UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 13, 1997
Commission File No. 0-24982
SILVER DINER, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 04-3234411
- ------------------------------- -----------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
11806 Rockville Pike, Rockville, Maryland, 20852
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(301) 770-0333
- --------------------------------------------------------------------------------
(Registrant's telephone number)
SILVER DINER DEVELOPMENT, INC.
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(Former name, former address and former fiscal year, if changed
since the last report)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, $.00074 par value, outstanding as of July 31, 1997:
11,635,973 shares
1
SILVER DINER, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets
as of July 13, 1997 and December 31, 1996 3
Consolidated Condensed Statements of Operations for the
Twelve weeks ended July 13, 1997 and July 14, 1996 and the
Twenty eight weeks ended July 13, 1997 and July 14, 1996 4
Consolidated Condensed Statement of Stockholders' Equity for the
Twenty eight weeks ended July 13, 1997 5
Consolidated Condensed Statements of Cash Flows for the
Twenty eight weeks ended July 13, 1997 and July 14, 1996 6
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
Signature 14
2
SILVER DINER, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
July 13, December 29,
1997 1996
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,548,016 $ 8,285,533
Marketable securities available for sale - 1,081,015
Inventory 193,155 147,981
Prepaid expenses and other current assets 213,940 202,081
----------------- -----------------
Total current assets 4,955,111 9,716,610
Property, equipment and improvements, net 15,809,135 12,956,119
Due from affiliates 104,947 55,957
Preopening costs, net 436,406 127,413
Goodwill, net 2,568,207 2,667,810
Deposits and other 364,631 340,466
----------------- -----------------
Total assets $24,238,437 $25,864,375
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,176,085 $ 3,174,262
Note payable 267,000 -
Deferred rent liability 848,203 749,396
----------------- -----------------
Total liabilities 3,291,288 3,923,658
Stockholders' equity:
Preferred stock, at July 13, 1997 and December 29, 1996, $.001 par
value, 1,000,000 shares authorized; none issued - -
Common stock, at July 13, 1997, $.00074 par value, 20,000,000
shares authorized; 11,635,973 shares issued and outstanding; at
December 29, 1996, $.00074 par value, 20,000,000 shares authorized;
11,520,473 shares issued and outstanding 8,609 8,526
Additional paid-in capital 30,461,260 30,297,290
Accumulated deficit (9,522,720) (8,365,099)
----------------- -----------------
Total stockholders' equity 20,947,149 21,940,717
----------------- -----------------
Total liabilities and stockholders' equity $24,238,437 $25,864,375
================= =================
Accompanying notes are an integral part of these financial statements
3
SILVER DINER, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Twelve Weeks Ended Twenty Eight Weeks Ended
July 13, July 14, July 13, July 14,
1997 1996 1997 1996
----------------- ---------------- ----------------- ---------------
Net sales $ 6,011,695 $ 3,974,420 $12,143,899 $8,868,848
Restaurant costs and expenses
Cost of sales 1,733,727 1,093,769 3,497,399 2,448,791
Labor 2,040,198 1,288,696 4,160,863 2,997,133
Operating 977,526 606,875 2,025,245 1,348,026
Occupancy 609,840 429,440 1,307,046 1,037,131
Depreciation and amortization 343,863 197,113 659,415 514,178
----------------- ---------------- ----------------- ---------------
Total restaurant costs and expenses 5,705,154 3,615,893 11,649,968 7,132,039
----------------- ---------------- ----------------- ---------------
Restaurant operating income 306,541 358,527 493,931 523,589
General and administrative expenses 742,104 672,912 1,725,847 1,348,601
Depreciation and amortization 48,686 24,444 114,560 70,301
----------------- ---------------- ----------------- ---------------
Operating loss (484,249) (338,829) (1,346,476) (895,313)
Interest expense 1,509 14,851 1,509 189,560
Investment income (76,199) (105,543) (190,364) (138,645)
----------------- ---------------- ----------------- ---------------
NET LOSS $ (409,559) $ (248,137) $(1,157,621) $ (946,228)
================= ================ ================= ===============
Net loss per common share $ (0.04) $ (0.02) $ (0.10) $ (0.12)
----------------- ---------------- ----------------- ---------------
Weighted average common shares outstanding 11,634,642 10,075,287 11,600,752 7,853,126
================= ================ ================= ===============
Accompanying notes are an integral part of these financial statements
4
SILVER DINER, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Twenty Eight Weeks Ended July 13, 1997
Common Stock Additional
------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
---------------- ----------------- ---------------- ---------------- ----------------
Balance at December 29, 1996 11,520,473 $ 8,526 $ 30,297,290 $ (8,365,099) $ 21,940,717
Sale of common stock 95,084 70 94,934 - 95,004
Stock options exercised 20,416 13 30 - 43
Amortization of unearned compensation - - 69,006 - 69,006
Net loss - - - (1,157,621) (1,157,621)
---------------- ---------------- ---------------- ---------------- ----------------
Balance at July 13, 1997 11,635,973 $ 8,609 $ 30,461,260 $ (9,522,720) $ 20,947,149
================ ================ ================ ================ ================
Accompanying notes are an integral part of these financial statements
5
SILVER DINER, INC. AND SUBSIDIARIES,
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Twenty Eight Weeks Ended
July 13, 1997 July 14, 1996
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,157,621) $ (946,228)
Adjustments to reconcile net loss to net cash used in operations
Depreciation and amortization 773,975 584,479
Compensation expense - stock options and deferred compensation 69,006 35,907
Changes in operating assets and liabilities
Inventory (45,174) 10,323
Prepaid expenses and other assets (1,501) (131,087)
Preopening costs (481,303) (23,324)
Deposits and other (73,155) 6,599
Accounts payable and accrued expenses 56,475 (1,142,634)
Deferred rent liability 98,807 52,298
--------------- --------------
Net cash used in operating activities (760,491) (1,553,667)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (4,409,730) (920,260)
Purchases of marketable securities available for sale (2,960,250) -
Maturities of marketable securities available for sale 4,030,907 -
--------------- --------------
Net cash used in investing activities (3,337,073) (920,260)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from merger - 12,166,964
Net proceeds from sale of stock 95,047 8,202,214
Acquisition of outstanding interest in Silver Diner Limited Partnership - (2,517,089)
Proceeds from notes payable 267,000 -
Payments of principal - notes payable - (1,274,798)
Payments of principal - notes payable - related party - (881,788)
--------------- --------------
Net cash provided by financing activities 362,042 15,695,503
--------------- --------------
Net (decrease) increase in cash and cash equivalents (3,737,517) 13,221,576
Cash and cash equivalents at beginning of the period 8,285,533 1,584,716
--------------- --------------
Cash and cash equivalents at end of the period $ 4,548,016 $ 14,806,292
=============== ==============
Supplemental disclosure of cash flow information:
Interest paid $ - $ 130,711
=============== ==============
Noncash investing and financing activities:
Construction payables included in accounts payable and accrued
expenses $ - $ 12,500
=============== ==============
Financing and acquisition costs included in accounts payable
and accrued expenses $ - $ 845,474
=============== ==============
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
=============== ==============
Accompanying notes are an integral part of these financial statements
6
SILVER DINER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE TWELVE AND TWENTY EIGHT WEEKS ENDED JULY 13, 1997 AND JULY 14, 1996
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements of Silver
Diner, Inc., a Delaware Corporation, and its wholly owned subsidiary, Silver
Diner Development, Inc. ("SDDI"), (collectively the "Company") have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the twenty eight week period ended July 13,
1997 are not necessarily indicative of the results that may be expected for the
year ended December 28, 1997. All significant intercompany balances and
transactions have been eliminated in consolidation. During 1996, the Company
acquired the minority interest in Silver Diner Limited Partnership ("SDLP"),
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. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 29, 1996.
2. NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share,"
was recently issued by the Financial Accounting Standards Board. SFAS No. 128 is
effective for periods ending after December 15, 1997 and early adoption is not
permitted.
SFAS No. 128 requires the Company to compute and present a basic and diluted
earnings per share. Had the company computed net loss per share in accordance
with SFAS No. 128 for the twenty eight weeks ended July 13, 1997 there would be
no material difference in the reported net loss per share.
7
GENERAL
The Company currently operates ten Silver Diners in the Washington / Baltimore
metropolitan area, including a restaurant opened June 16, 1997 in Reston,
Virginia. The Company's eleventh Silver Diner is scheduled to open by the end of
1997, in Cherry Hill, New Jersey.
8
Twelve Weeks Ended Twenty Eight Weeks Ended
---------------------------- -----------------------------
July 13, July 14, July 13, July 14,
1997 1996 1997 1996
------------ ------------ ------------ ------------
Net sales 100.0% 100.0% 100.0% 100.0%
Restaurant costs and expenses
Cost of sales 28.8% 27.5% 28.8% 27.6%
Labor 33.9% 32.4% 34.3% 33.8%
Operating 16.3% 15.3% 16.7% 15.2%
------------ ------------ ------------ ------------
Restaurant operating margin 21.0% 24.8% 20.3% 23.4%
Occupancy 10.1% 10.8% 10.8% 11.7%
Depreciation and amortization 5.7% 5.0% 5.4% 5.8%
------------ ------------ ------------ ------------
Restaurant operating income 5.1% 9.0% 4.1% 5.9%
General and administrative expenses 12.3% 16.9% 14.2% 15.2%
Depreciation and amortization 0.8% 0.6% 0.9% 0.8%
------------ ------------ ------------ ------------
Operating loss (8.1%) (8.5%) (11.1%) (10.1%)
Interest expense 0.0% 0.4% 0.0% 2.1%
Investment income (1.3%) (2.7%) (1.6%) (1.6%)
------------ ------------ ------------ ------------
Net Loss (6.8%) (6.2%) (9.5%) (10.7%)
============ ============ ============ ============
Net sales for the twelve weeks ended July 13, 1997 ("1997 Second Quarter")
increased $2,037,275 to $6,011,695 compared to $3,974,420 for the twelve weeks
ended July 14, 1996 ("1996 Second Quarter"). Year-to-date, net sales for the
twenty-eight weeks ended July 13, 1997 ("1997 YTD Period") increased $3,275,051
to $12,143,899 compared to $8,868,848 for the twenty-eight weeks ended July 14,
1996 ("1996 YTD Period"). Four new restaurants opened between December 1996, and
June 1997, in Northern Virginia were primarily responsible for the increases,
adding $2,311,307 and $3,649,516 to net sales for the current quarter and
year-to-date periods, respectively.
Comparable Silver Diner sales (sales for Silver Diners open throughout both
periods being compared, excluding the initial twelve months of operations during
which sales are typically higher than normal) decreased 5.8% for the quarter and
decreased 2.1% year-to-date. In addition to a very competitive restaurant market
in the Washington/Baltimore area, the Company believes that comparable store
sales were adversely affected by the concentration of seven Silver Diners now
open in the Northern Virginia area as a result of four openings since December
1996. While this trend is expected to continue, the Company believes that in the
longer term it will recognize the benefits of greater brand recognition and
familiarity from customers in this geographic region.
9
In June 1997, the Company introduced its summer menu designed to enhance
customer value and build sales, while reducing operational complexity. The new
menu rollout resulted in initially higher food costs, but the Company believes
it will result in improved future sales, improved overall menu quality, faster
customer service time, and decreased employee training time.
Cost of sales, primarily food and beverage cost, increased 1.3% of net sales to
28.8% in the 1997 Second Quarter, compared to 27.5% for the 1996 Second Quarter.
Year-to-date, cost of sales increased 1.2% of net sales. The higher cost in the
1997 Second Quarter and year to date was primarily attributable to higher food
cost associated with new store openings, outsourcing the preparation of several
menu items to reduce operational complexity, and the rollout of the new summer
menu.
Labor, which consists of restaurant management and hourly employee wages and
bonuses, payroll taxes, workers' compensation insurance, group health insurance
and other benefits, was 33.9% of net sales for the 1997 Second Quarter, an
increase of 1.5% of net sales compared to the 1996 Second Quarter. Year-to-date,
labor increased 0.5% of net sales to 34.3% for the 1997 YTD Period, compared to
33.8% for the 1995 YTD Period. The 1997 Second Quarter and year to date labor
costs increases resulted from higher labor costs in the initial periods of
operation at the four Silver Diners opened since December 1996. Labor costs in
comparable stores was 30.7% for the 1997 Second Quarter and 31.6% year to date,
a decrease of 0.7% and 0.8%, respectively, primarily the result of lower workers
compensation expense.
Operating expenses, which consist of all restaurant operating costs other than
labor and occupancy, including supplies, utilities, repairs and maintenance and
advertising, increased to 16.3% of net sales for the 1997 Second Quarter,
compared to 15.3% for the 1996 Second Quarter. Year-to-date, operating expenses
increased 1.5% of net sales to 16.7% of net sales for the 1997 YTD period.
Higher marketing costs were responsible for approximately 1% of the increases
for the quarter and year to date. These expenses relate primarily to a radio
advertising campaign and coupon mailings to prospective customers. The remaining
increase in cost primarily relates to the Operating expenses are likely to
continue to exceed historical levels during the summer months due to the radio
advertising campaign supporting the newly opened Silver Diners.
Occupancy, which is composed primarily of rent, property taxes and property
insurance, increased $180,400 for the 1997 Second Quarter compared to the 1996
Second Quarter, and $269,915 for the 1997 YTD Period compared to the 1996 YTD
Period. Occupancy costs for the new restaurants in Clarendon, Merrifield,
Springfield and Reston, Virginia accounted for most of the increase.
Restaurant depreciation and amortization increased $146,750 for the 1997 Second
Quarter compared to the 1996 Second Quarter, and $145,237 for the 1997 YTD
Period compared to the 1996 YTD period. These increases were primarily
associated with the new restaurant openings since December 1996 which had lower
preopening cost amortization, offset by additional property and equipment
depreciation for new stores. The 1997 Quarter and 1997 YTD Period include
approximately $109,000 and $174,000, respectively, of preopening amortization,
compared to approximately $45,000 and $165,000 for the 1996 Quarter and 1996 YTD
Period, respectively. Preopening costs, which are amortized on a straight-line
basis over twelve months from the date of each new restaurant opening, were
reduced from approximately $200,000 per store for Tysons Corner and Fair Oaks to
an average of approximately $140,000 for Clarendon, Merrifield, Springfield and
Reston.
10
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 $742,104 in the 1997 Second
Quarter, an increase of $69,192 compared to the 1996 Second Quarter. The
increase was largely related to higher restaurant recruitment and training costs
associated with new restaurant openings and the write off of a $25,000 deposit
for a liquor license that the Company was pursuing and subsequently abandoned.
In the 1997 YTD Period, general and administrative expenses were $1,725,847, an
increase of $377,246 compared to the 1996 YTD Period. The increase year to date
costs were, in addition to higher restaurant recruitment and training costs
associated with new restaurant openings, the result of additional expenses
associated with being a public company, including preparation of the Company's
first annual report, 10-K and annual proxy statement, plus costs of implementing
store management compensation and stock option and purchase plans adopted in
late 1996. As a percentage of net sales, general and administrative expenses
decreased from 16.9% in the 1996 Second Quarter to 12.3% in the 1997 Second
Quarter, and from 15.2% in the 1996 YTD Period to 14.2 in the 1997 YTD Period.
The Company's administrative overhead as a percentage of net sales remains above
the industry average primarily due to the cost of building a corporate
management team to support the Company's intermediate and long-term growth
plans. As revenues increase with the addition of new Silver Diners, general and
administrative expenses are expected to decrease as a percentage of net sales.
The Company earned $76,199 in investment income for the Second Quarter 1997
compared to $105,543 in the Second Quarter 1996. Year to date, investment income
was $190,364 and $138,645 in 1997 and 1996, respectively. The Company incurred
$1,509 in interest expense for the Second Quarter 1997 and the YTD 1997 Period
compared to $14,851 and $189,560 in the 1996 Second Quarter and the 1996 YTD
Period, respectively, reflecting the Company's stronger financial position
following the merger with Food Trends Acquisition Corporation in March 1996
("Merger") and a private placement of common stock in July 1996 ("Private
Placement").
Depreciation and amortization increased approximately $25,000 for Second Quarter
1997 compared to Second Quarter 1996. Depreciation and amortization for Second
Quarter 1997 includes approximately $42,000 for amortization of goodwill related
to the acquisition of the Silver Diner Limited Partnership ("SDLP") minority
interest in June 1996 compared to $14,000 in the prior year's quarter. Year to
date, 1997 depreciation & amortization expense was approximately $45,000 greater
than the same period in 1996 primarily due to goodwill amortization related to
the acquisition of SDLP offset in part by approximately $30,000 of loan cost
amortization in 1996.
The net loss for the 1997 Second Quarter was $409,559, or $0.04 per share,
compared to the net loss of $248,137, or $0.02 per share, for the 1996 Second
Quarter. Net loss for the 1997 YTD Period was $1,157,621, or $0.10 per share,
compared to the net loss of $946,228, or $0.12 per share, for the 1996 YTD
Period. Average shares outstanding increased from 10,075,287 for the 1996 Second
Quarter to 11,634,642 for the 1997 Second Quarter, and from 7,853,126 for the
1996 YTD Period to 11,600,752 for the 1997 YTD Period. The increase in shares
resulted from the Merger and the Private Placement. 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's current financial position is positive as a result of the
consummation of the Merger and the Private Placement. At July 13, 1997, cash and
cash equivalents were approximately $4.5 million, working
11
capital was approximately $2.8 million, the Company had only $267,000 of
long-term debt and stockholders' equity was approximately $20.9 million. Cash
and cash equivalents decreased $3.8 million during the 1997 YTD Period, due
primarily to cash used to finance the 1997 YTD Period operating cash flow
deficit and purchase property and equipment for new restaurants, offset in part
by the maturity of $1.1 million of marketable securities.
The Company's principal future capital requirement is expected to be the
development of restaurants. The Company plans to open 3 or 4 Company-owned
stores in 1998. The typical building, equipment (including smallwares) and site
development cost of a new Silver Diner prototype is expected to be approximately
$1,665,000. Land generally will be leased. When land is purchased, management
may pursue a sale leaseback or debt financing strategy following the
restaurant's opening.
Management believes that the Company's current capital resources will be
adequate to meet its planned capital requirements through 1997. Additional debt
or equity financing will be required to finance 1998 growth. Management is
currently evaluating financing alternatives. Should the Company be unable to
raise sufficient capital in 1997 to meet its 1998 requirements, 1998 new store
growth could be limited.
12
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of the Company was held on June 11,
1997. The following items were voted on and approved by a majority of the
stockholders:
1. Re-election of the Company's directors.
2. Approval of the Company's 1996 Non-employee Director Stock Option Plan,
as adopted by the Company's Board of Directors (the "Board") on May 29,
1996. With regards to this item, 5,948,788 shares were voted for,
144,161 shares were voted against, 33,454 shares were abstained, and
2,135,595 shares were not voted.
3. Approval of the Company's Stock Option Plan, as adopted by the Board on
September 11, 1996. With regards to this item, 5,971,578 shares were
voted for, 126,750 shares were voted against, 28,075 shares were
abstained, and 2,135,595 shares were not voted.
4. Approval of the Company's 1996 Employee Stock Purchase Plan, as adopted
by the Board on September 11, 1996. With regards to this item,
6,046,957 shares were voted for, 51,289 shares were voted against,
22,157 shares were abstained, and 2,135,595 shares were not voted.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Lists of Documents Filed as Part of this Report
1. Exhibits
Exhibit Number Description of Document
- -------------- -----------------------
10 MATERIAL CONTRACTS
10.1 Amendment to SDDI Second Amended and Restated 1991 Stock
Option Plan, together with forms of incentive stock
option agreement and non-qualified stock option
agreement filed herewith. The SDDI Second Amended and
Restated 1991 Stock Option Plan, together with forms of
incentive stock option agreement and non-qualified stock
option agreement has been incorporated by reference to
Exhibit 10.14 of the registrar's Form 8-K dated
March 27, 1996.
13
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SILVER DINER, INC.
--------------------------------------
(Registrant)
August 27, 1997 /s/ Daniel P. Brannan
- ------------------------------- --------------------------------------
Date Daniel P. Brannan
Vice President, Finance
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
14