,000 12/29/01 12/14/03
(*) An additional 18% of options vest when the market price of the Shares is greater than $5.00 per Share, $7.50 per Share and $10 per Share, with the options vesting 100% when the market price is greater than $12.00 per Share. 2. The exercise of all or any portion of the Award is conditioned upon the acceptance by Optionee of the terms hereof as evidenced by his execution of this Option Agreement in the space provided therefor at the end hereof and the return of an executed copy to the Secretary of the Company. Written notice of an election to exercise any portion of the Award, in a form substantially identical to that attached as an Exhibit hereto and specifying the portion thereof being exercised and the exercise date, shall be given by Optionee, or his legal representative, (a) by delivering such notice at the principal executive offices of the Company no later than the exercise date, or (b) by mailing such notice, postage prepaid, addressed to the Secretary of the Company at the Company's principal executive offices at least three business days prior to the exercise date. 3. Neither Optionee nor any other person entitled to exercise the Stock Option under the terms hereof shall be, or have any of the rights or privileges of, a shareholder of the Company in respect of any Common Stock issuable on exercise of the Stock Option, until the date of the issuance of a stock certificate for such Common Stock. 4. If the Award shall be exercised in whole, this Option Agreement shall be surrendered to the Company for cancellation. If the Award shall be exercised in part, or a change in the number or designation of the Common Stock shall be made, this Option Agreement shall be delivered by Optionee to the Company for the purpose of making appropriate notation thereon, or of otherwise reflecting, in such manner as the Company shall determine, the partial exercise or the change in the number or designation of the Common Stock. 5. Optionee represents, warrants and agrees that Optionee will acquire and hold the shares purchased on exercise of the Option for his own account for investment and not with the view to the resale or distribution thereof, except for resales or distributions in accordance with applicable securities laws, and that Optionee will not, at any time or times, directly or indirectly, offer, sell, distribute, pledge, or otherwise grant a security interest in or otherwise dispose of or transfer all, any portion of or any interest in, any shares purchased on exercise of the Option (or solicit an offer to buy, take in pledge or otherwise acquire or receive, all or any portion thereof). Optionee acknowledges that Optionee has received and reviewed a description of the Common Stock of the Company and a copy of the Plan. Optionee further acknowledges that Optionee has had the opportunity to ask questions of, and receive answer from, the officers and representatives of the Company concerning all material information concerning the Company and the terms and conditions of the transactions in which Optionee is acquiring the Option and may subsequently acquire shares of the Common Stock. Optionee further acknowledges that Optionee understands that the Company may use the proceeds from the exercise of the Option for general corporate purposes. 6. The grant of the Award hereunder shall not be deemed to give the Optionee the right to be retained in the employ of the Company or to affect the right of the Company to discharge the Optionee at any time. 7. The Award shall be exercised in accordance with such administrative regulations, as the Board shall from time to time adopt. 8. The Award and this Option Agreement shall be construed, administered and governed in all respects under and by the laws of the State of Maryland, without giving effect to principles of conflict of laws. SILVER DINER, INC., a Delaware corporation By:______________________________________________ The undersigned hereby accepts the foregoing Award and the terms and conditions hereof. _________________________________________________ Robert T. Giaimo, Key Employee EX-10.38 9 RESTATED STOCK OPTION PLAN AGREEMENT Exhibit 10.38 (Form) SILVER DINER, INC. RESTATED STOCK OPTION PLAN AGREEMENT A Stock Option award is hereby granted by Silver Diner, Inc., a Delaware corporation ("Company"), to the Key Employee named below ("Optionee"), for and with respect to common stock of the Company, par value $0.00074 per share ("Common Stock"), subject to the following terms and conditions: 1. Subject to the provisions set forth herein and the provisions of the Stock Option Plan ("Plan"), the provisions of which are hereby incorporated by reference, and in consideration of the agreements of Optionee herein provided, the Company hereby grants to Optionee a Stock Option to purchase from the Company the number of shares of Common Stock, at the purchase price per share ("Option Exercise Price"), and on the schedule, all as set forth below. Such Stock Option is sometimes referred to herein as the "Award". Name of Optionee: Patrick Meskell Number of Shares Subject 100,000 to Stock Option: Option Exercise Price $1.25 Per Share: Date of Grant: 12/29/97 Exercise Schedule:
Number of Shares Exercise Period Date(*) Subject to Stock Option Date First Exercisable Expiration ------ ----------------------- ---------------------- ---------- 12/29/97 10,000 12/29/97 12/28/07 12/29/98 20,000 12/29/98 12/28/07 12/29/99 20,000 12/29/99 12/28/07 12/29/00 20,000 12/29/00 12/28/07 12/29/01 30,000 12/29/01 12/28/07
(*) An additional 18% of options vest when the market price of the Shares is greater than $5.00 per Share, $7.50 per Share and $10 per Share, with the options vesting 100% when the market price is greater than $12.00 per Share. 2. The exercise of all or any portion of the Award is conditioned upon the acceptance by Optionee of the terms hereof as evidenced by his execution of this Option Agreement in the space provided therefor at the end hereof and the return of an executed copy to the Secretary of the Company. Written notice of an election to exercise any portion of the Award, in a form substantially identical to that attached as an Exhibit hereto and specifying the portion thereof being exercised and the exercise date, shall be given by Optionee, or his legal representative, (a) by delivering such notice at the principal executive offices of the Company no later than the exercise date, or (b) by mailing such notice, postage prepaid, addressed to the Secretary of the Company at the Company's principal executive offices at least three business days prior to the exercise date. 3. Neither Optionee nor any other person entitled to exercise the Stock Option under the terms hereof shall be, or have any of the rights or privileges of, a shareholder of the Company in respect of any Common Stock issuable on exercise of the Stock Option, until the date of the issuance of a stock certificate for such Common Stock. 4. If the Award shall be exercised in whole, this Option Agreement shall be surrendered to the Company for cancellation. If the Award shall be exercised in part, or a change in the number or designation of the Common Stock shall be made, this Option Agreement shall be delivered by Optionee to the Company for the purpose of making appropriate notation thereon, or of otherwise reflecting, in such manner as the Company shall determine, the partial exercise or the change in the number or designation of the Common Stock. 5. Optionee represents, warrants and agrees that Optionee will acquire and hold the shares purchased on exercise of the Option for his own account for investment and not with the view to the resale or distribution thereof, except for resales or distributions in accordance with applicable securities laws, and that Optionee will not, at any time or times, directly or indirectly, offer, sell, distribute, pledge, or otherwise grant a security interest in or otherwise dispose of or transfer all, any portion of or any interest in, any shares purchased on exercise of the Option (or solicit an offer to buy, take in pledge or otherwise acquire or receive, all or any portion thereof). Optionee acknowledges that Optionee has received and reviewed a description of the Common Stock of the Company and a copy of the Plan. Optionee further acknowledges that Optionee has had the opportunity to ask questions of, and receive answer from, the officers and representatives of the Company concerning all material information concerning the Company and the terms and conditions of the transactions in which Optionee is acquiring the Option and may subsequently acquire shares of the Common Stock. Optionee further acknowledges that Optionee understands that the Company may use the proceeds from the exercise of the Option for general corporate purposes. 6. The grant of the Award hereunder shall not be deemed to give the Optionee the right to be retained in the employ of the Company or to affect the right of the Company to discharge the Optionee at any time. 7. The Award shall be exercised in accordance with such administrative regulations, as the Board shall from time to time adopt. 8. The Award and this Option Agreement shall be construed, administered and governed in all respects under and by the laws of the State of Maryland, without giving effect to principles of conflict of laws. 9. The Award and this Option Agreement are subject to the requirement that the shareholders of the Company approve and ratify the adoption of the Plan no later than June 11, 1997. SILVER DINER, INC., a Delaware corporation By:_______________________________________________ The undersigned hereby accepts the foregoing Award and the terms and conditions hereof. __________________________________________________ Patrick Meskell, Key Employee EX-10.39 10 EMPLOYMENT AGREEMENT Exhibit 10.39 EMPLOYMENT AGREEMENT -------------------- This Employment Agreement (the AGREEMENT), effective as of November __, 1998, is made and entered into by and between Silver Diner, Inc., a Delaware corporation (the COMPANY), and Ype Von Hengst, a Maryland resident (the EXECUTIVE). RECITALS 1. The Company is engaged in the business of operating and franchising diner-style restaurants in the United States operating under the trade name of "Silver Diner" and plans to expand such operations outside of the United States. 2. The Company has employed the Executive for __ years. 3. The Company desires to continue to employ the Executive, and the Executive desires to obtain employment with the Company, upon the terms and conditions stated herein. NOW, THEREFORE, in consideration of the mutual promises contained herein, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties agree as follows: AGREEMENTS SECTION 1. EMPLOYMENT The Company hereby employs the Executive as an Executive Vice-President and Executive Chef, to perform such duties as are reasonably required by such position and such other duties as he may be assigned from time to time by the Company's President. The Executive agrees to devote his full and best efforts and abilities to the Company on a full-time basis. In performing duties hereunder, the Executive will at all times act in a professional, competent and loyal manner, and consistent with the Company's policies and procedures. SECTION 2. TERM The term of this Agreement shall commence on the date hereof, and shall continue until December 31, 2003, unless terminated sooner pursuant to the terms of this Agreement (the TERM). The Term may only be renewed or extended in a writing signed by the President of the Company. Section 3. COMPENSATION/BENEFITS (A) BASE SALARY The Executive shall be entitled to an annual base salary, ----------- payable in installments, less required legal deductions, and in accordance with the Company's policy governing salary payments to executive employees generally, as it may be amended from time to time by the Company (BASE SALARY). From the effective date of this Agreement through December 31, 1998, the Base Salary shall be payable at the annual rate of $125,000. From January 1, 1999 through December 31, 1999, the Base Salary shall be payable at the annual rate of $150,000. Effective January 1, 2000, the Base Salary shall be the sum of the Base Salary for the immediately preceding period (including all prior increases) plus an amount equal to the excess of (i) the amount determined by multiplying the Base Salary for the immediately preceding period (including all increases) by a fraction the numerator of which is the Consumer Price Index for all urban consumers -- all items (1967 = 100) for the Washington, D.C. - Maryland - Virginia Metropolitan Areas as prepared and published by the Bureau of Labor Statistics of the U.S. Department of Labor (the "CPI") for the comparison month and the denominator of which is the CPI for the base month over (ii) the Base Salary for the immediately preceding period (including all increases). For the purposes of this subsection, the initial base month shall be January 1999 and the initial comparison month shall be the following December 1999. For the second year following the execution of this Agreement and thereafter the base month and comparison month shall be the same month, respectively, during each subsequent year. If the CPI is revised or discontinued during the term of this Agreement, the parties shall devise a formula based on a then-published index of the Bureau of Labor Statistics of the U.S. Department of Labor that will yield a comparable annual increase. In no event, however, shall the Base Salary (as adjusted) be reduced during the term of this Agreement. (B) BENEFITS The Executive shall be entitled to the following benefits -------- during the Term: 1. Health/Dental Insurance. The Executive shall be entitled to participate in the group health and dental plans offered to the Company's executive employees generally, and as approved by the Company's President, in accordance with the terms of said plans, as they may be modified in the Company's discretion from time to time (MEDICAL BENEFITS). If the Executive elects coverage under said plan(s), the Company shall pay the full cost of family coverage under the plan(s). 2. Life/Disability Insurance. The Company shall, at no cost to the Executive , provide the Executive with life insurance coverage in the amount of $1,500,000 and disability insurance coverage in the minimum amount of $2,600 per week, subject to usual and customary terms and a 90-day waiting period. If, at any time during the Term, the Executive receives replacement income under the disability insurance coverage, the Company's obligation to pay the Base Salary shall be reduced by the amount of replacement income received by the Executive. 3. Other Benefits. In addition to existing stock options, the Executive shall be entitled to participate in stock options and bonus plans and to such other benefit plans as customarily made available by the Company to executive employees generally. (C) LOAN In consideration of the Executive entering into this Agreement, ---- the Company agrees to extend a $100,000 non-recourse loan (the LOAN) to the Executive upon the execution of this Agreement, subject to the Executive's agreement to execute a promissory note in the form attached hereto, and incorporated herein, as Exhibit A (the PROMISSORY NOTE). The Executive agrees to transfer 182,881 shares of his common stock in the Company to the Company under the terms set forth in Exhibit A to secure the Loan (SECURED SHARES). Upon the execution of this Agreement, the Executive agrees to transfer to the Company all stock certificates evidencing ownership of these shares and a stock power separate from certificate. (D) LOAN BONUS During each year of the Term in which the Executive is ---------- actually employed by the Company on December 31, beginning December 31, 1999, the Executive shall be entitled to an annual bonus of an amount equal to $20,000 plus accrued and unpaid interest on the Loan (the BONUS). The Bonus shall not be paid to the Executive, but shall be applied by the Company to repay the then outstanding principal and interest under the Loan. SECTION 4. EXPENSES The Company shall reimburse the Executive for all reasonable and necessary business expenses incurred by him in the performance of his duties hereunder, in accordance with its policies and procedures, as they may be amended from time to time and subject to submission of proper documentation of each expense. SECTION 5. PROTECTION OF THE COMPANY (A) EXCLUSIVE SERVICES During the term of his employment, the Executive ------------------ shall at all times devote his entire working time, attention, energies, efforts and skills to the business of the Company, and shall not, directly or indirectly, do anything to compete with the Company's present or contemplated business, nor will he plan or organize any competitive business activity. (B) CONFIDENTIAL INFORMATION The Executive shall not, at any time during ------------------------ or after his employment with the Company, disclose or use, directly or indirectly, any Confidential Information of the Company (or any affiliated entity, hereinafter, collectively, the COMPANY), except as required by the performance of his duties hereunder. For the purposes of this Agreement, "Confidential Information" shall mean all information disclosed to the Executive, 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 whatsoever to the business activities of the Company. "Confidential Information" shall include Company and/or franchisee (a) business plans, research, know how, development and survey information, (b) customer, staff and other training manuals and policy manuals, (c) kitchen and building designs, procedures, and techniques, and (d) recipes developed and/or used by the Company. Upon termination of this Agreement, the Executive shall immediately return to the Company all of its property (including all Company related documents), and all copies thereof, including without limitation all Confidential Information which has been reduced to tangible form, in his possession, custody or control. (C) SOLICITATION OF EMPLOYEES The Executive agrees that during the term of ------------------------- this Agreement, and for a period of twelve (12) consecutive months after termination of such employment for any reason, he shall not, except in the course of her duties hereunder, directly or indirectly induce or attempt to induce or otherwise counsel, advise, solicit or encourage any person to leave the employ of the Company or any person who at the time had left the employ of the Company within the previous six months to accept employment with any person or entity besides the Company. (D) NON-COMPETITION For a period of twelve (12) consecutive months after --------------- the termination of Executive's employment with the Company for any reason other than a termination by the Company without cause as provided in Section 6(C), the Executive shall not, (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 as a stockholder (other than a stockholder of less than 5% of a corporation the securities of which are traded on a national securities exchange), director, officer, partner, consultant, owner, employee, agent, or in any other capacity, work for, consult with or otherwise assist Movenpick (and all affiliates, subsidiaries and parent corporation) in the development of "diners". For purposes of this Agreement, the Executive shall be deemed to "engage in competition" with the Company if he shall directly or indirectly, either individually or as a stockholder (other than a stockholder of less than 5% of a corporation the securities of which are traded on a national securities exchange), director, officer, partner, consultant, owner, employee, agent, or in any other capacity, work for, consult with or otherwise assist any person or entity engaged in the same or similar business engaged in by the Company. For the purposes of this Agreement, "diners", the "diner business" and the business of the Company shall mean (i) any restaurant business with the word "Diner" in its name or logo, or which is commonly understood to be a diner; or (ii) any moderately priced restaurant business whose menu and trade dress together are confusingly similar to that employed by Silver Diner restaurants. The Executive agrees that the restrictions imposed by the provisions of this Section are fair and reasonable considering the nature of the Company's business, and are reasonably required for the protection of the Company. (E) SPECIFIC PERFORMANCE The Executive agrees that in the event of his -------------------- breach of any of the provisions of this Section, the remedies available at law to the Company would be inadequate and in lieu thereof or in addition thereto the Company shall be entitled to appropriate equitable remedies, including specific performance, attorneys fees and injunctive relief. In the event that a court of competent jurisdiction shall declare any provision or restriction contained in this Section to be unenforceable, the provisions of this section shall remain in full force and effect to the extent not so declared to be unenforceable, and the court shall be empowered to modify said unenforceable provision(s) as needed to make such provision(s) enforceable to the maximum extent permitted by law. In no event shall any such modifications increase the period of time or make the provisions contained in this Section 5 more restrictive. SECTION 6. TERMINATION (A) AUTOMATIC TERMINATION This Agreement shall terminate automatically --------------------- upon the death of the Executive or the Executive's inability to perform the essential functions of his job due to an impairment or disability, and with or without a reasonable accommodation, for at least 180 consecutive days. In the event of a termination under this Section because of the Executive's death, all Company obligations to pay the Base Salary, Bonus and Medical Benefits shall cease as of the effective date of the termination, except as otherwise required by law. In the event of a termination under this Section because of the Executive's inability to perform the essential functions of his job, (i) the Executive's right to Base Salary and the Bonus shall cease as of the effective date of the termination, and (ii) the Company shall make the Medical Benefits available to the Executive for a period of eighteen (18) months following termination, the costs of which shall be paid by the Company for the first twelve (12) months of such period. If the Agreement is terminated pursuant to this Section, the Principal Balance of the Loan shall be extinguished, and all right, title and interest in the Secured Shares shall vest with the Maker (or his estate or heirs). (B) FOR "CAUSE" This Agreement may be terminated by the Company ----------- immediately for "Cause" for any one of the following reasons: (i) the active participation of Executive in materially gross and fraudulent conduct; or (ii) the conviction of Executive of a felony where imprisonment is imposed. Upon an event constituting "Cause", the Company shall deliver to the Executive written notice of such conduct and the Executive shall immediately be suspended from performing his duties for a period of 14 calendar days during which time the compensation and other benefits provided to Executive shall continue and the Executive shall have the opportunity to review the facts and circumstances surrounding such notice and to meet with the Company's Board of Directors. If, at the end of the 14-day suspension, the Company has not revoked the written notice, the termination shall become effective. In the event of a termination under this Section, (i) the Company's obligation to pay the Base Salary, Medical Benefits and Bonus shall cease immediately upon the termination; and (ii) the Principal Balance shall be extinguished, and all right, title and interest to the Secured Shares shall vest immediately with the Company. (C) WITHOUT "CAUSE" This Agreement may be terminated by the Company --------------- immediately for any reason, with or without "Cause". If this Agreement is terminated by the Company without "Cause", (i) the Executive shall be entitled to the applicable Base Salary, Bonus, and Medical Benefits (at the Company's expenses), for a one (1) year period commencing with the effective date of the termination; and (ii) the Principal Balance of the Loan shall be extinguished and all right, title and interest in the Secured Shares shall vest with the Maker (or his estate or heirs). (D) VOLUNTARY RESIGNATION The Executive may terminate this Agreement at ---------------------- any time upon 60 days written notice. Upon receipt of such notice, the Company may, at its option, relieve Executive of any or all of his duties, or may terminate Executive immediately. If this Agreement is terminated by the Executive under this Section, (i) the Company's obligation to pay the Base Salary, Medical Benefits and Bonus shall cease immediately upon the termination; and (ii) the Principal Balance shall be extinguished, and all right, title and interest to the Secured Shares shall vest immediately with the Company. (E) DUTIES FOLLOWING TERMINATION Upon termination of employment and/or ---------------------------- this Agreement, the Executive shall cooperate with the Company, as reasonably requested by the Company, to effect a transition of Executive's responsibilities and to ensure that the Company is aware of all matters being handled by Executive. Except in any suit between the Executive and the Company, Executive shall also, upon reasonable notice, furnish such information and proper assistance to the Company as may be reasonably required by the Company in connection with any litigation in which it is or may become a party. Any suit between the Executive and the Company shall be subject to the rules of discovery in the jurisdiction in which the suit is pending. SECTION 7. MISCELLANEOUS (A) NON-WAIVER The Company's failure at any time to require the ---------- performance by the Executive of any of the terms hereof shall in no way affect the Company's right thereafter to enforce the same, nor shall the waiver by the Company of the breach of any term hereof be taken or held to be a waiver of any succeeding breach. (B) SEVERABILITY In the event that any provision of this Agreement ------------ conflicts with the law under which this Agreement is to be construed, or if any such provision is held invalid or unenforceable by a court of competent jurisdiction or an arbitrator, such provision shall be deleted from this Agreement and the Agreement shall be construed to give full effect to the remaining provisions thereof. (C) GOVERNING LAW This Agreement shall be interpreted, construed and ------------- governed according to the laws of the State of Maryland, without regard to the principle of conflicts of laws thereof. (D) HEADINGS AND CAPTIONS The paragraph headings and captions contained in --------------------- this Agreement are for convenience only and shall not be construed to define, limit or affect the scope or meaning of the provisions hereof. (E) ENTIRE AGREEMENT This Agreement contains and represents the entire ---------------- agreement of the parties and supersedes all prior agreements, representations or understandings, oral or written, express or implied with respect to the subject matter hereof. Neither this Agreement, nor any term of Executive's employment with the Company, may be modified or amended in any way unless in a writing signed by both the Executive and the Company's President. No representation, promise or inducement has been made by either party hereto that is not embodied in this Agreement, and neither party shall be bound or liable for any alleged representation, promise or inducement not specifically set forth herein. (F) ASSIGNMENT This Agreement shall be binding upon and inure to the ---------- benefit of the parties hereto and their respective successors and assigns. The Executive shall not have any right to assign, delegate or transfer any duty or obligation to be performed by him hereunder to any third party, nor to assign or transfer the right, if any, to receive payments hereunder. (G) NOTICES All notices required or permitted hereunder shall be in ------- writing and shall be deemed properly given if delivered personally or sent by certified or registered mail, postage prepaid, return receipt requested, or sent by telegram, telex, telecopy or similar form of telecommunication, and shall be deemed to have been given when received. Any such notice or communication shall be addressed: (a) if to the Company, to Robert T. Giaimo, Silver Diner, Inc., 11806 Rockville Pike, Rockville, Maryland 20852; and a copy to Arnold Westerman, Esquire, Arent Fox Kintner Plotkin & Kahn, PLLC, 1050 Connecticut Avenue, N.W., Washington, D.C. 20036-5339, or (b) if to the Executive, to his home address at 4307 Pinetree Road, Rockville, Maryland 20853; or to such other address as the parties shall have furnished to one another in writing. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement, to be effective as of the day and year first above written. EXECUTIVE: SILVER DINER, INC. By: - -------------------------------- -------------------------------- Ype Von Hengst Robert T. Giaimo, President Date: November _____, 1998 Date: November ___, 1998 EXHIBIT A PROMISSORY NOTE $100,000 November __, 1998 Ype Von Hengst, a Maryland resident (MAKER), promises to pay to the order of Silver Diner, Inc. (the COMPANY), the principal sum of $100,000, plus interest on the unpaid principal balance thereof from time to time outstanding (the PRINCIPAL BALANCE) at the rate of 5.25% per annum before maturity, as set forth in this Promissory Note. SECTION 1 REFERENCE TO OTHER DOCUMENTS. This Promissory Note is issued pursuant to the Company's agreement to make a $100,000 loan to Maker (the LOAN), as set forth in a certain Employment Agreement dated as of the date hereof between the Maker and the Company (incorporated herein by reference). All capitalized terms used in this Note which are not otherwise defined herein shall have the meanings assigned to them in the Employment Agreement. SECTION 2 SECURITY. To secure his obligations hereunder, the Maker hereby grants the Company a security interest in 182,881 shares of his common stock in the Company (including any securities or property issued or issuable with respect to this common stock by reason of dividends, stock splits, reclassification, recapitalization, mergers, asset sales or any similar transaction) (SECURED SHARES) and agrees to transfer to the Company (i) all stock certificates evidencing his ownership of the Secured Shares and (ii) a stock power separate from certificate. SECTION 3 REPAYMENT OF PRINCIPAL BALANCE. (a) Principal and Interest. This Note shall be deemed repaid in full if ----------------------- the Maker complies with all terms of the Employment Agreement for the full Term contemplated by that Agreement. Provided the Maker complies with all terms of the Employment Agreement, $20,000, together with accrued and unpaid interest on the Note shall be paid by application of the Bonus for each year that Maker complies with the Employment Agreement. (b) Interest Calculations. Interest shall be calculated and accrue through --------------------- the Maturity Date on the basis of a 365 day year and actual days elapsed. (c) Forgiveness of Debt. If the Employment Agreement is terminated by the -------------------- Company for "Cause" pursuant to Section 6(B) of the Employment Agreement, or through the voluntary resignation of Maker pursuant to Section 6(D), the Principal Balance shall be extinguished, and all right, title and interest to the Secured Shares shall vest immediately with the Company. If the Employment Agreement is terminated pursuant to Section 6(A), or by the Company without "Cause" pursuant to Section 6(C), the Principal Balance shall be extinguished, and all right, title and interest to the Secured Shares shall vest immediately with the Maker (or his estate or executors). (d) Prepayment. Except as provided in Section 3(c), the Maker may not ----------- prepay all or any part of the Principal Balance without the express written consent of the Chairman of the Board. (e) Release of Secured Shares. If the Chairman of the Board consents, -------------------------- Maker shall have the right to withdraw from the security granted hereby some of the Secured Shares; provided, however, that the aggregate fair market value of the Secured Shares remaining subject to the security interest granted hereby shall be equal to or greater than 125% of the remaining balance of this Note. SECTION 4 DEFAULT The filing by Maker of a voluntary petition for relief in a case under the Bankruptcy Code or any state insolvency law, or the filing of an involuntary petition against Maker in a case under the Bankruptcy Code or any state insolvency law, shall constitute a default under this Promissory Note. In the event of such a default, all right, title and interest in the Secured Shares shall vest immediately with the Company. SECTION 5 NON-RECOURSE Except as provided herein in Section 3(c), (i) the Maker shall have no personal liability for payment of the principal or interest under this Promissory Note; (i) the Company agrees to enforce any right to payment hereunder solely against the Secured Shares; and (iii) the Company agrees to look solely to the Secured Shares in satisfaction of the payments due hereunder. SECTION 6 MISCELLANEOUS (a) Notices. Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be delivered to the parties at the addresses set forth below (or to such other addresses as the parties may specify by due written notice to the other). Notices are other communications given by certified mail, return receipt requested, shall be deemed given 3 days after the date of mailing: Maker: Ype Von Hengst 4307 Pinetree Road Rockville, Maryland 20853 Company: Silver Diner, Inc. 11806 Rockville Pike Rockville, Maryland 20852 Attn: Robert T. Giaimo with a copy to: Arent Fox Kintner Plotkin & Kahn, PLLC 1050 Connecticut Avenue, N.W. Washington, D.C. 20036-5339 Attention: Arnold R. Westerman (b) Waivers. Waiver of any provision of this Promissory Note shall not -------- constitute a continuing waiver of any rights of the Company. (c) Governing Law. The validity, construction and enforceability of, and -------------- the rights and obligations of the Maker and the Company under this Promissory Note shall be governed by and construed and enforced in accordance with the laws of the State of Maryland without reference to the conflicts of laws provisions thereof. (d) Binding. The obligations and liabilities of Maker under this -------- Promissory Note shall be binding upon and enforceable against Maker and his successors and assigns, including but not limited any Chapter trustee appointed in the Maker in any bankruptcy matter. (e) Negotiability. The Company agrees not to assign, transfer or -------------- negotiate this Note without the written consent of the Maker. MAKER: Date: November __, 1998 ____________________________________ Ype Von Hengst This is to certify that this Promissory Note from Maker to Company was executed by the same in my presence: Dated this __ day of November, 1998. ____________________________________ Notary Public My Commission expires: [SEAL] EX-10.40 11 EXHIBIT 10.40 Exhibit 10.40 ROBERT T. GIAIMO 8708 Brook Road McLean, Virginia 22102 November 9, 1998 Silver Diner, Inc. Attn: Clinton A. Clark, Chairman, Compensation Committee 11806 Rockville Pike Rockville, MD 20852 RE: FOUNDER'S EMPLOYMENT AGREEMENT Dear Clint: This letter pertains to my employment agreement (the "Contract") with Silver Diner Development, Inc. (SDDI), dated August 28, 1995. Since SDDI was merged into Silver Diner, Inc. (the "Company"), all references in the Contract to SDDI shall mean the Company. This will advise you that I hereby agree that the Contract is amended, effective immediately, as follows: In the event of my termination for Involuntary Resignation, the maximum amount of the Involuntary Resignation Payment provided for in Section 7(c)(v) of the Contract shall not exceed three (3) times my Base Compensation, including all bonuses, for the Company's fiscal year immediately preceding the fiscal year in which the Involuntary Resignation occurs. To illustrate if the Involuntary Resignation were to occur with exactly four (4) years remaining in the then current term of the Contract, the Involuntary Resignation Payment would nevertheless be capped at three (3) times my Base Compensation, including all bonuses, for the immediately preceding fiscal year. On the other hand, if the Involuntary Resignation were to occur with exactly two (2) years remaining in the then current term of the Contract, the Involuntary Resignation Payment would equal two (2) times my Base Compensation, including all bonuses, for the immediately preceding year as is provided for in the Contract. Except as set forth in this letter, the Contract continues in full force and effect in accordance with its terms. I am pleased to make the foregoing modifications to my Contract, to be ratified by the Board in December. Sincerely, Robert T. Giaimo EX-10.41 12 1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN Exhibit 10.41 SILVER DINER, INC. 1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN (AS AMENDED MARCH 4, 1998) The following constitute the provisions of the Company's 1996 Non-Employee Director Stock Option Plan. 1. PURPOSE The purpose of the Plan is to provide an investment opportunity to the Company's Non-employee Directors by granting them Options to purchase shares of Common Stock as compensation for their service on the Board. 2. DEFINITIONS As used in this Plan, the following words and phrases shall have the meanings indicated: (A) "BOARD" shall mean the Company's Board of Directors. (B) "CODE" shall mean the Internal Revenue Code of 1986, as amended. (C) "COMMON STOCK" shall mean the shares of common stock, $.00074 par value, of the Company. (D) "COMPANY" shall mean Silver Diner, Inc., and its Subsidiaries. (E) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended. (F) "FAIR MARKET VALUE" shall mean the closing price of a share of the Common Stock as reported on the Nasdaq National Market System, or (ii) if the shares of such Common Stock are not then listed on the Nasdaq National Market System, the closing price per share of the Common Stock on the principal national securities exchange, if any, on which the shares of Common Stock shall then be listed, or (iii) if the shares of such Common Stock are not then listed on a national securities exchange, the closing price per share of Common Stock entered on a national inter-dealer quotation system, or (iv) if no closing or last sales price per share of Common Stock is entered on a national inter-dealer quotation system, the average of the closing bid and asked prices for the shares of such Common Stock in the over-the-counter market, or (v) if no price can be determined under the preceding alternatives, then the price per share as most recently determined by the Board, which shall, if the price is not determined under any one of the preceding alternatives, make such determination of the Fair Market Value at least once each month. (G) "FORM S-8 REGISTRATION STATEMENT" shall mean a registration statement filed on Form S-8 with and declared effective by the Securities and Exchange Commission under the Securities Act covering the offer and sale of the Options and the underlying Common Stock. (H) "NON-EMPLOYEE DIRECTOR" shall mean any member of the Company's Board who is a "Non-Employee Director" as such term is defined under Rule 16b- 3(b)(3)(i) promulgated under the Exchange Act. (I) "OPTION" shall mean any option issued pursuant to this Plan. (J) "OPTIONEE" shall mean any person to whom an Option is granted under this Plan. (K) "PARENT" shall mean any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if, at the time of granting an Option or the sale of any Common Stock, each of the corporations other than the Company owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. (L) "PLAN" shall mean this 1996 Non-employee Director Stock Option Plan. (M) "REORGANIZATION" shall mean any merger, reorganization, consolidation or sale of all or substantially all of the Company's assets. (N) "REGISTERED" shall mean a Form S-8 Registration Statement shall be in effect covering the purchase of the Options or the underlying shares. (O) "SECURITIES ACT" shall mean the Securities Act of 1933, as amended. (P) "STOCK OPTION AGREEMENT" shall mean the agreement evidencing the Options sold to Optionees pursuant to the Plan containing the terms and conditions specified in Section 7 below and on the form attached hereto as Exhibit A. (Q) "SUBSIDIARY" shall mean any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if, at the time of granting an Option, each of the corporations, other Than the last corporation in the unbroken chain owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 3. GENERAL ADMINISTRATION The Plan shall be administered by a committee (the "Committee"), consisting of not less than two Non-employee Directors. The Committee shall have the authority in its discretion to administer the Plan and to interpret the Plan and to prescribe, amend and rescind rules and regulations relating to the operation of the Plan and to make all other determinations deemed necessary or advisable for the administration of the Plan; provided, however, that the Committee may not alter, amend or modify the express provisions of the Plan. The Board shall fill all vacancies, however caused, in the Committee. The Board may from time to time appoint additional members to the Committee, and may at any time remove one or more Committee members and substitute others. No member of the Board or the Committee shall be liable for any action taken or determination made in good faith with respect to the Plan or any action taken thereunder. 4. TERM OF PLAN The Plan became effective upon its adoption by the Company's Board on September 11, 1996, subject to stockholder approval, and shall continue in effect for a term of ten (10) years unless sooner terminated under Section 10 hereof. Any Options outstanding under the Plan on such date shall continue to be exercisable pursuant to their terms, except as provided by Section 7(f) hereof. 5. ELIGIBILITY Options may be granted to any Non-employee Director of the Company as compensation for service on the Board. 6. STOCK SUBJECT TO THE PLAN An aggregate of 150,000 shares of Common Stock shall be reserved for issuance pursuant to Options issued pursuant to the Plan. If any outstanding Option under the Plan for any reason expires or is terminated without having been exercised in full, the shares of Common Stock allocable to the unexercised portion of such Option shall (unless the Plan shall have been terminated) become available for subsequent issuance of Options under the Plan. 7. TERMS AND CONDITIONS OF OPTIONS Each Option issued pursuant to the Plan shall be evidenced by a Stock Option Agreement containing the terms and conditions specified in this Section 7. (A) GRANT OF OPTIONS. Each Non-employee Director shall be granted an Option to purchase 1,000 shares of Common Stock on the first day of each calendar quarter from the date of the Plan's adoption by the Board. Each Non-employee Director shall also be granted an Option pursuant to the Plan for the second and third quarters of 1996 with the date of grant being May 29, 1996 and July 1, 1996, respectively. Options for the second and third quarters of 1996 and for each quarter until the Plan is approved by stockholders will be granted subject to stockholder approval. (B) OPTION EXERCISE PRICE. The exercise price of each Option (the "Option Exercise Price") shall equal the Fair Market Value of the Common Stock on the day immediately preceding the date of grant of each Option. The Option Exercise Price shall be subject to adjustment as provided in Section 7(f) hereof. (C) TERM AND EXERCISE OF OPTIONS. Options shall be exercisable in whole or in part at any time over the exercise period, but in no event shall such period exceed three years from the date of the grant of each such Option. The exercise period shall be subject to earlier termination as provided in Section 7(f) below. An Option may be exercised by giving prior written notice of such exercise to the Company and by paying the Option Exercise Price to the Company either by delivering on the date of exercise (i) a check in the amount of the Option Exercise Price, (ii) Common Stock having a Fair Market Value on the day immediately preceding the date of exercise equal to or less than the Option Exercise Price, or (iii) a combination thereof. If the Optionee tenders shares of Common Stock having a Fair Market Value which exceeds the Option Exercise Price, the Company shall return to the Optionee any and all whole shares of Common Stock which exceed the Option Exercise Price and the Company shall pay the Optionee any additional amount which exceeds the Option Exercise Price in cash in lieu of issuing the Optionee a fractional share for such amount. (D) VESTING AND RESTRICTIONS ON TRANSFERABILITY. Options issued under the Plan shall vest immediately upon grant and shall not be transferable other than by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act ("ERISA") or the rules thereunder. (E) DEATH OR DISABILITY OF OPTIONEE. If an Optionee shall die or become disabled, all Options theretofore issued to such Optionee may, unless earlier terminated in accordance with their terms, be exercised at any time during the term of the Option by the personal representative of the Optionee or by the person who acquired the right to exercise such Option by bequest or inheritance or otherwise by reason of the death or disability of the Optionee. (F) RECLASSIFICATION; RECAPITALIZATION; AND REORGANIZATIONS. (1) DIVIDENDS AND STOCK SPLITS. If there is any change in the number of shares of Common Stock through the declaration of stock dividends, recapitalization resulting in stock splits, or combinations or exchanges of such shares, then the number of shares of Common Stock available for Options, the number of such shares covered by outstanding Options and the Option Exercise Price shall be proportionately adjusted to reflect any increase or decrease in the number of issued shares of Common Stock; provided, however, that any fractional shares resulting from such adjustment shall be eliminated. (2) SPIN-OFFS AND LIQUIDATIONS. In the event of the proposed dissolution or liquidation of the Company, or in the event of any corporate separation or division, including, but not limited to, a split-up, a split- off or spin-off, each Option granted under the Plan shall terminate as of a date to be fixed by the Board, provided, however, that no less than thirty (30) days' written notice of the date so fixed shall be given to each Optionee, who shall have the right during the period of thirty (30) days preceding such termination, to exercise the Options as to all or any part of the shares of Common Stock covered thereby. (3) REORGANIZATIONS. If, while unexercised Options remain outstanding under the Plan, the Company executes a definitive Reorganization agreement, the Committee may provide that each Option granted under the Plan shall (i) terminate as of a date to be fixed by the Board, provided, however, that no less than thirty (30) days' written notice of the date so fixed shall be given to each Optionee, who shall have the right, during the period of thirty (30) days preceding such termination, to exercise the Options as to all or any part of the shares of Common Stock covered thereby or (ii) remain outstanding and be adjusted so that on exercise the Optionee shall receive the securities, cash or property that would have been issued with respect to the shares of Common Stock had the Option been exercised immediately prior to the Reorganization. The Committee may also, in its discretion, permit the cancellation of outstanding Options in exchange for a cash payment to the Optionee equal to the difference between the exercise price of the Option and the value of the consideration that would have been paid had the Option been exercised immediately prior to the Reorganization. (4) EXEMPTIONS. Section 7(f) shall not apply to a Reorganization in which the Company is the surviving corporation and shares of Common Stock are not converted into or exchanged for stock, securities of any other corporation, cash or any other thing of value. Notwithstanding the preceding sentence, in case of any Reorganization in which the Company is the continuing corporation and in which there is a reclassification or change (including a change to the right to receive cash or other property) of the shares of Common Stock (other than a change in par value, or from par value to no par value, or as a result of a subdivision or combination, but including any changes in such shares into two or more classes series of shares), the Committee may provide that the holder of each Option then exercisable shall have the right to exercise such Option solely for the kind and amount of shares of stock and other securities (including those of any new direct or indirect Parent of the Company), property, cash or any combination thereof receivable by the holder of the number of shares of Common Stock for which such Option might have been exercised upon such Reorganization or reclassification. In the event of a change in the Common Stock as presently constituted, which is limited to a change of all of its authorized shares with par value into the same number of shares with a different par value or without par value, the shares resulting from any such change shall be deemed to be the Common Stock within the meaning of the Plan. Except as herein expressly provided, the Optionee shall have no rights by reason of any subdivision or consolidation of shares of stock of any class or the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class or by reason of any dissolution, liquidation, or Reorganization, and any assurance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, and no adjustment by reason thereof shall be made with respect to the number of shares of Common Stock subject to an Option or to the Option Price. The grant of an Option pursuant to the Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, Reorganizations or changes of its capital or business structure or to merge or to consolidate or to dissolve, liquidate or sell, or transfer all or any part of its business or assets. 8. RIGHTS AS A SHAREHOLDER No Optionee shall have any rights as a shareholder with respect to any shares until the stock certificate evidencing such shares has been issued evidencing such shares. No adjustments shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the date such stock certificate is issued, except as provided in Section 7(f) hereof. 9. GENERAL RESTRICTIONS (A) INVESTMENT REPRESENTATIONS. The Company may require an Optionee to give written assurances in substance and form satisfactory to the Company to the effect that such person is acquiring the Common Stock for his or her own account for investment and not with any present intention of selling or otherwise distributing the same, and to such other effect as the Company deems necessary or appropriate in order to comply with applicable federal and applicable state securities laws. (B) COMPLIANCE WITH SECURITIES LAWS. Each Option shall be subject to the requirement that if, at any time, counsel to the Company shall determine that the listing, registration or qualification of the shares subject thereto on any securities exchange or any state or federal law, or the consent or approval of any governmental or regulatory body, is necessary as a condition of, or in connection with, the issuance of Options, such Options may not be sold or exercised, in whole or in part, unless such listing, registration, qualification, consent or approval shall have been effected or obtained on conditions acceptable to the Board. The Company plans to register the shares subject to the Options on a Form S-8 Registration Statement. However, nothing herein shall be deemed to require the Company to obtain an effective Form S-8 Registration Statement or to apply for or to obtain any listing, registration or qualification of the Options or Common Stock to be issued pursuant thereto. 10. AMENDMENT AND TERMINATION OF THE PLAN The Board may at any time and from time to time suspend, terminate, modify or amend the Plan, provided that no suspension, termination, modification or amendment of the Plan may adversely affect any rights under the Plan unless the written consent of those affected is obtained. SILVER DINER, INC. STOCK OPTION AGREEMENT FOR THE 1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN A stock option award (the "Stock Option" or "Award") is hereby granted by Silver Diner, Inc., (the "Company"), to the Non-employee Director named below ("Optionee"), for and with respect to common stock of the Company, par value $.00074 per share ("Common Stock"), subject to the following terms and conditions: 1. Subject to the provisions set forth herein and the provisions of the 1996 Non-employee Director Stock Option Plan (the "Plan"), the provisions of which are hereby incorporated by reference, and in consideration of the agreements of Optionee provided in this Stock Option Agreement (the "Option Agreement"), the Company hereby grants to Optionee a Stock Option to purchase from the Company the number of shares of Common Stock, at the exercise price and on the schedule, all as set forth below. Name of Optionee: Date of Grant: Option Exercise Price: Number of Shares of Common Stock Subject to Stock Option: Expiration Date: 2. Written notice of an election to exercise any portion of the Award specifying the portion thereof being exercised and the exercise date, shall be given by Optionee, or his legal representative, (a) by delivering such notice at the principal executive offices of the Company no later than the exercise date, or (b) by mailing such notice, postage prepaid, addressed to the Secretary of the Company at the Company's principal executive offices at least three business days prior to the exercise date. 3. Neither Optionee nor any other person entitled to exercise the Stock Option under the terms hereof shall be, or have any of the rights or privileges of, a shareholder of the Company in respect of any Common Stock issuable on exercise of the Stock Option, until the date of the issuance of a stock certificate for such Common Stock. 4. If the Award shall be exercised in whole, this Option Agreement shall be surrendered to the Company for cancellation. If the Award shall be exercised in part, or a change in the number or designation of the Common Stock shall be made, this Option Agreement shall be delivered to the Company for the purpose of making appropriate notation thereon, or of otherwise reflecting, in such manner as the Company shall determine, the partial exercise or the change in the number or designation of the Common Stock. 5. The grant of the Award hereunder shall not be deemed to give the Optionee the right to be retained as a Non-employee Director of the Company or to affect the right of the Company to discharge the Optionee at any time. 6. The Award shall be exercised in accordance with such administrative regulations as the Board shall from time to time adopt. 7. The Award and this Option Agreement shall be construed, administered and governed in all respects under and by the laws of the State of Delaware, without giving effect to principles of conflict of laws. 8. The Award and this Option Agreement are subject to the requirement that the shareholders of the Company approve and ratify the adoption of the Plan no later than __________________, 199 . SILVER DINER, INC. By: _________________________________ Name: Title: EX-23.1 13 EXHIBIT 23.1 Exhibit 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333-09735 of Silver Diner, Inc. on Form S-3 and in Registration Statements No. 333-18509, No. 333-21841, No. 333-27325, No. 333-59533 and No. 333-59535 of Silver Diner, Inc. on Forms S-8 of our report dated March 8, 1999, appearing in this Annual Report on Form 10-K of Silver Diner, Inc. for the year ended January 3, 1999. /s/ Deloitte & Touche LLP March 31, 1999 Washington, D.C. EX-27 14 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the financial statements of Silver Diner, Inc. and Subsidiaries, for the year ended January 3, 1999, and is qualified in its entirety by reference to such financial statements. YEAR JAN-03-1999 JAN-03-1999 1,611,757 746,597 0 0 139,039 2,852,265 20,907,989 4,790,572 21,638,497 2,227,222 0 0 0 8,558 18,229,437 21,638,497 28,561,422 28,561,422 7,920,808 7,920,808 19,087,455 0 40,639 (1,556,438) 0 (1,556,438) 0 0 (326,868) (1,883,306) (0.16) (0.16)
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