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 December 28, 1997
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 January 31, 1998, the registrant had 11,602,403 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
$9,356,357. The aggregate market value was determined based on the closing price
of the Common Stock on the Nasdaq Stock MarketSM on January 31,1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for its Annual Meeting of
Shareholders in 1998 are incorporated by reference into Part III.
<PAGE>
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 are 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 MarketSM 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 $7.45 and the average dining time is
approximately 35 minutes. For the last fiscal year, the seven Silver Diner
restaurants open throughout the year had sales ranging from $2.2 million to $4.0
million with average unit sales of $2.6 million on an average of 212 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 which differentiate Silver Diner restaurants from other restaurants
include:
o 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 carry-out section offering its full menu.
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o 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.
o 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 afford 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.
o 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.
o GENEROUS PORTIONS AND MODERATE PRICES WITH ENTREES FROM $3.99 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 $3.99 to $12.99, and full meals
are available at moderate prices including a 10% senior citizen discount and
"blue plate specials" at $7.99.
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RESTAURANTS. The following sets forth certain information regarding the
Company's existing restaurants.
<TABLE>
<CAPTION>
APPROXIMATE
APPROXIMATE NUMBER
OPERATING LOCATIONS DATE OPENED SQUARE FEET OF SEATS
- - ------------------- ----------- ----------- --------
<S><C>
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
</TABLE>
The Company leases its corporate offices at 11806 Rockville Pike,
Rockville, Maryland, which is the location of the original Silver Diner
restaurant.
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 pursuing additional locations in this
market and throughout the Mid-Atlantic region for restaurant openings commencing
in early 1999. The Company does not plan to open any stores in 1998 either
because the sites where the Company contemplated opening restaurants had
material unfulfilled landlord contingencies or the sites were determined to
overlap existing Silver Diner markets. The Company is anticipating opening one
to three Company-owned restaurants in 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. As a
result, the Company has been able to maintain a minimal marketing budget for its
existing restaurants, with marketing funds primarily used for pre-opening
events, public relations and direct marketing for new Silver Diner openings. In
the summer of 1997, the Company experimented with mass marketing through a
modest 10 week radio advertising campaign in the Washington Metropolitan area to
raise awareness of the Silver Diner. As the Company achieves sufficient market
penetration within a given market area and economies of scale with respect to
its discretionary marketing budget, other mass marketing vehicles, including
television advertising, may become viable methods of further increasing average
unit volume.
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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 omelettes, pancakes and waffles, is
available throughout the day and night. The menu includes numerous entrees which
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.
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<PAGE>
EMPLOYEES
As of December 28, 1997, the Company had 972 employees, 12 of whom are
corporate personnel, 53 of whom are restaurant management personnel (including 7
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 "owner operator" (general manager) and four assistant managers, including a
kitchen manager and a service manager. Each Silver Diner restaurant also employs
approximately 75 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 OWNER OPERATOR PLAN. To attract and retain talented
management, the Company's compensation plan 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 Owner Operator Plan whereby the general manager receives an annual
salary and a monthly cash profit sharing award which equals a percentage of the
restaurant's operating income. In addition, each general manager is required to
purchase $12,500 of Common Stock at a price equal to 50% of the Common Stock's
market value and receives an annual award of between $5,000 and $10,000 of
Common Stock. Also, all assistant managers receive annual grants of Common Stock
in amounts of between $2,500 and $5,000.
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.
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
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<PAGE>
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:
<TABLE>
<CAPTION>
Name Age Served Since(1) Position(s) Held
- - -----------------------------------------------------------------------------------------------
<S><C>
Robert T. Giaimo 46 1987 Chairman of the Board,
President and Chief Executive Officer
Ype Hengst 47 1987 Director, Vice President, Executive Chef and
Corporate Secretary
Patrick Meskell 44 1996 Senior Vice President, Human Resources
Daniel Brannan 28 1997 Vice President, Finance
</TABLE>
(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. Brannan was
the Company's controller from 1996 to 1997. Previously, Mr. Brannan was
corporate controller for Greenstone Industries, a public manufacturing company
with annual sales exceeding $30 million from 1995 to 1996 and was an auditor
with KPMG Peat Marwick LLP from 1991-1995.
ITEM 2. PROPERTY.
Information concerning the registrant's property is set forth under
"Restaurants" in Item 1 of Part I.
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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 occurrence of the event in November 1994. Plaintiff continues
to be an employee of the Company. The Complaint contains four counts against the
Company: failure to provide a reasonably safe and harassment free working
environment, negligently and unreasonably allowing alcoholic beverages to be
consumed at a Company sponsored event, negligently hiring and retaining
Richardson after knowing of his drinking problem and respondent superior.
Plaintiff seeks recovery of $500,000 for each count. It is not clear if the
counts are in the alternative or cumulative. The Company's insurance carrier is
currently defending the claim with reservation of rights. The Company is insured
up to $1,000,000 with respect to the above mentioned claims. The Company does
not believe that it is liable to the plaintiff and intends to vigorously defend
itself.
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
------- ---- ---
1996 First (to March 26) $6-11/16 $4-3/4
First (March 27 to March 31) $6-3/4 $6-1/8
Second $7-7/8 $5-5/8
Third $6$4-1/2
Fourth $5-5/8 $3-1/2
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
DIVIDENDS. Since the Company's inception, no dividends have been paid
on the Common Stock.
HOLDERS. As of December 28, 1997, there were approximately 473 record
holders of the Common Stock.
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ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
Fiscal Years Ended
-------------------------------------------------------------------------------
December 31, January 1, December 31, December 29, December 28,
1993 1995 1995 1996 1997
<S><C>
STATEMENT OF OPERATIONS DATA:
Net Sales $11,257,307 $10,896,682 $13,350,255 $16,550,468 $24,259,156
Restaurant costs and expenses:
Cost of sales 3,179,552 3,036,995 3,655,254 4,526,286 6,929,221
Labor 3,519,484 3,525,472 4,452,134 5,464,896 7,999,812
Operating 1,660,515 1,642,039 2,015,668 2,536,609 4,037,198
Occupancy 1,316,757 1,293,842 1,588,527 1,931,866 2,534,210
Depreciation and amortization 860,126 382,082 715,426 882,843 1,499,125
--------------- --------------- --------------- --------------- ---------------
Total restaurant costs and expenses 10,536,434 9,880,430 12,427,009 15,342,500 22,999,566
--------------- --------------- --------------- --------------- ---------------
Restaurant operating income 720,873 1,016,252 923,246 1,207,968 1,259,590
General and administrative expenses 1,179,264 1,877,774 2,077,735 2,705,940 3,065,436
Depreciation and amortization 41,639 61,042 97,351 183,928 263,484
Write off of abandoned site costs 746,026 98,637 - - 172,618
--------------- --------------- --------------- --------------- ---------------
Operating loss (1,246,056) (1,021,201) (1,251,840) (1,681,900) (2,241,948)
--------------- --------------- --------------- --------------- ---------------
Interest expense 382,291 254,810 334,086 180,293 10,702
Investment income (16,759) 3,599 (83,021) (432,721) (294,231)
--------------- --------------- --------------- --------------- ---------------
Loss before minority interest (1,611,588) (1,279,610) (1,502,905) (1,429,472) (1,958,419)
Minority interest in net loss of SDLP 137,224 332,977 180,175 - -
--------------- --------------- --------------- --------------- ---------------
NET LOSS $(1,474,364) $ (946,633) $(1,322,730) $(1,429,472) $(1,958,419)
=============== =============== =============== =============== ===============
Net loss per common share $ (0.39) $ (0.19) $ (0.26) $ (0.15) $ (0.17)
=============== =============== =============== =============== ===============
Weighted average common shares outstanding 3,755,038 4,982,414 5,013,319 9,545,681 11,609,400
=============== =============== =============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
As of
-----------------------------------------------------------------------------------------
December 31, January 1, December 31, December 29, December 28,
1993 1995 1995 1996 1997
<S><C>
BALANCE SHEET DATA:
Working capital (deficiency) $1,697,475 $(560,972) $(4,961,352) $6,669,761 $1,332,141
Total assets 8,947,195 7,078,679 10,794,469 25,864,375 23,646,765
Current liabilities 2,765,405 2,580,329 6,975,363 3,174,262 2,207,891
Long-term liabilities 2,726,974 2,205,695 2,584,832 749,396 1,317,667
Stockholders' equity (deficit) 2,941,664 2,112,480 1,234,274 21,940,717 20,121,207
</TABLE>
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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 December 28, 1997. As of this date, the Company operated 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 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. The
following table reflects the growth in number of restaurants over the three year
period.
RESTAURANTS 1995 1996 1997
----------- ---- ---- ----
In operation, beginning of year 4 6 7
Newly opened 2 1 4
-------- -------- -------
In operation, end of year 6 7 11
======== ======== =======
Under construction, end of year 0 3 0
======== ======== =======
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.
9
<PAGE>
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 which ends on the Sunday nearest December 31. Fiscal quarters consist of
accounting periods of 16, 12, 12 and 12 or 13 weeks, respectively. As a result
of the change, the year ended January 1, 1995 was a 366-day year.
10
<PAGE>
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:
<TABLE>
<CAPTION>
Fiscal Years Ended
------------------------------------------------------
December 28, December 29, December 31,
1997 1996 1995
---------------- ---------------- ---------------
<S><C>
Net sales 100.0% 100.0% 100.0%
Restaurant costs and expenses:
Cost of sales 28.6% 27.4% 27.4%
Labor 33.0% 33.0% 33.3%
Operating 16.6% 15.3% 15.1%
---------------- ---------------- ---------------
Restaurant operating margin 21.8% 24.3% 24.2%
Occupancy 10.4% 11.7% 11.9%
Depreciation and amortization 6.2% 5.3% 5.4%
---------------- ---------------- ---------------
Restaurant operating income 5.2% 7.3% 6.9%
General and administrative expenses 12.6% 16.3% 15.6%
Depreciation and amortization 1.1% 1.1% 0.7%
Write off of abandoned site costs 0.7% 0.0% 0.0%
---------------- ---------------- ---------------
Operating loss (9.2%) (10.1%) (9.4%)
Interest expense 0.0% 1.1% 2.5%
Investment income, net (1.1%) (2.6%) (0.6%)
---------------- ---------------- ---------------
Loss before minority interest (8.1%) (8.6%) (11.3%)
Minority interest in net loss of SDLP 0.0% 0.0% 1.4%
---------------- ---------------- ---------------
Net Loss (8.1%) (8.6%) (9.9%)
================ ================ ===============
</TABLE>
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.
11
<PAGE>
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.
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 which 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
12
<PAGE>
$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 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.
YEAR ENDED DECEMBER 29, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31,
1995. Net sales for the fiscal year ended December 29, 1996 ("Fiscal 1996")
increased $3.2 million to $16,550,468 compared to $13,350,255 for the fiscal
year ended December 31, 1995 ("Fiscal 1995"). Silver Diner restaurants opened
during Fiscal 1995 and Fiscal 1996 in Fair Oaks, Tysons Corner and Arlington,
Virginia added $3.3 million to net sales.
13
<PAGE>
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 1.2%.
Average net sales for Rockville and Tysons Corner, the Company's highest volume
stores, were $3,598,000 for Fiscal 1996, with the two diners aggregating
approximately 44% of net sales. Average net sales for the other four restaurants
open throughout Fiscal 1996 were approximately $2,312,000.
Cost of sales, primarily food and beverage cost, was unchanged at 27.4%
of net sales for Fiscal 1996 compared to Fiscal 1995. Management was able to
offset higher wholesale food costs during the year through improved purchasing
as a result of the Company's stronger financial condition.
Labor, which consists of restaurant management and hourly employee
wages and bonuses, payroll taxes, workers' compensation insurance, group health
insurance and other benefits, was 33.0% of net sales for the Fiscal 1996, a
decrease of 0.3% of net sales compared to Fiscal 1995. Fiscal 1996 was favorably
impacted by the maturing of the Fair Oaks and Tysons Corner Silver Diner
restaurants opened during 1995, as well as lower workers' compensation costs in
the Company's Virginia stores.
Federal legislation increased the minimum wage effective October 1,
1996. Many of the Company's employees are paid hourly wages, and any increase in
the minimum wage increases the Company's cost. Management estimates that the
minimum wage increase raised the Company's overall labor cost by approximately
0.2% to 0.3% of net sales. The Company expects to recover this increased cost
through increased operating efficiencies, and to a lesser degree, price
increases to customers.
Operating expenses, which consist of all restaurant operating costs
other than cost of sales, labor and occupancy, including supplies, utilities,
repairs and maintenance and advertising, increased to 15.3% of net sales for
Fiscal 1996, compared to 15.1% for Fiscal 1995. Lower comparable store sales,
combined with slightly above average operating expenses in new stores, resulted
in the increase as a percentage of net sales.
Restaurant operating margin, which consists of net sales minus cost of
sales, labor and operating expenses exclusive of occupancy, improved to 24.3% of
net sales for Fiscal 1996 from 24.2% for Fiscal 1995. Management believes
restaurant operating margin is the most consistent measure of store level
operating results because it focuses on unit level performance. The Fiscal 1996
improvement was due to better control of costs overall, and the maturing of the
Company's new stores at Fair Oaks and Tysons Corner.
In late 1996, the Company began testing a new menu designed to enhance
customer value and build sales, while reducing operational complexity. The new
menu, which was implemented in all stores in late January 1997, increased cost
of sales but slightly decreased labor as a percentage of net sales, with the
result being no significant change in restaurant operating margin. However, the
implementation of the new menu temporarily increased cost of sales, labor and
operating expenses in the first quarter of 1997 due to initial training and
smallwares costs.
Occupancy, which is composed primarily of rent, property taxes and
property insurance, increased $343,339 for Fiscal 1996 compared to Fiscal 1995,
due primarily to the opening of new restaurants during 1995 and 1996.
Restaurant depreciation and amortization increased $167,417 for Fiscal
1996 compared to Fiscal 1995, primarily due to new restaurant openings.
Depreciation decreased approximately $75,000 overall in the first four diners,
due in part to a prospective reduction in the estimated useful life of
smallwares, which increased expense in Fiscal 1995. Fiscal 1996 and Fiscal 1995
include approximately $240,000 and $153,000, 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 $2,705,940 for
Fiscal 1996, an increase of $628,205 compared to Fiscal 1995. As a percentage of
net sales, general and
14
<PAGE>
administrative expenses increased to 16.3% in Fiscal 1996 from 15.6% in Fiscal
1995. Increased corporate salary costs, higher restaurant management and
recruitment costs, new menu costs and additional expenses related to being a
public company were the primary factors contributing to the increases. 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. Also,
during Fiscal 1996, the Company began to incur expenses related to the
recruitment and training of restaurant management to support new Silver Diner
openings in late 1996 and early 1997.
Depreciation and amortization for Fiscal 1996 includes approximately
$100,000 for amortization of goodwill related to the acquisition of the SDLP
minority interest.
In September 1995, the Company raised $2.5 million in a private
placement of subordinated notes and common stock warrants, and in October 1995
borrowed $750,000 from a bank. Investment income, interest expense and
amortization expense (related to deferred loan costs) all initially increased
during Fiscal 1996 compared to Fiscal 1995 as a result of these borrowings.
Following consummation of the Merger with FTAC, the subordinated notes were
converted into common stock, the common stock warrants were canceled and the
Company's bank debt and affiliate debt was repaid. 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.
Interest income increased significantly in Fiscal 1996 due to investment of the
Merger and private placement proceeds.
The limited partners' interest in the net loss of SDLP of $180,175 for
Fiscal 1995 depleted the remaining equity of the limited partners. Accordingly,
minority interest was not available in Fiscal 1996 prior to the acquisition of
the minority interest in SDLP to absorb SDLP losses, and SDLP's losses were
realized by the Company in their entirety.
Net loss for Fiscal 1996 was $1,429,472, or $0.15 per share, compared
to the net loss of $1,322,730, or $0.26 per share, for Fiscal 1995. Average
shares outstanding increased from 5,013,319 for Fiscal 1995 to 9,545,681 for
Fiscal 1996. The increase in shares resulted from the Merger and the private
placement. Management expects that the Company will continue incurring
relatively modest 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 December 28, 1997,
the Company has a net operating loss carryforward of approximately $5.5 million
for income tax purposes that expires in 2008 through 2012, which may be used to
reduce future taxable income and tax liabilities.
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". 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. Adoption of SFAS No. 130
will not have a significant effect on the Company's 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. Adoption of SFAS No. 131
will not have a significant effect 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.
LIQUIDITY AND CAPITAL RESOURCES
At December 28, 1997, cash and cash equivalents were $1.6 million,
short-term investments were $1.2 million, working capital was $1.3 million, the
Company had $0.3 million of long-term debt and stockholders' equity
15
<PAGE>
was $20.1 million. Cash and cash equivalents decreased $6.7 million during
Fiscal 1997, due primarily to cash used to finance the Fiscal 1997 operating
cash flow deficit and to pay for purchases of property and equipment, including
construction payables associated with the Clarendon diner, which opened in
December 1996.
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 because either the sites where the Company contemplated opening restaurants
had material unfulfilled landlord contingencies or the sites were determined to
overlap existing Silver Diner markets. 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 $1.7 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 December 28, 1997, the Company did not have any restaurants under
construction. The Company has been pursuing locations in a new geographical
market, specifically the Philadelphia-Southern New Jersey area. 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 early 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 1998 cash flow will be adequate to construct from one to three 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.
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 in the process of evaluating its risk and the related
costs of updating its computer hardware and software to properly process year
2000 and later dates. The Company has not yet determined the cost related to the
Year 2000 issue.
16
<PAGE>
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 8. FINANCIAL STATEMENTS
SILVER DINER, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S><C>
Reports of Independent Auditors.................................................................................... 18
Consolidated Financial Statements:
Consolidated Balance Sheets as of
December 28, 1997 and December 29, 1996............................................................................ 20
Consolidated Statements of Operations for the
Fiscal Years Ended December 28, 1997, December 29, 1996 and December 31, 1995...................................... 21
Consolidated Statements of Stockholders' Equity for the
Fiscal Years Ended December 28, 1997, December 29, 1996 and December 31, 1995...................................... 22
Consolidated Statements of Cash Flows for the
Fiscal Years December 28, 1997, December 29, 1996 and December 31, 1995............................................ 23
Notes to Consolidated Financial Statements......................................................................... 25
</TABLE>
17
<PAGE>
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 December 28, 1997 and December 29,
1996, and the related consolidated statements of operations, stockholders'
equity, and cash flows for years ended 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. The consolidated financial statements of the Company for the year
ended December 31, 1995 were audited by other auditors whose report, dated April
2, 1996, expressed an unqualified opinion on those consolidated statements.
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 December 28, 1997 and December 29, 1996, and the results of their
operations and their cash flows for the years ended December 28, 1997 and
December 29, 1996 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Washington, DC
March 6, 1998
18
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders
Silver Diner, Inc. and Subsidiaries
We have audited the accompanying consolidated statement of operations,
stockholders' equity and partners' deficit and cash flows of Silver Diner, Inc.
and Subsidiaries (formerly Silver Diner Development, Inc., Silver Diner Limited
Partnership and Silver Diner Potomac Mills, Inc.) for the year ended December
31, 1995. These consolidated financial statements are the responsibility of the
corporations' and partnership's managements. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations of Silver Diner
Development, Inc., Silver Diner Limited Partnership and Silver Diner Potomac
Mills, Inc., their stockholders' equity and partners' deficit and their cash
flows for the year ended December 31, 1995, in conformity with generally
accepted accounting principles.
/s/ REZNICK FEDDER & SILVERMAN
Bethesda, Maryland
April 2, 1996
19
<PAGE>
SILVER DINER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 28, December 29,
1997 1996
----------------- -----------------
<S><C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,597,430 $ 8,285,533
Marketable securities available for sale 1,222,083 1,081,015
Inventory 196,443 147,981
Prepaid and other current assets 197,208 202,081
Preopening costs, net 326,868 127,413
----------------- -----------------
Total current assets 3,540,032 9,844,023
Property, equipment and improvements, net 17,384,019 12,956,119
Due from related parties 10,600 55,957
Goodwill, net 2,482,833 2,667,810
Deposits and other 229,281 340,466
----------------- -----------------
Total assets $23,646,765 $ 25,864,375
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,207,891 $ 3,174,262
Long term liabilities:
Note Payable 267,000 -
Deferred rent liability 1,050,667 749,396
----------------- -----------------
Total liabilities 3,525,558 3,923,658
Commitments and contingencies (Note 9)
Stockholders' equity:
Preferred stock, at December 28, 1997 and December 29, 1996, $.001
par value, 1,000,000 shares authorized, none issued - -
Common stock, $.00074 par value, 20,000,000 shares authorized; at
December 28, 1997, 11,602,403 shares issued and outstanding; at
December 29, 1996, 11,520,473 shares issued and outstanding 8,586 8,526
Additional paid-in capital 31,604,937 30,423,561
Unearned compensation (1,168,798) (126,271)
Accumulated deficit (10,323,518) (8,365,099)
----------------- -----------------
Total stockholders' equity 20,121,207 21,940,717
----------------- -----------------
Total liabilities and stockholders' equity $23,646,765 $ 25,864,375
================= =================
</TABLE>
ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
20
<PAGE>
SILVER DINER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Fiscal Years Ended
December December 29, December 31,
28, 1997 1996 1995
----------------- ---------------- ----------------
<S><C>
Net sales $ 24,259,156 $ 16,550,468 $ 13,350,255
----------------- ---------------- ----------------
Restaurant costs and expenses:
Cost of sales 6,929,221 4,526,286 3,655,254
Labor 7,999,812 5,464,896 4,452,134
Operating 4,037,198 2,536,609 2,015,668
Occupancy 2,534,210 1,931,866 1,588,527
Depreciation and amortization 1,499,125 882,843 715,426
----------------- ---------------- ----------------
Total restaurant costs and expenses 22,999,566 15,342,500 12,427,009
----------------- ---------------- ----------------
Restaurant operating income 1,259,590 1,207,968 923,246
General and administrative expenses 3,065,436 2,705,940 2,077,735
Depreciation and amortization 263,484 183,928 97,351
Write off of abandoned site costs 172,618 - -
----------------- ---------------- ----------------
Operating loss (2,241,948) (1,681,900) (1,251,840)
Interest expense 10,702 180,293 334,086
Investment income, net (294,231) (432,721) (83,021)
----------------- ---------------- ----------------
Loss before minority interest (1,958,419) (1,429,472) (1,502,905)
Minority interest in net loss of SDLP - - 180,175
----------------- ---------------- ----------------
NET LOSS $ (1,958,419) $ (1,429,472) (1,322,730)
================= ================ ================
Basic net loss per common share $ (0.17) $ (0.15) $ (0.26)
================= ================ ================
Weighted average common shares outstanding 11,609,400 9,545,681 5,013,319
================= ================ ================
Diluted net loss per common share $ (0.17) $ (0.15) $ (0.26)
================= ================ ================
Weighted average common shares outstanding 11,609,400 9,545,681 5,013,319
================= ================ ================
</TABLE>
ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
21
<PAGE>
SILVER DINER, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Fiscal Years Ended December 28, 1997, December 29, 1996 and December 31, 1995
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Unearned
Shares Amount Capital Compensation
---------------- ---------------- ------------------ ----------------
<S><C>
Balance at January 1, 1995 149,447 $ 14,945 $ 7,710,432 $ -
Common stock offering 1,500 150 202,350 -
Stock options issued - - 449,182 (238,488)
Amortization of unearned compensation - - - 42,051
Repurchase of options - - (10,721)
Net loss - - -
------------ ------------- ------------- -----------
Balance at December 31, 1995 150,947 15,095 8,351,243 (196,437)
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 -
Common stock offering 1,500,000 1,111 7,555,427 -
Payments on notes receivable
from stockholders - - 41,669 -
Stock options exercised 16,669 12 38 -
Repurchase of outstanding options - - (60,691) 30,343
Amortization of unearned compensation - - - 39,823
Warrants issued - - 141,960 -
Net loss - - - -
------------ ------------- ------------- -----------
Balance at December 29, 1996 11,520,473 8,526 30,423,561 (126,271)
Issuance of common stock 130,117 96 467,404 (315,000)
Issuance of stock awards - - 920,000 (920,000)
Common stock purchased (83,606) (62) (186,938) 52,500
Stock options exercised 35,419 26 15 -
Stock options issued - - 61,865 -
Repurchase of outstanding options - - (40,500) 20,250
Cancellation of outstanding options - - (40,470) 40,470
Amortization of unearned compensation - - - 79,253
Net loss - - - -
------------ ------------- ------------- -----------
Balance at December 28, 1997 11,602,403 $ 8,586 $ 31,604,937 $(1,168,798)
============ ============= ============= ===========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Deficit Total
------------------ ------------------
<S><C>
Balance at January 1, 1995 $ (5,612,897) $ 2,112,480
Common stock offering - 202,500
Stock options issued - 210,694
Amortization of unearned compensation - 42,051
Repurchase of options - (10,721)
Net loss (1,322,730) (1,322,730)
------------- ------------
Balance at December 31, 1995 (6,935,627) 1,234,274
Issuance of common stock in connection
with Food Trends merger - 11,731,620
Debenture conversion - 2,654,603
Common stock offering - 7,556,538
Payments on notes receivable
from stockholders - 41,669
Stock options exercised - 50
Repurchase of outstanding options - (30,348)
Amortization of unearned compensation - 39,823
Warrants issued - 141,960
Net loss (1,429,472) (1,429,472)
------------- ------------
Balance at December 29, 1996 (8,365,099) 21,940,717
Issuance of common stock - 152,500
Issuance of stock awards - -
Common stock purchased - (134,500)
Stock options exercised - 41
Stock options issued - 61,865
Repurchase of outstanding options - (20,250)
Cancellation of outstanding options - -
Amortization of unearned compensation - 79,253
Net loss (1,958,419) (1,958,419)
------------- ------------
Balance at December 28, 1997 $ (10,323,518) $ 20,121,207
============= ============
</TABLE>
ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
22
<PAGE>
SILVER DINER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Years Ended
-------------------------------------------------------
December 28, December 29, December 31,
1997 1996 1995
------------------ ------------------ ------------------
<S><C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,958,419) $ (1,429,472) $ (1,322,730)
Adjustments to reconcile net loss to net cash used in operations
Depreciation and amortization 1,762,609 1,066,771 812,777
Development and abandoned site costs 172,618 - -
Compensation expense - stock options and deferred
compensation 141,118 81,489 368,505
Termination of note receivable 123,329 - -
Minority interest - - (180,175)
Changes in operating assets and liabilities
Inventory (48,462) (30,588) (47,802)
Prepaid expenses and other assets 4,873 (73,972) 41,294
Preopening expenses (660,325) (128,287) (392,779)
Deposits and other 100,585 (78,696) (185,234)
Accounts payable and accrued expenses (262,323) (284,195) 628,798
Deferred rent liability 301,271 174,575 86,772
--------------- ---------------- ---------------
Net cash used in operating activities (323,126) (702,375) (190,574)
--------------- ---------------- ---------------
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchases of property and equipment (6,421,329) (5,729,378) (2,691,825)
Maturities of short-term investments 4,030,907 - 1,529,543
Purchase of short term investments (4,171,974) (1,081,015) (120,000)
Advances to affiliates (67,372) (55,957) (204,080)
Payment of advances to affiliates - - 84,371
--------------- ---------------- ---------------
Net cash used in investing activities (6,629,768) (6,866,350) (1,401,991)
--------------- ---------------- ---------------
</TABLE>
(continued)
ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
23
<PAGE>
SILVER DINER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
<TABLE>
<CAPTION>
Fiscal Years Ended
-------------------------------------------------------
December 28, December 29, December 31,
1997 1996 1995
------------------ ------------------ ------------------
<S><C>
CASH FLOWS FROM FINANCING ACTIVITIES
Loan costs - - (26,439)
Net proceeds from merger - 11,916,868 (167,764)
Net proceeds from sale of stock 152,500 7,556,538 202,500
Exercise of options 41 50
Net proceeds from sale of stock options to employees - - 39,471
Acquisition of outstanding interest in Silver Diner Limited
Partnership - (2,625,453) -
Purchase of common stock (134,500) - -
Proceeds from notes payable 267,000 - 3,620,000
Payments on advances - affiliates - - (13,000)
Payments of principal - notes payable - (1,666,325) (641,106)
Payments of principal - capital leases - - (107,123)
Payments of principal - notes payable - related party - (881,788) -
Repurchase of employee stock options (20,250) (30,348) (10,721)
-------------- -------------- ---------------
Net cash provided by financing activities 264,791 14,269,542 2,895,818
-------------- -------------- ---------------
Net (decrease) increase in cash and cash equivalents (6,688,103) 6,700,817 1,303,253
Cash and cash equivalents at beginning of the year 8,285,533 1,584,716 281,463
-------------- -------------- ---------------
Cash and cash equivalents at end of the year $ 1,597,430 $ 8,285,533 $ 1 ,584,716
============== ============== ===============
Supplemental disclosure of cash flow information:
Interest paid $ 10,702 $ 137,300 $ 334,086
============== ============== ===============
Noncash investing and financing activities:
Construction payables included in accounts
payable and accrued expenses $ 350,604 $ 1,054,652 $ 301,702
============== ============== ===============
Recapitalization costs included in accounts payable and
accrued expenses $ - $ - $ 722,128
============== ============== ===============
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 $ -
============== ============== ===============
</TABLE>
(concluded)
ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
24
<PAGE>
SILVER DINER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 1997
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 December 28, 1997, 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 which 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 1997, 1996 and 1995 were comprised of 52 weeks and ended on December
28, 1997, December 29, 1996, and December 31, 1995, 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 December 28, 1997, 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.
PREOPENING COSTS
Preopening costs, including payroll, employee recruitment and advertising,
incurred in the restaurant start-up and training period prior to the
opening of each restaurant, are amortized on the straight-line basis over
twelve months from the date of opening.
25
<PAGE>
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 December 28, 1997, December 29, 1996, and
December 31, 1995; 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 1997, the Company
wrote off $172,618 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. Management believes no material impairment of
these assets exists at December 28, 1997.
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 with the 1997
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". SFAS No. 130
establishes standards for reporting and display of comprehensive income and
its
26
<PAGE>
components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. Adoption of SFAS No. 130 will not
have a significant effect on the Company's 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. Adoption of
SFAS No. 131 will not have a significant effect 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.
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.
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 are 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 $184,977 and $99,603 in
fiscal years 1997 and 1996, respectively.
27
<PAGE>
4. PROPERTY, EQUIPMENT AND IMPROVEMENTS
The major components of property and equipment are as follows:
<TABLE>
<CAPTION>
December 28, December 29,
1997 1996
--------------- ---------------
<S><C>
Land $ 1,647,655 $ 1,090,470
Buildings and leasehold improvements 12,605,754 7,042,095
Furniture, fixtures and equipment 6,465,211 3,961,786
Deferred lease costs 572,549 599,790
Construction in progress 101,916 3,168,023
--------------- ---------------
21,393,085 15,862,164
Less accumulated depreciation and amortization (4,009,066) (2,906,045)
--------------- ---------------
$ 17,384,019 $ 12,956,119
=============== ===============
</TABLE>
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 & ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 28, December 29,
1997 1996
--------------- ---------------
<S><C>
Trade payables $ 1,442,913 $ 2,564,381
Payroll and related taxes 622,013 427,584
Sales and use taxes 142,965 92,628
Other - 89,669
--------------- ---------------
$ 2,207,891 $ 3,174,262
=============== ===============
</TABLE>
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 $10,702 in interest expense related to the note for
the year ended December 28, 1997.
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 theses notes
on a monthly basis. 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. As of December 28, 1997, the Company has received $9,000
in principal payments and $6,000 in interest income.
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.
28
<PAGE>
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 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 expires October
14, 2011 and includes annual CPI adjustments to base rent and percentage
rent based on gross receipts. The amount of property leased was reduced by
the land purchase described above. For the years ending December 28, 1997,
December 29, 1996 and December 31, 1995, occupancy costs include $350,000,
$389,000, $391,000, respectively, in rent and related pass through costs
associated with the lease.
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. As such, the Company recorded $123,000 of expense for
these insurance policies for the year ended December 28, 1997.
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 December 28, 1997 are:
1998 $ 2,136,000
1999 2,251,000
2000 2,334,000
2001 2,378,000
2002 2,436,000
Thereafter 22,194,000
Rent expense under the leases for fiscal 1997, 1996 and 1995 was
approximately $2,033,000, $1,622,000, and $1,270,000, respectively,
inclusive of contingent rent of $9,000 for fiscal 1995 respectively.
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
29
<PAGE>
include incentive bonuses based on specified management goals. The
aggregate minimum commitment for future salaries, excluding bonuses, as of
December 28, 1997 is approximately $1.4 million.
Legal Matters
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. The
plaintiff in this case is seeking aggregate recovery of $2 million. The
Company's insurance carrier is currently defending the claim with
reservation of rights. The Company does not believe that it is liable and
intends to vigorously defend itself. The Company believes the resolution of
this proceeding will not have a material effect on its financial position
and results of operations.
11. INCOME TAXES
At December 28, 1997, the Company has a net operating loss carryforward of
approximately $5.5 million for income tax purposes, that expires in 2008
through 2012, which may be used to reduce future taxable income 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. Significant components of the Company's deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
December 28, December 29,
1997 1996
----------------- ---------------
<S><C>
Net operating loss carryforwards $ 2,219,298 $ 1,962,941
Book over tax depreciation/amortization 238,197 172,063
Deferred rent 422,475 302,697
--------------- ---------------
Deferred tax assets 2,879,970 2,437,701
Less: valuation allowance (2,879,970) (2,437,701)
--------------- ---------------
Net deferred tax asset $ - $ -
=============== ===============
</TABLE>
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
December 28, 1997 and December 29, 1996, 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 plans to implement the plan in the spring of 1998.
INCENTIVE STOCK OPTION PLAN
The Incentive 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. The Company has
reserved 350,000 shares of common stock for issuance under the plan.
30
<PAGE>
RESTAURANT OWNER OPERATOR PROGRAM
The Restaurant Owner Operator 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 (Owner Operator) 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, Owner Operators must make an
initial investment in discounted Company common stock, which may not be
sold or otherwise transferred by the Owner Operator 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 Owner Operator for the amount of
his or her investment. The plan also provides for annual restricted common
stock awards to Owner Operators and Store Managers. Stock awarded at the
end of the first year vests after the fourth anniversary of the award date.
For each year thereafter, stock awards vest after the third anniversary of
the award date. The Company has reserved 300,000 shares of common stock for
issuance 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 at the fair
market value of the common stock on the first day of each calendar quarter
at a price determined pursuant to Black-Sholes methodology, 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 has reserved 100,000
shares of common stock for issuance under the plan. During 1997, 34,384
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 75,000 shares of common
stock for issuance under the plan.
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 December 28, 1997, 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
December 28, 1997, no options were available for future grant under the
plan.
31
<PAGE>
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 $141,118, $39,823, and
$126,318 for the years ended December 28, 1997, December 29, 1996, and
December 31, 1995, 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:
<TABLE>
<CAPTION>
Years Ended
------------------------------------------------------------------
December 28, December 29, December 31,
1997 1996 1995
<S><C>
Net loss:
As reported $ (1,958,419) $ (1,429,472) $ (1,322,730)
Pro forma $ (2,030,469) $ (1,469,539) $ (1,421,642)
Net loss per common share:
As reported $ (0.17) $ (0.15) $ (0.26)
Pro forma $ (0.17) $ (0.15) $ (0.28)
</TABLE>
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 Incentive 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 .
Options granted during 1995 were issued pursuant to the Second Amended and
Restated 1991 Stock Option Plan and the Second Amended and Restated Earned
Ownership Plan. During this period the Company was privately held. 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%; expected volatility
of 1%; common stock fair market value of $4.05; risk-free interest rates of
6.1% and an expected life of seven years.
32
<PAGE>
A summary of the status of the Company's stock option plans as of December
28, 1997, December 29, 1996 and December 31, 1995 and changes during the years
ended on these dates is:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
<S><C>
Options outstanding, 689,220 $ 2.52 784,959 $ 2.50 279,451 $ 1.49
beginning of year
Granted 89,387 $ 3.54 18,000 $ 5.83 563,251 $ 3.13
Exercised (35,421) $ 0.00 (16,669) $ 0.00 - $ -
Forfeited (149,858) $ 3.78 (82,081) $ 4.05 (53,276) $ 3.98
Repurchased (10,001) $ 0.00 (14,989) $ 0.00 (4,467) $ 0.00
-------------- -------------- -------------
Options outstanding,
end of year 583,327 $ 2.55 689,220 $ 2.52 784,959 $ 2.50
============== ============== =============
Options exercisable at
year end 396,809 313,260 284,382
Weighted-average fair
value of options
granted during the year $ 1.41 $ 1.21 $ 1.98
</TABLE>
The following table summarizes information about stock options outstanding at
December 28, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------- ---------------------------------
Range Number Weighted-Avg. Weighted-Avg. Number Weighted-Avg.
of Outstanding Remaining Exercise Exercisable Exercise
Exercise Prices at 12/28/97 Contractual Life Price at 12/28/97 Price
<S><C>
Less than $0.01 207,994 6.5 years $ 0.00 183,970 $ 0.00
$2.13 to $3.82 89,054 2.7 years $ 3.27 79,053 $ 3.30
$4.05 to $6.50 286,279 4.9 years $ 4.18 133,786 $ 4.33
------------- -------------
$0.0003 to $6.50 583,327 4.7 years $ 2.55 396,809 $ 2.12
============= =============
</TABLE>
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 December
28, 1997, December 29, 1996, and December 31, 1995, 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
December 28, 1997, December 29, 1996, and December 31, 1995, there were options
to purchase 583,327, 689,220, and 784,959 shares, respectively at the weighted
average price of $2.55, $2.52, and $2.50, respectively. These options are
antidilutive and, thus, not included in the computation of diluted net loss per
share for the years ended December 28, 1997, December 29, 1996, and December 31,
1995. In addition, at December 28, 1997, there were 8,528 restricted shares of
common stock outstanding. These shares, which were issued during 1997 pursuant
to the Restaurant Owner Operator Program, are antidilutive and are not included
in the computation of net loss per share for the year ended December 28, 1997.
33
<PAGE>
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 December
28, 1997, December 29, 1996, and December 31, 1995, respectively, the Company
made no contributions to the 401(k) Plan.
34
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
PREVIOUS INDEPENDENT ACCOUNTANTS. Prior to the Merger, the Company's
certifying accountant was KPMG Peat Marwick LLP ("Peat Marwick"). Pursuant to
the Merger, and effective as of March 27, 1996, Reznick Fedder & Silver
("Reznick"), 4520 East-West Highway, Suite 300, Bethesda, Maryland, SDDI's
certifying accountant, became the Company's certifying accountant. Peat
Marwick's report on the financial statements for each of the two years prior to
the Merger did not contain an adverse opinion or disclaimer of opinion, and was
not qualified or modified as to uncertainty, audit scope or generally accepted
accounting principles. The decision to change accountants was approved by the
Company's board of directors and was reported in the Company's Current Report on
Form 8-K dated March 27, 1996, as amended.
During the Company's two fiscal years prior to the Merger and for any
subsequent interim period preceding such dismissal, there were no disagreements
with Peat Marwick on any matter of generally accepted accounting principles or
practices, financial statement disclosure, or auditing scope or procedures,
which disagreement(s), if not resolved to the satisfaction of the former
accountant, would have caused it to make reference to the subject matter of such
disagreement(s) in connection with its report.
The Company's board of directors and audit committee subsequently
determined that it was in the Company's best interest to engage a new
independent auditor. The Company notified Reznick of its dismissal as
independent auditors on December 3, 1996 and reported the dismissal in a Current
Report on Form 8-K dated December 9, 1996.
Reznick has not issued any reports on the Company's financial
statements. Reznick's report on the Combined Financial Statements of SDDI, SDLP
and Silver Diner Potomac Mills, Inc. ("SDPMI") for the years ended December 31,
1995 and January 1, 1995 contained no adverse opinion or disclaimer of opinion,
and was not qualified or modified as to uncertainty, audit scope or accounting
principles. During the fiscal years ended December 31, 1995 and January 1, 1995,
and through the date of termination on December 3, 1996, neither the Company nor
SDDI had any disagreements with Reznick on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which, if not resolved, would have caused Reznick to make reference to the
subject matter of the disagreement in connection with its report.
NEW INDEPENDENT ACCOUNTANTS. On December 3, 1996, the Company engaged
Deloitte & Touche LLP to audit the Company's financial statements for the year
ended December 29, 1996 and reported such engagement on a Current Report on form
8-K dated December 9, 1996.
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 1997 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 1997 is incorporated herein by
reference.
35
<PAGE>
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 1997 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
1997 is incorporated herein by reference.
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
<TABLE>
<CAPTION>
Page
<S><C>
Reports of Independent Auditors................................................ 18
Consolidated Financial Statements:
Consolidated Balance Sheets as of
December 28, 1997 and December 29, 1996........................................ 20
Consolidated Statements of Operations for the
Fiscal Years Ended December 28, 1997, December 29, 1996 and December 31, 1995.. 21
Consolidated Statements of Stockholders' Equity for the
Fiscal Years Ended December 28, 1997, December 29, 1996 and December 31, 1995.. 22
Consolidated Statements of Cash Flows for the
Fiscal Years Ended December 28, 1997, December 29, 1996 and December 31, 1995.. 23
Notes to Consolidated Financial Statements..................................... 25
</TABLE>
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
36
<PAGE>
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.
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.
37
<PAGE>
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)
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)
38
<PAGE>
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
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.
39
<PAGE>
10.18 Certificate and Agreement of Participation, Silver Diner,
Inc. Restaurant Owner Operator 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.
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.
40
<PAGE>
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.
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.
21 Subsidiaries of the Registrant.
(a) Silver Diner Development, Inc., a Virginia
corporation
23 Accountants Consents
23.1 Consent of Reznick Fedder & Silverman.*
23.2 Consent of Deloitte & Touche LLP.*
27.1 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.
41
<PAGE>
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: /s/ Robert T. Giaimo
______________________________________
Robert T. Giaimo
President and Chief Executive Officer
March 30, 1998
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 March 30, 1998
_________________________ Officer and Director
Robert T. Giaimo
/s/ Daniel P. Brannan Vice President, Finance March 30, 1998
_________________________
Daniel P. Brannan
/s/ Catherine Britton Director March 30, 1998
_________________________
Catherine Britton
/s/ Clinton Clark Director March 30, 1998
_________________________
Clinton Clark
/s/ Ype Hengst Director March 30, 1998
_________________________
Ype Hengst
/s/ Edward H. Kaplan Director March 30, 1998
_________________________
Edward H. Kaplan
/s/ George A. Naddaff Director March 30, 1998
_________________________
George A. Naddaff
/s/ Louis P. Neeb Director March 30, 1998
_________________________
Louis P. Neeb
/s/ Charles Steiner Director March 30, 1998
_________________________
Charles Steiner
/s/ Douglas M. Suliman Director March 30, 1998
_________________________
Douglas M. Suliman
42
Securities and Exchange Commission
450 Fifth Street
Washington, DC 20543
Dear Sir or Madam:
We hereby consent to the incorporation by reference in this Form 10-K of
our report dated April 2, 1996, related to the consolidated financial statements
of Silver Diner, Inc. and Subsidiaries (formerly Silver Diner Development, Inc.,
Silver Diner Limited Partnership and Silver Diner Potomac Mills, Inc.) for the
year ended December 31, 1995.
/s/ Reznick Fedder & Silverman
____________________________________
REZNICK FEDDER & SILVERMAN
Bethesda, Maryland
March 28, 1998
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.
33-96684449 and No. 33-97535703 of Silver Diner,Inc. on Forms S-8 of our report
dated March 6, 1998, appearing in this Annual Report on Form 10-K of Silver
Diner, Inc. for the year ended December 28, 1997.
/s/ Deloitte & Touche LLP
_________________________
March 27, 1998
Washington D.C.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-END> DEC-28-1997
<CASH> 1,597,430
<SECURITIES> 1,222,083
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 196,443
<CURRENT-ASSETS> 3,540,032
<PP&E> 21,393,085
<DEPRECIATION> 4,009,066
<TOTAL-ASSETS> 23,646,765
<CURRENT-LIABILITIES> 2,207,891
<BONDS> 0
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0
0
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</TABLE>
