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 October 5, 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.
- --------------------------------------------------------------------------------
(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 October, 31, 1997:
11,647,601 shares
SILVER DINER, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets
as of October 5, 1997 and December 31, 1996 3
Consolidated Condensed Statements of Operations for
the Twelve weeks ended October 5, 1997 and October 6, 1996 and the
Forty weeks ended October 5, 1997 and October 6, 1996 4
Consolidated Condensed Statements of Cash Flows for the
Forty weeks ended October 5, 1997 and October 6, 1996 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Signature 12
2
SILVER DINER, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
October 5, December 29,
1997 1996
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,859,952 $ 8,285,533
Marketable securities available for sale - 1,081,015
Inventory 145,530 147,981
Prepaid expenses and other current assets 260,625 202,081
----------------- -----------------
Total current assets 4,266,107 9,716,610
Property, equipment and improvements, net 16,973,483 12,956,119
Due from affiliates 104,947 55,957
Preopening costs, net 336,573 127,413
Goodwill, net 2,525,520 2,667,810
Deposits and other 211,138 340,466
----------------- -----------------
Total assets $24,417,768 $ 25,864,375
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,457,004 $ 3,174,262
Note payable 267,000 -
Deferred rent liability 964,060 749,396
----------------- -----------------
Total liabilities 3,688,064 3,923,658
Stockholders' equity:
Preferred stock, at October 5, 1997 and December 29, 1996, $.001
par value, 1,000,000 shares authorized; none issued - -
Common stock, at October 5, 1997, $.00074 par value, 20,000,000
shares authorized; 11,612,547 shares issued and outstanding; at
December 29, 1996, $.00074 par value, 20,000,000 shares authorized;
11,520,473 shares issued and outstanding 8,593 8,526
Additional paid-in capital 30,468,452 30,297,290
Accumulated deficit (9,747,341) (8,365,099)
----------------- -----------------
Total stockholders' equity 20,729,704 21,940,717
----------------- -----------------
Total liabilities and stockholders' equity $24,417,768 $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 Forty Weeks Ended
October October October October
5, 1997 6, 1996 5, 1997 6, 1996
----------------- ---------------- ----------------- ---------------
Net sales $ 6,177,517 $ 3,892,818 $ 18,321,416 $12,761,666
Restaurant costs and expenses
Cost of sales 1,774,266 1,063,498 5,271,664 3,512,289
Labor 1,967,689 1,242,751 6,128,552 4,239,884
Operating 1,065,543 601,194 3,090,788 1,949,220
Occupancy 617,237 442,638 1,924,284 1,479,769
Depreciation and amortization 399,949 189,665 1,059,364 703,843
----------------- ---------------- ----------------- ---------------
Total restaurant costs and expenses 5,824,684 3,539,746 17,474,652 11,885,005
----------------- ---------------- ----------------- ---------------
Restaurant operating income 352,833 353,072 846,764 876,661
General and administrative expenses 553,145 647,845 2,278,992 1,996,446
Depreciation and amortization 72,319 61,057 186,879 131,358
----------------- ---------------- ----------------- ---------------
Operating loss (272,631) (355,830) (1,619,107) (1,251,143)
Interest expense 5,763 6,589 7,272 196,149
Investment income (53,773) (162,835) (244,137) (301,480)
----------------- ---------------- ----------------- ---------------
NET LOSS $ (224,621) $ (199,584) $ (1,382,242) $(1,145,812)
================= ================ ================= ===============
Net loss per common share $ (0.02) $ (0.02) $ (0.12) $ (0.13)
----------------- ---------------- ----------------- ---------------
Weighted average common shares outstanding 11,623,948 11,520,130 11,607,668 8,953,227
================= ================ ================= ===============
Accompanying notes are an integral part of these financial statements
4
SILVER DINER, INC. AND SUBSIDIARIES,
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Forty Weeks Ended
October 5, October 6,
1997 1996
--------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,382,242) $(1,145,812)
Adjustments to reconcile net loss to net cash used in operations
Depreciation and amortization 1,246,244 835,201
Compensation expense - stock options and deferred compensation 72,800 74,131
Changes in operating assets and liabilities
Inventory 2,451 11,409
Prepaid expenses and other assets (48,186) (226,350)
Preopening costs (512,556) (67,633)
Deposits and other 80,338 (109,807)
Accounts payable and accrued expenses (53,923) (1,311,706)
Deferred rent liability 214,664 63,602
--------------- --------------
Net cash used in operating activities (380,410) (1,876,965)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (5,481,257) (1,588,349)
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 (4,410,600) (1,588,349)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from merger - 12,071,149
Net proceeds from sale of stock 130,929 7,727,904
Purchase of treasury stock (32,500) -
Acquisition of outstanding interest in Silver Diner Limited Partnership - (2,517,088)
Proceeds from notes payable 267,000 -
Payments of principal - notes payable - (1,666,325)
Payments of principal - notes payable - related party - (881,788)
Proceeds from exercise of stock options 50
Repurchase of employee stock options (30,348)
--------------- --------------
Net cash provided by financing activities 365,429 14,703,554
--------------- --------------
Net (decrease) increase in cash and cash equivalents (4,425,581) 11,238,240
Cash and cash equivalents at beginning of the period 8,285,533 1,584,716
--------------- --------------
Cash and cash equivalents at end of the period $ 3,859,952 $12,822,956
=============== ==============
Supplemental disclosure of cash flow information:
Interest paid $ 7,272 $ 137,300
=============== ==============
Noncash investing and financing activities:
Construction payables included in accounts payable and accrued expenses $ 391,317 $ 44,247
=============== ==============
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 $ - $ 2,673,791
=============== ==============
Issuance of 84,000 warrants in conjunction with SDLP purchase $ - $ 141,960
=============== ==============
Accompanying notes are an integral part of these financial statements
5
SILVER DINER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE TWELVE AND FORTY WEEKS ENDED OCTOBER 5, 1997 AND OCTOBER 6, 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 forty week period ended October 5, 1997
are not necessarily indicative of the results that may be expected for the year
ending 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 forty weeks ended October 6, 1997 there would be no
material difference in the reported net loss per share.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company currently operates ten Silver Diners in the Washington/Baltimore
metropolitan area and its eleventh Silver Diner is scheduled to open by the end
of 1997, in Cherry Hill, New Jersey. The Company also is negotiating for
additional sites in the Washington/Baltimore and Philadelphia/Southern New
Jersey markets. The Philadelphia/Southern New Jersey area is Silver Diner's
first non-Washington/Baltimore market. In addition, the Company continues to
explore the South Florida market. Also, the Company continues to explore the
development of a franchise/joint venture plan in order to accelerate growth
outside of the Washington/Baltimore area and to move toward its vision of
operating and franchising restaurants throughout the U.S.
7
RESULTS OF OPERATIONS
The following table sets forth the percentage of net sales of items included in
the consolidated condensed statements of operations for the periods indicated:
Twelve Weeks Ended Forty Weeks Ended
---------------------------- -----------------------------
October 5, October 6, October 5, October 6,
1997 1996 1997 1996
------------- ------------- ------------- -------------
Net sales 100.0% 100.0% 100.0% 100.0%
Restaurant costs and expenses
Cost of sales 28.7% 27.3% 28.8% 27.5%
Labor 31.9% 31.9% 33.5% 33.2%
Operating 17.2% 15.4% 16.9% 15.3%
------------- ------------- ------------- -------------
Restaurant operating margin 22.2% 25.3% 20.9% 24.0%
Occupancy 10.0% 11.4% 10.5% 11.6%
Depreciation and amortization 6.5% 4.9% 5.8% 5.5%
------------- ------------- ------------- -------------
Restaurant operating income 5.7% 9.1% 4.6% 6.9%
General and administrative expenses 9.0% 16.6% 12.4% 15.7%
Depreciation and amortization 1.2% 1.6% 1.0% 1.0%
------------- ------------- ------------- -------------
Operating loss (4.4%) (9.1%) (8.8%) (9.8%)
Interest expense 0.1% 0.2% 0.0% 1.5%
Investment income (0.9%) (4.2%) (1.3%) (2.3%)
------------- ------------- ------------- -------------
Net Loss (3.6%) (5.1%) (7.5%) (9.0%)
============= ============= ============= =============
Net sales for the twelve weeks ended October 5, 1997 ("1997 Third Quarter")
increased $2,284,699 to $6,177,518 compared to $3,892,819 for the twelve weeks
ended October 6, 1996 ("1996 Third Quarter"). Year-to-date, net sales for the
forty weeks ended October 5, 1997 ("1997 YTD Period") increased $5,559,750 to
$18,321,416 compared to $12,761,666 for the forty weeks ended October 6, 1996
("1996 YTD Period"). The increase was attributable to sales generated by four
new restaurants opened since December 1996 in Clarendon, Merrifield, Springfield
and Reston, adding $2,446,419 and $6,095,936 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 six months of operations during
which sales are typically higher than normal) decreased 4.3% for the quarter and
2.9% 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
8
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.
Cost of sales, primarily food and beverage cost, increased 1.4% of net sales to
28.7% in the 1997 Third Quarter, compared to 27.3% for the 1996 Third Quarter.
Year-to-date, cost of sales increased 1.3% of net sales. The higher food cost in
the 1997 Third Quarter was primarily attributable to the Company's summer menu
introduced in June 1997 which has continued to result in higher food cost. This
new menu included the outsourcing of the preparation of several menu items to
reduce operational complexity. Year-to-date, the increase in cost of goods was
most significantly impacted by the four new restaurants opened since December
1996 which incurred anticipated higher cost of goods, labor and operating
expenses for 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 31.9% of net sales for both the 1997 Third Quarter and
1996 Third Quarter. An increase in direct labor primarily related to new store
openings was offset by decreases in management labor and workers' compensation
expenses. Year-to-date, labor increased 0.3% of net sales to 33.5% for the 1997
YTD Period, compared to 33.2% for the 1996 YTD Period. The 1997 YTD Period labor
cost was negatively impacted by higher direct and management labor costs in the
initial periods of operation at the four Silver Diners opened since December
1996.
Operating expenses, which consist of all restaurant operating costs other than
labor and occupancy, including supplies, utilities, repairs and maintenance and
advertising, increased to 17.2% of net sales for the 1997 Third Quarter,
compared to 15.4% for the 1996 Third Quarter. Year-to-date, operating expenses
increased 1.6% of net sales to 16.9% of net sales for the 1997 YTD period.
Higher marketing costs were responsible for approximately 1.5% of the increases
for the 1997 Third Quarter and 0.7% of the increases for the 1997 YTD Period.
These expenses relate primarily to a radio advertising campaign and coupon
mailings to prospective customers. The remaining increase in cost primarily
relates to the initially higher costs associated with new store openings.
Restaurant operating margin, which consists of net sales minus cost of sales,
labor and operating expenses exclusive of occupancy, decreased to 22.2% of net
sales for the 1997 Third Quarter from 25.3% for the 1996 Third Quarter.
Year-to-date, restaurant operating margin decreased 3.1% of net sales to 20.9%
for the 1997 YTD Period, compared to 24.0% for the 1996 YTD Period. Management
believes restaurant operating margin is the most consistent measure of store
level operating results because it focuses on unit level performance. The
decrease in restaurant operating margin for the third quarter of 1997 was most
significantly impacted by the introduction of a new menu in early 1997 which has
continued to result in higher food cost, and higher marketing expenses from both
a radio advertising campaign which ran from early July 1997 through mid-August
1997 and a direct marketing campaign to promote new store openings.
Year-to-date, margins were most significantly impacted by the four new
restaurants opened since December 1996 which incurred anticipated higher cost of
goods, labor and operating expenses for their initial months of operation.
Occupancy, which is composed primarily of rent, property taxes and property
insurance, increased $174,599 for the 1997 Third Quarter compared to the 1996
Third Quarter, and $444,515 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.
9
Restaurant depreciation and amortization increased $210,284 for the 1997 Third
Quarter compared to the 1996 Third Quarter, and $355,521 for the 1997 YTD Period
compared to the 1996 YTD period. These increases were primarily associated with
the new restaurant openings since December 1996. The 1997 Third Quarter and 1997
YTD Period include approximately $131,000 and $303,000, respectively, of
preopening amortization, compared to approximately $45,000 and $210,000 for the
1996 Third 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.
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 $553,145 in the 1997 Third
Quarter, a decrease of $94,700 compared to the 1996 Third Quarter. The decrease
was largely related to lower restaurant recruitment and training costs
associated with new restaurant openings, lower investor relation costs and a
decrease in corporate salaries. Year-to-date, general and administrative
expenses were $2,278,992, an increase of $282,548 compared to the 1996 YTD
Period. The increase in year-to-date costs was primarily 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 16.6% in the 1996 Third
Quarter to 9.0% in the 1997 Third Quarter, and from 15.6% in the 1996 YTD Period
to 12.4% 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 the corporate management team and infrastructure 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 $53,773 and $244,137 in investment income for Third Quarter
1997 and the 1997 YTD Period, respectively compared to $162,835 and $301,480 for
the corresponding periods in 1996, respectively. The decrease in investment
income is a direct result of cash used to construct and open four Silver Diners
since December 1996. The Company incurred $5,763 and $7,272 in interest expense
for the Third Quarter 1997 and the 1997 YTD Period, respectively compared to
$7,272 and $196,149 in the 1996 Third 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 $11,000 for the Third
Quarter 1997 compared to the Third Quarter 1996 related primarily to the
Company's installation of a new computer network and accounting package in 1997.
Year to date, 1997 depreciation & amortization expense was approximately $56,000
greater than the same period in 1996. The majority of the increase year to date
relates to goodwill amortization resulting from the Company's acquisition of the
minority interest in Silver Diner Limited Partnership in June 1996.
The net loss for the 1997 Third Quarter was $224,621, or $0.02 per share,
compared to the net loss of $199,584, or $0.02 per share, for the 1996 Third
Quarter. Net loss for the 1997 YTD Period was $1,382,242, or $0.12 per share,
compared to the net loss of $1,145,812, or $0.13 per share, for the 1996 YTD
Period. Average shares outstanding increased from approximately 9.0 million for
the 1996 YTD Period to approximately 11.6 million for the 1997 YTD Period. The
increase in shares resulted from the Merger and the Private Placement.
10
Management expects that the Company will continue incurring relatively modest
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 October 5, 1997, cash
and cash equivalents were $3.9 million, working capital was $1.8 million, the
Company had only $267,000 of long-term debt and stockholders' equity was $20.7
million. Cash and cash equivalents decreased $4.4 million during the 1997 YTD
Period, due primarily to cash used to purchase property and equipment for new
restaurants and to finance the 1997 YTD Period operating cash flow deficit,
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 2 or 3 Company-owned
Silver Diners in 1998 in addition to the Cherry Hill, New Jersey location which
is currently under construction. At October 5, 1997, the unpaid portion of
construction costs and preopening expenses related to the Cherry Hill Diner
totaled approximately $1.0 million. The typical building, equipment (including
smallwares) and site development cost of a new Silver Diner prototype is
expected to be approximately $1.7 million. However, the building, equipment
(including smallwares) and site development costs of the previous five Silver
Diners opened since December 1995 have averaged $1.84 million primarily due to
higher site development, architectural and design 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.
Management believes that the Company's current capital resources will be
adequate to meet its planned capital requirements through 1997 and to construct
1 or 2 units in 1998. Additional debt or equity financing will be required to
finance planned 1998 growth. Management is currently evaluating financing
alternatives and is negotiating a $3 million line of credit with a commercial
bank which, if obtained, would be sufficient to fund 1998 growth. Should the
Company be unable to raise sufficient capital in 1997 to meet its 1998
requirements, 1998 new store growth could be limited.
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, 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.
11
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)
November 19, 1997 /s/ Daniel P. Brannan
- ------------------- _________________________________________
Date Daniel P. Brannan
Vice President, Finance
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
12