ITEM 1. BUSINESS.
GENERAL
Silver Diner, Inc. (the "Company" or "Silver Diner") was incorporated in Delaware in April 1994 under the name Food Trends Acquisition Corporation ("FTAC"). In March 1996, a subsidiary of the Company merged with Silver Diner Development, Inc., a Virginia corporation ("SDDI"). Silver Diner Limited Partnership ("SDLP"), of which the Company was the general partner, operated the first three Silver Diner restaurants. In June 1996, the Company acquired all of the limited partner interests in SDLP for a purchase price of $2.472 million and 84,000 warrants to purchase shares of the Common Stock at $8.00 per share and, subsequently, liquidated SDLP into SDDI. The warrants were exercisable at any time on or before the earlier of January 31, 1998 or 30 days following the first public offering of Common Stock on or after June 30, 1997. Unless the context otherwise requires, references to the Company or Silver Diner also include FTAC, SDDI and their wholly owned subsidiaries.
The Company's executive offices are located at 11806 Rockville Pike, Rockville, Maryland 20852 and its telephone number is (301) 770-0333. The Company's Common Stock trades on The Nasdaq Stock Market/SM/ under the symbol "SLVR."
BUSINESS
The Company currently operates 11 Silver Diner restaurants, 10 in the Washington/Baltimore Metropolitan Area and one in Cherry Hill, New Jersey, serving breakfast, lunch, dinner and late night meals. The Company targets the growing number of customers tired of traditional fast food whose need for a quick, high-quality, reasonably priced meal is not being adequately served by existing family or casual theme restaurants; the Company capitalizes on the timeless diner theme to uniquely address this need. By attracting a broad range of customer segments, and maintaining extended operating hours, a diverse menu and convenient locations, the Company is able to compete effectively in the fast food, family and casual dining segments of the restaurant industry, contributing to the significant sales volumes of its units. The Company also offers Silver Diner To Go, which features a range of carry out/delivery options targeting the growing "home meal replacement" market, as well as specialty coffee drinks and expanded bakery selections.
The restaurants typically are open for business from 7:00 a.m. to midnight on weekdays and from 7:00 a.m. to 3:00 a.m. on weekends. The Silver Diner menu strategy is to serve generous portions of made-from-scratch cooking at prices competitive with traditional family dining restaurants. The average check per customer is approximately $7.50 and the average dining time is approximately 40 minutes. For the last fiscal year the Silver Diner restaurants had sales ranging from $2.0 million to $4.1 million with average unit sales of $2.6 million on an average of 222 seats. Management attributes the significant sales volumes of its units to its ability to attract a broad range of customer segments, extended operating hours, diverse menu and convenient locations. Management believes it has established a strong company mission and culture by emphasizing a sense of ownership and entrepreneurship in its employees and by providing frequent training, recognition and development of its management.
Diners have been indigenous to the United States for more than 100 years. Since opening the first Silver Diner restaurant in 1989, the Company has capitalized on the diner restaurant theme to uniquely address the customers' need of where to go for quick, high quality meals at reasonable prices. Key elements that differentiate Silver Diner restaurants from other restaurants include:
. BROAD AND DIVERSE MENU COMBINING "TRADITIONAL DINER" ITEMS WITH CONTEMPORARY REGIONAL SPECIALTIES - The menu includes a broad range of made- from-scratch meal choices featuring traditional home-style diner fare and all- day breakfast, as well as more contemporary "heart healthy" selections and regional specialty items. Each Silver Diner restaurant bakes all of its cakes on the premises and features a carryout section offering its full menu.
. CLASSIC, READILY RECOGNIZABLE DINER EXTERIOR, IN COMBINATION WITH A COMFORTABLE DINER INTERIOR DECOR AND ATMOSPHERE - The visually striking exterior of the Silver Diner restaurants is both familiar and distinctive, combining polished stainless steel, glass block and neon lighting traditional to old-style diners with more contemporary tile, accent colors and a 25-foot clock tower. Similarly, the Silver Diner restaurants' interior combines traditional diner motifs such as a counter area with seating, booths and tabletop old style juke boxes with a contemporary open kitchen and ambient dining room lighting. The result of these contrasting elements produces a high energy, fun, nostalgic atmosphere which is also comfortable.
. EXTENDED OPERATING HOURS WITH FOUR MEAL PERIODS - Silver Diner's breadth of entree selection, its beer and wine service and night time ambiance allow it to generate close to 50% of its business at dinner and late night, the most profitable meal periods. Additionally, the Silver Diner's extended hours and diverse menu affords it two extra meal periods - breakfast and late night. Together, these four meal periods provide the Silver Diner the opportunity to generate significantly greater customer counts per facility than traditional two- or three-meal period full-service restaurants.
. RAPID MEAL SERVICE RESULTING IN A TABLE TURNOVER RATE SIGNIFICANTLY ABOVE INDUSTRY AVERAGES FOR FULL SERVICE RESTAURANTS - Silver Diner's menu, food preparation techniques and kitchen engineering account for its rapid meal service. The Silver Diner's physical plant and kitchen layout allow it to serve the majority of meals in approximately 10 minutes, providing quick turnover and further improving productivity. The Silver Diner employs a food preparation and storage process which incorporates a type of "sous vide" production technique enabling it to efficiently make a wide range of scratch-cooking recipes with reduced labor hours, kitchen preparation and raw ingredient storage area. As a result, Silver Diner restaurants are able to achieve high quality, consistency and excellent productivity despite the broad menu.
. GENEROUS PORTIONS AND MODERATE PRICES WITH ENTREES FROM $5.99 AND UP - Management believes the Silver Diner delivers outstanding value by providing generous portions of fresh, high quality food at affordable prices. Appetizers range from $3.99 to $6.99, entrees range from $5.99 to $12.99, and full meals are available at moderate prices including a 10% senior citizen discount and "blue plate specials" at $5.99 to $7.99.
RESTAURANTS. The following sets forth certain information regarding the Company's existing restaurants.
APPROXIMATE APPROXIMATE NUMBER OPERATING LOCATIONS DATE OPENED SQUARE FEET OF SEATS - ------------------- ----------- ----------- -------- Rockville, Maryland February 1989 5,500 256
Laurel, Maryland September 1990 4,680 153
Potomac Mills, Virginia October 1991 4,675 164
Towson, Maryland September 1992 5,250 194
Fair Oaks, Virginia April 1995 5,675 240
Tysons Corner, Virginia December 1995 5,675 240
Clarendon, Virginia December 1996 5,675 240
Merrifield, Virginia February 1997 5,675 240
Springfield, Virginia April 1997 5,675 240
Reston, Virginia June 1997 5,675 240
Cherry Hill, New Jersey November 1997 5,675 240
The Company leases its corporate offices at 11806 Rockville Pike, Rockville, Maryland, which is the location of the original Silver Diner restaurant, as well as the majority of its operating units. The Company owns the Reston, Virginia location.
Management believes the greater Washington/Baltimore area can support twelve to fifteen Silver Diner restaurants and it will continue to penetrate this market area while avoiding market overlap in order to take advantage of increased name recognition and economies of scale in advertising, management and overhead. Management believes that there are numerous other major metropolitan areas throughout the United States that can support a similar concentration of Silver Diner restaurants and intends to pursue expansion in these markets in a manner similar to Washington/Baltimore. The Company opened its first restaurant in a new geographical market, specifically the Philadelphia-Southern New Jersey area in November 1997. The Company is anticipating opening the first of its latest generation of prototype restaurants in late 1999 and expects that the Silver Diner restaurants opened in the next two years will continue to be company-owned; however, expansion into any markets outside of the Mid-Atlantic region may include area joint-ventures or franchises. There is no assurance that the Company's expansion plans will be realized or that future Silver Diner restaurants will be favorably received.
MARKETING. Management focuses on providing its customers with superior food quality, service and perceived value in a distinctive atmosphere and has relied primarily on its eye-catching appearance, customer satisfaction and word of mouth to obtain repeat customers as well as to attract new clientele. Since 1998, the Company has focused its marketing efforts on direct marketing, which allows the Company to target customers and create a relationship in the neighborhoods surrounding each restaurant. The Company's penetration in its core Washington Metro market has generated economies of scale and shown significant results as measured by increased comparable store sales.
MENU. The Silver Diner menu includes a broad range of dining alternatives featuring traditional diner fare, including soups, sandwiches, hamburgers, "blue plate specials" as well as more contemporary "heart healthy" items, salads, grilled chicken, seafood, pasta and regional specialties. Silver Diner's full breakfast menu, including omelets, pancakes and waffles, is available throughout the day and night. The menu includes numerous entrees that rotate on a seasonal basis, as well as signature homemade pies and cakes baked on premises. High- quality ingredients are used for all menu items, including Silver Diner's own unique gravies, sauces and dressings. Silver Diner's recipes are prepared for the way management believes people eat today with an emphasis on fresh ingredients, low salt and cholesterol-free oil. In addition, Silver Diner's "heart healthy" menu features A DOZEN low-fat popular items formulated to exceed USDA "heart healthy" dietary guidelines. Silver Diner restaurants also serve beer and wine in all locations except Cherry Hill, New Jersey, and non-alcoholic specialty beverages. The Company is currently test marketing frozen alcoholic specialty beverages.
PURCHASING. The Company purchases items on a centralized basis and negotiates directly with suppliers for food and beverage products to ensure consistent quality and freshness of products as well as to obtain competitive prices. Food and supplies are shipped directly to the Silver Diner restaurants. All shipments are inspected for quality and freshness by a kitchen manager or supervisor upon receipt. The Company does not maintain a central product warehouse or commissary. The Company's food and supplies are available from a wide number of suppliers. Therefore, Silver Diner is not dependent on any particular source of supplies.
CUSTOMER SATISFACTION/QUALITY CONTROL. The Company has a variety of programs to measure its customer satisfaction, including comment cards, a mystery shopper program, exit interviews, and frequent visits by supervisory management. Through the use of these techniques, senior management receives valuable feedback from customers and through prompt action, demonstrates a continued interest in meeting customer needs and desires. In addition, Silver Diner staff perform a variety of quality checks and are authorized to not serve any products which do not meet Silver Diner's quality standards.
COMPETITION
The restaurant industry is intensely competitive with respect to price, service, location and food quality. With respect to quality and cost of food, size of food portions, decor and quality service, Silver Diner restaurants compete with fast food and family style restaurants with ready to cook food and take-out. Silver Diner restaurants are located in areas of high concentration of such restaurants. There are many well-established food service competitors with substantially greater financial and other resources than the Company and with substantially longer operating histories. These competitors will also compete with the Company in obtaining premium locations for restaurants (e.g., shopping malls and strip shopping centers) and in attracting and retaining employees. In addition, one or more national food service chains or other companies could introduce a multi-unit chain of food service establishments that use one or more food service concepts which resemble one or more of the food service concepts used by the Company.
The restaurant business is also affected by changes in consumer tastes and eating patterns of the general public; national, regional or local economic conditions; demographic trends; traffic patterns; as well as the type, number and location of competitors. In addition, factors such as inflation, increased food, labor and benefit costs and a lack of experienced management and hourly employees may adversely affect the restaurant industry in general and the Company in particular.
The Company believes that its distinctive diner concept, attractive price- value relationship and quality of food and service enable it to differentiate itself from its competitors. While the Company believes that its restaurants are distinctive in design and operating concept, it is aware of restaurants that operate with similar concepts. The Company believes that its ability to compete effectively will continue to depend upon its ability to offer high-quality, moderately priced food in a full-service distinctive dining environment.
EMPLOYEES
As of January 3, 1999, the Company had 775 employees, 12 of whom are corporate personnel, 55 of whom are restaurant management personnel (including 8 managers-in-training), and the remainder of whom are hourly restaurant personnel. None of the Company's employees are covered by a collective bargaining agreement. The Company considers its employee relations to be good.
The management staff of a typical Silver Diner restaurant consists of one Operating Partner (general manager) and four assistant managers, including a kitchen manager and a service manager. Each Silver Diner restaurant also employs approximately 65 associates on a part-time and full-time basis.
RESTAURANT PERSONNEL. The Company has established a strong company mission focusing on culture and values and emphasizing a sense of ownership and entrepreneurship that empowers its people to achieve professional and personal excellence. Management believes that its people are its most valuable asset and has a variety of programs to provide training, recognition and development of its management and associates to their full potential. Non-management employees' performance is tracked daily through productivity measurements that are established as an integral part of a system of frequent incentive awards.
RESTAURANT OPERATING PARTNER PROGRAM. To attract and retain talented management, the Company's compensation program is very competitive. Management believes that a key component for long-term success is for each restaurant to be led by a general manager who lives in the community and has a long-term commitment to that restaurant's success. Accordingly, management has established a Restaurant Operating Partner Program. Under the Program, the Operating Partner receives an annual salary and a periodic, profit based, cash bonus award which equals a percentage of the restaurant's operating income. In addition, each general manager is required to purchase 8,000 shares of Common Stock at market value and can potentially receive an annual award up to $10,000 of Common Stock, dependent upon achievement of performance criteria as established and evaluated by the Board. This Program is the successor to the Restaurant Owner Operator Plan and contains similar plan elements. Also, all assistant managers received an annual grant of 500 Common Stock options with a market exercise price at the grant date. The stock awards under these plans are awarded at the discretion of the Company's Board of Directors.
SELECTION, TRAINING AND SUPERVISION. Management has developed specific profiles and protocols used to interview and select its management and associate staff. Management personnel are required to participate in an 8- to 12-week training program emphasizing the Company's operating procedures as well as management development programs. Each associate also participates in a standardized training program ranging from two to five days (depending on position) which utilizes testing results to ensure all associates achieve a specified standard of performance.
GOVERNMENT REGULATIONS
The Company is subject to numerous federal, state and local laws affecting health, sanitation and safety standards as well as to state and local licensing regulation of the sale of alcoholic beverages. The Company has appropriate licenses from regulatory authorities allowing it to sell beer and wine (except in Cherry Hill, New Jersey where the Company does not sell beer or wine), and has food service licenses from local health authorities. The Company's licenses to sell alcoholic beverages must be renewed annually and may be suspended or revoked at any time for cause, including violation by the Company or its employees of any law or regulation pertaining to alcoholic beverage control, such as those regulating the minimum age of patrons or employees, advertising, wholesale purchasing and inventory control. The Company's failure to obtain or retain liquor or food service licenses would have a material adverse effect on its operation. To reduce this risk, each restaurant is operated with procedures in accordance with complete compliance with applicable code and regulations. There can be no assurance, however, that such approvals and licenses for new restaurants will be obtained and, if obtained, will be renewed or not revoked.
The Company is subject in certain states to "dram-shop" statutes, which generally provide a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person. The Company carries liquor liability coverage as part of its existing comprehensive general liability insurance. The Company has never been named as a defendant in a lawsuit involving "dram-shop" statutes.
The development and construction of additional restaurants will be subject to compliance with applicable zoning, land use and environmental regulations. The Company's operations are also subject to federal and state minimum wage laws governing such matters as working conditions, overtime and tip credits and other employee matters.
Management believes it is in compliance with all current applicable regulations relating to restaurant accommodations for the disabled including the Federal Americans With Disabilities Act of 1992.
TRADEMARKS
Management believes that its trademarks and servicemarks are valuable to the marketing of its restaurants and that it has substantial rights in such trademarks and servicemarks for the Silver Diner name, based upon the Company's actual usage and constructive usage derived from its U.S. trademark. The Company intends to aggressively protect its marks from infringement and competing claims. However, there can be no assurance that the Company's marks, even as, and if, registered do not or will not violate the proprietary rights of others, that the marks will be upheld if challenged, or that the Company will not be prevented from using the marks, any of which could have a material adverse effect on the Company. Management's policy is to pursue registration of its marks whenever possible and to oppose vigorously any infringements of its marks, the success of which cannot be assured.
EXECUTIVE OFFICERS OF THE COMPANY
The name, age, period of service and position held of each of the executive officers of the Company are as follows:
Name Age Served Since/(1)/ Position(s) Held - ------------------------------------------------------------------------------- Robert T. Giaimo 47 1987 Chairman of the Board, President and Chief Executive Officer Ype Hengst 48 1987 Director, Vice President, Executive Chef and Corporate Secretary Patrick Meskell 45 1996 Senior Vice President, Human Resources Craig Kendall 47 1998 Vice President, Finance Timothy Cusick 33 1996 Area Director of Operations
/(1)/ Includes service with SDDI.
All of the officers have had the principal occupation indicated under "Position(s) Held" for the previous five years except as follows: Mr. Meskell was an independent consultant to financial institutions, specializing in the areas of risk management systems design and implementation from 1988 to 1992 and Director of Organizational Development & Management & Operations Training for the Student Loan Marketing Association from 1992 to 1995; and Mr. Kendall who joined the Silver Diner management team in November of 1998. Previously, from 1988 to 1998, Mr. Kendall was corporate controller for Team Washington, Inc., one of the largest Domino Pizza franchises, which operates in the Washington, D.C. metropolitan, area with annual sales exceeding $40 million. Mr. Cusick was a general manager for the Company from 1994 to 1996.
ITEM 2.
ITEM 2. PROPERTY.
Information concerning the registrant's property is set forth under "Restaurants" in Item 1 of Part I.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
On May 20, 1996, the Company was named as a defendant in a proceeding instituted in the Circuit Court for Prince George's County, Maryland captioned Laura Reese v. Roger Richardson and Silver Diner Development, Inc. The plaintiff alleges that she was sexually assaulted by Roger Richardson, who was the general manager of the Laurel Silver Diner restaurant. Mr. Richardson was terminated promptly following the occurrence of the event in November 1994. Plaintiff sought recovery of $500,000 for each count. It was not clear if the counts were in the alternative or cumulative. The Company's insurance carrier was defending the claim with reservation of rights. The Company is insured up to $1,000,000 with respect to the above mentioned claims. In September 1998 the court granted summary judgement in favor of the Company as to all claims brought against them in this case. No final judgement can be entered at this time due to a Suggestion of Bankruptcy filed by Mr. Richardson, the co-defendant in the case, prior to the decision of the court to grant summary judgement on behalf of the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
Not Applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION. Since March 27, 1996, the Common Stock has been listed on The NASDAQ Stock Market/SM/ under the symbol SLVR. Before that date, the Common Stock was quoted on the OTC Bulletin Board under the symbol FDTR. The following table sets forth the high and low closing prices for the Common Stock for the periods indicated:
QUARTER HIGH LOW ------- ---- ---
1997 First $4-7/8 $3-1/4 Second $3-19/32 $2-7/8 Third $3-1/8 $2 Fourth $2-5/16 $1
1998 First $2-9/16 $1-1/8 Second $1-15/32 $1 Third $1-7/8 $7/8 Fourth $1-1/16 $5/8
DIVIDENDS. Since the Company's inception, no dividends have been paid on the Common Stock.
HOLDERS. As of January 3, 1999, there were approximately 489 record holders of the Common Stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
/(I)/ Selected financial data as of and for the years ended January 3, 1999, December 28, 1997 and December 29, 1996 were obtained from the Company's audited financial statements. Selected financial data as of and for the years ended December 31, 1995 and January 1, 1995 were obtained from the Company's financial statements audited by another accounting firm whose opinion was unqualified.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
FORWARD LOOKING DISCLOSURE
Certain information included herein contains statements that are forward-looking, such as statements relating to plans for future expansion and other business development activities as well as operating costs, capital spending, financial sources and the effects of competition. Such forward-looking information is subject to changes and variations which are not reasonably predictable and which could significantly affect future results. Accordingly, such results may differ from those expressed in any forward-looking statements made by or on behalf of the Company. These changes and variations which could significantly affect future results include, but are not limited to, those relating to development and construction activities, including delays in opening new diners, acceptance of the Silver Diner concept, increased competition in the restaurant industry, weather conditions, the quality of the Company's restaurant operations, the adequacy of operating and management controls, dependence on discretionary consumer spending, dependence on existing management, inflation and general economic conditions, and changes in federal or state laws or regulations.
GENERAL
The following discussion includes comments and data relating to the Company's financial condition and results of operations for the three-year period ended January 3, 1999. As of this date, the Company operates 11 diners, 10 in the Washington/Baltimore metropolitan area and one in Cherry Hill, New Jersey. Currently, there are no additional Silver Diners under construction. The Company is pursuing additional locations in the Philadelphia/Southern New Jersey market and throughout the Mid-Atlantic region for restaurant openings commencing in 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. The following table reflects the growth in number of restaurants over the three-year period.
RESTAURANTS 1996 1997 1998 ----------- ---- ---- ---- In operation, beginning of year 6 7 11 Newly opened 1 4 0 ---- ---- ---- In operation, end of year 7 11 11 ==== ==== ==== Under construction, end of year 3 0 0 ==== ==== ====
On March 27, 1996, FTAC Transition Corporation, a wholly owned subsidiary of FTAC, merged with and into Silver Diner Development, Inc., a Virginia Corporation, with SDDI surviving as a wholly owned subsidiary of FTAC. In connection with the Merger, FTAC changed its name to Silver Diner Development, Inc., then subsequently to Silver Diner, Inc. Pursuant to the merger agreement, each outstanding share of SDDI common stock converted into 33.339 shares of the common stock of FTAC. Upon consummation of the Merger, the stockholders of SDDI became the owners in the aggregate of approximately 57% of the outstanding common stock of FTAC and the directors and officers of SDDI became directors and officers of FTAC.
For accounting and financial reporting purposes, the Merger was treated as a recapitalization of SDDI and as an issuance of SDDI common shares for monetary assets and liabilities. The Company has reflected in its consolidated financial statements the assets, liabilities and equity of SDDI and its subsidiary Silver Diner Limited Partnership at their historical book values. Accordingly, the consolidated results of operations and financial position of the Company for periods and dates prior to the Merger are the consolidated historical results of operations and financial position of SDDI and SDLP for such periods and dates.
All historical shares of common stock and per share amounts for periods prior to the Merger have been retroactively adjusted to reflect the FTAC shares issued to the SDDI shareholders at the time of the Merger.
In connection with the Merger, on April 2, 1996, notes payable to related parties totaling $1,236,811 were repaid by the offset of amounts due from affiliates of $355,023 and the net outstanding balance was paid in full by the Company. On April 1, 1996, the Company terminated its capital lease obligation with a related party by purchasing the leased equipment at the remaining lease obligation balance of approximately $148,000. In addition, the Company repaid certain bank notes of SDDI in the approximate amount of $904,000 on April 4, 1996.
On June 13, 1996, the Company completed its purchase of the minority interest in SDLP from the original investors for $2,472,000 in cash and 84,000 warrants to purchase common stock exercisable at $8.00 per share until the earlier of 30 days following a public offering or January 31, 1998. The offer was accepted by 100% of the limited partners. Because SDLP's financial statements are included in the consolidated financial statements of the Company, acquisition of the minority interest will not result in any change in the Company's future reported net sales, restaurant costs and expenses or restaurant operating income. The acquisition has been accounted for under the purchase method and the entire cost of the transaction, totaling $2.8 million, has been recorded as goodwill and is being amortized on a straight-line basis over 15 years.
On July 11, 1996, the Company completed a $8,250,000 private placement of common stock through the sale of 1.5 million shares at $5.50 per share. Of the $7.6 million net proceeds of the sale, $2.5 million was used to replace the funds used for the acquisition of the minority interests in SDLP, approximately $400,000 was used to repay the bank debt of SDLP and the remainder was available to fund expansion. On August 7, 1996, the Company registered the shares with the Securities and Exchange Commission pursuant to a Form S-3 Registration Statement filed under the Securities and Exchange Act of 1933, as amended.
Effective January 1, 1994, the Company adopted a 52 or 53-week fiscal year that ends on the Sunday nearest December 31. Fiscal quarters consist of accounting periods of 16, 12, 12 and 12 or 13 weeks, respectively. Fiscal years 1998, 1997 and 1996 were comprised of 53, 52 and 52 weeks, respectively and ended on January 3, 1999, December 28, 1997 and December 29, 1996, respectively.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to net sales of items included in the consolidated statements of operations for the periods indicated:
YEAR ENDED JANUARY 3, 1999 COMPARED TO THE YEAR ENDED DECEMBER 28, 1997
Net sales for the fiscal year ended January 3, 1999 ("Fiscal 1998") of $28,561,422 increased $4.3 million compared to the fiscal year ended December 28, 1997. Silver Diners opened during Fiscal 1997 in Northern Virginia and Cherry Hill, New Jersey contributed significantly to the incremental sales. Additionally, Fiscal 1998 included 53 weeks, adding approximately $591,000 to net sales.
Comparable Company sales (sales for Silver Diner restaurants open throughout both periods being compared, excluding the initial six months of operations during which sales are typically higher than normal) increased 3.6% (1.5% exclusive of the 53rd week sales). Same store customer counts were up 1.4%, while average guest check increased 2.0%. The Company believes the increase in same store sales was generated through continued focus and improvement in operational excellence as measured by exit interviews with customers, which have improved by approximately 50% from year-end 1997 to year- end 1998. The vehicle to achieve this was the development, implementation and continued focus on the Company's 110% guarantee program. The 110% guarantee initiative provides for a 10% discount on the customer's current meal and a coupon for a free entree if not completely satisfied with the dining experience. Additionally, a direct mail campaign increased customer traffic.
Average unit sales, measured on an effective restaurants open basis, decreased 3.9% from $2,651,274 in fiscal 1997 to $2,547,852 in Fiscal 1998; primarily as the result of the "honeymoon sales period" of four new unit openings throughout Fiscal 1997 and increased penetration of the Northern Virginia market reducing the trade area of existing diners.
Cost of Sales, consisting primarily of food and beverage costs, decreased from 28.6% of net sales in Fiscal 1997 to 27.7% of net sales in Fiscal 1998 due primarily to operational improvements, purchasing efficiencies on high cost, high turnover items and a significant menu re-engineering, that included recipe reformulation as well as basic menu redesign and layout. The maturation of new units also contributed favorably to improved cost of sales performance.
Labor, which consists of restaurant management and hourly employee wages and bonuses, payroll taxes, workers' compensation insurance, group health insurance and other benefits increased 0.1% to 33.1% of net sales for Fiscal 1998, resulting from a decrease in average unit volume. An analysis of this dollar cost element indicates an overall per unit dollar expenditure decrease in effective unit direct labor of 3.6%, driven by a 5.6% decrease in hourly wages, a 26.2% reduction in training labor and partially offset by modest increases in unit management compensation and escalating benefit costs.
Operating expenses, which consists of all restaurant operating costs other than cost of sales, labor, occupancy and depreciation, including supplies, utilities repairs and maintenance and advertising increased 1.6% to 18.3% of net sales for Fiscal 1998, compared to 16.6% for Fiscal 1997. All but .2% of the increase was attributable to the higher marketing costs associated with the 110% guarantee program and the related direct mail campaign. Fiscal 1998 expenditures for these initiatives totaled $410,000. The remainder of the margin variance resulted from increased supply and maintenance costs reflecting management's commitment under the 110% guarantee to ensure a quality dining experience to its customers.
Occupancy, which is composed primarily of rent, property taxes and property insurance, increased $243,722 for Fiscal 1998 compared to Fiscal 1997, principally due to a full year of expense recognition on units opened in Fiscal 1997. As a percentage of net sales occupancy expenses decreased 0.7% in Fiscal 1998 to 9.7% compared to 10.4% in Fiscal 1997. Additionally, the Company owns the Reston, Virginia site and consequently does not absorb any rent expense on this location.
Restaurant depreciation and amortization increased $149,009 to $1,648,134 for Fiscal 1998. The increase was the result of depreciation associated with the new unit openings throughout Fiscal 1997 totaling $112,000, plus $372,734 in depreciation and amortization incurred in connection with an evaluation of unit operational processes, menu engineering, and a comprehensive unit equipment assessment resulting in the Company writing off equipment in the fourth quarter of 1998. This increase in restaurant depreciation and amortization was offset by a $326,886 reduction for the expensing of all preopening costs capitalized as of December 28, 1997 and recording of a cumulative effect of a change in accounting principle in the first quarter of 1998. During the First Quarter of 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 the First Quarter 1998, the Company had capitalized all preopening expenses and amortized these costs over a 12-month 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 $2,921,299 for Fiscal 1998, a decrease of $144,137, or 4.7%, compared to Fiscal 1997. As a percentage of net sales, general and administrative expenses decreased to 10.2% for Fiscal 1998 from 12.6% for Fiscal 1997. The decrease was a direct result of management's efforts to reduce overhead and leverage increased sales to improve overall margin performance. 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.
Write off of abandoned site costs decreased from $172,618 in Fiscal 1997 to $32,455 in Fiscal 1998. The Fiscal 1998 write off related to a suburban Maryland site, which was abandoned during the fourth quarter.
The Company earned $151,967 in investment income for Fiscal 1998, compared to investment income of $294,231 for Fiscal 1997. The decrease is a direct result of cash being used to construct and open four Silver Diners since Fiscal 1996. Interest expense was $40,639 for Fiscal 1998 and $10,702 for Fiscal 1997. The issuance of debt in the second quarter of 1997 and interest charges on non- financing transactions caused interest expense to increase to $40,639 from $10,702 in the prior year.
Net loss for Fiscal 1998 was $1,883,306 or $0.16 per share, compared to a loss of $1,958,419 or $0.17 per share in Fiscal 1997. Weighted average shares outstanding remained substantially unchanged at 11,591,822 in 1998 versus 11,609,400 at December 28, 1997. Management expects that the Company will continue to incur quarterly losses until such time as revenue generation from increased market penetration is sufficient to absorb new unit start-up costs and the increased general and administrative infrastructure costs currently in place to support the Company's growth plans.
YEAR ENDED DECEMBER 28, 1997 COMPARED TO THE YEAR ENDED DECEMBER 29, 1996.
Net sales for the fiscal year ended December 28, 1997 ("Fiscal 1997") increased $7.7 million to $24,259,156 compared to $16,550,468 for the fiscal year ended December 29, 1996 ("Fiscal 1996"). Silver Diner restaurants opened during Fiscal 1996 and Fiscal 1997 in Arlington, Merrifield, Springfield, and Reston, Virginia and Cherry Hill, New Jersey added $8.4 million to net sales.
Comparable Company sales (sales for Silver Diner restaurants open throughout both periods being compared, excluding the initial six months of operations during which sales are typically higher than normal) decreased 2.1%. Same store customer counts were down 4.3% for Fiscal 1997, but price increases in mid-June 1997 helped raise average sales per customer and offset a portion of that decline. Average net sales for the seven restaurants open throughout Fiscal 1997 was $2.6 million compared to $2.7 million for the six restaurants open throughout 1996.
Cost of sales, primarily food and beverage cost, was 28.6% of net sales for Fiscal 1997, an increase of 1.2% from 27.4% in Fiscal 1996. The increase was primarily the result of the Company's adoption of a new menu in 1997. Additionally, cost of sales was unfavorably impacted by stores opened in late 1996 and throughout 1997, which incurred anticipated higher cost of goods as well as labor and operating expenses in their initial months of operation.
Labor, which consists of restaurant management and hourly employee wages and bonuses, payroll taxes, workers' compensation insurance, group health insurance and other benefits, was unchanged at 33.0% of net sales for Fiscal 1997 compared to Fiscal 1996. Increases in hourly employee wages as a result of increased minimum wage and higher labor expenses in new stores was offset by lower workers' compensation costs in all stores and lower health and vacation benefit costs in the Company's new stores where most hourly employees have not worked for the Company long enough to qualify for these benefits.
Operating expenses, which consist of all restaurant operating costs other than cost of sales, labor, occupancy, and depreciation, including supplies, utilities, repairs and maintenance and advertising, increased to 16.6% of net sales for Fiscal 1997, compared to 15.3% for Fiscal 1996. Higher marketing costs primarily related to the Company's summer radio advertising campaign and coupon mailings to prospective customers accounted for 0.9% of the increase in operating expenses. The remainder of the increase as a percentage of sales was caused by higher administrative expenses driven by lower comparable store sales, combined with slightly above average operating expenses in new stores.
Restaurant operating margin, which consists of net sales minus cost of sales, labor and operating expenses exclusive of occupancy, decreased to 21.8% of net sales for Fiscal 1997 from 24.3% for Fiscal 1996. Management believes restaurant operating margin is the most consistent measure of store level operating results because it focuses on unit level performance. Restaurant operating margin was unfavorably impacted by the five stores opened between December 1996 and November 1997, which incurred anticipated higher cost of sales, labor and operating expenses in their initial months of operation. As these stores mature, management expects their restaurant operating margin to be similar to the Company's comparable stores. The table below illustrates the components of restaurant operating margin as a percentage of sales (New stores include all stores that are not comparable stores as defined above):
Additionally, the decrease in restaurant operating margin was driven by an approximately 0.7% increase in food cost related to the Company's new menu platform and a 0.9% increase in marketing expenses.
Occupancy, which is composed primarily of rent, property taxes and property insurance, increased $602,344 for Fiscal 1997 compared to Fiscal 1996, due primarily to the opening of new restaurants during 1996 and 1997. As a percentage of sales, occupancy expenses decreased from 11.7% in Fiscal 1996 to 10.4% in Fiscal 1997 due to lower rent expense in the new stores. Also, the Company owns the property for the Reston store that opened in June 1997.
Restaurant depreciation and amortization increased $616,282 from $882,843 for fiscal 1996 to $1,499,125 for Fiscal 1997, primarily due to new restaurant openings. Fiscal 1997 and Fiscal 1996 include approximately $461,000 and $240,000, respectively, of preopening amortization. Preopening costs are amortized on a straight-line basis over twelve months from the date of each new restaurant opening.
General and administrative expenses include the cost of corporate administrative personnel and functions, multi-unit management and restaurant management recruitment and initial training. Such expenses were $3,065,436 for Fiscal 1997; an increase of $359,496 compared to Fiscal 1996. As a percentage of net sales, general and administrative expenses decreased to 12.6% in Fiscal 1997 from 16.3% in Fiscal 1996. Increased corporate salary costs and higher restaurant management and recruitment costs accounted for approximately $140,000 of the increase. Also, higher professional fees during the first two quarters of 1997 related to preparation of the Company's first annual report, 10-K and annual proxy statement plus costs of implementing various compensation and benefit plans added approximately $160,000. In addition, the Company is paying premiums for three life insurance policies owned respectively by two officers. In 1996, the Company recorded notes receivable from the two officers which were payable in full upon demand, were collateralized by the life insurance policies and were equal to the amount of premiums paid by the Company on such life insurance policies. The notes receivable were non-interest
bearing. During 1997, the Company terminated these note receivable agreements and recorded the full amount of premiums paid in 1996 and 1997, less the cash surrender value of the policies, as expense. As such, the Company recorded $123,000 of expense for these insurance policies for the year ended December 28, 1997. The Company's administrative overhead as a percentage of net sales remains above the industry average primarily due to the cost of the corporate management team and infrastructure necessary to support the Company's intermediate and long-term growth plans. As revenues increase in 1998, general and administrative expenses are expected to decrease in absolute dollars and as a percentage of net sales.
The increase in depreciation and amortization of approximately $80,000 for Fiscal 1997 is a result of additional goodwill amortization related to the acquisition of the SDLP minority interest in June 1996. Total goodwill amortization related to this transaction in Fiscal 1996 was approximately $100,000 and in Fiscal 1997 was approximately $184,000.
Write off of abandoned site costs increased from zero in Fiscal 1996 to $172,618 in Fiscal 1997. These costs relate to deferred site costs including legal, design and development costs for potential restaurant sites that the Company is no longer pursuing due to unanticipated non-fulfillment of landlord contingencies and sites that did not meet the Company's unit economic criteria.
The decrease in interest expense from $180,293 in 1996 to $10,702 in 1997 is nearly entirely the result of the consummation of the Merger with FTAC in March 1996 at which time the majority of the outstanding debt of the Company was either repaid or converted to equity. The bank debt of SDLP was subsequently repaid in late July 1996 following acquisition of the SDLP minority interest. Interest expense and amortization of deferred loan costs were eliminated for the remainder of Fiscal 1996 due to the repayment of debt. The interest expense incurred in Fiscal 1997 relates to debt incurred by the Company in the purchase of a piece of property adjacent to the Potomac Mills Silver Diner from a related party. Interest income decreased significantly in Fiscal 1997 due to use of the proceeds of the Merger and private placement proceeds to fund operating losses and construct new Silver Diners.
Net loss for Fiscal 1997 was $1,958,419, or $0.17 per share, compared to the net loss of $1,429,472, or $0.15 per share, for Fiscal 1996. Average shares outstanding increased from 9,545,681 for Fiscal 1996 to 11,609,400 for Fiscal 1997. The increase in shares resulted from the Merger and the private placement in Fiscal 1996. Management expects that the Company will continue incurring quarterly losses until sufficient revenue is generated from new units to absorb start-up expenses and the increased overhead put in place to support the Company's growth plans.
INCOME TAXES. No current or deferred income tax benefit has been provided in the Company's consolidated financial statements due to the Company's history of net operating losses for income tax purposes. At January 3, 1999, the Company has a net operating loss carryforward of approximately $6 million for income tax purposes that expires in 2008 through 2013, which may be used to reduce future income tax expense and tax liabilities.
NEW ACCOUNTING PRONOUNCEMENTS.
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," and in February 1998, FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits -- an amendment of FASB Statements No. 87, 88, and 106." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. 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. These standards are effective for financial statements issued for fiscal years beginning after December 15, 1997. Adoption of SFAS Nos. 130, 131 and 132 did not have a material impact on the Company's financial statement presentation or disclosures.
On April 3, 1998, the American Institute of Certified Public Accountants (AICPA) 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 12 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.
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. The Company has not yet determined the impact of adopting SFAS No. 133 on its financial statement presentations or disclosures.
LIQUIDITY AND CAPITAL RESOURCES
At January 3, 1999, cash and cash equivalents were $1.6 million, short-term investments were $.7 million, working capital was $.6 million, the Company had no long-term debt and stockholders' equity was $18.2 million. Short-term investments decreased $.5 million during Fiscal 1998, due primarily to cash used to finance the Fiscal 1998 purchases of property and equipment, including construction payables associated with the Cherry Hill diner which opened in late November 1997 and the purchase of computer systems.
The Company's principal future capital requirement is expected to be the development of restaurants. The Company is anticipating opening one to three Company-owned restaurants in 1999; however, the location of these sites has not been determined. Currently, the typical building, equipment (including smallwares) and site development cost of a new Silver Diner prototype is expected to be approximately $1.3 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 January 3, 1999, the Company did not have any restaurants under construction. 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 beginning in late 1999. Management is continuing to negotiate to obtain other sites throughout the Mid-Atlantic region.
Management believes that the Company's current capital resources and expected 1999 cash flow will be adequate to construct up to two units in 1999. 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 in 2000.
SEASONALITY AND QUARTERLY RESULTS
Although the Company's limited operating history, geographic concentration and small number of existing Silver Diners make future trends difficult to predict, Silver Diner restaurants have generally experienced higher average weekly net sales in the second and third quarters. The timing of new Silver Diner restaurant openings and extreme weather, especially during the winter months, may also affect sales and quarterly results. Accordingly, quarter-to- quarter comparisons of the Company's results of operations may not be meaningful, and results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year. The first fiscal quarter includes 16 weeks of operations as compared to 12, 12 and 12 or 13 weeks for each of the subsequent three-quarters, respectively. As a result, despite higher average weekly sales, net sales from comparable Silver Diners can be expected to be lower in the second quarter as compared to the first quarter of each year.
YEAR 2000 ISSUE AND COMPLIANCE
The Year 2000 issue is the result of software programs being written using two digits rather than four to define the applicable year, and some computers (and other date-sensitive equipment including credit card processing machines) may incorrectly recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions or engage in similar business activities both at the restaurant and corporate level.
The Company is continually evaluating its risk and the related costs of updating its computer hardware and software to properly process Year 2000 and later dates. Included in this process is the upgrade of its point of sale systems mentioned above which has been assessed by the vendor as being Year 2000 compliant. The Company has identified the other areas which may be potentially affected by the Year 2000 issue: credit card processing machines, and the Year 2000 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 Year 2000 issue to be between $10,000 and $50,000.
In the event that the Company's systems fail as a result of the Year 2000 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.
IMPACT OF INFLATION
Management does not believe that inflation has materially affected the Company's operating results. Substantial increases in costs and expenses, particularly food, supplies, labor and operating expenses, could have a significant impact on the Company's operating results to the extent that such increases cannot be passed along to customers.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS
SILVER DINER, INC. AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
To the Stockholders of Silver Diner, Inc.:
We have audited the accompanying consolidated balance sheets of Silver Diner, Inc. and subsidiaries (the "Company") as of January 3, 1999 and December 28, 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for years ended January 3, 1999, December 28, 1997 and December 29, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Silver Diner, Inc. and subsidiaries as of January 3, 1999 and December 28, 1997, and the results of their operations and their cash flows for the years ended January 3, 1999, December 28, 1997 and December 29, 1996 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, the Company changed its method of accounting for preopening costs during the year ended January 3, 1999 to conform with the American Institute of Certified Public Accountants Statement of Position No. 98-5.
/s/ Deloitte & Touche LLP
Washington, DC March 8, 1999
SILVER DINER, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
Accompanying notes are an integral part of these financial statements.
SILVER DINER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Accompanying notes are an integral part of these financial statements.
SILVER DINER, INC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Fiscal Years Ended January 3, 1999, December 28, 1997 and December 29, 1996
Accompanying notes are an integral part of these financial statements.
SILVER DINER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
Accompanying notes are an integral part of these financial statements.
SILVER DINER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(concluded)
Accompanying notes are an integral part of these financial statements.
SILVER DINER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 3, 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Silver Diner, Inc., (the Company) and its subsidiaries develop and operate the Silver Diner restaurant chain. At January 3, 1999, the Company owned and operated ten diners in the Washington/Baltimore metropolitan area and one in Cherry Hill, New Jersey.
Basis of Presentation
The consolidated financial statements include the accounts and operations of the Company and its subsidiaries, Silver Diner Development, Inc. (SDDI) and Silver Diner Limited Partnership (SDLP). All significant intercompany balances and transactions have been eliminated in consolidation.
During 1996, the Company acquired the minority interest in SDLP (see Note 3), liquidated SDLP into SDDI and began presenting results on a consolidated basis. Because SDLP's financial statements were previously combined with the Company's, the change to a consolidated basis did not have a material impact on the Company's financial statements.
Fiscal Year
The Company operates on a 52 or 53-week fiscal year that ends on the Sunday nearest December 31. The fiscal quarters for the Company consist of accounting periods of 16, 12, 12 and 12 or 13 weeks, respectively. Fiscal years 1998, 1997 and 1996 were comprised of 53, 52 and 52 weeks, respectively and ended on January 3, 1999, December 28, 1997 and December 29, 1996, respectively.
Cash and Cash Equivalents and Marketable Securities
All short-term investments are classified as available-for-sale. Those investments that are part of the Company's cash management portfolio with a remaining maturity of three months or less when purchased are reported as cash equivalents. The balance of the short-term investments are classified as marketable securities. At January 3, 1999, marketable securities consists of investment grade commercial paper. Cash and cash equivalents and marketable securities are stated at cost plus accrued interest, which approximates fair value.
Inventory
Inventory consists of food and supplies and is valued at the lower of cost (first-in, first-out) or market.
Property, Equipment and Improvements
Property, equipment and improvements are stated at cost. Buildings and leasehold improvements are depreciated over the shorter of the estimated useful lives of the assets or the respective anticipated lease period including renewal options, ranging from 20 to 35 years, with a provision for salvage value for the Rockville building. Furniture and equipment are depreciated over the estimated useful lives of the related assets, ranging from 2 to 10 years. Depreciation is computed using the straight-line method.
Change in Accounting Principle
On April 3, 1998, the American Institute of Certified Public Accountants (AICPA) 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. Had preopening costs been accounted for in accordance with SOP No. 98-5 in prior fiscal years, the Company's net loss and net loss per share would have been the proforma amounts indicated below:
Goodwill
Cost in excess of fair value of net assets acquired related to the acquisition of the minority interest in SDLP (see Note 3) is being amortized on a straight-line basis over 15 years.
Deferred Rent
Deferred rent is recorded and amortized to the extent the total minimum rental payments allocated to the current period on a straight-line basis exceed or are less than the cash payments required.
Income Taxes
The provision for income taxes is based on earnings reported in the financial statements. Deferred income taxes are provided for temporary differences between financial assets and liabilities and those reported for income tax purposes. Taxable losses reported by SDLP passed through to, and were reportable by, its partners.
Net Loss Per Common Share
Net loss per common share is computed based upon the weighted average number of common shares outstanding during the period. The Company implemented Statement of Financial Accounting Standards (SFAS) No. 128 which requires presentation of basic and diluted earnings per share amounts and a reconciliation of the respective calculations. The Company incurred a net loss for the years ended January 3, 1999, December 28, 1997 and December 29, 1996; therefore, all potential common shares are anitdilutive and not included in the calculation of diluted net loss per share.
Evaluation of Long-Lived Assets
The Company evaluates the potential impairment of long-lived assets, including goodwill, based upon projections of undiscounted cash flows whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. During 1998 and 1997, the Company wrote off $32,455 and $172,618, respectively, of deferred site costs including legal, design and development costs for potential restaurant sites that the Company is no longer pursuing or that the Company believes the probability of the site being procured is unlikely. During the fourth quarter of 1998, in connection with an evaluation of unit operational processes, menu engineering, and a comprehensive unit equipment assessment, the Company wrote off equipment with a net book value of $372,734, which is included in depreciation and amortization within the Fiscal Year 1998 Statement of Operations. Management believes no additional material impairment of these assets exists at January 3, 1999. The write-off resulted from the elimination of the operational usefulness for certain equipment and the identification of obsolete or no longer in service equipment.
Stock-Based Compensation
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, requires expanded disclosures of stock-based compensation arrangements with employees and encourages (but does not require) compensation cost to be measured based on fair value of the equity instrument awarded (see Note 12). The Company has chosen to continue to account for employee stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. Accordingly, compensation costs for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount the employee must pay to acquire the stock.
Reclassification
Certain prior year balances have been reclassified to conform to the 1998 presentation.
Use of Estimates
Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," and in February 1998, FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits -- an amendment of FASB Statements No. 87, 88, and 106." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. 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. These standards are effective for financial statements issued for fiscal years beginning after December 15, 1997. Adoption of SFAS Nos. 130, 131 and 132 did not have a material impact on the Company's financial statement presentation or disclosures.
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. The Company has not yet determined the impact of adopting SFAS No. 133 on its financial statement presentations or disclosures.
2. MERGER
On March 27, 1996, FTAC Transition Corporation, a wholly owned subsidiary of Food Trends Acquisition Corporation (FTAC) merged (the Merger) with and into SDDI with SDDI surviving as a wholly owned subsidiary of FTAC. In connection with the Merger, FTAC changed its name to Silver Diner Development, Inc., and in June 1996, to Silver Diner, Inc. Pursuant to the Merger agreement, each outstanding share of SDDI common stock converted into 33.339 shares of the common stock of FTAC. Upon consummation of the Merger, the stockholders of SDDI became the owners in the aggregate of approximately 57% of the outstanding common stock of FTAC and the directors and officers of SDDI became directors and officers of FTAC. Prior to the Merger, FTAC had no operating activities.
For accounting and financial reporting purposes, the Merger was treated as a recapitalization of SDDI and as an issuance of SDDI common shares for monetary assets and liabilities. The transaction was in essence a reverse acquisition with SDDI retaining the majority voting interest in the merged entity. The reverse acquisition is a business combination accounted for by the purchase method in which the continuing entity is not assumed to be the acquirer. The substance of the reverse acquisition is that of an initial public offering and the acquisition costs incurred by the Company have therefore been treated as a reduction in paid-in capital. The Company has reflected in its consolidated financial statements the assets, liabilities and equity of SDDI at their historical book values. Accordingly, the consolidated results of operations and financial position of the Company for periods and dates prior to the Merger are the consolidated historical results of operations and financial position of SDDI for such periods and dates. All historical shares of common stock and per share amounts for periods prior to the Merger have been retroactively adjusted to reflect the FTAC shares issued to the SDDI shareholders at the time of the Merger.
3. ACQUISITION OF MINORITY INTEREST IN SILVER DINER LIMITED PARTNERSHIP
On June 13, 1996, the Company completed its purchase of all of the limited partnership interests in SDLP from the original investors for $2,472,000 in cash and 84,000 warrants (New Warrants) to purchase common stock exercisable at $8.00 per share. The New Warrants were exercisable until the earlier of 30 days following a public offering of common stock or January 31, 1998. The offer was unanimously accepted by all of the limited partners. The acquisition was accounted for under the purchase method and the entire cost of the transaction, totaling $2.8 million, has been allocated to goodwill based on the Company's estimate that the fair value of the tangible assets acquired approximates book value. The goodwill is being amortized on a straight-line basis over 15 years and as a result, amortization expense related to goodwill totaled $183,751, $184,977 and $99,603 in fiscal years 1998, 1997 and 1996, respectively.
4. PROPERTY, EQUIPMENT AND IMPROVEMENTS
The major components of property, equipment and improvements are as follows:
Deferred lease costs represent brokerage commissions, legal fees and zoning related costs primarily related to leases on the land upon which the Company constructed its restaurants.
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
6. LONG-TERM OBLIGATIONS
In June, 1997 the Company was issued a $267,000 note payable to a bank to purchase a parcel of land from the Company's president (see Note 9). The principal of the note is due in June, 1999, and interest is paid monthly at an annual rate of 9.25%. The note is collateralized by the land purchased. The Company incurred $25,523 and $10,702 in interest expense related to the note for the years ended January 3, 1999 and December 28, 1997, respectively.
7. NOTES RECEIVABLE
During 1997, the Company issued notes receivable totaling $132,000 to an outside party which owns and maintains the jukeboxes in four Silver Diner units. The Company receives principal and interest payments on these notes on a monthly basis. The outstanding balance, classified as deposits and other, was $113,729 for 1998 and $123,035 for 1997. Interest is calculated at an annual rate of 9% and the principal payments are based on the amount of monthly cash flow generated by the jukeboxes. For the years ended January 3, 1999 and December 28, 1997, the Company has received $9,300 and $9,000 in principal payments, respectively and $11,000 and $6,000 in interest income, respectively.
8. PRIVATE PLACEMENT
On July 11, 1996, the Company completed a $8,250,000 private placement of common stock through the sale of 1.5 million shares at $5.50 per share. Approximately $2.5 million of the approximately $7.6 million net proceeds of the sale were used to replace the funds used for the acquisition of the minority interests in SDLP, and the remainder was available to fund expansion. In connection with the sale, the Company registered the shares with the Securities and Exchange Commission.
9. RELATED PARTY TRANSACTIONS
Robert Giaimo Development, Inc. ------------------------------- On June 17, 1997, the Company purchased from Robert Giaimo Development, Inc., a corporation wholly-owned by the president of the Company, an undivided parcel of land representing a parking lot adjacent to the Silver Diner restaurant in Potomac Mills, Virginia. The total cost of the land was $408,000. The Company received a loan from a bank in the amount of $267,000 to purchase the property. The note, bearing interest of 9.25% annually, is fully collateralized by the land and is due in June, 1999.
Silver Diner Potomac Mills, Inc. -------------------------------- The Company leases the diner at Potomac Mills pursuant to two lease agreements with Silver Diner Potomac Mills, Inc., a corporation wholly- owned by the president of the Company. The leases expire October 14, 2011 and include annual CPI adjustments to base rent and percentage rent based on gross receipts. The amount of property leased was reduced in 1997 by the land purchase described above. For the years ending January 3, 1999, December 28, 1997 and December 29, 1996, occupancy costs include $355,000, $350,000 and $389,000, respectively, in rent and related pass through costs associated with the leases.
Keyman Life Insurance --------------------- The Company is paying premiums for three life insurance policies owned respectively by two officers. In 1996, the Company recorded notes receivable from the two officers which were payable in full upon demand, were collateralized by the life insurance policies and were equal to the amount of premiums paid by the Company on such life insurance policies. The notes receivable were non-interest bearing. During 1997, the Company terminated these note receivable agreements and recorded the full amount of premiums paid in 1996 and 1997, less the cash surrender value of the policies, as expense. In 1998, the Company recorded the full amount of premiums paid in 1998, less the cash surrender value of the policies, as expense. As such, the Company recorded $92,000 and $123,000 of expense for these insurance policies for the years ended January 3, 1999 and December 28, 1997, respectively.
Due from Related Parties ------------------------ In connection with entering into an employment continuity agreement during 1998, the Company made a $100,000 loan to an officer of the Company. The note, bearing interest at a rate of 5.25%, is secured by the Company's common stock holding of the officer. The loan and accrued interest is to be repaid by the officer through the application of annual bonuses in the amount of $20,000, plus accrued interest, to the officer over a five year period.
10. COMMITMENTS AND CONTINGENCIES
Operating Leases ---------------- The Company leases restaurant land and buildings under various noncancellable operating leases with terms expiring at various dates through 2017. Certain of these leases are with related parties (see Note 9). These leases include minimum lease payments, reimbursable operating costs and real estate taxes. Also, certain of these leases contain renewal options for a maximum of 20 years beyond the original term, have provisions for additional rent based on sales at the individual locations and annual increases based on the consumer price index. The leases provide for certain rent holidays and escalations in payments over the lease terms. The effect of the holidays and escalations have been reflected in rent expense on a straight-line basis over the initial lease terms. The excess of expense over cash payments has been reflected in the consolidated financial statements as deferred rent.
Future minimum annual lease payments as of January 3, 1999 are:
1999 2,121,000 2000 2,204,000 2001 2,248,000 2002 2,290,000 2003 2,319,000 Thereafter 18,390,000
Rent expense under the leases for fiscal 1998, 1997 and 1996 was approximately $2,236,000, $2,033,000, and $1,622,000, respectively.
Legal Proceedings ----------------- On May 20, 1996, the Company was named as a defendant in a proceeding instituted in the Circuit Court for Prince George's County, Maryland, captioned Laura Reese v. Roger Richardson and Silver Diner Development, Inc. The plaintiff alleges that she was sexually assaulted by Roger Richardson, who was the general manager of the Laurel Silver Diner restaurant. Mr. Richardson was terminated promptly following the occurrence of the event in November 1994. Plaintiff sought recovery of $500,000 for each count. It was not clear if the counts were in the alternative or cumulative. The Company's insurance carrier was defending the claim with reservation of rights. The Company is insured up to $1,000,000 with respect to the above mentioned claims. In September 1998, the court granted summary judgement in favor of the Company as to all claims brought against them in this case. No final judgement can be entered at this time due to a Suggestion of Bankruptcy filed by Mr. Richardson, the co-defendant in the case, prior to the decision of the court to grant summary judgement on behalf of the Company.
Employment Continuity Agreements -------------------------------- SDDI has entered into employment continuity agreements with certain executives. The agreements are for one to five years in length and provide for minimum salary levels, as adjusted for minimum percentage increases and include incentive bonuses based on specified management goals. The aggregate minimum commitment for future salaries, excluding bonuses, as of January 3, 1999 is approximately $1.2 million.
11. INCOME TAXES
At January 3, 1999, the Company has a net operating loss carryforward of approximately $6 million for income tax purposes, that expires in 2008 through 2013, which may be used to reduce future income tax expense and tax liabilities. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts reported for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities are as follows:
As a result of the Company's history of cumulative losses, a valuation allowance equal to the calculated deferred tax benefit has been recorded at January 3, 1999 and December 28, 1997, respectively.
12. STOCK COMPENSATION PLANS
The Company has the following stock-based compensation plans:
1996 Employee Stock Purchase Plan
The 1996 Employee Stock Purchase Plan was adopted in September 1996 by the Company's board of directors and approved by shareholders in June 1997, and continues in effect for a term of 10 years. The Company is authorized to issue 300,000 shares under the plan to employees who customarily work at least 20 hours per week and more than five months in a calendar year, and who have been continuously employed by the Company for six months. Under the terms of the plan, employees can choose each quarter to have up to 10 percent of their base earnings (not to exceed $21,250 annually) withheld to purchase the Company's common stock. The purchase price of the stock is 85% of the lower of its beginning-of-quarter or end-of-quarter market price. The Company implemented the plan in August of 1998.
1996 Stock Option Plan
The 1996 Stock Option Plan was adopted by the Company's board of directors in September 1996 and approved by shareholders in June 1997, and continues in effect for 10 years. The plan provides for incentive stock options and nonqualified stock options. Options may be granted to any director, officer, key employee or outside consultant of the Company. Terms of the options are set by the Company's board of directors and range from seven to ten years, with the ability to accelerate vesting upon the Company achieving certain performance measurements, as predetermined by the Board. The Company has reserved 1,200,000 shares of common stock for issuance under the plan. A total of 1,143,500 options were granted under this plan during Fiscal 1998.
Restaurant Operating Partner Program
The Restaurant Operating Partner Program, which was adopted by the Company's board of directors in December 1996 for implementation in fiscal year 1997, provides for the general manager (Operating Partner) and the store manager team (Store Managers) of each of the Company's restaurants to share in the profits of their restaurant and to participate as equity owners of the Company. To participate in the program, employees who became Operating Partners prior to January 4, 1999 were required to make an initial investment in discounted Company common stock, which may not be sold or otherwise transferred by the Operating Partner for a period of five years from the date of purchase. Should the Operating Partner's employment terminate for any reason other than death or disability, the Company has the right to repurchase the stock from the Operating Partner for the amount of his or her investment. Employees who become Operating Partners beginning January 4, 1999 and thereafter are required to purchase 8,000 shares of Company common stock at market value and can potentially receive an annual award up to $10,000 of Common Stock, dependent upon achievement of performance criteria as established and evaluated by the Board. The plan also provides for annual restricted common stock awards to Store Managers; however, the Company has determined that no further stock awards will be provided to Store Managers subsequent to January 3, 1999. For employees who became Operating Partners and Store Managers prior to January 4, 1999, stock awarded at the end of the first year generally vests after the fourth anniversary of the award date. For each year thereafter, stock awards generally vest after the third anniversary of the award date. For employees who became Operating Partners beginning January 4, 1999 and thereafter, stock awarded at the end of the first year vests
after the fifth anniversary of the award date, stock awarded at the end of the second year vests after the fourth anniversary of the award date, and stock awarded in each subsequent year vests after the third anniversary of each award date. The stock awards under these plans are awarded at the discretion of the Company's Board of Directors. The Company has reserved 415,000 shares of common stock for issuance under the plan. During Fiscal 1998, 17,391 shares were issued under the plan.
1996 Consultant Stock Option and Stock Purchase Plan
The 1996 Consultant Stock Option and Stock Purchase Plan was adopted by the Company's board of directors in September 1996, and continues in effect for a term of 10 years. The plan provides for the Company's consultants to purchase (i) options to purchase shares of common stock in the Company or (ii) shares of common stock in the Company, and apply a portion of the fees otherwise payable to them by the Company to pay the purchase price for such options or common stock. Options under the plan are granted with an exercise price at the fair market value of the common stock on the first day of each calendar quarter, and are exercisable at any time in whole or in part for a period of three years from date of grant and vest immediately. The Company records the transactions at the fair value of the options granted to the consultant, using the Black-Sholes methodology. The Company has reserved 100,000 shares of common stock for issuance under the plan. During Fiscal 1998, no options were issued to consultants under this plan.
1996 Non-Employee Director Stock Option Plan
The 1996 Non-Employee Director Stock Option Plan was adopted by the Company's board of directors in September 1996 and approved by shareholders in June 1997, and continues in effect for 10 years. Under the plan, each non-employee director shall be granted an option to purchase 1,000 shares of the Company's common stock at fair market value on the first day of each calendar quarter. Options granted under the plan are exercisable at any time in whole or in part for a period of three years from date of grant, and vest immediately. The Company has reserved 150,000 shares of common stock for issuance under the plan. A total of 35,000 options were granted under this plan during Fiscal 1998.
Second Amended and Restated 1991 Stock Option Plan
The Second Amended and Restated 1991 Stock Option Plan for directors, officers, key employees and consultants provides for incentive and non- qualified stock options. The options generally expire 10 years from the date of grant and are exercisable over the period stated in each option. The board of directors determines the option price (not to be less than fair market value for incentive options) at the date of grant. Excluding the effect of the Merger (see Note 2), options under the plan are exercisable in full if the Company executes a merger agreement or consolidates with another company, if more than 50% of the Company's voting stock is acquired by another person or group in an other than capital stock transaction, or if Robert T. Giaimo ceases to be President of the Company. The plan expires in 2001. At January 3, 1999, no options were available for future grant under the plan.
Second Amended and Restated Earned Ownership Plan
The Second Amended and Restated Earned Ownership Plan for key employees provides for non-qualified stock options. The options generally expire 10 years from the date of grant, have an option price of $0.0003 and vest 20% at date of grant and 20% on each of the next four anniversaries following the grant date. Excluding the effect of the Merger (see Note 2), options under the plan are exercisable in full if the Company executes a merger agreement or consolidates with another company, if more than 50% of the Company's voting stock is acquired by another person or group in an other than capital stock transaction, or if Robert T. Giaimo ceases to be President of the Company. The plan has no fixed expiration date. At January 3, 1999, no options were available for future grant under the plan.
The Company applies APB Opinion No. 25 and related Interpretations in accounting for its plans. The compensation cost that has been charged against income under the Company's plans was approximately $10,000, $141,118 and $39,823 for the years ended January 3, 1999, December 28, 1997 and December 29, 1996, respectively. Had compensation cost been determined in accordance with FASB Statement No. 123, the Company's net loss and net loss per share would have been the pro forma amounts indicated below:
Options granted during the year ended January 3, 1999 were issued pursuant to the 1996 Non-Employee Director Stock Option Plan and the 1996 Stock Option Plan. The fair value of each option grant under these plans is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: dividend yield of 0.0% and expected volatility of 50%. In addition, in estimating the fair value of the options granted under the 1996 Non-Employee Director Stock Option Plan and the 1996 Stock Option Plan, the following weighted average assumptions were used: risk free interest rate of 5.5% and an expected life of 6 years.
Options granted during the year ended December 28, 1997 were issued pursuant to the 1996 Non-Employee Director Stock Option Plan, the 1996 Consultant Stock Option and Stock Purchase Plan and the 1996 Stock Option Plan. The fair value of each option grant under these plans is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: dividend yield of 0.0% and expected volatility of 49%. In addition, in estimating the fair value of the options granted under the 1996 Non-Employee Director Stock Option Plan and the 1996 Consultant Stock Option and Stock Purchase Plan, the following weighted average assumptions were used: risk free interest rate of 5.7% and an expected life of 2 years. The fair value of options granted under the Incentive Stock Option Plan was estimated assuming a risk free interest rate of 6.2% and an expected life of seven years.
All options granted during the year ended December 29, 1996 were issued pursuant to the 1996 Non-Employee Director Stock Option Plan. The fair value of each option grant under this plan is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: dividend yield of 0.0%, expected volatility of 27%, risk free interest rate of 6.2% and an expected life of two years.
A summary of the status of the Company's stock option plans as of January 3, 1999, December 28, 1997 and December 29, 1996 and changes during the years ended on these dates is:
The following table summarizes information about stock options outstanding at January 3, 1999:
13. NET LOSS PER COMMON SHARE
SFAS 128, "Earnings per Share", requires the disclosure of a reconciliation between the numerators and the denominators of the basic and diluted per-share computations for income from continuing operations. For the years ended January 3, 1999, December 28, 1997 and December 29, 1996, the Company incurred a net loss; therefore, all potential common shares are antidilutive and are not included in the calculation of the diluted net loss per common share. At January 3, 1999, December 28, 1997 and December 29, 1996, there were options to purchase 1,691,291, 583,327, and 689,220 shares, respectively at the weighted average price of $1.51, $2.55, and $2.52, respectively. These options are antidilutive and, thus, not included in the computation of diluted net loss per share for the years ended January 3, 1999, December 28, 1997 and December 29, 1996. In addition, at January 3, 1999 and December 28, 1997, there were 25,919 and 8,528, respectively, restricted shares of common stock outstanding. These shares, which were issued during 1997 and 1998 pursuant to the Restaurant Operating Partner Program, are antidilutive and are not included in the computation of net loss per share for the years ended January 3, 1999 and December 28, 1997.
14. EMPLOYEE BENEFIT PLAN
The Company sponsors a plan to provide retirement benefits under the provision of Section 401(k) of the Internal Revenue Code (the 401(k) Plan) for all employees who have completed one year of service. Company contributions may range from 0% to 100% of employee contributions, up to a maximum 6% of eligible employee compensation, as defined. Employees may elect to contribute up to 20% of their eligible compensation on a pretax basis. Benefits under the 401(k) Plan are limited to the assets of the 401(k) Plan. During the years ended January 3, 1999, December 28, 1997 and December 29, 1996, respectively, the Company made no contributions to the 401(k) Plan.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The information under "Election of Directors" in the Proxy Statement for the Annual Meeting of Shareholders in 1998 is incorporated herein by reference. Information concerning executive officers is set forth under "Executive Officers of the Registrant" in Part I.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The information under "Executive Compensation" in the Proxy Statement for the Annual Meeting of Shareholders in 1998 is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information under "Ownership of Common Stock by Directors and Executive Officers" and "Election of Directors" in the Proxy Statement for the Annual Meeting of Shareholders in 1999 is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information under "Election of Directors" and "Executive Compensation" in the Proxy Statement for the Annual Meeting of Shareholders in 1999 is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Lists of Documents Filed as Part of this Report
1. Financial Statements
2. Schedules
All Schedules are omitted because the required information is inapplicable or it is presented in the Consolidated Financial Statements or the notes thereto.
3. Exhibits
Exhibit Number Description of Document - -------------- -----------------------
3 Articles of incorporation and bylaws
3.1 Registrant's Certificate of Incorporation as amended by Certificates of Amendment incorporated by reference to Exhibit 3.01 of the registrant's Form 8-K dated March 27, 1996.
3.2 Registrant's Bylaws incorporated by reference to Exhibit 3.3 of the registrant's Form S-4 (File No. 33-98844).
9 Form of Voting and Lockup Agreement with respect to Stock Option Agreements incorporated by reference to Exhibit 9.01 of the registrant's Form 8-K dated March 27, 1996.
9.1 Form of SDDI Voting and Lockup Agreement among SDDI, Robert T. Giaimo and certain shareholders of SDDI, together with Schedule of executed Voting and Lockup Agreements incorporated by reference to Exhibit 9.04 of the registrant's Form 8-K dated March 27, 1996.
9.2 FTAC Voting and Lockup Agreement dated as of September 15, 1995 by and among the registrant and George A. Naddaff, Douglas M. Suliman, Jr., Ralph J. Guarino and Charles A. Cocotas incorporated by reference to Exhibit 9.05 of the registrant's Form 8-K dated March 27, 1996.
9.3 Assumption of SDDI Voting and Lockup Agreement, SDDI Affiliate Lockup Agreement and Stockholder Lockup Agreement dated March 27, 1996, pursuant to Section 5.14(c) of merger agreement by and among FTAC, FTAC Transition Corporation and SDDI, incorporated by reference to Exhibit 9.06 of the registrant's Form 8-K dated March 27, 1996.
9.4 GKN Voting and Lockup Agreement dated as of September 15, 1995 by and among the registrant, Robert T. Giaimo, GKN Securities Corp., and certain additional signatories thereto incorporated by reference to Exhibit 9.07 of the registrant's Form 8-K dated March 27, 1996.
10 Material Contracts
Material Contracts - Real Property
Rockville, Maryland
10.1 Lease Agreement between Federal Realty Investment Trust (Landlord) and SDLP (Tenant) dated July 13, 1988 as amended by Lease Modification dated August 17, 1988, Second Lease Modification dated February 3, 1989, Third Amendment to Lease dated January 20, 1993, and Fourth Lease Modification Agreement dated October 17, 1994 incorporated by reference to Exhibit 10.01 of the registrant's Form 8-K dated March 27, 1996.
Laurel, Maryland
10.2 Lease between CG Beltsville Limited Partnership (Landlord) and SDLP (Tenant) dated January 26, 1990, as amended by Letter Agreement dated October 28, 1995 incorporated by reference to Exhibit 10.02 of the registrant's Form 8-K dated March 27, 1996.
Dale City, Virginia (Potomac Mills)
10.3 Lease between RGDI (Landlord) and SDPMI (Tenant), dated June 10, 1991, as amended by First Amendment to Lease, dated October 14, 1991, as amended by Second Amendment to Lease dated October 30, 1995 incorporated by reference to Exhibit 10.03 of the registrant's Form 8-K dated March 27, 1996.
Parking Lot (parcel 11-B-1A), Dale City, Virginia (located adjacent to Silver Diner Restaurant at Potomac Mills)
10.4 Lease between Robert Giaimo Development, Inc. ("RGDI") (Landlord) and SDPMI (Tenant) dated May 27, 1992, as amended by Amendment to Lease dated October 30, 1995 incorporated by reference to Exhibit 10.04 of the registrant's Form 8-K dated March 27, 1996.
Towson, Maryland
10.5 Lease Agreement between Towson Town Center Associates (Landlord) and the registrant (Tenant) effective January 30, 1992 incorporated by reference to Exhibit 10.05 of the registrant's Form 8-K dated March 27, 1996.
Fair Lakes, Virginia (Fair Oaks)
10.6 Ground Lease Agreement between F.L. Promenade L.P. (Landlord) and the registrant (Tenant) dated July 12, 1994, as amended by First Amendment to Ground Lease Agreement dated February 15, 1995, and Second Amendment to Ground Lease Agreement dated April 4, 1995 incorporated by reference to Exhibit 10.06 of the registrant's Form 8-K dated March 27, 1996.
Tysons Corner, Virginia
10.7 Ground Lease between Lehndorff Tysons Joint Venture (Landlord) and the registrant (Tenant) dated December 29, 1994), as amended by First Amendment to Lease dated May 14, 1995 incorporated by reference to Exhibit 10.07 of the registrant's Form 8-K dated March 27, 1996.
Springfield, Virginia
10.8 Springfield Mall Lease between Franconia Associates (Landlord) and the registrant (Tenant) effective May 1, 1996 incorporated by reference to Exhibit 10.08 of the registrant's Form 8-K dated March 27, 1996.
Merrifield, Virginia
10.9 Agreement of Lease dated September 14, 1995 by and between 2909 Gallows LC (Landlord) and the registrant (Tenant) incorporated by reference to Exhibit 10.09 of the registrant's Form 8-K dated March 27, 1996.
Reston, Virginia
10.10 Purchase and Sale Agreement dated December 29, 1995 by and between Reston Land Corporation (Seller) and the registrant (Buyer) incorporated by reference to Exhibit 10.10 of the registrant's Form 8-K dated March 27, 1996.
Clarendon, Virginia
10.11 Lease dated February 12, 1996 between Wilson Limited Partnership (Landlord) and the registrant (Tenant) incorporated by reference to Exhibit 10.11 of the registrant's Form 8-K dated March 27, 1996.
Kendall, Florida
10.12 Purchase Agreement dated October 4, 1996 by and between Documentation Corp. And Bersin Development Corp. (Sellers) and the registrant (Buyer). Exhibit 10.12 to the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 1996, is incorporated herein by reference.
Cherry Hill, New Jersey
10.13 Lease Agreement dated September 30, 1996 by and between Cherry Hill Associates L.P. (Landlord) and the registrant (Tenant). Exhibit 10.13 to the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 1996 is incorporated herein by reference.
Material Contracts - Stock Plans
10.14 SDDI Second Amended and Restated 1991 Stock Option Plan, together with forms of incentive stock option agreement and non- qualified stock option agreement incorporated by reference to Exhibit 10.14 of the registrant's Form 8-K dated March 27, 1996.
10.15 SDDI Second Amended and Restated Earned Ownership Plan, together with form of non-qualified stock option agreement incorporated by reference to Exhibit 10.15 of the registrant's Form 8-K dated March 27, 1996.
10.16 Silver Diner, Inc. 1996 Non-employee Director Stock Option Plan together with form of stock option agreement incorporated by reference to Exhibit 4(a) of the registrant's Form S-8 filed December 20, 1996.
10.17 Silver Diner, Inc. 1996 Consultant Stock Option and Stock Purchase Plan together with form of stock option agreement, form of stock purchase agreement, form of election to purchase common stock and form of election to purchase options, incorporated by reference to Exhibit 4(b) of the registrant's Form S-8 filed December 20, 1996.
10.18 Certificate and Agreement of Participation, Silver Diner, Inc. Restaurant Operating Partner Program and Addenda incorporated by reference to Exhibit 4 of the registrant's Form S-8 filed February 14, 1997.
10.19 Silver Diner, Inc. Stock Option Plan together with form of Stock Option Agreement. Exhibit 10.19 to the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 1996, is incorporated herein by reference.
10.20 Silver Diner, Inc. Employee Stock Purchase Plan together with form of Subscription Agreement and Notice of Withdrawal. Exhibit 10.20 to the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 1996, is incorporated herein by reference.
Material Contracts - Agreements with Executive Officers/Directors
10.21 Letter Agreement dated December 31, 1995 between the registrant and Daniel Brannan regarding terms of employment, as amended by Letter Agreement dated March 26, 1996 incorporated by reference to Exhibit 10.18 of the registrant's Form 8-K dated March 27, 1996.
10.22 Letter Agreement dated December 4, 1996 between the registrant and Patrick Meskell regarding terms of employment, as amended by Letter Agreement dated March 26, 1996 incorporated by reference to Exhibit 10.19 of the registrant's Form 8-K dated March 27, 1996.
10.23 Founder's Employment Agreement dated August 28, 1995 by and between the registrant and Robert T. Giaimo incorporated by reference to Exhibit 10.20 of the registrant's Form 8-K dated March 27, 1996.
10.24 Assumption of Founder's Employment Agreement dated March 27, 1996 pursuant to Section 5.14(b) of merger agreement by and among FTAC, FTAC Transition Corporation and SDDI, incorporated by reference to Exhibit 10.21 of the registrant's Form 8-K dated March 27, 1996.
10.25 Indemnity Agreement dated August 29, 1995 by and between Robert T. Giaimo, as indemnitee, and the registrant incorporated by reference to Exhibit 10.22 of the registrant's Form 8-K dated March 27, 1996.
Material Contracts - Miscellaneous
10.26 Option to Purchase dated January 26, 1990 between CG Beltsville Limited Partnership (Optionor), and SDLP (Optionee) regarding land parcel on which the Silver Diner Restaurant in Laurel, Maryland, is located incorporated by reference to Exhibit 10.36 of the registrant's Form 8-K dated March 27, 1996.
10.27 Amendment No. 1 to the Stock Escrow Agreement dated as of March 26, 1996 among the Registrant, George A. Naddaff, Douglas M. Suliman, Jr., Ralph J. Guarino, Charles A. Cocotas and Continental Stock Transfer & Trust Company, together with letter dated March 27, 1996 from the Registrant to Continental Stock Transfer & Trust Company incorporated by reference to Exhibit 10.37 of the registrant's Form 8-K dated March 27, 1996.
10.28 Affiliate Warrant Exchange and Custodial Agreement dated September 15, 1996, by and among George A. Naddaff, Douglas M. Suliman, Jr. and Charles A. Cocotas, as Warrant Holders, SDDI and Douglas M. Suliman, Jr., as Custodian incorporated by reference to Exhibit 10.38 of the registrant's Form 8-K dated March 27, 1996.
10.29 Escrow Agreement dated as of February 1, 1996 by and between GKN Securities Corp., certain affiliates thereof, the SDDI and Arent Fox, as Escrow Agent incorporated by reference to Exhibit 10.39 of the registrant's Form 8-K dated March 27, 1996.
10.30 Option Agreement dated March 27, 1996 by and between RGDI and SDDI granting option to SDDI for the purchase of Potomac Mills real estate parcels incorporated by reference to Exhibit 10.34 of the registrant's Form 8-K dated March 27, 1996.
10.31 Form of Certificate and Agreement of Participation-Restaurant Operating Partner Program, as approved by the Board on December 15, 1998*
10.32 Form of Addendum to a Certain Certificate and Agreement of Participation in the Silver Diner, Inc. Restaurant Operating Partner Program (Version for 1997 Certificates issued after January 1, 1997), as approved by the Board on December 15, 1998*
10.33 Form of Addendum to a Certain Certificate and Agreement of Participation in the Silver Diner, Inc. Restaurant Operating Partner Program (Version for 1997 Certificates issued on January 1, 1997), as approved by the Board on December 15, 1998*
10.34 Silver Diner, Inc. Stock Option Plan (as amended March 4, 1998)*
10.35 Stock Option Plan Agreement between Silver Diner, Inc. and Robert T. Giaimo for grant of 150,000 Shares on December 15, 1998*
10.36 Form of Stock Option Plan Agreement between Silver Diner, Inc. and certain Executive Officers, Date of Grant: December 15, 1998, together with Performance Criteria for each of: Craig Kendall; Patrick Meskell; Timothy Cusick; and Ype Von Hengst*
10.37 Stock Option Plan Agreement between Silver Diner, Inc. and Robert T. Giaimo for grant of 400,000 Shares on December 15, 1998*
10.38 Form of Restated Stock Option Plan Agreement between Silver Diner, Inc. and Certain Executive Officers Granting Shares on December 29, 1997*
10.39 Employment Agreement dated November 9, 1998, between Silver Diner, Inc. and Ype Von Hengst, including Promissory Note in principal amount of $100,000*
10.40 Letter Agreement dated November 9, 1998 between Robert T. Giaimo and Silver Diner, Inc. Re: Founder's Employment Agreement*
10.41 1996 Non-Employee Director Stock Option Plan, as amended March 4, 1998 and incorporated by reference to registrant's Form S-8 dated July 21, 1998*
21 Subsidiaries of the Registrant. (a) Silver Diner Development, Inc., a Virginia corporation
23 Accountants Consents
23.1 Consent of Deloitte & Touche LLP.*
27 Financial Data Schedule
(b) Reports on Form 8-K
There were no Reports on Form 8-K filed during the last fiscal quarter of the period covered by this report.
* Filed herewith. All other exhibits have been previously filed as indicated.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Silver Diner, Inc.
By: Robert T. Giaimo --------------------- Robert T. Giaimo President and Chief Executive Officer April 5, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signatures Title Date /s/ Robert T. Giaimo President, Chief Executive April 5, 1999 - -------------------- Officer and Director Robert T. Giaimo
/s/ Craig Kendall Vice President, Finance April 5, 1999 - ----------------- Craig Kendall
/s/ Catherine Britton Director April 5, 1999 - --------------------- Catherine Britton
/s/ Ype Hengst Director April 5, 1999 - -------------- Ype Hengst
/s/ Edward H. Kaplan Director April 5, 1999 - -------------------- Edward H. Kaplan
/s/ George A. Naddaff Director April 5, 1999 - --------------------- George A. Naddaff
/s/ Louis P. Neeb Director April 5, 1999 - ----------------- Louis P. Neeb
/s/ Charles Steiner Director April 5, 1999 - ------------------- Charles Steiner
/s/ Douglas M. Suliman Director April 5, 1999 - ---------------------- Douglas M. Suliman