UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 4, 1998
Commission File No. 0-24982
SILVER DINER, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 04-3234411
- ------------------------------- ----------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
11806 Rockville Pike, Rockville, Maryland, 20852
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(Address of principal executive offices)
(301) 770-0333
- --------------------------------------------------------------------------------
(Registrant's telephone number)
SILVER DINER DEVELOPMENT, INC.
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(Former name, former address and former fiscal year, if changed
since the last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_].
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, $.00074 par value, outstanding as of November 1, 1998:
11,581,634 shares
SILVER DINER, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of October 4, 1998
and December 28, 1997 3
Consolidated Statements of Operations for the
Twelve and Forty Weeks Ended October 4, 1998
and October 5, 1997 4
Consolidated Statements of Cash Flows for the
Forty Weeks Ended October 4, 1998 and October 5, 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Signature 12
2
SILVER DINER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
October 4, December 28,
1998 1997
------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 956,106 $ 1,597,430
Marketable securities available for sale 1,681,064 1,222,083
Inventory 150,762 196,443
Prepaid expenses and other current assets 206,431 197,208
Preopening costs, net - 326,868
------------- -------------
Total current assets 2,994,363 3,540,032
Property, equipment and improvements, net 16,737,104 17,384,019
Goodwill, net 2,340,543 2,482,833
Deposits and other 230,177 239,881
------------- -------------
Total assets $ 22,302,187 $ 23,646,765
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,900,714 2,207,891
Note payable 267,000 -
------------- -------------
Total current liabilities 2,167,714 2,207,891
Note payable - 267,000
Deferred rent liability 1,093,584 1,050,667
------------- -------------
Total liabilities 3,261,298 3,525,558
Stockholders' equity:
Preferred stock, at October 4, 1998 and December 28, 1997, $.001
par value, 1,000,000 shares authorized, none issued - -
Common stock, $.00074 par value, 20,000,000 shares authorized; at
October 4, 1998, 11,581,634 shares issued and outstanding; at
December 28, 1997, 11,602,403 shares issued and outstanding 8,570 8,586
Additional paid-in capital 31,256,605 31,604,937
Unearned compensation (761,050) (1,168,798)
Accumulated deficit (11,463,236) (10,323,518)
------------- -------------
Total stockholders' equity $ 19,040,889 $ 20,121,207
------------- -------------
Total liabilities and stockholders' equity $ 22,302,187 23,646,765
============= =============
Accompanying notes are an integral part of these financial statements
3
SILVER DINER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Twelve Weeks Ended Forty Weeks Ended
October 4, October 5, October 4, October 5,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Net sales $ 6,742,567 $ 6,177,517 $21,584,985 $18,321,416
Restaurant costs and expenses
Cost of sales 1,883,213 1,774,266 6,012,755 5,271,664
Labor 2,238,560 1,967,689 7,314,246 6,128,552
Operating 1,157,495 1,065,543 3,858,627 3,090,788
Occupancy 652,824 617,237 2,172,277 1,924,284
Depreciation and amortization 291,664 399,949 988,207 1,059,364
----------- ----------- ----------- -----------
Total restaurant costs and expenses 6,223,756 5,824,684 20,346,112 17,474,652
----------- ----------- ----------- -----------
Restaurant operating income 518,811 352,833 1,238,873 846,764
General and administrative expenses 481,649 553,145 1,933,422 2,278,992
Depreciation and amortization 66,991 72,319 211,737 186,879
----------- ----------- ----------- -----------
Operating loss (29,829) (272,631) (906,286) (1,619,107)
Interest expense 5,765 5,763 21,270 7,272
Investment income (19,826) (53,773) (114,704) (244,137)
----------- ----------- ----------- -----------
Loss before cumulative effect of a change in
accounting principle (15,768) (224,621) (812,852) (1,382,242)
Cumulative effect of a change in accounting
principle - - (326,868) -
----------- ----------- ----------- ------------
NET LOSS $ (15,768) $ (224,621) $(1,139,720) $(1,382,242)
=========== =========== =========== ============
Basic loss per common share
Loss per common share before cumulative effect of
a change in accounting principle $ (0.00) $ (0.02) $ (0.07) $ (0.12)
Cumulative effect of a change in accounting
principle - - (0.03) -
----------- ----------- ----------- ------------
Net loss per common share $ (0.00) $ (0.02) $ (0.10) $ (0.12)
=========== =========== =========== ============
Weighted average shares outstanding 11,581,634 11,623,948 11,589,396 11,607,668
=========== =========== =========== ============
Diluted loss per common share
Loss per common share before cumulative effect of
a change in accounting principle $ (0.00) $ (0.02) $ (0.07) $ (0.12)
Cumulative effect of a change in accounting
principle - - (0.03) -
----------- ----------- ----------- ------------
Net loss per common share $ (0.00) $ (0.02) $ (0.10) $ (0.12)
=========== =========== =========== ============
Weighted average common shares outstanding 11,581,634 11,623,948 11,589,396 11,607,668
=========== =========== =========== ============
Accompanying notes are an integral part of these financial statements
4
SILVER DINER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Forty Weeks Ended
October 4, October 5,
1998 1997
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,139,720) $(1,382,242)
Adjustments to reconcile net loss to net cash provided by (used in)
operations
Cumulative effect of a change in accounting principle 326,868 -
Depreciation and amortization 1,199,944 1,246,243
Compensation expense - stock options and deferred compensation 94,400 72,800
Changes in operating assets and liabilities
Inventory 45,681 2,451
Prepaid expenses and other current assets (132,485) (48,185)
Preopening costs - (512,556)
Deposits and other 9,704 80,338
Accounts payable and accrued expenses 22,017 (53,923)
Deferred rent liability 42,917 214,664
----------- -----------
Net cash provided by (used in) operating activities 469,326 (380,410)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (739,932) (5,481,257)
Purchases of marketable securities available for sale (2,335,718) (2,960,250)
Maturities of available for sale securities 2,000,000 4,030,907
----------- -----------
Net cash used in investing activities (1,075,650) (4,410,600)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from sale of stock 12,500 130,929
Proceeds from notes payable - 267,000
Purchase of treasury stock (47,500) (32,500)
----------- -----------
Net cash (used in) provided by financing activities (35,000) 365,429
----------- -----------
Net decrease in cash and cash equivalents (641,324) (4,425,581)
Cash and cash equivalents at beginning of the period 1,597,430 8,285,533
----------- -----------
Cash and cash equivalents at end of the period $ 956,106 $ 3,859,952
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Construction payables included in accounts payable and accrued
expenses $ 21,411 $ -
=========== ===========
Interest paid $ 21,270 $ 7,272
=========== ===========
Accompanying notes are an integral part of these financial statements
5
SILVER DINER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE TWELVE AND FORTY WEEKS ENDED
OCTOBER 4, 1998 AND OCTOBER 5, 1997
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Silver Diner,
Inc., a Delaware Corporation, and its wholly owned subsidiary, Silver Diner
Development, Inc. ("SDDI"), (collectively the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the twelve and forty week periods ended
October 4, 1998 are not necessarily indicative of the results that may be
expected for the year ending January 3, 1999. All significant intercompany
balances and transactions have been eliminated in consolidation. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's annual report on Form 10-K for the year ended
December 28, 1997.
2. COMPREHENSIVE INCOME
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income", issued June 1997, requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income (loss) be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS No. 130
does not require a specific format for that financial statement but requires
that an enterprise display an amount representing total comprehensive income
(loss) for the period in that financial statement. SFAS No. 130 is effective
for fiscal years beginning after December 15, 1997. For the twelve weeks ended
October 4, 1998 and October 5, 1997, the Company recorded a comprehensive loss
of $15,768, and $224,621, respectively, and for the forty weeks ended October 4,
1998 and October 5, 1997, the Company recorded a comprehensive loss of
$1,139,720 and $1,382,242, respectively.
3. CHANGE IN ACCOUNTING PRINCIPLE
On April 3, 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) No. 98-5, "Reporting on the Cost of Start-Up
Activities". SOP No. 98-5 requires that costs associated with start-up
activities, such as opening a new facility, be expensed as incurred. This SOP
is effective for financial statements for fiscal years beginning after
December 15, 1998, however, early application is encouraged.
Prior to 1998, the Company capitalized preopening costs, including payroll,
employee recruitment and advertising, incurred in the restaurant start-up and
training period prior to the opening of each restaurant, and amortized these
costs over twelve months from the date of opening. The Company elected early
application of SOP 98-5 during the first quarter of 1998. As a result of the
early application, all preopening costs capitalized as of December 28, 1997 were
expensed and recorded as a cumulative effect of a change in accounting principle
in the first quarter of 1998.
4. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997 and February 1998, the Financial Accounting Standards Board (FASB)
issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", and SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits -- an amendment of FASB Statements No. 87, 88, and 106",
respectively. SFAS No. 131 establishes standards for the way public business
enterprises report information about operating segments and the related
disclosures about products and services, geographic areas and major customers.
SFAS No. 132 revises employers' disclosures about pension and other
postretirement benefit plans. Adoption of SFAS No. 131 and SFAS No. 132 does
not have a material impact on the Company's financial
6
statement presentation or disclosures. Both standards are effective for
financial statements issued for fiscal years beginning after December 15, 1997.
In June, 1998 the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes accounting and
reporting standards for derivative instruments. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. This statement
is effective for all fiscal quarters of fiscal years beginning after June 15,
1999. Adoption of SFAS No. 133 will not have a material impact on the Company's
financial statement presentations or disclosures.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING DISCLOSURE
Certain information included herein contains statements that are forward-
looking, such as statements relating to plans for future expansion and other
business development activities as well as operating costs, capital spending,
financial sources and the effects of competition. Such forward-looking
information is subject to changes and variations which are not reasonably
predictable and which could significantly affect future results. Accordingly,
such results may differ from those expressed in any forward-looking statements
made by or on behalf of the Company. These changes and variations which could
significantly affect future results include, but are not limited to, those
relating to development and construction activities, including delays in opening
new Diners, acceptance of the Silver Diner concept, the quality of the Company's
restaurant operations, the adequacy of operating and management controls,
dependence on discretionary consumer spending, dependence on existing
management, inflation and general economic conditions, and changes in federal or
state laws or regulations.
GENERAL
The Company currently operates ten Silver Diners in the Washington/
Baltimore metropolitan area and one in Cherry Hill, New Jersey. Currently, there
are no Silver Diners under construction. The Company is pursuing additional
locations in the Philadelphia/Southern New Jersey market and throughout the Mid-
Atlantic region for restaurant openings commencing in late 1999. Longer term,
the Company plans to expand the Silver Diner chain nationwide through additional
openings of Company-owned restaurants and possibly through the development of
franchise or joint venture relationships.
7
RESULTS OF OPERATIONS
The following table sets forth the percentage of net sales of items included
in the consolidated condensed statements of operations for the periods
indicated:
Twelve Weeks Ended Forty Weeks Ended
------------------------------ -------------------------------
October 4, October 5, October 4, October 5,
1998 1997 1998 1997
------------- -------------- -------------- --------------
Net sales 100.0% 100.0% 100.0% 100.0%
Restaurant costs and expenses:
Cost of sales 27.9% 28.7% 27.9% 28.8%
Labor 33.2% 31.9% 33.9% 33.4%
Operating 17.2% 17.2% 17.8% 16.9%
------------- -------------- -------------- --------------
Restaurant operating margin 21.7% 22.2% 20.4% 20.9%
Occupancy 9.7% 10.0% 10.1% 10.5%
Depreciation and amortization 4.3% 6.5% 4.6% 5.8%
------------- -------------- -------------- --------------
Restaurant operating income 7.7% 5.7% 5.7% 4.6%
General and administrative expenses 7.1% 9.0% 8.9% 12.4%
Depreciation and amortization 1.0% 1.1% 1.0% 1.0%
------------- -------------- -------------- --------------
Operating loss (0.4%) (4.4%) (4.2%) (8.8%)
Interest expense 0.1% 0.0% 0.1% 0.0%
Investment income (0.3%) (0.8%) (0.5%) (1.3%)
------------- -------------- -------------- --------------
Loss before cumulative effect of a change in
accounting principle (0.2%) (3.6%) (3.8%) (7.5%)
Cumulative effect of a change in accounting principle 0.0% 0.0% (1.5%) 0.0%
------------- -------------- -------------- --------------
Net Loss (0.2%) (3.6%) (5.3%) (7.5%)
============= ============== ============== ==============
Net sales for the twelve weeks ended October 4, 1998 ("Third Quarter 1998")
increased $0.6 million, or 9%, to $6,742,567 compared to $6,177,517 for the 12
weeks ended October 5, 1997 ("Third Quarter 1997"). Year-to-date, net sales for
the forty weeks ended October 5, 1998 ("1998 YTD Period") increased
$3.3 million, or 18%, to 21,584,985, compared to $18,321,416 for the forty weeks
ended October 5, 1997 ("1997 YTD Period"). The increase for Third Quarter 1998
was attributable to sales generated by one new restaurant opened in each of the
second and fourth quarters of 1997 in Reston, Virginia, and Cherry Hill, New
Jersey, respectively, adding $0.8 million to net sales for the current quarter.
The increase for the 1998 YTD Period was attributable to sales generated by four
new restaurants opened since February 1997 in Merrifield, Springfield and
Reston, Virginia, and Cherry Hill, New Jersey, adding $1.5 million to net sales.
8
Comparable Silver Diner sales (sales for Silver Diners open throughout both
periods being compared, excluding the initial six months of operations during
which sales are typically higher than normal) for the 1998 Third Quarter
increased 2.8% compared to the third quarter of 1997 and for the 1998 YTD Period
increased 0.2% compared to the 1997 YTD Period. The increase in comparable sales
for the quarter and year to date period was the result of the Company's ongoing
110% guarantee initiative and direct coupon mailing which ended during Third
Quarter 1997. The 110% guarantee initiative calls for a 10% discount for a
patron's current meal and a coupon for a free entree if not completely satisfied
with the meal, while the summer coupon direct mailing involved distributing
discount entree coupons. These two initiatives significantly increased customer
traffic and resulted in the increased sales compared to Third Quarter 1997. On a
year to date basis, these increases were offset by decreases in comparable store
sales in the Company's Tysons Corner and Fair Oaks diners in northern Virginia,
whose sales have been impacted by the opening of three new Silver Diners in that
area since February 1997.
Cost of sales, primarily food and beverage cost, decreased to 27.9% of net
sales for Third Quarter 1998, compared to 28.7% of net sales for Third Quarter
1997. Cost of sales for the 1998 YTD Period were 27.9% of net sales, compared
to 28.8% of net sales for the 1997 YTD Period. The decrease from the Third
Quarter 1997 was attributable to the maturation of new stores opened during the
second quarter of 1997, specifically, the Springfield and Reston diners, which
were opened in April and June of 1997, and improvements in kitchen cost
controls. The development of these stores, along with the maturation of the
Merrifield and Clarendon diners, opened in February 1997 and December 1996,
respectively, and the operational improvements contributed to the decrease in
cost of sales for the forty weeks ended October 4, 1998.
Labor, which consists of restaurant management and hourly employee wages
and bonuses, payroll taxes, workers' compensation insurance, group health
insurance and other benefits, increased to 33.2% of net sales in Third Quarter
1998 compared to 31.9% of net sales for Second Quarter 1997. Labor expense
increased over Third Quarter 1997 due to the increase in the minimum wage in
October 1997 and an extremely competitive labor market. For the 1998 YTD Period,
labor expense as a percentage of sales increased from 33.4% in the 1997 YTD
Period to 33.9%. In addition to the factors mentioned above, labor expense as a
percentage of sales increased in the 1998 YTD Period due to the increase in
training and staffing required by the 110% guarantee and coupon mailing
initiatives in the second quarter of 1998.
Operating expenses, which consist of all restaurant operating costs other
than cost of goods, labor and occupancy, including supplies, utilities, repairs
and maintenance and advertising, was 17.2% of net sales for Third Quarter 1998,
compared to 17.2% for Third Quarter 1997. Operating expenses remained high
during the quarter due to the cost of redemptions of the 110% guarantee coupons
and the discount coupons which amounted to 1.4% of net sales. For the 1998 YTD
Period, operating expenses increased from 16.9% in 1997 to 17.8%. Operating
expenses in the year-to-date period were adversely affected by the increase in
mailing, advertising, and coupon redemption costs related to the 110% guarantee
and coupon mailing campaigns; the cost associated with these activities amounted
to $294,000, or 1.4% of net sales for the 1998 YTD Period. For the remainder to
1998, the Company anticipates experiencing ongoing sales improvements from
customers returning to the Silver Diner as a result of the couponing and the
110% guarantee initiative.
Occupancy, which is composed primarily of rent, property taxes and property
insurance, decreased to 9.7% for Third Quarter 1998 compared to 10.0% in Third
Quarter 1997. For the 1998 YTD Period, occupancy decreased to 10.1% of net
sales, compared to 10.5% in the 1997 YTD Period. The decrease in both the
quarterly and year to date periods was a result of the lower occupancy costs in
the new prototype units (the last five restaurants built) and the fact that the
Company incurs no lease expense for the Reston diner as result of the Company's
purchase of the land on which the unit was constructed. In addition, the
decrease in occupancy expense as a percentage of net sales for the quarter and
year to date period was driven by the improvements in comparable store sales
mentioned previously.
Restaurant depreciation and amortization decreased $108,285 for Third
Quarter 1998 compared to Third Quarter 1997 and $71,157 for 1998 YTD Period
compared to 1997 YTD Period. Both the decrease for the second quarter and the
increase for the year-to-date period were due to the additional property and
equipment depreciation for new stores, offset by the Company's change in its
method for accounting for preopening expenses. During First Quarter 1998, the
Company elected early adoption of SOP No. 98-5, "Reporting on the Costs of
Start-Up Activities". SOP No. 98-5 requires that costs associated with start-up
activities, such as opening a new restaurant, be expensed as incurred. Prior to
First Quarter 1998, the Company had capitalized all preopening costs and
9
amortized these costs over a twelve month period. As a result of the application
of SOP No. 98-5, all preopening costs capitalized as of December 28, 1997 have
been expensed and recorded as a cumulative effect of a change in accounting
principle for 1998 YTD Period. Due to the change in accounting treatment,
preopening amortization expense was zero for the twelve and forty weeks ended
October 4, 1998, compared to $130,852 for Third Quarter 1997 and $303,396 for
1997 YTD Period.
General and administrative expenses include the cost of corporate
administrative personnel and functions, multi-unit management and restaurant
management recruitment and initial training. Such expenses were $481,649 for
Third Quarter 1998, a decrease of $71,496, or 13%, compared to Third Quarter
1997. As a percentage of net sales, general and administrative expenses
decreased to 7.1% for Third Quarter 1998 from 9.0% for Third Quarter 1997. The
decrease was primarily related to a partial reversal of an accrual relating to
the executive incentive bonus plan which resulted from a change in estimate
during Third Quarter 1998. General and administrative expenses for 1998 YTD
Period decreased $345,570, or 15.0% from $2,278,992 in 1997 YTD Period. In
addition to the factors noted above, this decrease was also a result of lower
restaurant manager training expenses and reductions in professional fees
associated with the preparation of the Company's first annual report, 10-K and
annual proxy statement. During the 1997 YTD Period, the Company also incurred
the costs of implementing store management compensation and stock option and
purchase plans. The Company's administrative overhead as a percentage of net
sales remains above the industry average primarily due to the cost of the
corporate management team required to support the Company's intermediate and
long-term growth plans. The Company expects general and administrative expenses
as a percentage of net sales to remain lower than 1997 for the remainder of
1998.
The Company earned $19,826 in investment income for Third Quarter 1998,
compared to investment income of $53,773 for Third Quarter 1997. Investment
income for 1998 YTD Period was $114,704 compared to $244,137 in 1997 YTD period.
The decrease for both the quarterly and year-to-date periods is a direct result
of cash being used to construct and open five Silver Diners since December 1996.
Interest expense was $5,765 for Third Quarter 1998 and $5,763 for Third Quarter
1997. Issuance of debt of debt in the second quarter of 1997 caused interest
expense to increase from $7,272 in 1997 YTD period to $21,270 for the forty
weeks ended October 4, 1998.
Net loss for Third Quarter 1998 was $15,768, or $0.00 per share on a basic
and diluted basis, compared to $224,621, or $0.02 per share on a basic and
diluted basis, for Third Quarter 1997. Net loss before cumulative effect of a
change in accounting principle for 1998 YTD Period was $812,852, or $0.07 per
share on a basic and diluted basis, compared to $1,382,242, or $0.12 per share
on a basic and diluted basis, for 1997 YTD Period. Net loss for the forty weeks
ended October 4, 1998 was $1,139,720, or $0.10 per share on a basic and diluted
basis, compared to $1,382,242, or $0.12 per share on a basic and diluted basis
for the forty weeks ended October 5, 1998. Management expects that the Company
will continue incurring losses until sufficient revenue is generated from new
units to absorb start-up expenses and the general and administrative costs
associated with developing and running the Company.
Liquidity and Capital Resources
At October 4, 1998, cash and cash equivalents were approximately
$1.0 million, short-term investments were approximately $1.7 million, working
capital was approximately $0.8 million, the Company had $0.3 million of long-
term debt and stockholders' equity was approximately $19.0 million. Cash and
cash equivalents decreased $0.6 million during the 1998 YTD Period, due
primarily to cash being used to make the final payment on the real estate for
the Reston diner and to make a payment on the construction of the Cherry Hill
diner.
The Company's principal future capital requirement is expected to be the
development of restaurants. The Company does not plan to open any stores in
1998 and, as such, the Company did not have any restaurants under construction
at October 4, 1998. The Company is anticipating opening either one or two
Company-owned restaurants in the third or fourth quarter of 1999, however, the
locations of these sites has not been determined. Currently, the Company is
negotiating for sites throughout the Mid-Atlantic region, which includes the
area from Richmond, Virginia to Northern New Jersey, primarily along the
Interstate 95 corridor. In addition to capital expenditures for the upkeep of
existing restaurants, the principal capital requirements for the remainder of
1998 will include approximately $300,000 for the upgrade of the Company's point
of sale and back office restaurant information systems.
10
Management believes that the Company's current capital resources and
expected 1998 cash flow will be adequate to construct at least one unit in 1999.
Additional financing will be required to finance the remainder of 1999 growth.
The Company's lead bank has preliminarily indicated a willingness to extend a $3
million line of credit which, if obtained, would be sufficient to fund 1999
growth. Should the Company be unable to raise sufficient capital in 1998 to meet
its 1999 requirements, management may be forced to limit 1999 growth.
Year 2000 Issue and Compliance
The Year 2000 Issue is the result of software programs being written using
two digits rather than four to define the applicable year, and some computers
(and other date-sensitive equipment including credit card processing machines)
may incorrectly recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions or engage in similar business activities both at the
restaurant and corporate level.
The Company is in the process of evaluating its risk and the related costs
of updating its computer hardware and software to properly process year 2000 and
later dates. 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 has not yet determined the
cost related to the Year 2000 Issue.
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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The action noted in the Company's annual report on Form 10-K for the year
ended December 28, 1997 in regard to Laura Reese v. Roger Richardson and
Silver Diner Development, Inc. is still pending and no major changes have
developed.
11
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SILVER DINER, INC.
-----------------------------------------------
(Registrant)
November 18, 1998 /s/ Daniel P. Brannan
- -------------------------- -----------------------------------------------
Date Daniel P. Brannan
Vice President, Finance
(Duly Authorized Officer and Principal Financial
Officer)
November 18, 1998 /s/ Thomas A. McHale
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Date Thomas A. McHale
Controller
(Principal Accounting Officer)
12