UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 12, 1998
Commission File No. 0-24982
SILVER DINER, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 04-3234411
- ------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
11806 Rockville Pike, Rockville, Maryland, 20852
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(301) 770-0333
- --------------------------------------------------------------------------------
(Registrant's telephone number)
SILVER DINER DEVELOPMENT, INC.
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since the last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ].
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, $.00074 par value, outstanding as of August, 1, 1998:
11,581,634 shares
<PAGE>
SILVER DINER, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of July 12, 1998
and December 28, 1997 3
Consolidated Statements of Operations for the
Twelve and Twenty Eight Weeks Ended July 12, 1998
and July 13, 1997 4
Consolidated Statements of Cash Flows for the
Twenty Eight Weeks Ended July 12, 1998 and July 13, 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Signature 13
<PAGE>
SILVER DINER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
July 12, December 28,
1998 1997
------------ ------------
<S><C>
ASSETS
Current assets:
Cash and cash equivalents $ 681,349 $ 1,597,430
Marketable securities available for sale 1,672,659 1,222,083
Inventory 171,000 196,443
Prepaid expenses and other current assets 227,348 197,208
Preopening costs, net - 326,868
------------ ------------
Total current assets 2,752,356 3,540,032
Property, equipment and improvements, net 17,000,383 17,384,019
Goodwill, net 2,383,230 2,482,833
Deposits and other 241,180 239,881
------------ ------------
Total assets $ 22,377,149 $ 23,646,765
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,023,061 $ 2,207,891
Note payable 267,000 -
------------ ------------
Total current liabilities 2,290,061 2,207,891
Deferred rent liability 1,046,551 1,050,667
------------ ------------
Total liabilities 3,336,612 3,525,558
Stockholders' equity:
Preferred stock, at July 12, 1998 and
December 28, 1997, $.001 par value,
1,000,000 shares authorized, none issued - -
Common stock, $.00074 par value, 20,000,000
shares authorized; at July 12, 1998,
11,581,634 shares issued and outstanding; at
December 28, 1997, 11,602,403 shares issued
and outstanding 8,570 8,586
Additional paid-in capital 31,256,604 31,604,937
Unearned compensation (777,168) (1,168,798)
Accumulated deficit (11,447,469) (10,323,518)
------------ ------------
Total stockholders' equity 19,040,537 20,121,207
------------ ------------
Total liabilities and stockholders'equity $ 22,377,149 $ 23,464,765
============ ============
</TABLE>
ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
3
<PAGE>
SILVER DINER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Twelve Weeks Ended Twenty Eight Weeks Ended
July 12, July 13, July 12, July 13,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S><C>
Net sales $ 6,563,484 $ 6,011,695 $ 14,842,418 $ 12,143,897
Restaurant costs and expenses:
Cost of sales 1,816,638 1,733,727 4,129,542 3,497,399
Labor 2,212,141 2,040,198 5,075,686 4,160,863
Operating 1,325,090 977,526 2,701,132 2,025,244
Occupancy 651,053 609,840 1,519,453 1,307,045
Depreciation and amortization 300,062 343,863 696,543 659,415
------------ ------------ ------------ ------------
Total restaurant costs and expenses 6,304,984 5,705,154 14,122,356 11,649,966
------------ ------------ ------------ ------------
Restaurant operating income 258,500 306,541 720,062 493,931
General and administrative expenses 585,764 742,104 1,451,773 1,725,847
Depreciation and amortization 57,946 48,686 144,746 114,560
------------ ------------ ------------ ------------
Operating loss (385,210) (484,249) (876,457) (1,346,476)
Interest expense 5,763 1,509 15,505 1,509
Investment income (44,301) (76,199) (94,879) (190,364)
------------ ------------ ------------ ------------
Loss before cumulative effect of a change
in accounting principle (346,672) (409,559) (797,083) (1,157,621)
Cumulative effect of a change in
accounting principle - - (326,868) -
------------ ------------ ------------ ------------
NET LOSS $ (346,672) $ (409,559) $ (1,123,951) $ (1,157,621)
============ ============ ============ ============
Basic loss per common share
Loss per common share before cumulative
effect of a change in accounting principle $ (0.03) $ (0.04) $ (0.07) $ (0.10)
Cumulative effect of a change in
accounting principle - - (0.03) -
============ ============ ============ ============
Net loss per common share $ (0.03) $ (0.04) $ (0.10) $ (0.10)
============ ============ ============ ============
Weighted average shares outstanding 11,587,946 11,634,642 11,592,722 11,600,752
============ ============ ============ ============
Diluted loss per common share
Loss per common share before cumulative
effect of a change in accounting principle $ (0.03) $ (0.04) $ (0.07) $ (0.10)
Cumulative effect of a change in
accounting principle - - (0.03) -
------------ ------------ ------------ ------------
Net loss per common share $ (0.03) $ (0.04) $ (0.10) $ (0.10)
============ ============ ============ ============
Weighted average common shares outstanding 11,587,946 11,634,642 11,592,722 11,600,752
============ ============ ============ ============
</TABLE>
ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
4
<PAGE>
SILVER DINER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Twenty Eight Weeks Ended
July 12, July 13,
1998 1997
------------ ------------
<S><C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,123,951) $(1,157,621)
Adjustments to reconcile net loss to net cash provided by (used in)
operations:
Cumulative effect of a change in accounting principle 326,868 -
Depreciation and amortization 841,289 773,975
Compensation expense - stock options and deferred compensation 78,281 69,006
Changes in operating assets and liabilities
Inventory 25,443 (45,174)
Prepaid expenses and other current assets (124,580) (1,501)
Preopening costs - (481,303)
Deposits and other (1,299) (73,155)
Accounts payable and accrued expenses 134,830 56,475
Deferred rent liability (4,116) 98,807
----------- -----------
Net cash provided by (used in) operating activities 152,765 (760,491)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (677,709) (4,409,730)
Purchases of marketable securities available for sale (1,606,137) (2,960,250
Maturities of available for sale securities 1,250,000 4,030,907
----------- -----------
Net cash used in investing activities (1,033,846) (3,339,073)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from sale of stock 12,500 95,047
Proceeds from notes payable - 267,000
Purchase of treasury stock (47,500) -
----------- -----------
Net cash (used in) provided by financing activities (35,000) 362,047
----------- -----------
Net decrease in cash and cash equivalents (916,081) (3,737,517)
Cash and cash equivalents at beginning of the period 1,597,430 8,285,533
----------- -----------
Cash and cash equivalents at end of the period $ 681,349 $ 4,548,016
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Construction payables included in accounts payable and
accrued expenses 30,945 -
=========== ===========
Interest paid $ 15,505 $ -
=========== ===========
</TABLE>
ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
5
<PAGE>
SILVER DINER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE TWELVE AND TWENTY EIGHT WEEKS ENDED
JULY 12, 1998 AND JULY 13, 1997
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Silver Diner,
Inc., a Delaware Corporation, and its wholly owned subsidiary, Silver Diner
Development, Inc. ("SDDI"), (collectively the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the twelve and twenty eight week periods ended
July 12, 1998 are not necessarily indicative of the results that may be expected
for the year ending January 3, 1999. All significant intercompany balances and
transactions have been eliminated in consolidation. For further information,
refer to the consolidated financial statements and footnotes thereto included in
the Company's annual report on Form 10-K for the year ended December 28, 1997.
2. COMPREHENSIVE INCOME
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income", issued June 1997, requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income (loss) be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS No. 130
does not require a specific format for that financial statement but requires
that an enterprise display an amount representing total comprehensive income
(loss) for the period in that financial statement. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. For the twelve weeks ended July
12, 1998 and July 13, 1997, the Company recorded a comprehensive loss of
$346,672 and $409,559, respectively, and for the twenty eight weeks ended July
12, 1998 and July 13, 1997, the Company recorded a comprehensive loss of
$1,123,951 and $1,157,621, respectively.
3. CHANGE IN ACCOUNTING PRINCIPLE
On April 3, 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) No. 98-5, "Reporting on the Cost of Start-Up
Activities". SOP No. 98-5 requires that costs associated with start-up
activities, such as opening a new facility, be expensed as incurred. This SOP is
effective for financial statements for fiscal years beginning after December 15,
1998, however, early application is encouraged.
Prior to 1998, the Company capitalized preopening costs, including payroll,
employee recruitment and advertising, incurred in the restaurant start-up and
training period prior to the opening of each restaurant, and amortized these
costs over twelve months from the date of opening. The Company elected early
application of SOP 98-5 during the first quarter of 1998. As a result of the
early application, all preopening costs capitalized as of December 28, 1997 were
expensed and recorded as a cumulative effect of a change in accounting principle
in the first quarter of 1998.
4. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997 and February 1998, the Financial Accounting Standards Board (FASB)
issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", and SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits -- an amendment of FASB Statements No. 87, 88, and 106",
respectively. SFAS No. 131 establishes standards for the way public business
enterprises report information about operating segments and the related
disclosures about products and services, geographic areas and major customers.
SFAS No. 132 revises employers' disclosures about pension and other
postretirement benefit plans. Adoption of SFAS No. 131 and SFAS No. 132 does not
have a material impact on the Company's financial statement presentation or
disclosures. Both standards
6
<PAGE>
are effective for financial statements issued for fiscal years beginning after
December 15, 1997.
In June 1998 the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes accounting and
reporting standards for derivative instruments. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. This statement
is effective for all fiscal quarters of fiscal years beginning after June 15,
1999. Adoption of SFAS No. 133 will not have a material impact on the Company's
financial statement presentations or disclosures.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING DISCLOSURE
Certain information included herein contains statements that are
forward-looking, such as statements relating to plans for future expansion and
other business development activities as well as operating costs, capital
spending, financial sources and the effects of competition. Such forward-looking
information is subject to changes and variations which are not reasonably
predictable and which could significantly affect future results. Accordingly,
such results may differ from those expressed in any forward-looking statements
made by or on behalf of the Company. These changes and variations which could
significantly affect future results include, but are not limited to, those
relating to development and construction activities, including delays in opening
new Diners, acceptance of the Silver Diner concept, the quality of the Company's
restaurant operations, the adequacy of operating and management controls,
dependence on discretionary consumer spending, dependence on existing
management, inflation and general economic conditions, and changes in federal or
state laws or regulations.
GENERAL
The Company currently operates ten Silver Diners in the Washington/Baltimore
metropolitan area and one in Cherry Hill, New Jersey. Currently, there are no
Silver Diners under construction. The Company is pursuing additional locations
in the Philadelphia/Southern New Jersey market and throughout the Mid-Atlantic
region for restaurant openings commencing in late 1999. Longer term, the Company
plans to expand the Silver Diner chain nationwide through additional openings of
Company-owned restaurants and possibly through the development of franchise or
joint venture relationships.
7
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the percentage of net sales of items included
in the consolidated condensed statements of operations for the periods
indicated:
<TABLE>
<CAPTION>
Sixteen Weeks Ended Twenty Eight Weeks Ended
---------------------------------------------------
July 12, July 13, July 12, July 13,
1998 1997 1998 1997
----------- ----------- ----------- ---------
<S><C>
Net sales 100.0% 100.0% 100.0% 100.0%
Restaurant costs and expenses:
Cost of sales 27.7% 28.8% 27.8% 28.8%
Labor 33.7% 33.9% 34.2% 34.3%
Operating 20.2% 16.3% 18.2% 16.7%
----------- ----------- ----------- ---------
Restaurant operating margin 18.4% 21.0% 19.8% 20.2%
Occupancy 9.9% 10.2% 10.2% 10.7%
Depreciation and amortization 4.6% 5.7% 4.7% 5.4%
----------- ----------- ----------- ---------
Restaurant operating income 3.9% 5.1% 4.9% 4.1%
General and administrative expenses 8.9% 12.3% 9.8% 14.2%
Depreciation and amortization .9% 0.9% 1.0% 1.0%
----------- ----------- ----------- ---------
Operating loss (5.9%) (8.1%) (5.9%) (11.1%)
Interest expense 0.1% 0.0% 0.1% 0.0%
Investment income (0.7%) (1.3%) (0.6%) (1.6%)
----------- ----------- ----------- ---------
Loss before cumulative effect of a
change in accounting principle (5.3%) (6.8%) (5.4%) (9.5%)
Cumulative effect of a change in
accounting principle 0.0% 0.0% (2.2%) 0.0%
----------- ----------- ----------- ---------
Net Loss (5.3%) (6.8%) (7.6%) (9.5%)
=========== =========== =========== =========
</TABLE>
Net sales for the twelve weeks ended July 12, 1998 ("Second Quarter 1998")
increased $0.6 million, or 9%, to $6,563,494, compared to $6,011,695 for the 12
weeks ended July 13, 1997 ("Second Quarter 1997"). Year-to-date, net sales for
the twenty-eight weeks ended July 12, 1998 ("1998 YTD Period") increased $2.7
million, or 22%, to 14,842,418, compared to $12,143,897 for the twenty eight
weeks ended July 13, 1997 ("1997 YTD Period"). The increase for Second Quarter
1998 was attributable to sales generated by two new restaurants opened since
June 1997 in Reston, Virginia, and Cherry Hill, New Jersey, adding $0.8 million
to net sales for the current quarter. The increase for the 1998 YTD Period was
attributable to sales generated by four new restaurants opened since February
1997 in Merrifield, Springfield and Reston, Virginia, and Cherry Hill, New
Jersey, adding $3.0 million to net sales.
Net sales for the 1998 Second Quarter and 1998 YTD Period reflect an
approximately 2.5% price increase in June of 1997 and a menu change in March
1998 which increased average net sales per customer by approximately 3%. In
addition to minimal price increases, the menu change in March 1998 involved
changing the physical layout of the menu and increasing the number of entree
selections. The new menu layout has resulted in higher add-on sales, such as
beverages and side items, by making them more visible to the customer. The
increase in entrees on the menu has resulted in a slight increase in entree
sales and a corresponding decrease in lower priced sandwich offerings.
8
<PAGE>
Comparable Silver Diner sales (sales for Silver Diners open throughout both
periods being compared, excluding the initial six months of operations during
which sales are typically higher than normal) for the 1998 Second Quarter
increased 0.7% compared to the second quarter of 1997 and for the 1998 YTD
Period decreased 1.5% compared to the 1997 YTD Period. The increase in
comparable sales for the quarter was the result of the Company's 110% guarantee
initiative and direct coupon mailing. The 110% guarantee initiative calls for a
10% discount for a patron's current meal and a coupon for a free entree if not
completely satisfied with the meal, while the summer coupon direct mailing
involved distributing discount entree coupons. These two initiatives
significantly improved the trend of decreased customer traffic over the first
quarter of 1998, and, combined with the increases in average net sales per
customer discussed above, resulted in the increased sales compared to Second
Quarter 1997. For the 1998 YTD Period the decrease in same store sales has
resulted from the performance of the Company's Tysons Corner and Fair Oaks
diners in northern Virginia, whose sales have been impacted by the opening of
three new Silver Diners in that area since February 1997. Excluding those two
units, comparable diner sales (the sales of the Rockville, Laurel, Potomac
Mills, and Towson units) increased by 1.5% and 1.1%, respectively, for the
twelve and twenty eight weeks ended July 12, 1998.
The Company's 110% guarantee initiative and direct coupon mailing, as
anticipated, caused labor expense to remain high and significantly increased
operating expenses. Labor expenses remained high as the Company focused on
retraining its associates and increasing staffing levels to support the 110%
guarantee. Operating expenses increased due to the design and mailing of a
marketing piece which introduces the 110% guarantee and offers discount meal
coupons. As a result, restaurant operating margin for the second quarter of 1998
decreased from the first quarter of 1998. For the remainder of 1998, the Company
anticipates experiencing ongoing sales improvements from customers returning to
the Silver Diner as a result of the couponing and the 110% guarantee initiative.
In the third quarter of 1998, operating and labor expenses are expected to
decrease because the cost of the mailing of coupons and the retraining efforts
were incurred in Second Quarter 1998.
Cost of sales, primarily food and beverage cost, decreased to 27.7% of net
sales for Second Quarter 1998, compared to 28.8% of net sales for Second Quarter
1997. Cost of sales for the 1998 YTD Period were 27.8% of net sales, compared to
28.8% of net sales for the 1997 YTD Period. The decrease from the Second Quarter
1997 was attributable to the maturation of new stores opened during that
quarter, specifically, the Springfield and Reston diners, which were opened in
April and June of 1997, and improvements in kitchen cost controls. The
development of these stores, along with the maturation of the Merrifield and
Clarendon diners, opened in February 1997 and December 1996, respectively, and
the operational improvements contributed to the decrease in cost of sales for
the twenty eight weeks ended July 12, 1998.
Labor, which consists of restaurant management and hourly employee wages and
bonuses, payroll taxes, workers' compensation insurance, group health insurance
and other benefits, decreased to 33.7% of net sales in Second Quarter 1998
compared to 33.9% of net sales for Second Quarter 1997. For the 1998 YTD Period,
labor expense as a percentage of sales decreased from 34.3% in the 1997 YTD
Period to 34.2%. During Second Quarter 1997 labor expenses were high due to the
opening of three stores in the first six months of 1997. Labor expense as a
percentage of sales remained high in both the 1998 quarterly and year-to-date
periods due to the increase in training and staffing required by the 110%
guarantee and coupon mailing initiatives. Labor costs in Second Quarter 1998
and the 1998 YTD Period were also high as a result of the effect of the increase
in the minimum wage in October 1997 and an extremely competitive labor market.
These two factors will continue to affect labor expense during the remainder of
1998.
Operating expenses, which consist of all restaurant operating costs other
than cost of goods, labor and occupancy, including supplies, utilities, repairs
and maintenance and advertising, increased to 20.2% of net sales for Second
Quarter 1998, compared to 16.3% for Second Quarter 1997. For the 1998 YTD
Period, operating expenses increased from 16.7% in 1997 to 18.2%. Operating
expenses in both the quarterly and year-to-date periods were adversely affected
by the increase in mailing, advertising, and coupon redemption costs related to
the 110% guarantee and coupon mailing campaigns.
9
<PAGE>
Occupancy, which is composed primarily of rent, property taxes and property
insurance, increased $41,213 for Second Quarter 1998 compared to Second Quarter
1997, due primarily to the opening of the Springfield, Reston and Cherry Hill
diners. The increase of $212,407 for the 1998 YTD Period over the 1997 YTD
Period was caused by the opening of the diners mentioned above, as well as the
Merrifield diner. As a percentage of sales, occupancy has decreased from 10.2%
for Second Quarter 1997 to 9.9% for Second Quarter 1998, and from 10.7% for the
1997 YTD Period to 10.2% for the 1998 YTD period due to fact that the Company
incurs no lease expense for the Reston store as result of the Company's purchase
of the land on which the unit was constructed.
Restaurant depreciation and amortization decreased $43,802 for Second Quarter
1998 compared to Second Quarter 1997 and increased $38,085 for 1998 YTD period
compared to 1997 YTD Period. Both the decrease for the second quarter and the
increase for the year-to-date period were due to the additional property and
equipment depreciation for new stores, offset by the Company's change in its
method for accounting for preopening expenses. During First Quarter 1998, the
Company elected early adoption of SOP No. 98-5, "Reporting on the Costs of
Start-Up Activities". SOP No. 98-5 requires that costs associated with start-up
activities, such as opening a new restaurant, be expensed as incurred. Prior to
First Quarter 1998, the Company had capitalized all preopening costs and
amortized these costs over a twelve month period. As a result of the application
of SOP No. 98-5, all preopening costs capitalized as of December 28, 1997 have
been expensed and recorded as a cumulative effect of a change in accounting
principle for 1998 YTD Period. Due to the change in accounting treatment,
preopening amortization expense was zero for the twelve and twenty eight weeks
ended July 12, 1998, compared to $108,552 for Second Quarter 1997 and $175,544
for 1997 YTD Period.
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 $585,764 for
Second Quarter 1998, a decrease of $156,340, or 21%, compared to Second Quarter
1997. As a percentage of net sales, general and administrative expenses
decreased to 8.9% for Second Quarter 1998 from 12.3% for Second Quarter 1997.
The decrease was largely related to lower legal fees and lower management
training expenses during Second Quarter 1998. General and administrative
expenses for 1998 YTD Period decreased $274,074, or 15.9% from $1,725,847 in
1997 YTD Period. This decrease was also caused by a significant decrease in
professional fees for the preparation of the Company's first annual report, 10-K
and annual proxy statement. During 1998 YTD Period, the Company significantly
reduced the costs associated with theses activities. During the 1997 YTD Period,
the company also incurred the costs of implementing store management
compensation and stock option and purchase plans. The Company's administrative
overhead as a percentage of net sales remains above the industry average
primarily due to the cost of the corporate management team required to support
the Company's intermediate and long-term growth plans. The Company expects
general and administrative expenses as a percentage of net sales to remain lower
than 1997 for the remainder of 1998 and thereafter as revenues increase with the
addition of new Silver Diners.
The Company earned $44,301 in investment income for Second Quarter 1998,
compared to investment income of $76,199 for Second Quarter 1997. Investment
income for 1998 YTD Period was $94,879 compared to $190,364 in 1997 YTD period.
The decrease for both the quarterly and year-to-date periods is a direct result
of cash being used to construct and open five Silver Diners since December 1996.
Interest expense increased from $1,509 in Second Quarter 1997 to $5,763 in
Second Quarter 1998 as a result of debt incurred by the Company during Second
Quarter 1997. This issuance of debt also caused interest expense to increase
from $1,509 in 1997 YTD period to $15,505 for the twenty eight weeks ended July
12, 1998.
Net loss for Second Quarter 1998 was $346,672, or $0.03 per share on a basic
and diluted basis, compared to $409,559, or $0.04 per share on a basic and
diluted basis, for Second Quarter 1997. Net loss before cumulative effect of a
change in accounting principle for 1998 YTD Period was $797,083, or $0.07 per
share on a basic and diluted basis, compared to $1,157,621, or $0.10 per share
on a basic and diluted basis, for 1997 YTD Period. Net loss for the twenty eight
weeks ended July 12, 1998 was $1,123,951, or $0.10 per share on a basic and
diluted basis, compared to $1,157,621, or $0.10 per share on a basic and diluted
basis for the twenty eight weeks ended July 13, 1998. Management expects that
the Company will continue incurring losses until sufficient revenue is generated
from new units to absorb start-up expenses and the general and administrative
costs associated with developing and running the Company.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At July 12, 1998, cash and cash equivalents were approximately $0.7 million,
short-term investments were approximately $1.7 million, working capital was
approximately $0.7 million, the Company had $0.3 million of long-term debt and
stockholders' equity was approximately $19.1 million. Cash and cash equivalents
decreased $0.5 million during the 1998 YTD Period, due primarily to cash used to
make final payment on the real estate for the Reston diner and to make a payment
on the construction of the Cherry Hill diner.
The Company's principal future capital requirement is expected to be the
development of restaurants. The Company does not plan to open any stores in 1998
and, as such, the Company did not have any restaurants under construction at
July 12, 1998. The Company is anticipating opening either one or two
Company-owned restaurants in the third or fourth quarter of 1999, however, the
locations of these sites has not been determined. Currently, the Company is
negotiating for sites throughout the Mid-Atlantic region, which includes the
area from Richmond, Virginia to Northern New Jersey, primarily along the
Interstate 95 corridor. In addition to capital expenditures for the upkeep of
existing restaurants, the principal capital requirements for the remainder of
1998 will include approximately $300,000 for the upgrade of the Company's point
of sale and back office restaurant information systems.
Management believes that the Company's current capital resources and
expected 1998 cash flow will be adequate to construct at least one unit 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.
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 identified the areas which may be potentially
affected by the Year 2000 issue: restaurant point of sale and back office
information systems, credit card processing machines, and the Year 2000
compliance of those entities on which the Company relies for goods and service,
such as its suppliers and bank. The Company has not yet determined the cost
related to the Year 2000 Issue.
11
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The action noted in the Company's annual report on Form 10-K for the year
ended December 28, 1997 in regard to Laura Reese v. Roger Richardson and
Silver Diner Development, Inc. is still pending and no major changes have
developed.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of the Company was held on June 10, 1998.
The following items were voted on and approved by a majority of the
stockholders:
1. Re-election of the Company's directors.
2. Approval of the amendment to the Company's Stock Option Plan increasing
the number of shares of Common Stock available for grant under the Stock
Option plan from 350,000 to 1,200,000. With regards to this item,
6,376,397 shares were voted for, 445,950 were voted against, 28,955 shares
were abstained, and 2,778,013 were not voted.
3. Approval of the amendment to the Company's 1996 Non-Employee Directors
Stock Option Plan increasing the number of shares of Common Stock
available for grant under the Plan from 75,000 to 150,000. With regards to
this item, 6,457,600 shares were voted in favor of the resolution, 453,240
shares were voted against the resolution, 38,396 shares were abstained,
and 2,680,079 were not voted.
12
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SILVER DINER, INC.
--------------------------------------
(Registrant)
August 25, 1998 /s/ Daniel P. Brannan
- ------------------------------- --------------------------------------
Date Daniel P. Brannan
Vice President, Finance
(Duly Authorized Officer and
Principal Financial Officer)
August 25, 1998 /s/ Thomas A. McHale
- ------------------------------- --------------------------------------
Date Thomas A. McHale
Controller
(Principal Accounting Officer)
13
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JAN-03-1999 JAN-03-1999
<PERIOD-START> DEC-29-1997 DEC-29-1997
<PERIOD-END> JUL-12-1998 JUL-12-1998
<EXCHANGE-RATE> 1 1
<CASH> 681,349 681,349
<SECURITIES> 1,672,659 1,672,659
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 171,000 171,000
<CURRENT-ASSETS> 227,348 227,348
<PP&E> 21,732,763 21,732,763
<DEPRECIATION> (4,732,380) (4,732,380)
<TOTAL-ASSETS> 22,377,149 22,377,149
<CURRENT-LIABILITIES> 2,290,061 2,290,061
<BONDS> 0 0
0 0
0 0
<COMMON> 8,570 8,570
<OTHER-SE> 0 30,479,436
<TOTAL-LIABILITY-AND-EQUITY> 22,377,149 22,377,149
<SALES> 6,563,484 14,842,418
<TOTAL-REVENUES> 6,563,484 14,842,418
<CGS> 1,816,638 4,129,542
<TOTAL-COSTS> 1,816,638 4,129,542
<OTHER-EXPENSES> 4,488,346 9,992,814
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 5,763 15,505
<INCOME-PRETAX> (346,672) (797,083)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 (326,868)
<NET-INCOME> (346,672) (1,123,951)
<EPS-PRIMARY> (.03) (.10)
<EPS-DILUTED> (.03) (.10)
</TABLE>
