10-Q 1 d10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 7, 2001 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) N/A -------------------------------------------------------------------------------- (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 November 2, 2001: 11,761,004 shares SILVER DINER, INC. AND SUBSIDIARY INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Balance Sheets as of October 7, 2001 (unaudited) and December 31, 2000 3 Consolidated Statements of Operations for the Twelve and Forty Weeks Ended October 7, 2001 (unaudited) and October 8, 2000 (unaudited) 4 Consolidated Statements of Cash Flows for the Forty Weeks Ended October 7, 2001 (unaudited) and October 8, 2000 (unaudited) 5 Notes to Consolidated Financial Statements (unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 PART II. OTHER INFORMATION Item 1. Legal Proceedings 11 Item 2. Changes in Securities and Use of Proceeds 11 Item 4. Submission of Matters to a Vote of Security Holders 11 Item 5. Other Information 11 Item 6. Exhibits and Reports on Form 8-K 11 Signature 12

Item 1. Financial Statements SILVER DINER, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these financial statements 3 SILVER DINER, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

Accompanying notes are an integral part of these financial statements 4 SILVER DINER, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

The accompanying notes are in integral part of these financial statements 5 SILVER DINER, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE TWELVE AND FORTY WEEKS ENDED OCTOBER 7, 2001 AND OCTOBER 8, 2000 (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 forty week periods ended October 7, 2001 are not necessarily indicative of the results that may be expected for the year ending December 30, 2001. All significant inter-company 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 31, 2000. 2. Diner Closing The Company closed its diner in Towson, Maryland on November 18, 2001. Under terms of the lease termination agreement, dated November 16, 2001, the Company paid rent and other related expenses through November 30, 2001 and paid the landlord $170,000 to exit the lease. The Company will also incur expenses related to the termination of the lease and closure of the diner, of approximately $40,000. 3. Evaluation of Long-Lived Assets In accordance with Statement of Financial Accounting Standards (SFAS) No. 121 "Accounting for the Impairment of Long-Lived Assets," the Company evaluates the potential impairment of long-lived assets, including goodwill and property and equipment on a restaurant by restaurant basis, 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. Based on that evaluation and the trends of operations, management believes no material impairment of long lived assets exists at October 7, 2001. 4. New Accounting Standards In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-lived Assets". SFAS No. 141 requires the use of the purchase method of accounting for all business combinations initiated after June 30, 2001, thereby eliminating the pooling-of-interests method of accounting. SFAS No. 141 also addresses the recognition and measurement of goodwill and other intangible assets acquired in a business combination. The adoption of SFAS No. 141 by the Company is not expected to have a significant effect on the Company's financial statements. Upon the adoption of SFAS No. 142, goodwill and intangible assets that have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment. The Company will adopt the provisions of SFAS No. 142 on January 1, 2002. The Company will complete its assessment of goodwill impairment by April 21, 2002. The impact of an impairment, if any determined during such assessment, would be recorded as a cumulative effect of a change in accounting principle during the first quarter of fiscal 2002. 6 SFAS No. 144 addresses accounting and reporting for the impairment or disposal of long-lived assets. The statement supercedes SFAS No. 121 "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of" and establishes an accounting model for long-lived assets to be disposed of by sale. The statement also addresses implementation issues related to SFAS No. 121. The statement is applicable for financial statements issued for fiscal years beginning after December 15, 2001. The adoption of SFAS No. 144 by the Company on January 1, 2001 is not expected to have a significant effect on the Company's financial statements. 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 As of October 7, 2001 the Company operated eleven Silver Diner restaurants in the Washington/Baltimore metropolitan area, one in Cherry Hill, New Jersey, and one in Virginia Beach, Virginia, serving breakfast, lunch, dinner and late night meals. On November 18, 2001 the Company closed its diner in Towson, Maryland (see note 2). 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 address this need. 7 RESULTS OF OPERATIONS The following table sets forth the percentage of net sales of items included in the consolidated condensed statements of operations for the periods indicated:

Net sales for the twelve weeks ended October 7, 2001 ("Third Quarter 2001") decreased $86,368 to $7,595,300 compared to $7,681,668 for the 12 weeks ended October 8, 2000 ("Third Quarter 2000"). Year-to-date, net sales for the forty weeks ended October 7, 2001 ("2001 YTD Period") increased $461,691 or 1.9%, to $24,505,832, compared to $24,044,141 for the Forty weeks ended October 8, 2000 ("2000 YTD Period"). The decrease for Third Quarter 2001 was primarily attributable to the increase in new store sales of $15,963 and the decrease in same store sales of $102,331. The increase in sales for the 2001 YTD period was due to an increase in new store sales of $1,803,294, offset by a decline in same store sales of $1,341,603. A portion of the decline in sales, approximately $225,000, is attributable to a fire that temporarily closed the Tysons Corner, Virginia store. Same 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 Third Quarter 2001 decreased 1.5% compared to the Third Quarter 2000. Cost of sales, primarily food and beverage costs, increased to 27.9% of net sales for Third Quarter 2001, compared to 26.3% of net sales for Third Quarter 2000. Cost of sales for the 2001 YTD Period were 27.5% of net sales, compared to 26.7% of net sales for the 2000 YTD Period. The increase from 2000 was primarily attributable to higher food costs. 8 Labor, which consists of restaurant management and hourly employee wages and bonuses, payroll taxes, workers' compensation insurance, group health insurance and other benefits, increased to 35.4% of net sales in Third Quarter 2001 compared to 34.8% of net sales for Third Quarter 2000. Labor costs for same stores decreased $79,796 from the same quarter last year while labor costs attributable to new stores increased $64,080 for the 2001 YTD Period, labor expense as a percent of sales increased from 34.7% in the 2000 YTD Period to 35.3%. in 2001 YTD Period. For same stores, year to date labor decreased $245,954, offset by increases in new store labor of $544,145. 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, decreased $285,115 or 19.4% to $1,182,090 in the Third Quarter 2001 from $1,467,205 in the Third Quarter of 2000. Operating expenses decreased to 15.6% in the Third Quarter 2001 from 19.1% in the Third Quarter 2000. Year to Date 2001 operating expenses decreased $516,057 to $4,093,096 from $4,609,153 in YTD 2000. Reductions in Third Quarter 2001 operating expenses are primarily due to decreased marketing activity, administrative and property maintenance expenses. Occupancy, which is composed primarily of rent, property taxes and property insurance, increased $80,456 or 11.0% to $809,621 for Third Quarter 2001 from $729,165 in the Third Quarter 2000. The increase was primarily due to increases in rent and common area maintenance costs, including those attributable to new stores. In addition, property insurance expense increased $28,597 over the same period last year. As a percentage of net sales, occupancy has increased to 10.7% for Third Quarter 2001 from 9.5% for Third Quarter 2000, and to 11.5% for the 2001 YTD Period from 9.6% for the 2000 YTD period. Restaurant depreciation and amortization decreased $37,533 to $281,468 for Third Quarter 2001 compared to $319,001 for Third Quarter 2000. Depreciation and amortization expenses for same stores decreased approximately $41,000 results from the Company writing down, in Fourth Quarter 2000, the assets of two restaurants. There were no abandoned site costs in the Third Quarter 2001 or Third Quarter 2000. During the 2001 YTD period $267,448 was attributable to the lease termination and other related costs of the Pentagon Row Shopping Center location. There were no abandoned site costs in the 2000 YTD Period. Net proceeds from fire insurance, represents proceeds from the Company's business interruption insurance claim, in excess of costs incurred to date, of $67,210 in the Third Quarter 2001 and $114,098 in the 2001 YTD period for a fire in the Tysons Corner, Virginia diner. There were no such proceeds in the 2000 YTD period. General and administrative expenses which include the cost of corporate administrative personnel and functions, multi-unit management and restaurant management recruitment and initial training decreased $171,809 to $542,969 in the Third Quarter 2001 from $714,778 in Third Quarter 2000. General and administrative expenses decreased to 7.1% of sales in Third Quarter 2001 from 9.3% of sales in the Third Quarter of 2000. This was primarily the result of a decrease in administrative salaries, investor relation's expenses and legal fees. Year to Date 2001 general and administrative expense have been reduced to 9.3% of net sales, down from 10.9% of sales in the 2000 YTD period. Corporate depreciation and amortization decreased $8,918 to $74,327 in Third Quarter 2001 compared to $83,245 in Third Quarter 2000. Depreciation and amortization includes goodwill amortization of $42,500 in both Third Quarter 2001 and 2000, respectively. Investment income was $11,044 in the Third Quarter 2001, compared to $26,442 in Third Quarter 2000. Year to Date 2001 investment income was $52,180, a decrease of $28,866 from Year to Date 2000 investment income of $81,046. The decrease for both the quarterly and year-to-date periods is the result of reduced levels of invested funds and lower yields. Interest expense increased $15,292 in Third Quarter 2001 to $44,495 compared to $29,203 in the Third Quarter 2000. YTD 2001 interest expense increased $98,802 to $155,639 from YTD 2000 expense of $56,837. The increases are attributable to additional borrowing in 2001. 9 Net loss for Third Quarter 2001 decreased $390,808 to $73,770. The loss per share on a basic and diluted basis was ($0.01) in the Third Quarter 2001 and ($0.04) in Third Quarter 2000. Net loss for the Forty weeks ended October 7, 2001 was $1,563,795 compared to $1,795,246, for the forty weeks ended October 8, 2000, a decrease of $231,451. Loss per share on a basic and diluted basis was ($0.13) and ($0.15), respectively. Management expects that the Company will continue incurring quarterly losses, but at reduced levels, due to reductions in administrative expenses until revenue and operating efficiencies are sufficient to absorb the general and administrative expenses associated with developing and running the Company. Liquidity and Capital Resources The Silver Diner's operations are subject to significant external factors beyond its control. Any one, or more, could materially impact the actual results of the Silver Diner's operations. Those factors include, but are not limited to: (I) changes in general economic conditions, (II) changes in consumer spending (III) changes in the availability and cost of raw materials, (IV) changes in the availability of capital resources, (V) changes in interest rates, (VI) changes in the competitive environment and (VII) changes in Federal or State laws. At October 7, 2001, the Company's cash and cash equivalents were $1,666,988. Cash and cash equivalents decreased $476,817 during Third Quarter 2001, primarily due to seasonal costs and non-recurring expenses. The Company's working capital deficit was $159,075, compared to working capital deficits of $273,869 as of July 15, 2001 and $893,151 at December 31, 2000. This represents an increase in working capital of $115,000 during the Third Quarter 2001 and $734,000 for YTD 2001. Additionally, the Company's long-term debt was $2,589,545 and stockholders' equity was $11,791,376. Based on the Company's current operating plan, the Company believes that the cash generated from operating activities, coupled with borrowings on its line of credit facility and additional cost reductions, where necessary, will be sufficient to meet the anticipated needs for working capital, capital expenditures and non-cancelable lease obligations for at least the next 12 months. Thereafter, if cash generated from operations is insufficient to satisfy the Company's liquidity needs, the Company may seek to obtain additional capacity on its line of credit, sell convertible debt securities, subject to consent being received from the Company's bank or sell additional equity securities. However, no assurances can be given that any such addition financing sources will be available on acceptable terms or at all. The Company, as previously announced, signed a lease on September 22, 2000, subject to certain contingencies, for a mall type unit in the Pentagon Row Shopping Center in Arlington, Virginia, which was scheduled to open in the second half of 2001. On March 30, 2001 the lease was terminated, with no further obligation to the Company. The Company closed its diner in Towson, Maryland on November 18, 2001. Under terms of the lease termination agreement dated November 16, 2001 the Company paid rent and other related expenses through November 30, 2001 and paid the landlord $170,000 to exit the lease. The Company will also incur expenses, related to the termination of the lease and closure of the diner, of approximately $40,000. The Company has a loan agreement with its bank whereby the Company may borrow, through December 31, 2002 up to $3,000,000. As of October 7, 2001, the Company has borrowed $2,500,000 under the agreement. Terms of the loan agreement limit the Company's ability to incur new debt, which may restrict the Company's ability to expand and to finance working capital requirements. As defined in the loan agreement, the Company may draw additional funds only to the extent that its cash flow is equal to or greater than 1.3 times the debt service coverage requirements. The amount borrowed in 2000, $1,000,000, is payable interest only until December 1, 2001. Principal and interest are payable monthly beginning January 1, 2002 through December 1, 2007. The amount borrowed in 2001, $1,500,000, is payable interest only until December 1, 2002. Principal and interest are payable monthly beginning January 1, 2003 through December 1, 2008. Annual principal payments are $167,667 in 2002, $416,667 in 2003 thru 2007 and $250,000 in 2008. As of October 7, 2001 the Company meets the debt service coverage requirements of the loan agreement. 10 Quantitative and Qualitative Disclosures about Market Risk Not applicable. Part II. Other Information Item 1. Legal Proceedings No reportable events or material developments in reported events occurred during the period ended October 7, 2001. 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) REPORTS ON FORM 8-K The Company filed no reports on Form 8-K during the period ended October 7, 2001. Item 3 is not applicable and has been omitted. 11 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SILVER DINER, INC. ---------------------------------------- (Registrant) November 19, 2001 /s/ Robert T. Giaimo ---------------------------- ---------------------------------------- Date President and Chief Executive Officer (Duly Authorized Officer and Principal Financial and Accounting Officer)) 12

SILVER DINER INC /DE/ 10-Q