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The following is an excerpt from a 10-K SEC Filing, filed by SILVER DINER INC /DE/ on 4/2/2001.
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SILVER DINER INC /DE/ - 10-K - 20010402 - RESULTS_OF_OPERATIONS

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:

                                                                  Fiscal Years Ended
                                                     ------------------------------------------
                                                      December 31,    January 2,      January 3,
                                                         2000           2000            1999
                                                     ------------   ------------     ----------
Net sales                                                100.0%           100.0%          100.0%

   Restaurant costs and expenses                         101.1%            91.7%           94.6%
                                                     ---------      -----------      ----------

     Restaurant operating income                          (1.1)%            8.3%            5.4%

General and administrative expenses                       10.7%            10.7%           10.2%
Depreciation and amortization                              1.2%             1.2%            0.9%
Write off of abandoned site costs                          0.3%               -             0.1%
                                                     ---------      -----------      ----------

     Operating loss                                      (13.3%)           (3.6%)          (5.8%)

Interest expense                                           0.3%             0.1%            0.0%
Investment income, net                                    (0.3%)           (0.3%)          (0.5%)
                                                     ---------      -----------      ----------

   Loss before cumulative effect of a change in
     accounting principle                                (13.3%)           (3.4%)          (5.3%)

   Cumulative effect of a change in accounting
     principle                                               -                -            (1.2%)
                                                     ---------      -----------      ----------

   Net loss                                              (13.3%)           (3.4%)          (6.5%)
                                                     =========      ===========      ==========

Year Ended December 31, 2000 Compared to the Year Ended January 2, 2000

Net sales for the fiscal year ended December 31, 2000 ("Fiscal 2000") of $31,559,535 increased $2,402,169 or 8.2% compared to the fiscal year ended January 2, 2000 ("Fiscal 1999"). Substantially all of the increased sales were directly attributable to new unit openings in Virginia Beach, Virginia and Gaithersburg, Maryland ("New Stores").

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) were flat compared to Fiscal 1999. Same store customer counts were down 5.2%, while average guest check increased 5.8%. The Company also experienced a 6.5% decrease in take-out sales further eroding the gains achieved in average check. The Company believes the reversal of nine consecutive quarters of same store sales increases was primarily caused by three factors. First, the more contemporary menu implemented in April 2000, did not fully meet the expectations of our customers; second, the price action taken at the time of the new menu implementation met some consumer resistance and lastly, the marketing activities employed in 2000 were not adequate to move the business above the record levels achieved in Fiscal 1999.

Cost of sales, consisting of food and beverage costs, increased from 26.1% of net sales in Fiscal 1999 to 26.7% of net sales in Fiscal 2000. The increase of 0.6% was equally attributable to increased costs in the existing stores and higher costs in the New Stores related to slightly different menu offerings as well as the initial cost escalation normally associated with new unit openings.

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Labor, which consists of restaurant management and hourly employee wages and bonuses, payroll taxes, workers' compensation insurance, group health insurance and other benefits increased 0.9% to 34.7% of net sales for Fiscal 2000. The increase was largely due to the overstaffing of the New Stores during the first several periods of operation.

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 0.7% to 18.7% of net sales for Fiscal 2000, compared to 18.0% for Fiscal 1999. Increased supply, utility, maintenance costs credit card fees and advertising expenses accounted for the majority of the increase. The New Stores had only a minimal impact on these expenses.

Occupancy, which is composed primarily of rent, property taxes and property insurance, increased $175,369 for Fiscal 2000 compared to Fiscal 1999. As a percentage of net sales occupancy expenses decreased 0.2% in Fiscal 2000 to 9.6% compared to 9.8% in Fiscal 1999. Nearly all of the dollar increase was attributable to the New Stores and was offset by a $59,311 rent refund, relating to a partial taking of the parking lot under the right of eminent domain at the Springfield location. The Company does not anticipate a significant negative impact on sales as a result of the partial taking of the parking lot

Restaurant depreciation and amortization increased $131,849 to $1,304,246 for Fiscal 2000. Approximately two-thirds of the increase was the result of depreciation associated with the addition of the New Stores. The remainder of the increase was the product of upgrading of our existing asset base.

Preopening expenses of $318,282 were principally labor costs (wages, taxes and benefits) incurred prior to opening the New Stores.

The Company periodically evaluates its' asset base for potential impairment of long-lived assets, including goodwill, utilizing projections of undiscounted cashflows in order to determine the future recoverability of an asset or group of assets. Based on that evaluation, the trends of operations of two restaurants indicated the undiscounted cashflows from their operations would be less than the net book value of the assets of the two restaurants. As a result, during the fourth quarter of Fiscal 2000 the Company recorded an impairment loss of $1,980,116. Management believes that it has taken all of the appropriate actions regarding the carrying value of its' assets and that no further material impairment exists at this time.

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 $3,379,958 for Fiscal 2000, an increase of $246,885, or 7.9%, compared to Fiscal 1999. The dollar increase in expenses was largely due to the recruitment and hiring of a vice president of operations coupled with a re-alignment of field management personnel and the recruitment, hiring and training of store management personnel to staff the New Stores. As a percentage of net sales, general and administrative expenses remained flat at 10.7% for Fiscal 2000. The Company's administrative overhead as a percentage of net sales remains above the industry average due to the cost of the corporate management team required to support the Company's growth plans, the materialization of which has been slower than anticipated.

The $102,012 write-off of abandoned site costs related to legal, architectural and design costs for the Pentagon Row site in Arlington, Virginia, which Management has decided not to construct.

The Company earned $91,759 in investment income for Fiscal 2000, compared to investment income of $100,917 for Fiscal 1999. The decrease is primarily a result of reduced levels of cash available for investment, stemming from the construction of the New Stores. Interest expense was $85,963 for Fiscal 2000 and $23,826 for Fiscal 1999. The increase in interest expense was entirely attributable to the increase in funds utilized under the Company's line of credit.

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Net loss for Fiscal 2000 was $4,195,564 or $0.36 per share, compared to a net loss of $971,879 or $0.08 per share in Fiscal 1999. Excluding the impact of the charge for impairment of long-lived assets, the net loss for Fiscal 2000 was $2,215,448 or $0.19 per share. Weighted average shares outstanding remained essentially unchanged in 2000 versus 1999. Management expects that the Company will continue to incur quarterly losses until such time as revenue generation from increased market penetration operating efficiencies are sufficient to absorb new unit start-up costs and the increased general and administrative infrastructure costs currently in place.

Year Ended January 2, 2000 Compared to the Year Ended January 3, 1999

Net sales for the fiscal year ended January 2, 2000 ("Fiscal 1999") of $29,157,366 increased approximately $600,000 compared to the fiscal year ended January 3, 1999 ("Fiscal 1998"). Fiscal 1998 included 53 weeks, adding approximately $591,000 to net sales. On a 52-week comparative basis, total sales increased approximately $1.2 million or 4.2%.

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 5.8% (3.9% inclusive of the Fiscal 1998 53/rd/ week sales). Same store customer counts were up 2.8%, while average guest check increased 2.2%. 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 continued to improve throughout Fiscal 1999.

Average unit sales increased $102,818 or 4.2% from $2,547,852 in Fiscal 1998 to $2,650,670 in Fiscal 1999; primarily as a result of the increased customer traffic and increased average check driven by a carefully focused marketing campaign and supported by operational execution.

Cost of sales, consisting primarily of food and beverage costs, decreased from 27.7% of net sales in Fiscal 1998 to 26.1% of net sales in Fiscal 1999 due primarily to continued management focus on cost control, purchasing agreements, refinement of food preparation and delivery systems and less extensive seasonal menu changes.

Labor, which consists of restaurant management and hourly employee wages and bonuses, payroll taxes, workers' compensation insurance, group health insurance and other benefits increased 0.7% to 33.8% of net sales for Fiscal 1999, resulting primarily from a highly competitive labor market causing upward pressure on average wage rates and continued cost escalation of health benefits.

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 decreased .3% to 18.0% of net sales for Fiscal 1999, compared to 18.3% for Fiscal 1998. Reduced supply and maintenance costs accounted for savings of 0.9% and was offset by an increase of 0.6% in advertising and promotional costs.

Occupancy, which is composed primarily of rent, property taxes and property insurance, increased $89,003 for Fiscal 1999 compared to Fiscal 1998. As a percentage of net sales occupancy expenses increased 0.1% in Fiscal 1999 to 9.8% compared to 9.7% in Fiscal 1998. Additionally, the Company owns the Reston, Virginia site and consequently does not absorb any rent expense on this location.

Restaurant depreciation and amortization decreased $475,737 to $1,172,397 for Fiscal 1999. The decrease was primarily the result of depreciation associated 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.

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 $3,133,073 for Fiscal 1999, an increase of $211,774, or 7.2%, compared to Fiscal 1998. As a percentage of net sales, general and administrative expenses increased to 10.7% for Fiscal 1999 from 10.2% for Fiscal 1998. The increase was principally related to higher legal and accounting fees during the first sixteen weeks of Fiscal 1999, coupled with the

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continued cost escalation of recruiting and training restaurant management talent. 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 earned $100,917 in investment income for Fiscal 1999, compared to investment income of $151,967 for Fiscal 1998. The decrease is primarily a result of reduced levels of cash available for investment. Interest expense was $23,826 for Fiscal 1999 and $40,639 for Fiscal 1998.

Net loss for Fiscal 1999 was $971,879 or $0.08 per share, compared to a loss of $1,883,306 or $0.16 per share in Fiscal 1998. Weighted average shares outstanding remained essentially unchanged in 1999 versus 1998. Management expects that the Company will continue to incur losses until such time as revenue generation from increased market penetration and operating efficiencies are 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.

New Accounting Pronouncements

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, 2000. Adoption of SFAS No. 133 is not expected to have a material impact on the Company's financial statement presentation or disclosures.

In April 2000, the FASB issued FASB Interpretation ("FIN") No. 44, "Accounting for Certain Transactions Involving Stock Compensation and Interpretation of APB No. 25", which is effective July 1, 2000, except for certain conclusions which cover specific events after either December 15, 1998 or January 12, 2000. FIN No. 44 clarifies the application of APB No. 25 related to modifications of stock options, changes in grantee status, and options issued on a business combination, among other things. The adoption of FIN No. 44 is not expected to have a significant impact on the Company's financial position or results of operations.

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