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 April 19, 1998
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
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(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:
1
Common Stock, $.00074 par value, outstanding as of May, 15, 1998: 11,590,936
shares
SILVER DINER, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of April 19, 1998
and December 28, 1997 3
Consolidated Statements of Operations and
for the Sixteen weeks ended April 19, 1998 and
April 20, 1997 4
Consolidated Statements of Cash Flows for the Sixteen
weeks ended April 19, 1998 and April 20, 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Signature 11
2
SILVER DINER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
April 19, December 28,
1998 1997
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 384,073 $ 1,597,430
Marketable securities available for sale 1,986,463 1,222,083
Inventory 169,932 196,443
Prepaid expenses and other current assets 204,667 197,208
Preopening costs, net - 326,868
----------------- -----------------
Total current assets 2,745,135 3,540,032
Property, equipment and improvements, net 17,186,859 17,384,019
Goodwill, net 2,425,917 2,482,833
Deposits and other 253,688 239,881
----------------- -----------------
Total assets $22,611,599 $ 23,646,765
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,927,696 $ 2,207,891
Note payable 267,000 267,000
Deferred rent liability 1,036,996 1,050,667
----------------- -----------------
Total liabilities 3,231,692 3,525,558
Stockholders' equity:
Preferred stock, at April 19, 1998 and December 28, 1997, $.001 par
value, 1,000,000 shares authorized, none issued - -
Common stock, $.00074 par value, 20,000,000 shares authorized; at
April 19, 1998, 11,590,936 shares issued and outstanding; at
December 28, 1997, 11,602,403 shares issued and outstanding 8,577 8,586
Additional paid-in capital 31,524,097 31,604,937
Unearned compensation (1,051,970) (1,168,798)
Accumulated deficit (11,100,797) (10,323,518)
----------------- -----------------
Total stockholders' equity 19,379,907 20,121,207
----------------- -----------------
Total liabilities and stockholders' equity $22,611,599 $23,646,765
================= =================
Accompanying notes are an integral part of these financial statements
3
SILVER DINER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Sixteen Weeks Ended
----------------------------------------
April 19, April 20,
1998 1997
------------------- -----------------
Net sales $ 8,278,933 $ 6,132,204
Restaurant costs and expenses
Cost of sales 2,312,904 1,763,672
Labor 2,863,545 2,120,665
Operating 1,376,042 1,047,719
Occupancy 868,400 697,206
Depreciation and amortization 396,481 315,552
------------------- -----------------
Total restaurant costs and expenses 7,817,372 5,944,814
------------------- -----------------
Restaurant operating income 461,561 187,390
General and administrative expenses 866,008 983,743
Depreciation and amortization 86,800 65,874
------------------- -----------------
Operating loss (491,247) (862,227)
Interest expense 9,742 -
Investment income (50,577) (114,165)
------------------- -----------------
Loss before cumulative effect of a change in accounting principle (450,412) (748,062)
Cumulative effect of a change in accounting principle (326,868) -
------------------- -----------------
NET LOSS $ (777,280) $ (748,062)
=================== =================
Basic loss per common share
Loss per common share before cumulative effect of a change in
accounting principle $ (0.04) $ (0.06)
Cumulative effect of a change in accounting principle (0.03) -
------------------- -----------------
Net loss per common share $ (0.07) $ (0.06)
=================== =================
Weighted average shares outstanding 11,596,304 11,575,266
=================== =================
Diluted loss per common share
Loss per common share before cumulative effect of a change in
accounting principle $ (0.04) $ (0.06)
Cumulative effect of a change in accounting principle (0.03) -
------------------- -----------------
Net loss per common share $ (0.07) $ (0.06)
=================== =================
Weighted average common shares outstanding 11,596,304 11,575,266
=================== =================
Accompanying notes are an integral part of these financial statements
4
SILVER DINER, INC. AND SUBSIDIARIES,
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Sixteen Weeks Ended
April 19, 1998 April 20, 1997
--------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (777,280) $ (748,062)
Adjustments to reconcile net loss to net cash provided by (used in)
operations
Cumulative effect of a change in accounting principle 326,868 -
Depreciation and amortization 483,281 381,426
Compensation expense - stock options and deferred compensation 58,480 36,341
Changes in operating assets and liabilities
Inventory 26,511 (31,806)
Prepaid expenses and current assets (41,902) (76,678)
Preopening costs - (313,643)
Deposits and other (13,807) 1,633
Accounts payable and accrued expenses 8,520 (281,389)
Deferred rent liability (13,671) 74,228
--------------- --------------
Net cash provided by (used in) operating activities 57,000 (957,950)
--------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (517,919) (2,857,882)
Purchases of marketable securities available for sale (729,938) (2,960,250)
--------------- --------------
Net cash used in investing activities (1,247,857) (5,818,132)
--------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from sale of stock - 95,000
Purchase of treasury stock (22,500) -
--------------- --------------
Net cash (used in) provided by financing activities (22,500) 95,000
--------------- --------------
Net decrease in cash and cash equivalents (1,213,357) (6,681,082)
Cash and cash equivalents at beginning of the period 1,597,430 8,285,533
--------------- --------------
Cash and cash equivalents at end of the period $ 384,073 $ 1,604,451
=============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 9,742 $ -
=============== ==============
NONCASH INVESTING AND FINANCING ACTIVITIES:
Construction payables included in accounts payable and accrued
expenses $ 61,890 $ -
=============== ==============
Accompanying notes are an integral part of these financial statements
5
SILVER DINER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIXTEEN WEEKS ENDED APRIL 19, 1998 AND APRIL 20, 1997
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying unaudited consolidated 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 sixteen week period ended April 19, 1998 are
not necessarily indicative of the results that may be expected for the year
ending January 3, 1999. All significant intercompany balances and transactions
have been eliminated in consolidation. 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 28, 1997.
2. COMPREHENSIVE INCOME
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income", issued June 1997, requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income (loss) be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS No. 130
does not require a specific format for that financial statement but requires
that an enterprise display an amount representing total comprehensive income
(loss) for the period in that financial statement. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. For the sixteen weeks ended
April 19, 1998 and April 20, 1997, the Company recorded a comprehensive loss of
$770,280 and $748,062, respectively.
3. CHANGE IN ACCOUNTING PRINCIPLE
On April 3, 1998, the Financial Accounting Standards Board (FASB) approved
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 the sixteen weeks ended April 19, 1998, the Company has 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. For the sixteen weeks ended April 19, 1998, the Company elected early
application of SOP 98-5. As a result of the early application, all preopening
costs capitalized as of December 28, 1997 have been expensed and recorded as a
cumulative effect of a change in accounting principle for the sixteen weeks
ended April 19, 1998 in the amount of $326,868, or $0.03 per share.
4. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997 and February 1998, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", and SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits -- an
amendment of FASB Statements No. 87, 88, and 106", respectively. SFAS No.
6
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.
Adoption of SFAS No. 131 and SFAS No. 132 does not have a material impact on the
Company's financial statement presentation or disclosures. Both standards are
effective for financial statements issued for fiscal years beginning after
December 15, 1997.
ITEM 2. 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, 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 Company currently operates ten Silver Diners in the
Washington/Baltimore metropolitan area and one in Cherry Hill, New Jersey.
Currently, there are no 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 early
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.
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:
Sixteen Weeks Ended
---------------------------------------
April 19, April 20,
1998 1997
------------------- -----------------
Net sales 100.0% 100.0%
Restaurant costs and expenses:
Cost of sales 27.9% 28.7%
Labor 34.6% 34.6%
Operating 16.6% 17.1%
------------------- -----------------
Restaurant operating margin 20.9% 19.6%
Occupancy 10.5% 11.4%
Depreciation and amortization 4.8% 5.1%
------------------- -----------------
Restaurant operating income 5.6% 3.1%
General and administrative expenses 10.5% 16.1%
Depreciation and amortization 1.0% 1.1%
------------------- -----------------
Operating loss (5.9%) (14.1%)
Interest expense 0.1% 0.0%
Investment income (0.6%) (1.9%)
------------------- -----------------
Loss before cumulative effect of a change in accounting principle (5.4%) (12.2%)
Cumulative effect of a change in accounting principle (3.9%) -
------------------- -----------------
Net Loss (9.3%) (12.2%)
=================== =================
Net sales for the 16 weeks ended April 19, 1998 ("First Quarter 1998")
increased $2.1 million to $8,278,933, compared to $6,132,204 for the 16 weeks
ended April 20, 1997 ("First Quarter 1997"). The increase was attributable to
sales generated by four new restaurants opened since February 1997 in
Merrifield, Springfield and Reston, Virginia, and Cherry Hill, New Jersey,
adding $2.3 million to net sales for the current quarter.
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 3.2% compared to the
first quarter of 1997. The decrease in sales was driven by a 7.2% decrease in
customer count which was partially offset by a 4.2% increase in average check.
The increase in average check resulted from an approximately 2.5% price increase
in June of 1997 and a menu change in March 1998 which increased average check by
approximately 3%. In addition to minimal price increase, the menu change in
March 1998 involved changing the physical layout of the menu and increasing the
number of entree selections. The new menu layout has resulted in higher add-on
sales, such as beverages and side items, by making them more visible to the
customer. The increase in entrees on the menu has resulted in a slight increase
in entree sales and a corresponding decrease in lower priced sandwich offerings.
The unfavorable same store sales in the first quarter of 1998 have been driven
primarily by the Company's Tysons Corner and Fair Oaks stores in northern
Virginia, whose sales have been impacted by the opening of four new
8
Silver Diners in that area since December 1996. Excluding those two stores,
comparable store sales (the sales of the Rockville, Laurel, Potomac Mills, and
Towson stores) increased by 0.7% for the sixteen weeks ended April 19, 1998. For
these stores, a 4.8% decrease in customer count was offset the factors discussed
above.
In the second quarter of 1998 the Company has undertaken two initiatives to
stimulate sales. First, Silver Diner has initiated a 110% guarantee initiative
that calls for a 10% discount for a patron's current meal and a coupon for a
free entree if not totally satisfied with the meal. The initiative specifically
guarantees that the restaurants will be sparkling clean, all food will be
delivered hot and timely and that all orders will be accurate and prepared to
the guests' specifications. Second, the Company will increase promotion
significantly through direct mail couponing in the second quarter. These two
initiatives are anticipated to increase both labor and operating expenses. Labor
expenses will increase as the Company focuses on retraining its associates and
increasing staffing levels to support the 110% guarantee. Operating expenses
will increase with the design and mailing of a marketing piece which introduces
the 110% guarantee and offers discount meal coupons. As a result, restaurant
operating margin for the second quarter of 1998 is expected to decrease from the
First Quarter 1998. The Company anticipates reaping the benefits of improving
sales in the third quarter of 1998 as operating and labor expenses decrease
after the mailing of coupons and retraining efforts have been completed.
Cost of sales, primarily food and beverage cost, decreased to 27.9% of net
sales for First Quarter 1998, compared to 28.7% of net sales for First Quarter
1997 as a result of the maturation of new stores opened in 1997. In addition,
the Company introduced a new menu in First Quarter 1997, resulting in initially
higher food costs in the period.
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 34.6% of net sales in both First Quarter
1998 and First Quarter 1997. In addition to seasonal factors, new store openings
immediately preceding and during First Quarter 1997 and preceding First Quarter
1998 contributed to higher labor costs in both periods.
Operating expenses, which consist of all restaurant operating costs other
than labor and occupancy, including supplies, utilities, repairs and maintenance
and advertising, decreased to 16.6% of net sales for First Quarter 1998,
compared to 17.1% for First Quarter 1997. Operating expenses, specifically
restaurant supplies, ran higher in First Quarter 1997 due to the initially
higher costs of the new store openings in December 1996 and First Quarter 1997.
Occupancy, which is composed primarily of rent, property taxes and property
insurance, increased $171,194 for First Quarter 1998 compared to First Quarter
1997, due primarily to the opening of the Merrifield, Springfield, Reston and
Cherry Hill diners.
Restaurant depreciation and amortization increased $80,929 for First Quarter
1998 compared to First Quarter 1997 due to the additional property and equipment
depreciation for new stores. In First Quarter 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 First Quarter 1998,
the Company had capitalized all preopening costs and amortized these costs over
a twelve month period. As a result of the application of SOP No. 98-5, all
preopening costs capitalized as of December 28, 1997 have been expensed and
recorded as a cumulative effect of a change in accounting principle for First
Quarter 1998, resulting in preopening amortization expense decreasing from
$63,992 in First Quarter 1997 to zero in First Quarter 1998.
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
9
$866,008 for Fiscal 1998, a decrease of $117,735, or 12%, compared to Fiscal
1997. As a percentage of net sales, general and administrative expenses
decreased to 10.5% for First Quarter 1998 from 16.1% for First Quarter 1997. The
decrease was largely related to lower legal and accounting fees during the first
sixteen weeks of 1998. During First Quarter 1997, the Company incurred
significant legal and accounting expenses as a result of 1996 being the
Company's first year as a public company. These expenses included the
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. During First Quarter 1998, the
Company significantly reduced the costs associated with theses activities. 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. 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 $50,577 in investment income for First Quarter 1998,
compared to investment income of $114,165 for First Quarter 1997. The decrease
is a direct result of cash being used to construct and open 5 Silver Diners
since December 1996. Interest expense increased from zero in First Quarter 1997
to $9,742 in First Quarter 1998 as a result of debt incurred by the Company
since First Quarter 1997.
Depreciation and amortization increased $20,926 for First Quarter 1998
compared to First Quarter 1997 as a result of the purchase of computers and
office equipment during 1997. Depreciation and amortization included goodwill
amortization expense of $56,916 in both First Quarter 1998 and First Quarter
1997.
Net loss before cumulative effect of a change in accounting principle for
First Quarter 1998 was $450,412, or $0.04 per share on a basic and diluted
basis, compared to $748,062, or $0.06 per share on a basic and diluted basis,
for First Quarter 1997. Net loss for first Quarter 1998 was $777,280, or $0.07
per share on a basic and diluted basis, compared to a net loss of $748,062, or
$0.06 per share on a basic and diluted basis, for First Quarter 1997. 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 general and administrative costs associated with developing and running the
Company.
Liquidity and Capital Resources
At April 19, 1998, cash and cash equivalents were approximately $0.4
million, short-term investments were approximately $2.0 million, working capital
was approximately $0.8 million, the Company had $0.3 million of long-term debt
and stockholders' equity was approximately $19.4 million. Cash and cash
equivalents decreased $1.2 million during First Quarter 1998, due primarily to
cash used to purchase marketable securities, to make final payment on the real
estate for the Reston diner, and to make a payment on the construction of the
Cherry Hill diner.
The Company's principal future capital requirement is expected to be the
development of restaurants. The Company does not plan to open any stores in 1998
and, as such, the Company did not have any restaurants under construction at
April 19, 1998. The Company is anticipating opening from one to three
Company-owned restaurants in 1999, however, the locations of these sites has not
been determined. Currently, the Company is negotiating for sites throughout the
Mid-Atlantic region, which includes the area from Richmond, Virginia to Northern
New Jersey, primarily along the Interstate 95 corridor.
Management believes that the Company's current capital resources and
expected 1998 cash flow will be adequate to construct at least two units in
1999. Additional financing will be required to finance the remainder of 1999
growth. The Company's lead bank has preliminarily indicated a willingness to
extend a $3 million line of credit which, if obtained, would be sufficient to
fund 1999 growth. Should the Company be unable to raise sufficient capital in
1998 to meet its 1999 requirements, management may be forced to limit 1999
growth.
10
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)
June 1, 1998 /s/ Daniel P. Brannan
- --------------------- ---------------------------------------------------
Date Daniel P. Brannan
Vice President, Finance
Duly Authorized Officer and Principal Financial and
Accounting Officer)
11