10-Q 1 d10q.txt FORM 10-Q U.S. SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the quarterly period ended July 14, 2002 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 Indicated 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 July 14, 2002: 12,024,603 shares SILVER DINER, INC. AND SUBSIDIARY INDEX

2 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)

The 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 an integral part of these financial statements 5 PART 1 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 14, 2002 are not necessarily indicative of the results that may be expected for the year ending December 29, 2002. 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/A, for the year ended December 30, 2001. 2. Going Private Transaction The Company has submitted to its shareholders a proposal for a one-for-5,000 reverse stock split and a cash payment of $0.32 per share in lieu of the issuance of any resulting fractional shares of common stock. If the reverse stock split is implemented, the Company will terminate its obligation to file periodic and annual reports with the Securities and Exchange Commission under Section 12(g) of the Securities and Exchange Act of 1934, as amended. The annual shareholder's meeting has been scheduled for September 27, 2002. In connection with the going private transaction, during the twenty eight weeks ended July 14, 2002, the Company has incurred legal, professional and other fees of $250,257, which have been recorded as an extraordinary item. 3. Goodwill In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." This statement provides accounting and reporting standards for intangible assets acquired individually, with a group of other assets, or as part of a business combination. This statement addresses how acquired goodwill and other intangible assets are to be accounted for after they have been initially recognized in the financial statements. Under this statement, goodwill and other intangible assets with indefinite useful lives, on a prospective basis beginning December 31, 2001, will no longer be amortized. Rather, goodwill and other indefinite-lived assets must be tested for impairment at least annually based on a fair value comparison. Intangible assets that have finite useful lives will continue to be amortized over their respective useful lives. This statement also requires expanded disclosure for goodwill and other intangible assets. The Company was required to adopt this statement on December 31, 2001. Upon adoption, the Company completed a transitional impairment test related to their goodwill and determined that no impairment existed. 6 In accordance with SFAS No. 142, the effect of this accounting change is reflected prospectively from December 31, 2001. Supplemental comparative disclosure, as if the change had been retroactively applied to the prior year period, is as follows:

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. Critical Accounting Policies and Judgments The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities in the financial statements and accompanying notes. The Securities and Exchange Commission has defined a company's most critical accounting policies as the ones that are most important to the portrayal of the Company's financial condition and results of operations, and which require the Company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified the critical accounting policies and judgments addressed below. Although the Company believes that its estimates and assumptions are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates under different assumptions or conditions. 7 Accounting for Goodwill Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business acquisitions accounted for under the purchase accounting method. Effective December 31, 2001, the Company adopted the full provisions of SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires that goodwill and certain indefinite-lived intangibles no longer be amortized, but instead be tested for impairment at least annually. SFAS No. 142 prescribes a two-phase process for impairment testing of goodwill. The first phase evaluates goodwill for impairment; while the second phase (if necessary), measures the impairment. In accordance with SFAS No.142, the Company records impairment losses on goodwill when events and circumstances indicate that such assets might be impaired and the estimated fair value of the asset is less than its recorded amount. Conditions that would necessitate an impairment assessment include material adverse changes in operations, significant adverse differences in actual results in comparison with initial valuation forecasts prepared at the time of acquisition, a decision to abandon acquired products, services or technologies, or other significant adverse changes that would indicate the carrying amount of the recorded asset might not be recoverable. The Company's goodwill is associated with the acquisition of three restaurants which have been fully integrated into the Company's operations. Goodwill was evaluated based on comparing the net book value indicated by applying multiples of earnings of comparable companies to the combined earnings of the three restaurants. If the net book value were to exceed the calculated fair value, the excess carrying amount of goodwill would be written off as an impairment-related charge. At the adoption of SFAS No. 142 on December 31, 2001, the Company assessed the fair value of the goodwill based on comparable company analysis, using the Company's own assumptions and found no impairment. Long-lived Assets Long-lived assets (primarily fixed assets of the Company) are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of the assets might not be recoverable. The Company does not perform a periodic assessment of assets for impairment in the absence of such information or indicators. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. For long-lived assets to be held and used, the Company measures fair value based on quoted market prices, discounted estimates of future cash flows or other methods. For the twenty eight weeks ended July 14, 2002, the Company noted no events or changes in circumstances indicating the carrying amount of long-lived assets were not recoverable. Accounting for Taxes The Company recognizes deferred tax assets and liabilities based on differences between the financial reporting and tax bases of assets and liabilities using the enacted tax rates and laws that are expected to be in effect when the differences are expected to be recovered. The Company provides a valuation allowance for deferred tax assets for amounts it considers unrealizable. As of July 14, 2002, the Company provided for a valuation allowance equal to the calculated deferred tax assets, as a result of the Company's history of cumulative losses. This assessment is also based on management's best estimate of forecasted operating results. There can be no guarantee that the actual results will not be materially different from forecasted results. Contingencies In the normal course of business, the Company is subject to certain claims and legal proceedings. We record an accrued liability for these matters when an adverse outcome is probable and the amount of the potential liability is reasonably estimable. Although the ultimate outcome of these matters is currently not determinable, we do not believe that the resolution of these matters will have a material effect upon our financial condition, results of operations or cash flows for an interim or annual period. 8 General As of July 14, 2002 the Company operated ten 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. 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. Management's near-term focus is to continue to improve operations in the existing restaurants, to maximize the cash flow generation of the business and to refine opportunities for future growth. The Company is currently working to improve the performance of its existing units and is not expanding. If satisfactory results are achieved by the existing restaurants, the Company, may, under the appropriate circumstances, resume expansion. 9 RESULTS OF OPERATIONS The following table sets forth the percentage of net sales of items included in the consolidated condensed statement of operations for the periods indicated:

10 Net sales for the twelve weeks ended July 14, 2002 ("Second Quarter 2002") of $7,818,671 increased $285,894 or 3.8% compared to the twelve weeks ended July 15, 2001. ("Second Quarter 2001"). Sales for Second Quarter 2001 include $302,043 from the Towson, Maryland store which closed in November 2001. Sales increased $587,937, or 8.1% if a comparison is made without those sales. Net sales for the twenty eight weeks ending July 14, 2002 ("the 2002 YTD Period") were $17,509,278 compared to sales for the period ending July 15, 2001 ("the 2001 YTD Period") of $16,910,532, an increase of 3.5%. Excluding the sales for the Towson location, sales for the 2002 YTD Period increased $1,346,095, or 8.3%. Sales for the 2001 YTD Period also reflect lost sales of approximately $225,000 resulting from a fire in the Tysons Corner Silver Diner which closed the location for 25 days. A comparison of both YTD Periods excluding both sales from the Tysons Corner and Towson location results in an increase of $1,054,522 or 7.1%. Although the Company expects to continue improving on its 2001 sales levels, it does not believe that the trend of the first two quarters is indicative of results in future quarters. Positive sales trends year to date, were, in part, helped by the mild winter in the Mid-Atlantic region, and the comparison to poor sales results in First and Second Quarters of 2001. Significant improvements in sales results in Third and Fourth Quarter 2001 may make it difficult to maintain the current comparable sales trends. Cost of sales, consisting of food and beverage costs, improved to 27.2% from 27.8% of net sales in Second Quarter 2002 compared to Second Quarter 2001. Cost of sales for the 2002 YTD Period improved to 27.1% from 27.4% in the 2001 YTD Period. Tighter controls and increased training offset an increase in food cost resulting from a focus on value-oriented menu offerings. Labor consists of restaurant management and hourly employee wages and bonuses, payroll taxes, workers' compensation insurance, group health insurance and other benefits. Labor decreased slightly for the twelve Remaining Stores (all stores excluding the Towson, Maryland location) by .1% to 34.7% of net sales for Second Quarter 2002 compared to 34.8% in Second Quarter 2001. Labor for the 2002 YTD Period remained unchanged from the 2001 YTD Period at 34.8% for the Remaining Stores and decreased from 35.2% to 34.8% for all stores being compared. These results are indicative of higher workers compensation insurance premiums and increased incentive compensation expense offset by tighter controls on direct labor costs. The Company expects that management costs will be slightly higher in succeeding quarters resulting from a significant effort in 2002 to hire high-quality managers. 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 decreased .1% to 18.1% of net sales for Second Quarter 2002. Results for the 2002 YTD Period show a reduction in operating expenses from 17.2% to 16.2% of net sales. The reductions seen in First Quarter 2002 in utility expenses due to mild weather and lower repair and maintenance costs led to the improved year to date results. Additional funds allocated to marketing initiatives in the 2002 YTD Period offset some of these changes. Occupancy, which is composed primarily of rent, property taxes and property insurance, decreased 2.7% to 10.1% of net sales in Second Quarter 2002. Results for the 2002 YTD Period improved 1.4% to 10.4% from 11.8% in the 2001 YTD Period. Significant rent increases in Second Quarter 2001 dictated the results, as other occupancy costs remained essentially unchanged. Restaurant depreciation and amortization increased $27,244 to $318,416 and 4.1% of sales for Second Quarter 2002. Updating of computer equipment and remodeling led to losses related to disposals of the initial assets. Results for the 2002 YTD Period show a slight improvement of .2% to 3.9% of sales versus 4.1% in the 2001 YTD Period. Slightly lower depreciation expense offset the increased asset disposals in the 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 $646,127 for Second Quarter 2002, a decrease of $144,202 from Second Quarter 2001. As a percentage of net sales, the Company's administrative expenses decreased 2.2% to 8.3% in Second Quarter 2002 from 10.5% in Second Quarter 2001. Results for 2001 reflect termination expenses in excess of $100,000 in connection with reducing corporate and executive positions, although current quarter results indicate further improvement of corporate salary expenses. 11 These savings were tempered by costs associated with recruitment and training of store management personnel which accounted for approximately $102,000 of Second Quarter 2002 expense, an increase of $54,000 from Second Quarter 2001. General and administrative expenses for the 2002 YTD Period decreased $158,467 to $1,580,640 from the 2001 YTD Period. Significant savings in administrative salaries and investor relations expenses were offset, in part, by recruitment and training expenses in 2002 in excess of $272,000, well beyond the $100,000 spent in the prior year. The Company expects that it will continue to incur higher than anticipated costs through the Third Quarter of 2002 to fully staff its existing stores with highly qualified management teams. Corporate depreciation and amortization decreased $56,991 to $22,690 in Second Quarter 2002 from $79,681 in Second Quarter 2001. Nearly $43,000 of the change is a result of the adoption of SFAS No. 142 in which the Company ceased to amortize its goodwill. Corporate depreciation and amortization decreased $129,855 to $54,898 in the 2002 YTD Period from $184,753 in 2001. Goodwill amortization in the 2001 YTD Period was $99,343. The remaining changes in the current quarter and year to date are a result of fully depreciating or amortizing a number of assets during Fiscal 2001. The Company had no abandoned site costs in Second Quarter 2002 or the 2002 YTD Period. Abandoned site costs were $6,869 in Second Quarter 2001 and $267,448 in the 2001 YTD Period. They consist of lease termination and other fees resulting from the decision to abandon plans to construct a diner in the Pentagon Row site in Arlington Virginia. Net proceeds of $46,887 in First Quarter 2001 related to a fire insurance claim in the Tysons Corner, Virginia location and represented business interruption insurance proceeds received in excess of costs incurred to that date. There were no such proceeds in 2002. The Company earned $11,829 in investment income in Second Quarter 2002 compared to investment income of $18,271 for Second Quarter 2001. Year to date investment income in 2002 was $26,545, a decrease of $14,590 from the 2001 YTD Period. The decreases are the result of lower yields on investments. Interest expense was $38,400 for Second Quarter 2002 and $89,080 in the 2002 YTD Period compared to $48,431 in First Quarter 2001 and $111,144 in the 2001 YTD Period. The decrease in interest expense was due to lower interest rates charged on the Company's credit facilities which fluctuate with the prime rate. Extraordinary item represents the transaction costs of $191,997 in the Second Quarter 2002 for legal, professional and filing fees related to the Company's plans to conduct a one-for-5,000 reverse stock split as part of a going private transaction. Transaction costs in the 2002 YTD Period were $250,257. There were no transaction costs in 2001. Net loss for Second Quarter 2002 was $436,713 or $0.04 per share. Net loss before extraordinary items of $191,997 was $244,716 or $0.02 per share, which represents an improvement of $467,262 over Second Quarter 2001 which posted a net loss of $711,978 or $0.06 per share. Net loss for the 2002 YTD Period was $611,984, or $0.05 per share. Net loss before extraordinary items was $361,727 or $0.03 per share, compared to the 2001 YTD Period net loss of $1,490,028, or $0.13 per share, an improvement of $1,128,301. Excluding the impact of the charge for abandoned site costs, the net loss for the 2001 YTD Period was $1,222,580, or $0.10 per share. Management expects that the Company will continue to incur some losses, but at reduced levels due to reductions in administrative expenses, until revenues and operating efficiencies are sufficient to absorb the general and administrative expenses associated with developing and operating the company. 12 Liquidity and Capital Resources The Silver Diner's operations are subject to significant external influences beyond its control. Any one, or any combination of such factors, could materially impact the actual results of the Diner's operations. Those factors include, but are not limited to: (I) changes in general economic conditions, (II) changes in consumer spending habits (III) changes in the availability and cost of raw materials, (IV) changes in the availability of capital resources, (V) changes in the prevailing interest rates, (VI) changes in the competitive environment and (VII) changes in Federal or State laws. At July 14, 2002, the Company's cash and cash equivalents were $2,250,512, an increase of $411,421 from December 30, 2001 due to additional borrowings on available credit facilities. The Company's working capital deficit was $354,269 compared to a deficit of $230,593 at December 30, 2001, a deficit increase of $123,676. The increased deficit was caused by a June 2003 maturity date for a $231,000 note payable which had previously been classified as a long term liability.. The Company intends to pursue the extension of this note. Additional borrowings on available credit facilities offset a portion of this note payable. Furthermore, the Company's long-term debt was $2,590,278 and stockholders' equity was $10,875,839 at July 14, 2002. Based on the Company's current operating plan, the Company believes that the cash generated from operating activities and additional cost reductions, if 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, as well as the going private transaction. 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 additional financing sources will be available on acceptable terms or at all. In October 1999, the Company entered into a loan agreement with its lead bank to extend a $3,000,000 credit facility bearing interest at the rate of prime + .50% (5.25% at July 14, 2002). The agreement was amended in May 2000 and a replacement agreement was executed. During 2000, the Company borrowed $1,000,000 to finance development and construction of new restaurants. During 2001, the Company borrowed $1,500,000 to finance working capital requirements. In January 2002, the Company borrowed the remaining $500,000 available on the facility in order to increase funds available for working capital. The $1,000,000 credit facility is payable in monthly interest-only installments through December 2001 and in principal and interest installments thereafter through December 2007. The $1,500,000 credit facility is payable in monthly interest-only installments through December 2002 and in principal and interest installments thereafter through December 2008. The $500,000 credit facility is payable in monthly interest-only installments through December 2003 and in principal and interest installments thereafter through December 2009. The credit facility is collateralized by most of the assets of the Company. 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. In addition, under the loan agreement, the Company must maintain a quarterly cash flow equal to or greater than 1.3 times the debt service coverage requirements defined in the agreement. Currently, the Company does not meet the debt service coverage requirements of the loan agreement. However, the Company's failure to maintain the debt service coverage ratio for any quarter shall not be a default under the loan agreement, if, during the immediately succeeding quarter the Company achieves a material improvement in the debt service coverage ratio and demonstrates a reasonable prospect of achieving the debt service coverage ratio by the beginning of the next quarter. The Company has submitted to its shareholders a proposal for a one-for-5,000 reverse stock split and a cash payment of $0.32 per share in lieu of the issuance of any resulting fractional shares of common stock. If the reverse stock split is implemented, the Company will terminate its obligation to file periodic and annual reports with the Securities and Exchange Commission under Section 12(g) of the Securities and Exchange Act of 1934, as amended. The annual shareholder's meeting has been scheduled for September 27, 2002. Cash on hand and operating cash will fund the cost of transaction, estimated to be approximately $1,140,000, inclusive of professional fees. 13 Recent Accounting Pronouncements In July 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities ("SFAS No. 146"). SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities, such as restructuring, involuntarily terminating employees, and consolidating facilities, initiated after December 31, 2002. The Company believes that the adoption of SFAS No. 146 will not have a significant impact on the Company's financial statements. Item 1. Legal Proceedings. There are no pending matters that should have a material adverse effect on the Company. Item 2. Changes in Securities and Use of Proceeds None Item 3. Defaults Upon Senior Securities Not Applicable 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 July 14, 2002 (b) CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 14 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 28, 2002 /s/ Robert T. Giaimo ---------------- ----------------------------------------- Date President and Chief Executive Officer (Duly Authorized Officer and Principal Financial and Accounting Officer) 15

SILVER DINER INC /DE/ 10-Q