UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 25, 1999
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 May, 15, 1999:
11,797,024 shares
1
<PAGE>
SILVER DINER, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of April 25, 1999
and January 3, 1999 3
Consolidated Statements of Operations for the Sixteen
weeks ended April 25, 1999 and April 19, 1998 4
Consolidated Statements of Cash Flows for the Sixteen
weeks ended April 25, 1999 and April 19, 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Signature 12
2
<PAGE>
ITEM 2. FINANCIAL STATEMENTS
SILVER DINER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
April 25, January 3,
1999 1999
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,415,869 $ 1,611,757
Marketable securities available for sale -- 746,597
Inventory 120,734 139,039
Prepaid rent -- 182,796
Incentive rebates 44,112 61,410
Prepaid expenses and other current assets 130,994 110,666
------------ ------------
Total current assets 2,711,709 2,852,265
Property, equipment and improvements, net 15,873,882 16,117,417
Due from related parties 128,656 126,516
Goodwill, net 2,242,314 2,299,082
Deposits and other 252,445 243,217
------------ ------------
Total assets $ 21,209,006 $ 21,638,497
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,842,548 $ 1,960,222
Note payable 267,000 267,000
Deferred rent liability 1,168,912 1,173,280
------------ ------------
Total liabilities 3,278,460 3,400,502
Stockholders' equity:
Preferred stock, $.001 par value, 1,000,000 shares authorized, none
issued -- --
Common stock, $.00074 par value, 20,000,000 shares authorized; at April
25, 1999, 11,797,024 shares issued and outstanding; at January 3, 1999,
11,585,510 shares issued and outstanding 8,570 8,558
Additional paid-in capital 30,689,146 30,688,714
Unearned compensation (247,853) (252,453)
Accumulated deficit (12,519,317) (12,206,824)
------------ ------------
Total stockholders' equity 17,930,546 18,237,995
------------ ------------
Total liabilities and stockholders' equity $ 21,209,006 $ 21,638,497
============ ============
</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>
Sixteen Weeks Ended
----------------------------
April 25, April 19,
1999 1998
------------ ------------
<S> <C> <C>
Net sales $ 8,719,730 $ 8,278,933
Restaurant costs and expenses
Cost of sales 2,266,815 2,312,904
Labor 2,980,644 2,863,545
Operating 1,435,595 1,376,042
Occupancy 885,594 868,400
Depreciation and amortization 366,423 396,481
------------ ------------
Total restaurant costs and expenses 7,935,071 7,817,372
------------ ------------
Restaurant operating income 784,659 461,561
General and administrative expenses 1,026,967 866,008
Depreciation and amortization 99,299 86,800
------------ ------------
Operating loss (341,607) (491,247)
Interest expense 7,684 9,742
Investment income (36,794) (50,577)
------------ ------------
Loss before cumulative effect of a change in accounting principle (312,497) (450,412)
Cumulative effect of a change in accounting principle -- (326,868)
------------ ------------
NET LOSS $ (312,497) $ (777,280)
============ ============
Basic and diluted loss per common share
Loss per common share before cumulative effect of a change in
accounting principle $ (0.03) $ (0.04)
Cumulative effect of a change in accounting principle -- (0.03)
------------ ------------
Net loss per common share $ (0.03) $ (0.07)
============ ============
Weighted average shares outstanding 11,797,024 11,596,304
============ ============
</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>
Sixteen Weeks Ended
April 25, April 19,
1999 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net loss $ (312,497) $ (777,280)
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 465,722 483,281
Compensation expense - stock options and deferred compensation 15,044 58,480
Changes in operating assets and liabilities
Inventory 18,305 26,511
Prepaid rent 182,796
Incentive rebates 17,298
Prepaid expenses and current assets (20,328) (41,902)
Deposits and other (2,019) (13,807)
Accounts payable and accrued expenses (117,674) 8,520
Deferred rent liability (4,368) (13,671)
Advances to officer and employees (2,140) --
----------- -----------
Net cash provided by operating activities 240,139 57,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (172,624) (517,919)
Purchases of marketable securities available for sale -- (729,938)
Maturities of marketable securities available for sale 746,597 --
----------- -----------
Net cash provided by (used in) investing activities 573,973 (1,247,857)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repurchase of common stock from employees (10,000) --
Purchase of treasury stock -- (22,500)
----------- -----------
Net cash used in financing activities (10,000) (22,500)
----------- -----------
Net increase (decrease) in cash and cash equivalents 804,112 (1,213,357)
Cash and cash equivalents at beginning of the period 1,611,757 1,597,430
----------- -----------
Cash and cash equivalents at end of the period $ 2,415,869 $ 384,073
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 7,684 $ 9,742
=========== ===========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Construction payables included in accounts payable and accrued expenses $ -- $ 61,890
=========== ===========
</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 SIXTEEN WEEKS ENDED APRIL 25, 1999 AND APRIL 19, 1998
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Silver Diner,
Inc., a Delaware Corporation, and its wholly owned subsidiary, Silver Diner
Development, Inc. ("SDDI"), (collectively the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the sixteen week period ended April 25, 1999 are
not necessarily indicative of the results that may be expected for the year
ending January 2, 2000. 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 January 3, 1999.
2. CHANGE IN ACCOUNTING PRINCIPLE
On April 3, 1998, the Financial Accounting Standards Board (FASB) approved
Statement of Position (SOP) No. 98-5 "Reporting on the Cost of Start-Up
Activities". SOP No. 98-5 requires that costs associated with start-up
activities, such as opening a new facility, be expensed as incurred. This SOP is
effective for financial statements for fiscal years beginning after December 15,
1998, however, early application is encouraged.
Prior to the sixteen weeks ended April 19, 1998, the Company has capitalized
preopening costs, including payroll, employee recruitment and advertising,
incurred in the restaurant start-up and training period prior to the opening of
each restaurant, and amortized these costs over twelve months from the date of
opening. For the sixteen weeks ended April 19, 1998, the Company elected early
application of SOP 98-5. As a result of the early application, all preopening
costs capitalized as of December 28, 1997 have been expensed and recorded as a
cumulative effect of a change in accounting principle for the sixteen weeks
ended April 19, 1998.
6
<PAGE>
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. 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
-------------------------
April 25, April 19,
1999 1998
----------- -----------
<S> <C> <C>
Net sales 100.0% 100.0%
Restaurant costs and expenses:
Cost of sales 26.0% 27.9%
Labor 34.2% 34.6%
Operating 16.5% 16.6%
----------- -----------
Restaurant operating margin 23.3% 20.9%
Occupancy 10.2% 10.5%
Depreciation and amortization 4.2% 4.8%
----------- -----------
Restaurant operating income 8.9% 5.6%
General and administrative expenses 11.8% 10.5%
Depreciation and amortization 1.1% 1.0%
----------- -----------
Operating loss (4.0%) (5.9%)
Interest expense 0.1% 0.1%
Investment income (0.4%) (0.6%)
----------- -----------
Loss before cumulative effect of a change in accounting principle (3.7%) (5.4%)
Cumulative effect of a change in accounting principle -- (3.9%)
----------- -----------
Net Loss (3.7%) (9.3%)
=========== ===========
</TABLE>
Net sales for the 16 weeks ended April 25, 1999 ("First Quarter 1999") increased
by $440,797, or 5.3%, to $8,719,730, compared to $8,278,933 for the 16 weeks
ended April 19, 1998 ("First Quarter 1998"). Comparable store 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) in
First Quarter 1999 increased 8.3% compared to the first quarter of 1998.
Contributing to the increase in First Quarter sales was a 6.8% increase in
customer count and a 1.1% increase in average check.
Customer counts in First Quarter 1999 continued to be favorably impacted by the
Company's 110% guarantee program, which was initiated in the second quarter of
1998. This program guarantees that: 1) every Silver Diner restaurant will be
sparkling clean; 2) all food will be delivered hot and in a timely manner; 3)
all orders will be accurately prepared to the guests' specifications. Average
check in First Quarter 1999 was favorably impacted by various menu design
changes begun in March 1998, such as an increase in the number of Silver Diner
entree selections, which resulted in a slight increase in higher-priced entree
sales and a corresponding decrease in lower-priced sandwich offerings. The
Company also experienced higher add-on sales for items such as beverages and
side items in First Quarter 1999, as a result of more prominent positioning on
the Company's menus. The Company also benefited from the impact of a holiday
mail campaign.
8
<PAGE>
Cost of sales (primarily food and beverage cost) decreased by $46,089, or 2.0%,
to $2,266,815 in First Quarter 1999 from $2,312,904 in First Quarter 1998. Cost
of sales as a percentage of net sales decreased to 26.0% in First Quarter 1999,
compared to 27.9% in First Quarter 1998 as a result the Company's continuing
efforts to refine its menu offering and control food costs.
Labor, which consists of restaurant management and hourly employee wages and
bonuses, payroll taxes, workers' compensation insurance, group health insurance
and other benefits, increased by $117,099, or 4.1%, to $2,980,644 in the First
Quarter 1999 from $2,863,545 in the First Quarter 1998. Labor as a percentage of
net sales decreased to 34.2% in First Quarter 1999 from 34.6% in First Quarter
1998.
Operating expenses, which consist of all restaurant operating costs other than
labor and occupancy, including supplies, utilities, repairs and maintenance and
advertising, increased by $59,553, or 4.3%, to $1,435,595 in the First Quarter
1999 from $1,376,042 in the First Quarter 1998. Operating expenses as a
percentage of net sales decreased to 16.5% in First Quarter 1999 from 16.6% in
First Quarter 1998.
Occupancy, which is composed primarily of rent, property taxes and property
insurance, increased by $17,194, or 2.0%, to $885,594 in the First Quarter 1999
from $868,400 in the First Quarter 1998, due primarily to normal rent
escalations. Occupancy as a percentage of net sales decreased to 10.2% in First
Quarter 1999 from 10.5% in First Quarter 1998.
Restaurant depreciation and amortization decreased $30,058, or 7.6%, to $366,423
in First Quarter 1999 compared to $396,481 in First Quarter 1998 due to a Fourth
Quarter 1998 reduction in the Company's asset base. Prior to First Quarter 1998,
the Company had capitalized all preopening costs and amortized these costs over
a twelve-month period. As a result of the application of SOP No. 98-5, all
preopening costs capitalized as of December 28, 1997 have been expensed and
recorded as a cumulative effect of a change in accounting principle for First
Quarter 1998.
General and administrative expenses include the cost of corporate administrative
personnel and functions, multi-unit management as well as restaurant management
recruitment and initial training, increased by $160,959, in First Quarter 1999
from $866,008 in First Quarter 1998. As a percentage of net sales, general and
administrative expenses increased to 11.8% in First Quarter 1999 from 10.5% in
First Quarter 1998. This increase was largely related to higher legal and
accounting fees during the first sixteen weeks of 1999 relating to the
preparation of the Company's annual report, 10-K and annual proxy statement, the
reconfiguration of the Company's benefit plans, future location costs, as well
as expenses associated with on-going business activities. The Company's
administrative overhead, as a percentage of net sales, remains above the
industry average primarily due to the cost of the corporate management team
required to support the Company's intermediate and long-term growth plans. As
revenues increase with the addition of new Silver Diners, general and
administrative expenses are expected to decrease as a percentage of net sales.
Investment income decreased by $13,783, or 27.3% in First Quarter 1999, compared
to $50,577 in First Quarter 1998. The decrease is a result of slightly lower
levels of invested cash combined with lower yields. Interest expense decreased
by $2,058, or 21.1%, $7,684 in First Quarter 1999 from $9,742 in First Quarter
1998.
Depreciation and amortization increased by $12,499, or 14.4%, to $99,299 in
First Quarter 1999 compared to $86,800 in First Quarter 1998. Depreciation and
amortization included goodwill amortization expense of approximately $57,000 in
both First Quarter 1999 and First Quarter 1998.
Net loss for the First Quarter 1999 decreased by $464,783, or 59.8%, to $312,497
($0.03 per share on a basic and diluted basis) in First Quarter 1999 compared to
a net loss of $777,280 ($0.07 per share on a basic and diluted basis) in First
Quarter 1998, primarily due to the cumulative effect of a change in accounting
principle during the First Quarter 1998. Management expects that the Company
will continue incurring quarterly losses until sufficient revenue is generated
from new units to absorb start-up expenses and the general and administrative
costs associated with developing and running the Company.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At April 25, 1999, cash and cash equivalents were approximately $2.4 million,
working capital was approximately $.6 million, the Company had no short-term
investments, $0.3 million of short-term debt and stockholders' equity was
approximately $17.9 million. Cash and cash equivalents increased $800,000 during
First Quarter 1999, due primarily to the sale of all of the Company's short-term
securities and cash generated from first quarter operations.
The Company's principal future capital requirement is expected to be the
development of restaurants. Currently, the typical building, equipment
(including smallwares) and site development cost of a new Silver Diner prototype
is expected to be approximately $1.3 to $1.5 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 April 25, 1999, the Company did not have any restaurants under
construction, and as previously announced management does not anticipate opening
its next diner until the year 2000. The Company has been pursuing locations in a
new geographical market, specifically in the Mid-Atlantic area from Richmond to
Southern New Jersey. 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. 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
1999 cash flow will be adequate to construct up to two units. Additional
financing will be required to finance growth in 2000 beyond the next two diners.
The Company has entered into a loan commitment with its lead bank to extend a
$3.0 million line of credit that, if obtained, would be sufficient to fund at
least two additional diners. Should the Company be unable to close on the
financing commitment, management may be forced to limit unit growth.
YEAR2000
The Year2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Computer equipment,
software and other devices with embedded technology that are date-sensitive 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 normal business activities both at the
restaurant and corporate level. The Company is continually evaluating its risk
and the related costs of updating its computer hardware and software to properly
process Year2000 and later dates. This process includes the upgrade of its point
of sale systems, which has been assessed by the vendor as being Year2000
compliant, and engagement of consultants and other contract service providers to
evaluate the preparedness of the Company's information technology systems as
well as non-information technology systems with embedded technology
applications. The Company has identified other areas potentially affected by the
Year2000 issue: credit card processing machines, and the Year2000 compliance of
those entities on which the Company relies for goods and services, such as its
suppliers and bank. The Company expects the cost related to the Year2000 issue
to be between $10,000 and $50,000. In the event that the Company's systems fail
as a result of the Year2000 issue, management believes that the Company's
restaurants will remain operating on a manual basis. The risks associated with
this contingency plan involve the decreased level of operational controls and
the inability to process credit card transactions. The Company cannot currently
estimate the potential cost of this contingency plan, but does not anticipate a
material impact on its business activities.
10
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
No reportable events or material developments in reported events
occurred during the period ended April 25, 1999.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(A) EXHIBITS
27. Financial Data Schedule (Submitted electronically for SEC
information only)
(B) REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the period ended
April 25, 1999.
Item 3 is not applicable and has been omitted.
11
<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)
June 9, 1999 /s/ Craig A. Kendall
- --------------------------- -----------------------------
Date Craig A. Kendall
Vice President, Finance
(Duly Authorized Officer and
Principal Financial and
Accounting Officer)
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Silver Diner, Inc. and Subsidiaries, for the sixteen
weeks ended April 25, 1999, and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-02-2000
<PERIOD-END> APR-25-1999
<CASH> 2,415,869
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 120,734
<CURRENT-ASSETS> 2,711,709
<PP&E> 21,047,573
<DEPRECIATION> 5,173,691
<TOTAL-ASSETS> 21,209,006
<CURRENT-LIABILITIES> 2,109,548
<BONDS> 0
8,570
0
<COMMON> 0
<OTHER-SE> 17,921,976
<TOTAL-LIABILITY-AND-EQUITY> 21,209,006
<SALES> 8,719,730
<TOTAL-REVENUES> 8,719,730
<CGS> 2,266,815
<TOTAL-COSTS> 2,266,815
<OTHER-EXPENSES> 5,668,256
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,684
<INCOME-PRETAX> (312,497)
<INCOME-TAX> 0
<INCOME-CONTINUING> (312,497)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (312,497)
<EPS-BASIC> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
