SMITH & WOLLENSKY RESTAURANT GROUP INC - 10-K Annual Report

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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934. (FEE REQUIRED)

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
OR

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ______________ TO ______________

COMMISSION FILE NO. 333-57518

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THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.

(Exact name of registrant as specified in its charter)

DELAWARE 58 2350980
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)

1114 FIRST AVENUE, NEW YORK, NY (ZIP CODE)
(Address of principal executive offices) 10021

212-838-2061
(Registrant's telephone number, including area code)

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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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

As of March 26, 2002, the aggregate market value of voting stock held by
non-affiliates of the registrant was $35,796,458.

As of March 26, 2002, the registrant had 9,354,447 Shares of its Common
Stock, $.01 par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

(1) Portions of the registrant's definitive proxy statement (to be filed
pursuant to Regulation 14A) for the 2002 Annual Meeting of Stockholders (the
"Proxy Statement") are incorporated by reference into Part III hereof.

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PART I

ITEM 1. BUSINESS

GENERAL

The Smith & Wollensky Restaurant Group Inc. (the "Company") was incorporated
as a Delaware corporation in October 1997 as a result of a merger with The New
York Restaurant Group, LLC, its predecessor limited liability company.

The Company is a developer, owner and operator of high-end, high-volume
restaurants in the United States. Our core concept is Smith & Wollensky, a
classic American restaurant. Management believes Smith & Wollensky is a
recognized brand name in the upscale segment of the restaurant industry. At
December 31, 2001, the Company operated 14 restaurants, nine of which we own and
five of which we manage. The Company owns six of the seven Smith & Wollensky
restaurants we operate. The Company believes that each of our restaurants
provides a fine dining experience, offering distinctive high quality food,
creative menus, an extensive wine selection and exceptional customer service
accompanied by attractive design and decor. The Company believes that the
Smith & Wollensky restaurant concept has broad national appeal and that, as a
result, we have significant opportunities to expand our business.

In 1977, the original Smith & Wollensky restaurant, which the Company
manages, opened in New York City. Three years later, the Company developed and
currently manages The Post House, a distinctive steak and chop house with an
American theme. In 1984, the Company opened the Manhattan Ocean Club, an upscale
seafood restaurant, and in 1989, opened Cite, a Parisian grand-cafe style
restaurant. The Park Avenue Cafe concept, begun in 1992, combines country-style
new American cuisine in a cafe atmosphere, while Maloney & Porcelli, which the
Company developed in 1996 and currently manages, presents updated classic
American cuisine. In 2000, the Company helped to develop and currently manages
ONEc.p.s., an American brasserie in the Plaza Hotel in New York. The Company's
owned and managed restaurants have received local and national dining awards,
including the Distinguished Restaurants of North America "DiRoNA Award" and WINE
SPECTATOR'S "Grand Award."

Our owned restaurants were originally owned by a series of partnerships and
limited liability companies under a common control group. In August 1995, The
New York Restaurant Group, LLC, our predecessor entity, was formed as a holding
company for these operating entities. In January 1996, the Company and the
operating entities entered into a group of related roll-up transactions pursuant
to which the owners of the operating entities transferred their equity interests
or operating assets to us for cash or membership interests. Our current
corporate entity was formed in October 1997 as a result of a merger with the
predecessor limited liability company

On May 29, 2001, the Company completed its initial public offering ("IPO")
of 5,295,972 shares of common stock, of which the Company sold 4,750,000 shares,
at $8.50 per share. Proceeds of the offering were used to redeem all of the
outstanding debt under the Company's senior credit facility, a $10.0 million
senior subordinated note and a $1.0 million senior revolving credit facility,
including accrued interest and prepayment premiums, and to pay certain fees and
expenses incurred relating to the offering. Financing activities for the year
ended January 1, 2001, consisted of $1.0 million from the proceeds from issuance
of short-term debt and the repayment of principal payments for long-term debt.

For the year ended December 31, 2001, the average sales for our six owned
Smith & Wollensky restaurants were $8.2 million. Sales for the year ended
December 31, 2001 for the managed Smith & Wollensky restaurant in New York were
$24.2 million, of which the Company received $556,000 as a management fee. For
the year ended December 31, 2001, average sales for all of our nine owned
restaurants open for the full period were $7.8 million.

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OPERATING STRATEGY

The Company believes that the key to our future success is our Smith &
Wollensky restaurant concept that is focused on the high-end segment of the
restaurant industry. To achieve our goal, the Company is pursuing the following
operating strategies:

PURSUE DISCIPLINED RESTAURANT GROWTH

Our core competency is the creation and development of Smith & Wollensky
restaurants that serve distinctive cuisine within the upscale segment of the
dining market. Our restaurants have seating capacities between 290 and 675
seats. The Company expects to open one to two new Smith & Wollensky restaurants
in 2002. The Company has begun construction on a 375 seat Smith & Wollensky in
Columbus, Ohio, which is planned to open at the beginning of the third quarter.
The Company expects to open three to four new Smith & Wollensky restaurants each
year starting in 2003. To the extent that the Company opens new restaurants in
metropolitan areas that are smaller than our current locations, management
expects that such restaurants would have smaller seating capacities.

FOCUS ON PROMINENT LOCATIONS

The Company believes that the locations of our restaurants are critical to
our long-term success, and we devote significant time and resources to analyzing
each prospective site. In general, the Company prefers to open restaurants on
attractive, high-profile sites near central business districts within larger
metropolitan areas. In addition to carefully analyzing demographic information
for each prospective site, management considers factors such as visibility,
traffic patterns, accessibility, adequacy of parking facilities, tourist volume,
local competition, and proximity to shopping areas, office towers, parks and
hotels.

MAINTAIN STRONG UNIT ECONOMICS

The Company intends to maintain our unit margins as a result of high per
unit sales volumes coupled with effective cost controls. For the year ended
December 31, 2001, sales for our six owned Smith & Wollensky restaurants open
for the full period averaged $8.2 million. Our cash investment for each of our
Smith & Wollensky restaurants opened since 1997, net of landlord contributions,
averaged approximately $7.2 million, excluding pre-opening costs. Our cash
investment for our Smith & Wollensky restaurants, excluding our two largest
units, net of landlord contributions, averaged approximately $5.1 million,
excluding pre-opening costs.

COMMITMENT TO SUPERIOR QUALITY FOOD AND WINE

The Company believes that a primary element of our appeal to our customers
is our reputation for quality menus, the creative presentation of carefully
prepared food and our extensive wine selection. To maintain our exacting
standards, nationally renowned chef David Burke serves as our Corporate
Executive Chef to oversee menu development and implementation and to monitor
ongoing quality control at all of our restaurants. In addition, the Company
employs a chef at each of our restaurants who ensures the quality of the food
served and creates signature menu items unique to that restaurant. Our
restaurants feature USDA prime grade beef, dry-aged on the premises, top-quality
seafood and the highest quality ingredients available, purchased daily in local
marketplaces. Each of our restaurants bakes some of their own bread on the
premises and feature highly trained pastry chefs who prepare a range of
traditional desserts and special confections.

Our commitment to fine wines is evident in our extensive inventory for all
of our restaurants of approximately 2,300 listings and an aggregate of over
102,000 bottles of wine. Each restaurant has its own wine steward, who is
supported at the corporate management level by our wine department.

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CAPITALIZE ON BRAND AWARENESS AND CUSTOMER LOYALTY

The Company believes that our significant investment in marketing and
advertising programs has contributed to what management believes is a national
awareness of our Smith & Wollensky restaurants. Our marketing strategy is
designed to build a regular customer base, enhance a stronger identity and name
recognition for our Smith & Wollensky restaurants, and generate positive
word-of-mouth advertising. The Company has implemented this strategy through the
use of advertising, promotional activity and cross-marketing of our restaurants.
The Company runs full-page advertisements in leading national publications,
including THE NEW YORK TIMES, FORBES and FORTUNE. The Company also employs
limited radio and cable television advertising. In addition, the Company holds
creative promotional events such as "Wine Week," a popular semi-annual event,
restaurant opening galas and concierge dinners.

PROVIDE EXCEPTIONAL CUSTOMER SERVICE

The Company is committed to providing our customers attentive and
professional service by employees trained to exceed guests' expectations. The
Company believes that our brand recognition, high unit sales volume and high
average checks enable us to attract talented managers, chefs and wait staff.
Each restaurant is staffed with an experienced team of managers, kitchen
personnel and wait staff, many of whom have a long tenure with us. Our general
managers have at least 12 years of work experience in the restaurant industry.
Restaurant personnel are instructed in areas of restaurant management, including
food quality and preparation, wine selection, customer service and beverage
service. In addition, our ability to offer opportunities for promotion and
training by experienced managers enhances our recruiting and training efforts.
The Company believes our low rate of employee turnover contributes to consistent
quality and attentive customer service.

PROVIDE STRONG MANAGEMENT SUPPORT

Our senior management team, comprised of Alan Stillman, James Dunn, Alan
Mandel, David Terry and Eugene Byrne, has an average of 29 years of experience
in the restaurant industry, has opened numerous restaurants and is highly
experienced in the creation and implementation of restaurant concepts. This team
is responsible for managing site selection, operations, systems design and
implementation, staff hiring and training and administration. Alan Stillman, our
Chief Executive Officer, who has been with us for over 20 years, has been
creating restaurant concepts for over 30 years, including T.G.I. Friday's and
our other restaurant concepts. James Dunn, our President and Chief Operating
Officer, has over 20 years of experience operating restaurants, including
responsibility for opening and operating five House of Blues, eight Hard Rock
Cafe and three Chart House restaurants. Our restaurant general managers, most of
whom are drawn from our restaurant personnel, have an average tenure with us of
over 15 years, and all of them have worked in the restaurant industry for at
least 12 years. In addition to our general managers, the Company currently
employs approximately 200 restaurant managers and believes they will be a
substantial source of managerial talent as the Company expands.

THE SMITH & WOLLENSKY CONCEPT

The Smith & Wollensky concept, a dining experience that provides high
quality entrees in an upscale environment, was started in 1977 with the opening
of the first Smith & Wollensky restaurant in New York City. The Smith &
Wollensky restaurant in New York typifies our approach and has been

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described by GOURMET as the "quintessential New York steakhouse." The essential
elements of the Smith & Wollensky concept are:

CRITICALLY ACCLAIMED FOOD

The Company strives to provide our customers with the best quality cuisine.
To maintain our exacting standards and to provide continuity among all our
restaurants, David Burke serves as our Corporate Executive Chef. Chef Burke is
nationally recognized for his culinary talents. In 1996, he received the first
Auggie Award from the Culinary Institute of America and was one of six
recipients of the Robert Mondavi Culinary Award of Excellence. In 1997 he was
named Chef of the Year by CHEF magazine and in 1998 he was named Chef of the
Year by Vatel Club.

Smith & Wollensky restaurants feature USDA prime grade beef served in
generous portions. Unlike most other high-end restaurants, each Smith &
Wollensky restaurant dry ages and butchers its beef on the premises. During this
dry aging process, which takes three to four weeks to complete, the beef
generally loses approximately 10% to 20% of its weight. Although the dry aging
process is expensive and time consuming, the Company believes it produces a more
flavorful and tender steak than alternative processes.

Our menu also offers the highest quality seafood, including three- to
thirteen-pound lobsters, fish, veal, lamb and poultry. Freshly baked bread is
served as well. Complementing our substantial main courses, our dessert menu
features traditional desserts such as cheesecake and carrot cake as well as
other specialized confections prepared on location by our highly trained pastry
chefs.

EXTENSIVE WINE SELECTION

Fine wine is an integral part of the Smith & Wollensky dining experience.
Smith & Wollensky restaurants boast an extensive wine inventory of over 72,000
bottles, and our Smith & Wollensky in New York, which has over 25,000 bottles of
wine, received WINE SPECTATOR'S "Grand Award" each year from 1987 through 1994
and WINE SPECTATOR'S "Award of Excellence" from 1995 through 2000. Additionally,
our Smith & Wollensky in New York won the Distinguished Restaurants of North
America "DiRoNA Award" in 1992, given to restaurants in business for more than
three years that exemplify the highest standards for food, beverage service and
atmosphere. Our nationally acclaimed wine programs, such as "Wine Week," have
been written about extensively by THE NEW YORK TIMES and WINE SPECTATOR.

DISTINCTIVE DESIGN AND DECOR

The Company believes that a unique decor is essential to the creation of a
fine dining experience for the customer. Each of our Smith & Wollensky
restaurants has a decor that features hardwood floors, polished brass and dark
wood accents and authentic folk-art from 1900-1940 Americana. Menus are
presented under glass in stained wooden frames, while blackboards located around
the dining rooms display signature menu items and daily specials. Each
restaurant's exterior, complete with traditional awnings, incorporates Smith &
Wollensky's signature green and white colors. In addition to the distinctive
decor, our Smith & Wollensky restaurants feature a design layout that creates
small dining areas and enhances efficiency. Our large square footage is broken
into small areas that create a more private dining experience while maintaining
a large seating capacity. In order to ensure the hottest food and most efficient
service, each Smith & Wollensky restaurant has kitchens located on each floor.
This flexible design allows us to close off sections of our restaurants, and
thus reduce operating costs, during non-peak hours.

The Company also offers customers a chance to view our chefs in action. Each
Smith & Wollensky, other than the Philadelphia location, has a "kitchen table"
in a glass-enclosed area inside of the main kitchen. Customers at the kitchen
table can eat, drink wine and watch our expert chefs prepare dinner.
Additionally, each of our Smith & Wollensky locations offers outdoor dining.

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WOLLENSKY'S GRILL

Most Smith & Wollensky's incorporate a Wollensky's Grill, a more informal
alternative which offers menu selections similar to those offered at Smith &
Wollensky in smaller, lower-priced portions, as well as hamburgers and
sandwiches. Wollensky's Grill provides flexibility for Smith & Wollensky, and
the two dining areas have the ability to expand and contract relative to one
another to accommodate customer demand. Wollensky's Grill generally has a
separate entrance and offers expanded late-night hours. A Wollensky's Grill
typically seats up to 125 customers. In several locations the Wollensky's Grill
menu is offered in addition to the Smith & Wollensky restaurant menu in the main
dining room.

BANQUET FACILITIES

All of our owned Smith & Wollensky restaurants have dedicated banquet
facilities. These facilities host numerous events that generate higher
per-person average checks than do our restaurants. In addition to these
dedicated banquet facilities, all of our Smith & Wollensky restaurants have the
capacity to host banquets and parties, and most of our Smith & Wollensky
restaurant locations have separate banquet managers that coordinate these
special events.

LOCATIONS.

The following table sets forth information with respect to our Smith &
Wollensky restaurant locations:

GROWTH STRATEGY

Our objective is to leverage our experience in developing and operating
high-end restaurants by expanding our Smith & Wollensky restaurant concept into
new markets. At the same time, we plan to increase our existing restaurant
operations as we build upon and increase what we believe is our reputation for
providing an exceptional dining experience and high-quality food.

PURSUE DISCIPLINED RESTAURANT GROWTH IN NEW MARKETS.

Opening Smith & Wollensky restaurants in new markets is the lead concept in
our growth and expansion strategy. The Company expects to open one to two new
Smith & Wollensky restaurants in 2002. The Company has begun construction on a
375 seat Smith & Wollensky in Columbus, Ohio, which is planned to open at the
beginning of the third quarter. The Company expects to open three to four new
Smith & Wollensky restaurants each year starting in 2003. To the extent the
Company opens new restaurants in metropolitan areas that are smaller than our
current locations, the plan is to utilize, but not be limited to, the Company's
prototype model. The Company anticipates that those new restaurants that are
smaller than our current locations will have fewer seats than our existing
restaurants and would not incorporate a separate Wollensky's Grill. The
prototype menu will consist of many of the items currently available at the
Smith & Wollensky locations, such as steaks and chops, along with some of the
selections available at our Wollensky's Grill, including hamburgers and
sandwiches. As the Company opens new Smith & Wollensky restaurants, the Company
intends to

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convey the concept of the New York-based restaurant in decor, menu and
atmosphere, while maintaining a flexible and fresh design that can be readily
adapted to accommodate particular geographic regions. Since December 1997, the
Company has opened six new Smith & Wollensky restaurants in major metropolitan
areas throughout the United States, including our most recent unit, which opened
in June 2000 in Philadelphia. The Company is currently considering other sites
but to date has not signed any formal documents committing to any locations,
other than Columbus, Ohio. During 2001, we terminated a lease agreement for a
22,000 square foot site in Boston and are currently considering a smaller site
in Boston as well as sites in other metropolitan areas.

In general, we prefer to open our restaurants on attractive, high-profile
sites near central business districts within larger metropolitan areas.
Typically, prior to opening a new restaurant our management team carefully
analyzes demographic information for each prospective site, such as visibility,
traffic patterns, accessibility, parking facilities near the site, proximity to
shopping areas, hotels, office towers or parks, tourist volume, local
competition, gross revenues of such competition and average household income
levels. After reviewing all of the relevant information, management will rate
the cities appropriateness as a location for a high-end restaurant generally,
and specifically, a Smith & Wollensky.

The Company seeks long-term leases providing for substantial development or
rent contributions from our landlords or real estate developers in exchange for
a market-based minimum annual rent or a percentage of annual gross sales above a
stipulated minimum. The Company also evaluates opportunities to purchase and
renovate existing restaurant sites that satisfy our selection criteria. Use of
such sites can significantly reduce construction costs, shorten the time
required to open a new restaurant and increase the return on investment.

The Company has developed a restaurant opening program and team designed to
optimize the performance of our new restaurants. The team includes a general
manager, training manager, purchasing manager, beverage manager and chef/kitchen
manager. Restaurant managers typically complete a one to three month training
program, and the senior managers of our established restaurants spend up to
three months at each of the new restaurants in order to ensure quality control.

GROW AND DEVELOP EXISTING RESTAURANTS

Since December 1997, we have opened six Smith & Wollensky restaurants. Our
experience has shown that our restaurants take between 15 and 36 months to
achieve expected company-wide targeted levels of performance. Our new
restaurants are currently in various stages of the ramp-up phase, and we believe
incremental revenue and restaurant level operating profitability can be realized
from each of these restaurants as they continue to develop.

LEVERAGE CENTRALIZED OPERATIONS TO INCREASE PROFITABILITY

We have established a central corporate infrastructure to manage our
restaurants through which we seek to take advantage of volume discounts and the
allocation of fixed costs over a larger revenue base. All of our restaurants
report daily through a point-of-sale system which allows us to monitor our
revenues, costs, inventory and other operating statistics. As we continue our
expansion, we will seek to take advantage of even greater volume discounts.

EXPAND RETAIL OFFERINGS AND DEVELOP BRANDED MERCHANDISE

We have developed a comprehensive merchandising strategy to reinforce and
capitalize on what we believe is a distinctive upscale brand image built on the
quality and name recognition of our Smith & Wollensky restaurants. At our
Smith & Wollensky restaurants and on our website, we now offer selected products
for sale under the Smith & Wollensky brand name, including custom steak knives,
dry-aged steaks, steak sauces and cookbooks. Sales of items incorporating the
Smith & Wollensky name will be subject to the payment of a royalty to St. James
Associates.

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UNIT ECONOMICS

While we seek to develop high profile locations that create a distinctive
dining experience, we are able to maintain unit operating margins due to high
sales volumes coupled with effective cost controls. For the year ended
December 31, 2001, the average sales for our six owned Smith & Wollensky
restaurants were $8.2 million. Sales for the year ended December 31, 2001 for
the managed Smith & Wollensky restaurant in New York were $24.2 million, of
which the Company received $556,000 as a management fee. For the year ended
December 31, 2001, average sales for all of our nine owned restaurants open for
the full period were $7.8 million. Our average cash investment, net of landlord
contributions, was approximately $7.2 million for our six owned Smith &
Wollensky restaurants opened since 1997, excluding pre-opening costs. Our cash
investment for our Smith & Wollensky restaurants, excluding our two largest
units, net of landlord contributions, averaged approximately $5.1 million,
excluding pre-opening costs. We expect that in the future our cash investment,
net of landlord contributions will range from $2.0 million to $5.0 million per
unit excluding pre-opening costs.

OUR OTHER RESTAURANT CONCEPTS

In addition to Smith & Wollensky, we have developed several other restaurant
concepts.

The following table sets forth information with respect to our other
restaurant concepts, which are located in New York City, except where noted:

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(1) Includes Mrs. Parks Tavern

MARKETING, ADVERTISING AND PROMOTIONS

For the past 20 years, the goal of our marketing strategy has been to build
a loyal customer base, to enhance what we believe is the strong identity and
name recognition of our restaurants, to generate positive word-of-mouth
advertising and to create opportunities to cross-promote our restaurants. In
order to attract new customers, we focus primarily on print advertising, but
also employ limited radio and television advertising. We achieve national as
well as local exposure through our print campaign.

We believe that our commitment to advertising sets us apart from other
upscale restaurants, and that our advertising expenditures are substantially
greater than that of comparable high-end restaurants. We also take advantage of
opportunities to cross-promote our restaurants by publishing advertisements and
marketing materials featuring all of our restaurants as a group.

Not only do we advertise directly to the general public, but we also offer
specific customer services that have the potential for repeated referrals. Our
restaurants host parties for the concierges of nearby hotels that are designed
to enhance each restaurant's name recognition and reputation for quality and
service, thereby encouraging concierge recommendations. Additionally, our wait
staff selectively provides complimentary food and drinks to customers, further
developing customer loyalty.

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We are continually strengthening our name recognition and brand identity,
particularly in new markets. In conjunction with restaurant openings, we host
dinners, lunches and cocktail parties for various civic, philanthropic and
charitable organizations.

We also host Wine Week, which we started in 1986. Wine Week has evolved into
"National Wine Weeks" which we hold twice a year, usually in September and
March. Our restaurants sponsor wine tastings at lunch each day for the entire
week where wine makers are invited to represent their wineries and to serve and
discuss their wines with customers. We believe these events enhance our
restaurants' reputations for dedication to maintaining superior quality wine
lists. Our other promotions include cigar or scotch events as well as dinners
hosted by nationally renowned chefs. We believe that our promotions build
customer loyalty and increase future sales at our restaurants.

RESTAURANT OPERATIONS AND MANAGEMENT

We believe that our high unit sales volume and portfolio of concepts allow
us to attract, compensate and maintain high-quality, experienced restaurant
management and personnel. We believe we have a low rate of staff turnover for
the restaurant industry. Professional, efficient and attentive service is
integral to our overall success. Each of our restaurants is operated as an
independent facility with each restaurant's general manager exercising
discretion and playing a key role in its success. The general managers in our
restaurants have an average tenure with us of over 15 years. During training,
restaurant personnel are instructed in areas of restaurant management, including
food quality and preparation, wine selection, customer service, beverage
service, quality and cost controls and employee relations. Restaurant general
managers are also provided with operations manuals relating to food and beverage
preparation and operation of restaurants. These manuals are designed to ensure
that we will provide uniform operations in each of our restaurants, consistently
high-quality products and service and proper accounting for restaurant
operations.

We have developed a restaurant opening program and team designed to optimize
the performance of our new restaurants. The team includes a general manager,
training manager, purchasing manager, beverage manager and chef/kitchen manager.
Restaurant managers typically complete a one to three month training program,
and the senior managers of our established restaurants spend up to three months
at each of the new restaurants in order to ensure quality control. Management
believes it is imperative for new managers to spend much of their training
period side by side with managers in existing operations in order to gain
critical insight into day to day operations and overall management philosophy.
The director of operations and the local restaurant manager interview all staff
on site. Chefs are brought to an established unit for training prior to an
opening, and periodically are given the opportunity to work at other locations
under the supervision of our award-winning chefs. The director of management
information systems typically stays at each new location until all accounting
and management information systems are fully operational. We also coordinate our
marketing, advertising and promotional program to support new restaurant
openings while at the same time building national brand recognition.

New wait staff at our restaurants participate in approximately three weeks
of training during which time they work under the close supervision of the
restaurant's management. Wait staff are trained and tested on proper service
technique, wine and food knowledge, customer satisfaction and point-of-sale
system usage.

PURCHASING

Our ability to maintain consistent quality throughout our restaurants
depends in part upon our ability to acquire food products and related items from
reliable sources in accordance with our specifications. To ensure continuity of
pricing and quality throughout all of our restaurants, we maintain on-premise
stewards at each restaurant who are supported by a corporate purchasing
department.

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We attempt to maintain a consistent food and beverage cost as a percentage
of sales through a variety of means. We have gained a great knowledge of trends
and fluctuations in the pricing of our key commodities based on our 24 years of
experience. While we do not believe most market conditions warrant purchasing
long-term pricing contracts on our primary items, we do consistently contract or
lock into appropriate volume commitments. We lock pricing and volume
availability on key items such as beef and shrimp, which represent the largest
percentage of our food cost. Although we do not have a single source of supply
for any particular food item and we believe that adequate alternative sources of
supply are readily available, these alternative sources might not provide as
favorable terms to us as our current suppliers when viewed on a long-term basis.
In addition, we believe we are able to achieve cost savings through purchasing
restaurant items such as glass, china, silver, utensils and similar items and
equipment and some food items for all restaurants from the same suppliers.

Each of our restaurants also has an in-store beverage manager and wine
steward who is supported by our corporate wine department. The majority of our
wine is purchased in local markets by the wine steward at each individual
restaurant in order to tailor wine selections to customer preferences, market
availability and menu/wine pairing. We have several national programs with
wineries creating pricing programs to support local purchasing.

We devote considerable attention to controlling food costs. We make use of
information technology and each of our restaurants' point-of-sale system,
providing us with precise information on daily sales and inventory needs, thus
reducing our need to carry large quantities of food inventory. This cost
management system is complemented by our ability to obtain volume-based
discounts. Additionally, as we open additional restaurants, we expect to be able
to take further advantage of volume discounts and other cost savings.

MANAGEMENT ARRANGEMENTS

Pursuant to our management arrangements, we provide new restaurant concept
design, construction, staff training, menu development, administration,
managerial and operating services to the restaurants we manage.

SMITH & WOLLENSKY. We manage the Smith & Wollensky restaurant in New York
pursuant to a management agreement with St. James Associates. The agreement
continues until terminated by the parties in accordance with the terms of the
agreement described below. Pursuant to the management agreement, we provide
management services to the Smith & Wollensky restaurant in New York in exchange
for a fee of 2.3% of all restaurant sales. Smith & Wollensky Operating Corp., an
entity controlled by Mr. Stillman, is one of the two general partners, and is
also a limited partner of St. James Associates. The other general partner may
terminate the agreement if we fail to manage and market the restaurant in the
same manner as has been done since the opening of the restaurant in 1977, and do
not cure any failure to do so within 30 days after notice from the other general
partner. In addition, the other general partner may terminate the agreement if
we fail to prepare and deliver financial statements to St. James Associates each
month, and do not cure any failure to do so within three days after notice from
the other general partner. Additionally, under the terms of the agreement, the
other partner of St. James Associates may terminate the agreement and replace us
with any person, firm or corporation chosen by the other general partner, if we
cease to be operated and directed by Mr. Stillman, whether by death, incapacity,
retirement or otherwise and if within 60 days of receipt by St. James Associates
of financial statements indicating that restaurant sales, available funds or
gross profit margins fall below defined levels. The levels for any quarter that
are set by the agreement in that event are restaurant sales less than
$5.3 million, available funds less than $1.4 million, or gross profit margins
less than 70%. The levels for any trailing four quarters that are set by the
agreement in that event are restaurant sales less than $25 million, available
funds less than $7 million, or gross profit margins less than 72%. The other
general partner of St. James Associates can also terminate the

10

agreement if there is a sale of the restaurant or of all of the partnership
interests in St. James Associates. These termination rights do not include the
right to terminate the trade name license.

THE POST HOUSE. We manage The Post House in the Lowell Hotel, and the food
and beverage service for the Lowell Hotel, pursuant to a written restaurant
management agreement. The agreement expires on January 23, 2003. Pursuant to The
Post House agreement, we provide operating services for The Post House in
exchange for a fee of 6.0% of gross revenues of The Post House. The Post House
agreement may be terminated by either party upon one year's notice.
Additionally, The Post House agreement may be terminated by the owners under
some circumstances upon notice to us, including if we are adjudicated bankrupt
or insolvent, upon 30 days notice to us if there is a sale of the restaurant,
upon six months notice to us if the owner enters into a joint venture in the
operation of the restaurant with a third party, or if the owner enters into
certain financing arrangements. In addition, if we, or any of our successors
cease, substantially to perform our duties and responsibilities (including
maintaining the current general atmosphere and administering cost controls)
under this agreement to the owners' satisfaction in their sole and absolute
discretion, or if we materially injure the owner's reputation or business, the
owner may terminate upon 30 days notice.

MALONEY & PORCELLI. We manage Maloney & Porcelli in New York pursuant to a
written restaurant management agreement. The agreement continues so long as the
tenant occupies the premises for the operation of a restaurant. We own the
rights to the name Maloney & Porcelli and can use the name anywhere outside of a
five mile radius of the New York Maloney & Porcelli. We are not obligated to pay
a royalty or fee outside of New York. We paid $1.5 million for the right to
provide management services to Maloney & Porcelli, for which we receive a fee of
3.0% of all restaurant sales, plus a sum equal to the lesser of (i) 50% of
operating cash flow or (ii) cash flow minus sums to be retained by the owner of
Maloney & Porcelli pursuant to the Maloney & Porcelli agreement. The amounts to
be retained by Maloney & Porcelli increase from $300,000 in 1999, to $360,000 in
years 2000 through 2003 and to $480,000 in 2004 and each year thereafter until
2011. The Maloney & Porcelli agreement grants us the right to manage Maloney &
Porcelli so long as its owner occupies the premises for the operation of a
restaurant. The Maloney & Porcelli agreement may be terminated by the owner upon
30 days notice to us of certain defaults, including our failure to perform our
duties and responsibilities under the agreement, gross negligence, reckless
disregard of the interests of the owner, violations of law which materially
injure the business of the restaurant or the reputation of the owner, or our
failure to pay the amounts to be retained by the owner as described above. We
have an option to purchase all of the assets of Maloney & Porcelli at any time
before July 1, 2002, at a price of $8.5 million, with the amount increasing by
$1.0 million each year thereafter up to a maximum amount of $10.5 million at any
time on or after June 30, 2004 until 2011, subject to the owner's right to
preempt the purchase option by paying us an amount equal to the scheduled
purchase price. Additionally, we have a right of first refusal, should the owner
receive an offer to sell Maloney & Porcelli.

PARK AVENUE CAFE IN CHICAGO. We also operate the Park Avenue Cafe in
Chicago, Mrs. Park's Tavern and the other services of the food and beverage
department of the Doubletree Hotel in Chicago pursuant to a written
sub-management agreement. The sub-management agreement expires on the earlier of
December 31, 2004 or the termination of the hotel management agreement between
the owner of the Doubletree Hotel, Chicago HSR Limited Partnership and
Doubletree Partners, which expires on December 31, 2010. We receive a fee of
(a) 1.5% of the total revenue of the food and beverage department, plus
(b) 17.5% of the profits of the food and beverage department in excess of
scheduled financial targets, plus (c) 5.0% of hotel profits in excess of
scheduled financial targets. Either party may terminate the sub-management
agreement if specified financial conditions are not met. Doubletree Partners may
terminate the sub-management agreement upon 30 days notice if our beneficial
ownership interests are transferred to any entity which is not owned more than
20% by Alan Stillman and of which Alan Stillman himself is not the Chief
Executive Officer. We were in default with respect to this requirement
subsequent to our May 23, 2001 IPO. This default could result in a

11

termination of this sub-management agreement, which would result in the loss of
any further management fee income from the Doubletree Hotel, which could have an
adverse effect on our financial condition and results of operations. In
addition, Doubletree Partners may terminate the agreement if we fail to allow
the Doubletree Hotel to use the names "Park Avenue Cafe" and "Mrs. Park's
Tavern," if we fail to make a payment under the agreement after 10 days notice,
if we are otherwise in default of our obligations under the agreement after
30 days notice, or if we are subject to certain events of bankruptcy or
insolvency.

ONEC.P.S. We are the guarantor of a management agreement between Plaza
Operating Partners, Ltd., and Parade 59 Restaurant, LLC, an entity we control.
The agreement expires on September 12, 2010. Pursuant to the ONEc.p.s.
management agreement, we manage the ONEc.p.s. restaurant located in the Plaza
Hotel, New York. We paid $500,000 for the right to provide these management
services, for which we receive a base management fee of 4% of the gross revenues
recognized from the services provided at ONEc.p.s. plus an additional fee of 50%
of the restaurant's cash flows, as reduced by the repayment of project costs and
working capital contributions. The base management fee is payable on a current
basis only to the extent there is sufficient cash flow after all operating
expenses have been accrued. To the extent that there is not sufficient cash
flow, payment of the base management fee is carried forward without interest
from one year to the next, but the owner of the restaurant has no liability for
such non-payment. The ONEc.p.s. agreement may be terminated by Plaza Operating
Partners at any time immediately upon notice to us, due to the fact that
pre-opening costs exceeded $5.25 million, although Plaza Operating Partners has
indicated to us that they do not have any present intention to terminate the
management agreement. We are currently in negotiations with Plaza Operating
Partners to amend this agreement. Termination of the management agreement would
result in the loss of any further management fee income from ONEc.p.s., which
could have an adverse effect on our financial condition and results of
operations. In addition, if the funds in the working capital account have been
expended, and insufficient funds exist to pay operating expenses, the agreement
may be terminated by either party upon notice. Plaza Operating Partners may also
terminate the agreement if we fail to achieve applicable performance goals, if
we are subject to certain events of bankruptcy or insolvency, if the individual
who directs the daily operations of the tenant or has overall control and
decision making authority of the tenant is replaced other than in the ordinary
course of business or in connection with the merger, consolidation or other
transfer of any direct or indirect interest in the tenant, or at any time upon
90 days notice to us and the payment of a fee to us.

MANAGEMENT INFORMATION SYSTEMS

We maintain financial and accounting controls for each of our restaurants
through the use of centralized accounting and management information systems. We
collect sales and related information daily from each restaurant and we provide
restaurant managers with operating statements for their respective locations. We
connect point-of-sale systems in individual restaurants via secured data network
to a central data repository in the corporate office and upgrade such
point-of-sale systems to facilitate the on-line downloading and constant
monitoring of financial information.

COMPETITION

The restaurant industry is intensely competitive. We compete on the basis of
the taste, quality and price of food offered, customer service, ambience,
location and overall dining experience. The restaurant business is often
affected by changes in consumer tastes and discretionary spending patterns,
national and regional economic conditions, demographic trends, consumer
confidence in the economy, traffic patterns, the cost and availability of raw
material and labor, purchasing power, governmental regulations and local
competitive factors. Although we believe we compete favorably with respect to
each of these factors, many of our direct and indirect competitors are
well-established national, regional or local chains and some have substantially
greater financial, marketing, and other resources

12

than we do. We also compete with many other restaurant and retail establishments
for site locations and restaurant level employees.

GOVERNMENT REGULATION

Our business is subject to extensive federal, state and local government
regulations, including regulations relating to alcoholic beverage control, the
preparation and sale of food, public health and safety, sanitation, building,
zoning and fire codes. A significant percentage of the revenues of each of the
restaurants we own or manage are attributable to the sale of alcoholic
beverages. Each restaurant has appropriate licenses from regulatory authorities
allowing it to sell liquor and/or beer and wine, and each restaurant has food
service licenses from local health authorities. Our licenses to sell alcoholic
beverages must be renewed annually and each restaurant is operated in accordance
with standardized procedures designed to assure compliance with all applicable
codes and regulations.

We are subject, in some states, to "dram shop" statutes which generally
provide a person injured by an intoxicated person the right to recover damages
from an establishment which wrongfully served alcoholic beverages to such person
and we carry liquor liability coverage as part of its existing comprehensive
general liability insurance. The development and construction of additional
restaurants will be subject to compliance with applicable zoning, land use and
environmental regulations.

We are also subject to the Fair Labor Standards Act, the Immigration Reform
and Control Act of 1986 and various state laws governing such matters as minimum
wages, overtime, tip credits and other working conditions. A significant number
of our hourly personnel are paid at rates related to the federal minimum wage.
In addition, the Federal Americans with Disabilities Act prohibits
discrimination on the basis of disability in public accommodations and
employment.

EMPLOYEES

As of December 31, 2001 the Company had 1,194 employees. Of these, 48 were
employed in our office facilities. In our restaurants, the Company had 1,146
employees, including 237 managers and administrators at the restaurants.
Management believes our relationships with our employees are excellent.

ITEM 2. PROPERTIES

PROPERTIES

The Company leases restaurant and office facilities and real property under
operating leases. Restaurant and office facilities lease terms, including
renewal options range, from 5 to 23 years through 2024. The Company's leases
provide for renewal options for terms ranging from five to ten years. The
restaurant leases provide for minimum annual rent and certain leases contain
contingent rental provisions based upon the sales of the underlying restaurants.
As of December 31, 2001, our future minimum lease payments of our headquarters
and restaurants are as follows: 2002--$4.8 million; 2003--$5.1 million;
2004--$5.3 and thereafter--$66.7 million.

13

All of our owned restaurants are located in space leased or owned by us as
set forth below:

- ------------------------------
(1) The Company owns this location.

(2) This location was closed in January 2001. On January 31, 2002, the Company
signed a lease termination agreement with the landlord of this location
reducing its remaining obligation under the terms of the lease to
January 31, 2002.

ITEM 3. LEGAL PROCEEDINGS

The Company is involved in various other claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.

ITEM 4. FOURTH QUARTER STOCKHOLDERS VOTES

None.

PART II

ITEM 5. MARKET INFORMATION

Our common stock began trading on the Nasdaq National Market under the
symbol SWRG on May 23, 2001. Prior to that time, there was no trading market for
our common stock. The following table sets forth for the periods indicated the
high and low closing sales price of our common stock on the Nasdaq National
Market.

FISCAL YEAR ENDED DECEMBER 31, 2001:

14

Since our initial public offering in May 2001, the Company has not declared
or paid any cash dividends on our common stock. The Company currently intends to
retain all earnings for the operation and expansion of our business and does not
anticipate paying any cash dividends in the foreseeable future. There were
approximately 1,000 holders of record of our common stock at March 26, 2002.

ITEM 6. SELECTED FINANCIAL DATA

The Consolidated Statement of Operations Data for each of the years in the
five-year period ended December 31, 2001 and the Balance Sheet Data as of
December 31, 2001, January 1, 2001, January 3, 2000, December 28, 1998 and
December 29, 1997 are derived from the Consolidated Financial Statements of the
Company, which have been audited by KPMG LLP, independent certified public
accountants. The Selected Consolidated Financial Information should be read in
conjunction with the Consolidated Financial Statements of the Company and the
Notes to the Consolidated Financial Statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

- ------------------------

(1) Fiscal 1999 consisted of a 53-week period. All other fiscal years consisted
of 52-week periods. All numbers in tables and footnotes are presented in
thousands, except shares and per share/unit amounts.

(2) During the fourth quarter of fiscal 2000 the Company recorded a pre-tax
charge of $2,423 representing the write-down of property and equipment and
certain other assets and accrual of certain lease exit costs associated with
the closure of the Maloney & Porcelli unit in Washington, D.C. In fiscal
2001 a pre-tax charge of $67 was recorded relating to the terms of the Lease
Termination Agreement.

(3) Net loss applicable to common shares includes the net loss and the total of
the accrued dividends on preferred shares and the amortization of issuance
costs on preferred shares.

(4) Membership units were outstanding from January 1, 1996 through October 31,
1997. All net loss per share information has been adjusted for a three for
two membership unit split and the conversion of membership units into shares
of common stock on October 31, 1997.

(5) All outstanding shares of preferred stock automatically converted to shares
of common stock upon the completion of the IPO. Prior to giving effect to
the 2-for-3 reverse stock split of the Company's common stock, the preferred
stock was convertible on a share for share basis.

(6) In 1997, the Company received proceeds of $19,400 from the issuance of
2,172,794 shares of convertible preferred stock. Part of these proceeds were
used for the construction of the units built in 1997 and 1998.

(7) For fiscal 2000, includes the Maloney & Porcelli unit in Washington, D.C.
which was opened in January 2000 and closed in January 2001, but the pre-tax
charge associated with the closing of the restaurant was recorded in the
fourth quarter of 2000.

(8) In calculating comparable restaurant sales, the Company introduces a
restaurant into our comparable restaurant base once it has been in operation
for 15 calendar months. Since 1999 was

16

a 53-week fiscal year and 2001, 2000, 1998 and 1997 were 52-week fiscal
years, the Company calculated comparable restaurant sales for those years on
an average weekly basis.

(9) EBITDA represents net income (loss) before interest expense--net of interest
income, income taxes and restaurant level depreciation and amortization and
corporate level depreciation and amortization which is included in general
and administrative expenses. EBITDA should not be construed as (a) an
alternative to operating income (as determined in accordance with generally
accepted accounting principles) as an indicator of our operating
performance, or (b) an alternative to cash flows from operating activities
(as determined in accordance with generally accepted accounting principles)
as a measure of liquidity. EBITDA as calculated by us may be calculated
differently than EBITDA for other companies. Management believes that EBITDA
is a widely accepted financial indicator of a company's ability to incur and
service debt. EBITDA does not take into account our debt service
requirements, capital expansion, and other commitments and, accordingly, is
not necessarily indicative of amounts available for the payment of
dividends, reinvestment, or other discretionary uses.

ITEM (7) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

AS USED HEREIN, UNLESS THE CONTEXT OTHERWISE REQUIRES, "THE SMITH &
WOLLENSKY RESTAURANT GROUP, INC.", THE "COMPANY", "WE", "US", OR "OUR" REFERS TO
THE SMITH & WOLLENSKY RESTAURANT GROUP, INC. AND ITS SUBSIDIARIES AND
PREDECESSOR ENTITIES. REFERENCES CONTAINED HEREIN TO FISCAL 2001, FISCAL 2000,
AND FISCAL 1999 MEAN THE FISCAL YEARS ENDED DECEMBER 31, 2001, JANUARY 1, 2001
AND JANUARY 3, 2000 RESPECTIVELY. THIS ANNUAL REPORT ON FORM 10-K (THE
"FORM 10-K") CONTAINS VARIOUS "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE
ACT"). FORWARD-LOOKING STATEMENTS, WRITTEN, ORAL, OR OTHERWISE MADE, REPRESENT
THE COMPANY'S EXPECTATION OR BELIEF CONCERNING FUTURE EVENTS. WITHOUT LIMITING
THE FOREGOING, THE WORDS "BELIEVES", "THINKS", "ANTICIPATES", "PLANS",
"EXPECTS", AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS
PROJECTED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A
DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS".
ACCORDINGLY, SUCH FORWARD-LOOKING STATEMENTS DO NOT PURPORT TO BE PREDICTIONS OF
FUTURE EVENTS OR CIRCUMSTANCES AND THEREFORE THERE CAN BE NO ASSURANCE THAT ANY
FORWARD-LOOKING STATEMENT CONTAINED IN THIS FORM 10-K WILL PROVE TO BE ACCURATE.

GENERAL

As of December 31, 2001, the Company operated 14 high-end, high volume
upscale restaurants in the United States. We believe that the particularly large
size of the markets we entered warranted investment in restaurants with seating
capacities from 290 to 675. We currently expect to open one to two new Smith &
Wollensky restaurants in 2002. The Company has begun construction on a 375 seat
Smith & Wollensky in Columbus, Ohio, which is planned to open at the beginning
of the third quarter. We plan to open three to four new Smith & Wollensky
restaurants each year starting in 2003. To the extent we open new restaurants in
metropolitan areas that are smaller than our current locations, the plan is to
utilize but not be limited to our prototype model, which would have fewer seats
than our existing restaurants. We believe these new restaurants will require, on
average, a total cash investment of $2.0 million to $5.0 million net of landlord
contributions and excluding pre-opening expenses.

As a result of our recent expansion, period to period comparisons of our
financial results may not be meaningful. When a new restaurant opens, we
typically incur higher than normal levels of food and labor costs as a
percentage of sales during the first year of operations. Average sales for our
nine owned units open for all of 2001 was $7.8 million. In calculating
comparable restaurant sales, we introduce a restaurant into our comparable
restaurant base once it has been in operation for

17

15 months. Because 1999 was a 53-week fiscal year and 2001 and 2000 were 52-week
fiscal years, we calculated comparable restaurant sales on a weekly average for
each fiscal year.

Pursuant to management contracts and arrangements, we operate, but do not
own, the original Smith & Wollensky, Maloney & Porcelli, The Post House and
ONEc.p.s. restaurants in New York and the Park Avenue Cafe in Chicago.

Owned restaurant sales include gross sales less sales taxes and other
discounts. Cost of owned restaurant sales include food and beverage costs,
salaries and related benefits, restaurant operating expenses, occupancy and
related expenses, marketing and promotional expenses and restaurant level
depreciation and amortization. Salaries and related benefits include components
of restaurant labor, including direct hourly and management wages, bonus, fringe
benefits and related payroll taxes. Restaurant operating expenses include
operating supplies, utilities, maintenance and repairs and other operating
expenses. Occupancy and related expenses include rent, real estate taxes and
other occupancy costs.

Management fee income relates to fees that we receive from our managed
units. These fees are based on a percentage of sales from the managed units,
ranging from 1.5% to 6.0%. Management fee income also includes fees from
Maloney & Porcelli equal to 50% of the unit's net operating cash flow generated
during each fiscal year, provided that the Maloney & Porcelli owner receives a
minimum amount per year ranging from $360,000 to $480,000. Management fee income
from Mrs. Park's Tavern is based on revenue of the food and beverage department
of the Doubletree Hotel, pursuant to the terms of our management agreement with
Doubletree Partners, the contract manager. Management fee income from ONEc.p.s.
is equal to between 40% and 50% of the restaurant's cash flows, as reduced by
the repayment of project costs and working capital contributions pursuant to the
terms of our management agreement with Plaza Operating Partners.

General and administrative expenses include all corporate and administrative
functions that support existing owned and managed operations and provide
infrastructure to facilitate our growth. General and administrative expenses are
comprised of management, supervisory and staff salaries and employee benefits,
travel, information systems, training, corporate rent and professional and
consulting fees. Pre-opening costs incurred in connection with the opening of
new restaurants are expensed as incurred and are included in general and
administrative expenses. General and administrative expenses also include the
depreciation of corporate-level property and equipment and the amortization of
corporate intangible assets, such as goodwill, licensing agreements and
management contracts.

Royalty expense represents fees paid, pursuant to the licensing agreement
with St. James Associates, based upon 2.0% of sales for restaurants utilizing
the Smith & Wollensky name.

Wherever we refer to a particular year, we refer to our 52- or 53-week
fiscal year ending on the Monday nearest December 31, unless otherwise noted.
Fiscal years ended December 31, 2001 and January 1, 2001 each consisted of
52-week periods. The fiscal year ended January 3, 2000 consisted of a 53-week
period.

CRITICAL ACCOUNTING POLICIES

The Company's discussion and analysis of its financial condition and results
of operations are based upon the Company's consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities.

On an on-going basis, the Company evaluates its estimates and assumptions,
including those related to revenue recognition, allowance for doubtful accounts,
valuation of inventories, valuation of long-lived assets, goodwill and other
intangible assets, income taxes, income tax valuation allowances

18

and litigation. The Company bases its estimates on historical experience and on
various other assumptions that it believes to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that can not readily be determined
from other sources. There can be no assurance that actual results will not
differ from those estimates.

The Company believes the following critical accounting policies require it
to make significant judgments and estimates in the preparation of its
consolidated financial statements:

Revenue recognition: Sales from owned restaurants are recognized as revenue
at the point of the delivery of meals and services. Management fee income is
recognized as the related management fee is earned, pursuant to the respective
agreements.

Allowance for doubtful accounts: Substantially all of the Company's accounts
receivable are due from companies with good historical track records. Accounts
receivable are reduced by an allowance for amounts that may become uncollectible
in the future. Such allowance is established through a charge to the provision
for bad debt expenses. The Company recorded bad debt expenses of $391,000 and
$88,000 in 2001 and 2000, respectively. These charges in 2001 were much higher
than historical levels and were primarily related to one of the Company's
management contracts due to the changes in economic conditions since the
contract's inception in fiscal 2000. The Company also analyzes the collection
history and financial condition of its other customers considering current
economic conditions and determines whether an additional allowance needs to be
established.

When the Company determines that the carrying value of intangibles or
goodwill may not be recoverable it measures any impairment by its ability to
recover the carrying amount of the assets from expected future operating cash
flow on a discounted basis. Net intangible assets and goodwill amounted to
$11.5 million and $12.1 million as of December 31, 2001 and January 1, 2001,
respectively.

For a detailed discussion on the application of these and other accounting
policies, see "Summary of Significant Accounting Policies" in the "Notes to the
Consolidated Financial Statements" in Item 14 on Form 10-K, beginning on page
F-8. This discussion and analysis should be read in conjunction with the
consolidated financial statements and related notes included elsewhere in this
report.

19

RESULTS OF OPERATIONS

Our operating results were as follows:

2001 COMPARED TO 2000

OWNED RESTAURANT SALES. Owned restaurant sales decreased $10.9 million, or
13.4%, to $70.6 million in 2001 from $81.5 million in 2000. The decrease in
restaurant sales was due to a $1.7 million decrease in sales from the Maloney &
Porcelli in Washington, D.C. which closed in January 2001, and a $10.6 million
or 13.8% decrease in sales for our comparable owned units open for these entire
periods. This decrease was primarily a result of a decrease in sales for our
three owned New York units, resulting from a significant economic slowdown, and
the Smith and Wollensky restaurant in Chicago, whose sales were affected by
major road construction that was in close proximity to the property. To a lesser
extent, our other Smith & Wollensky locations were impacted by the national
economic slowdown, and a company wide business disruption caused by the tragic
events of

20

September 11, 2001. The decrease in total sales for the year was partially
offset by the increase in sales of $1.4 million at the Smith & Wollensky in
Philadelphia, which opened in June 2000.

FOOD AND BEVERAGE COSTS. Food and beverage costs decreased $3.7 million to
$20.7 million in 2001 from $24.4 million in 2000. Food and beverage costs as a
percent of owned restaurant sales decreased to 29.3% in 2001 from 30.0% in 2000,
primarily due to cost efficiencies achieved at the two newer units, the Smith &
Wollensky restaurants in Washington D.C. and Philadelphia, resulting in food and
beverage costs as a percent of owned restaurant sales that are more comparable
to mature unit results, and to a lesser extent, the reduction in costs due to
the closing of the Maloney & Porcelli restaurant in Washington, D.C. in
January 2001.

SALARIES AND RELATED BENEFITS. Salaries and related benefits decreased
$3.3 million to $21.4 million in 2001 from $24.7 million in 2000. Salaries and
related benefits as a percent of owned restaurant sales decreased to 30.3% in
2001 from 30.4% in 2000. The decrease in salaries and related benefits was due
to a $1.3 million decrease resulting from the closing of the Maloney & Porcelli
restaurant in Washington, D.C. in January 2001, from the cost efficiencies
achieved at several of the units for 2001 and the additional staffing required
to support the June 2000 opening of the Smith & Wollensky unit in Philadelphia.

RESTAURANT OPERATING EXPENSES. Restaurant operating expenses decreased
$1.1 million to $11.0 million in 2001 from $12.1 million in 2000. The decrease
primarily related to the decrease in certain restaurant operating expenses,
including operating supplies and credit card charges that related to the
reduction in sales volume, and to a lesser extent, the higher operating costs
associated with the opening of two units in 2000. This decrease was partially
offset by an increase in utility costs in 2001. Restaurant operating expenses as
a percent of owned restaurant sales increased to 15.7% for 2001 from 14.9% in
2000 as a result of the overall decrease in sales volume.

OCCUPANCY AND RELATED EXPENSES. Occupancy and related expenses decreased
$433,000 to $5.3 million in 2001 from $5.7 million in 2000. The decrease was
primarily due to the closing of the Maloney & Porcelli restaurant in Washington,
D.C. in January 2001 and a reduction in percentage of sales rent at certain
locations. Occupancy and related expenses as a percent of owned restaurant sales
increased to 7.5% in 2001 from 7.0% in 2000 due to fixed minimum rent paid over
a decreasing revenue base.

MARKETING AND PROMOTIONAL EXPENSES. Marketing and promotional expenses
decreased $795,000 to $3.4 million in 2001 from $4.2 million in 2000. Marketing
and promotional expenses as a percent of owned restaurant sales decreased to
4.8% in 2001 from 5.1% in 2000, due to a decrease in print advertisements and a
reduction in advertising rates.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization remained
constant at $3.0 million in 2001 and 2000, respectively.

CHARGE TO CLOSE OWNED RESTAURANT. In the fourth quarter of 2000, the Company
closed the Maloney & Porcelli unit in Washington, D.C. and recorded a pretax
charge of $2.4 million, which included an accrual of $322,000 relating to lease
exist costs associated with the closure. In the third quarter of 2001, as a
result of the difficult economic conditions, exacerbated by the terrorist acts
on September 11, 2001 in New York and Washington, D.C. the Company concluded
that it would not be able to exit its lease obligation by the end of the year.
At that time, the Company recorded an additional charge of $360,000 assuming a
new tenant would not be identified until approximately June 30, 2003.

Prior to the end of the year, the Company began negotiations to terminate
its remaining lease term with the landlord. On January 31, 2002, the Company was
able to sign a lease termination agreement with the landlord of the Maloney and
Porcelli property in Washington D.C. reducing its remaining obligation under the
terms of the lease to January 31, 2002. The Company adjusted the

21

accrual to record the remaining costs to be incurred under the terms of the
agreement, as well as to write-off the remaining value of the property that it
was now abandoning. As a result, the Company reversed approximately $293,000 in
the fourth quarter of Fiscal 2001.

WRITE-OFF OF SITE DEVELOPMENT COSTS. In 2001, based on the tragic events
relating to the September 11, 2001 terrorist attacks and overall economic
conditions, management made a decision to terminate a lease that the Company had
entered into to open a new restaurant in Boston. In connection with our decision
to terminate the lease, the Company wrote-off the development costs (primarily
architectural and legal fees) associated with a proposed Smith & Wollensky
restaurant site. The write-off of costs incurred amounted to $283,000.

MANAGEMENT FEE INCOME. Management fee income decreased $627,000 to
$2.4 million in 2001 from $3.1 million in 2000, primarily due to a general
economic slowdown in the New York Metropolitan area, and a company wide
disruption of business resulting from the tragic events of September 11, 2001.
This was partially offset by the increase in fees received relating to the
management agreement for ONEc.p.s. that began operating in the third quarter of
2000. The economic slowdown and the September 11th attacks caused our managed
restaurants to have a decrease in their overall sales volume when comparing 2001
to 2000.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $352,000 to $8.8 million in 2001 from $8.4 million in 2000. General
and administrative expenses as a percent of owned restaurant sales increased to
12.4% in 2001 from 10.3% in 2000. General and administrative expenses include
corporate payroll and other expenditures that benefit both owned and managed
units. General and administrative expenses as a percent of owned and managed
restaurant sales increased to 7.3% in 2001 from 6.3% in 2000. The increase was
primarily due to an increase in public relations, professional fees and other
miscellaneous expenses, as well as due to the previously described decrease in
sales volumes.

ROYALTY EXPENSE. Royalty expense decreased $80,000 to $967,000 in 2001 from
$1.05 million in 2000, due to a net decrease in sales from the Smith & Wollensky
units of $3.9 million.

RESERVE ON RECEIVABLE FROM MANAGED RESTAURANTS. In 2001, due to the current
economic uncertainties, the Company established a reserve of $300,000 against
receivables related to a managed restaurant it deems may be uncollectable.

INTEREST EXPENSE--NET OF INTEREST INCOME. Interest expense, net of interest
income, decreased $1.9 million to $1.1 million in 2001 from $3.0 million in
2000, primarily due to the repayment of the senior credit facility, the
$10.0 million senior subordinated note and the $1.0 million senior revolving
credit facility on May 29, 2001.

PROVISION FOR INCOME TAXES. The tax provision in 2001 represents certain
state and local taxes. The tax provision in 2000 represents federal alternative
minimum tax and certain state and local taxes.

EXTRAORDINARY LOSS ON EARLY RETIREMENT OF DEBT. In connection with the IPO
and the retirement of the outstanding debt, the Company recorded an
extraordinary charge of $801,000, net of $280,000 of income tax benefits, to
write-off the remaining unamortized debt issuance costs and premiums associated
with the repayment of the senior credit facility and the repurchase of the
senior subordinated note.

2000 COMPARED TO 1999

OWNED RESTAURANT SALES. Owned restaurant sales increased $11.7 million, or
16.6%, to $81.5 million in 2000 from $69.8 million in 1999. The increase in
restaurant sales was due to $2.6 million in sales from a full year of operations
for the Smith & Wollensky in Washington, D.C., which opened in 1999,
$4.9 million in sales derived from the two restaurants opened in 2000, and a

22

$4.2 million or 8.4% increase in sales for our comparable owned units open for
these entire periods, which increase was primarily a result of an increase in
sales for the Smith & Wollensky units in Miami, Chicago, New Orleans and Las
Vegas, offset by a decrease in sales at the three owned New York units.

FOOD AND BEVERAGE COSTS. Food and beverage costs increased $3.5 million to
$24.4 million in 2000 from $20.9 million in 1999. Food and beverage costs as a
percent of owned restaurant sales increased to 30.0% in 2000 from 29.9% in 1999,
primarily due to the opening of Maloney & Porcelli in Washington, D.C., which
was subsequently closed in January 2001, and the Smith & Wollensky in
Philadelphia. The Company experienced higher than normal food and beverage costs
as a percent of sales at these two new restaurants as a result of initial
startup inefficiencies and a lower revenue base. It is common for new
restaurants to experience this in the first six months of operations. Generally,
as the unit matures and revenues increase, operating efficiency is expected to
improve and the food and beverage costs as a percent of sales for that unit are
expected to decrease.

SALARIES AND RELATED BENEFITS. Salaries and related benefits increased
$3.9 million to $24.7 million in 2000 from $20.8 million in 1999. Salaries and
related benefits as a percent of owned restaurant sales increased to 30.4% in
2000 from 29.8% in 1999, primarily due to the salaries for Maloney & Porcelli in
Washington, D.C., which unit was subsequently closed, and to a lesser extent the
Smith & Wollensky in Philadelphia. Additional staffing was required during the
first six months to support the opening of the two new units in 2000. Generally,
as the unit matures, staffing will be reduced through efficiencies and salaries
and related benefits as a percent of sales will decrease due to the lower
staffing requirement and higher revenue base.

RESTAURANT OPERATING EXPENSES. Restaurant operating expenses increased
$1.9 million to $12.1 million in 2000 from $10.2 million in 1999. Restaurant
operating expenses as a percent of owned restaurant sales increased to 14.9% in
2000 from 14.7% in 1999, primarily due to certain fixed costs associated with
the openings of the Maloney & Porcelli unit in Washington, D.C. and the Smith &
Wollensky unit in Philadelphia, and to a lesser extent, the increase in utility
charges and repairs and maintenance expenditures for the units that were open
prior to 2000.

OCCUPANCY AND RELATED EXPENSES. Occupancy and related expenses increased
$918,000 to $5.7 million in 2000 from $4.8 million in 1999. Occupancy and
related expenses as a percent of owned restaurant sales increased to 7.0% in
2000 from 6.9% in 1999, primarily due to the increase in rent paid as a
percentage of sales for the Smith & Wollensky unit in Chicago and the two new
units opened in 2000.

MARKETING AND PROMOTIONAL EXPENSES. Marketing and promotional expenses
increased $726,000 to $4.2 million in 2000 from $3.4 million in 1999. Marketing
and promotional expenses as a percent of owned restaurant sales increased to
5.1% in 2000 from 4.9% in 1999, primarily due to an increase in full-page print
advertisements related to the new units opened in 2000.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$479,000 to $3.0 million in 2000 from $2.6 million in 1999, primarily due to
approximately $4.4 million of new assets put into service during 2000
principally relating to the two new units opened in 2000.

CHARGE TO CLOSE OWNED RESTAURANT. In the fourth quarter of 2000 a decision
was made to close the Maloney & Porcelli unit in Washington, D.C. in
January 2001. In 2000, the Company recorded a pretax charge of $2.4 million
representing the write-down of property and equipment and certain other assets
and accrual of lease exit costs associated with the closure.

MANAGEMENT FEE INCOME. Management fee income increased $132,000 to
$3.1 million in 2000 from $2.9 million in 1999, primarily due to an increase of
$66,000 in fees from Maloney & Porcelli in New York and to $54,000 in fees
relating to the management agreement for ONEc.p.s., which began operating in the
third quarter of 2000.

23

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $1.3 million to $8.4 million in 2000 from $7.1 million in 1999.
General and administrative expenses as a percent of owned restaurant sales
increased to 10.3% in 2000 from 10.2% in 1999. General and administrative
expenses includes corporate payroll and other expenditures which benefit both
owned and managed units. General and administrative expenses as a percent of
owned and managed restaurant sales increased to 6.3% in 2000 from 5.9% in 1999.
This increase was primarily due to an increase in corporate management necessary
to facilitate the expansion plan and to train personnel required for the opening
of additional units, which resulted in additional payroll and related benefits
of approximately $929,000, advertising and public relations expense of $221,000
and additional travel expense of approximately $77,000.

ROYALTY EXPENSE. Royalty expense increased $269,000 to $1.0 million in 2000
from $778,000 in 1999, primarily due to an increase in sales from the Smith &
Wollensky units of $11.2 million.

INTEREST EXPENSE--NET OF INTEREST INCOME. Interest expense, net of interest
income, increased $863,000 to $3.1 million in 2000 from $2.2 million in 1999,
primarily due to prime rate increases and additional amounts outstanding under
our senior credit facility, the $10.0 million outstanding under our senior
subordinated note and the $1.0 million senior revolving credit facility.

PROVISION FOR INCOME TAXES. The tax provision represents federal alternative
minimum tax and certain state and local taxes. A benefit has not been provided
for deferred tax assets due to the uncertainty of their realization.

RISK RELATED TO CERTAIN MANAGEMENT AGREEMENTS AND LEASE AGREEMENTS

We are subject to various covenants and operating requirements in certain of
our management agreements that, if not complied with or otherwise met, provide
for the right of the other party to terminate these agreements.

With respect to management agreements, we are subject to a right of the
other party to terminate, at any time, the agreement relating to ONEc.p.s., and
we are in default under our agreement relating to the Park Avenue Cafe in
Chicago and Mrs. Park's Tavern, with respect to the requirement that our
chairman beneficially own more than 20% of the entity which manages the
facility, which could result in the loss of management fee income from these
restaurants. The Company has not been notified by the landlords that they plan
to terminate our lease agreements and management has no reason to believe that
the agreements will be terminated.

LIQUIDITY AND CAPITAL RESOURCES

The Company has funded our capital requirements in recent years through cash
flow from operations, a private placement of preferred stock, the sale of
subordinated notes and bank debt and in fiscal 2001 through its IPO. Net cash
provided by/(used in) operating activities amounted to ($2.7) million for the
year December 31, 2001, $3.6 million for the year ended January 1, 2001 and
$843,000 for the year ended January 3, 2000.

24

Net cash provided by / (used in) financing activities was $13.2 million for
the year ended December 31, 2001, ($14,000) for the year ended January 1, 2001
and $7.5 million for the year ended January 3, 2000. On May 29, 2001, the
Company completed its IPO of 5,295,972 shares of common stock, of which the
Company sold 4,750,000 shares, at $8.50 per share. Proceeds of the offering were
used to redeem all of the outstanding debt under the Company's senior credit
facility, the $10.0 million senior subordinated note and the $1.0 million senior
revolving credit facility, including accrued interest and prepayment premiums,
and to pay certain fees and expenses incurred relating to the offering.
Financing activities for the year ended January 1, 2001, consisted of
$1.0 million from the proceeds from issuance of short-term debt and the
repayment of principal payments of $1.0 million for long-term debt. Financing
activities for the year ended January 3, 2000, consisted of issuing a
$10.0 million senior subordinated note bearing interest at 12.5%.

The Company used cash primarily to fund the development and construction of
new restaurants and expansion of existing restaurants. Net cash used in
investing activities was $6.3 million, $5.3 million and $6.3 million for each of
the years ended December 31, 2001, January 1, 2001, and January 3, 2000,
respectively. Total capital expenditures were $2.8 million, $4.4 million and
$5.9 million in 2001, 2000 and 1999, respectively.

Total capital expenditures are expected to be approximately $3.0 million to
$5.5 million in 2002, depending on the total units to be opened in 2002. With
regard to our future expansion, the Company is conserving our resources and
moving ahead cautiously as management evaluates and monitors economic
conditions. The Company expects to open one to two new Smith & Wollensky
restaurants in 2002. The Company has begun construction on a 375 seat Smith &
Wollensky in Columbus, Ohio, which is planned to open at the beginning of the
third quarter. The Company expects to open three to four new Smith & Wollensky
restaurants each year starting in 2003. The Company intends to develop
restaurants that will require, on average, a total cash investment of
$2.0 million to $5.0 million net of landlord contributions and excluding
pre-opening costs. The cost of opening two new restaurants totaled $2.5 million
and $4.2 million in 2000 and 1999, respectively.

As of December 31, 2001, expected cash to be used for Maloney & Porcelli in
Washington, D.C., the unit the Company closed in January 2001, was approximately
$42,000 based on the terms of the lease termination agreement dated January 31,
2002.

The Company entered into a revolving credit facility with Fleet Bank on
September 1, 1998, as amended on June 8, 1999, June 29, 1999, February 29, 2000
and March 21, 2001. With the net proceeds from the IPO we repaid all debt
outstanding under the senior credit facility and the $1.0 million revolving
credit facility, including accrued interest and a prepayment premium on May 29,
2001. These repayments terminated the senior credit facility and the senior
revolving credit facility in accordance with the terms of the March 21, 2001
amendment.

On June 29, 1999, we entered into a senior subordinated note purchase
agreement with Magnetite. In connection with such purchase agreement, we issued
a $10.0 million senior subordinated note bearing interest at 12.5%. With the net
proceeds of the IPO, we repaid all debt outstanding under the senior
subordinated note on May 29, 2001, including accrued interest and a prepayment
premium. In connection with the Magnetite financing, we issued Magnetite
warrants to purchase up to 71,988 shares of our common stock at an exercise
price of $.01 per share. Magnetite exercised their warrant on June 14, 2001. In
connection with the exercise, the Company wrote off the remaining unamortized
fair value of these warrants to additional paid in capital. Proceeds from the
Company's IPO were used to retire this note in 2001.

In 1997, we assumed certain liabilities from two bankrupt corporations in
connection with the acquisition of our lease for the Smith & Wollensky in Miami.
Pursuant to the terms of the bankruptcy resolution, we are obligated to make
quarterly and annual payments over a six-year period. These obligations bear
interest at rates ranging from 8.0% to 12.0%. The aggregate outstanding balance
of

25

such liabilities was approximately $259,000 as of December 31, 2001. In
addition, we assumed a mortgage on the Miami property that requires monthly
interest and principal payments, expires in June 2004, and bears interest at
8.0% per year. In addition, we assumed a loan payable to a financing institution
that requires monthly payments through the year 2014 and bears interest at 7.67%
per year. The aggregate balance of the mortgage and loan payable was
approximately $1.8 million on December 31, 2001.

We are in the process of seeking to obtain a new credit facility. We believe
that our cash and short-term investments on hand, cash expected from operations
and expected landlord construction contributions should be sufficient to finance
our modified planned capital expenditures and other operating activities
throughout 2002. Changes in our operating plans, acceleration of our expansion
plans, lower than anticipated sales, increased expenses, potential acquisitions
or other events may cause us to seek additional financing sooner than
anticipated. We may require additional capital to fund our expansion plans after
fiscal 2002 or to satisfy working capital needs in the event that the general
weakness in economic conditions continues. As a result we would seek to obtain
additional funds through commercial borrowings or the private or public issuance
of debt or equity securities. However, there can be no assurance that such funds
will be available when needed or be available on terms acceptable to us. Failure
to obtain financing as needed could have a material adverse effect on our
expansion plans.

- ------------------------

(1) Thereafter in this agreement, "License Agreement", shall mean "each year"
based upon the terms of this agreement. The License agreement is irrevocable
and perpetual unless terminated in accordance with the terms of this
agreement. SEE ITEM 14, Notes to the Consolidated Financial Statements,
Note 6, page F-16.

SEASONALITY

Our business is seasonal in nature depending on the region of the United
States in which a particular restaurant is located, with revenues generally
being less in the third quarter than in other quarters due to reduced summer
volume and highest in the fourth quarter due to year-end and holiday events. As
we continue to expand in other locations, the seasonality pattern may change.

INFLATION

Components of our operations subject to inflation include food, beverage,
lease and labor costs. Our leases require us to pay taxes, maintenance, repairs,
insurance, and utilities, all of which are subject to inflationary increases. We
believe inflation has not had a material impact on our results of operations in
recent years.

26

EFFECT OF NEW ACCOUNTING STANDARDS

In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
BUSINESS COMBINATIONS, and SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS.
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. SFAS No. 141 specifies
criteria that intangible assets acquired in a business combination must meet to
be recognized and reported separately from goodwill. SFAS No. 142 will require
that goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead be tested for impairment at least annually in accordance
with the provisions of SFAS No. 142 and that intangible assets with definite
useful lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF, and subsequently, SFAS No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, after its adoption. Goodwill and
intangible assets acquired in business combinations completed before July 1,
2001 will continue to be amortized prior to the adoption of SFAS No. 142. The
Company was required to adopt the provisions of SFAS No. 141 in the third
quarter of 2001 and SFAS No. 142 was effective January 1, 2002.

Upon adoption of SFAS No. 142, the Company is required to evaluate its
existing intangible assets and goodwill that were acquired in purchase business
combinations, and to make any necessary reclassifications in order to conform
with the new classification criteria in SFAS No. 141 for recognition separate
from goodwill. The Company will be required to reassess the useful lives and
residual values of all intangible assets acquired, and make any necessary
amortization period adjustments by the end of the first interim period after
adoption. If an intangible asset is identified as having an indefinite useful
life, the Company will be required to test the intangible asset for impairment
in accordance with the provisions of SFAS No. 142 within the first interim
period. Impairment is measured as the excess of carrying value over the fair
value of an intangible asset with an indefinite life. Any impairment loss will
be measured as of the date of adoption and recognized as the cumulative effect
of a change in accounting principle in the first interim period.

In connection with the transitional goodwill impairment evaluation, SFAS
No. 142 requires the Company to perform an assessment of whether there is an
indication that goodwill is impaired as of the date of adoption. To accomplish
this, the Company must identify its reporting units and determine the carrying
value of each reporting unit by assigning the assets and liabilities, including
the existing goodwill and intangible assets, to those reporting units as of
January 1, 2002. The Company will then have up to six months from January 1,
2002 to determine the fair value of each reporting unit and compare it to the
carrying amount of the reporting unit. To the extent the carrying amount of a
reporting unit exceeds the fair value of the reporting unit, an indication
exists that the reporting unit goodwill may be impaired and the Company must
perform the second step of the transitional impairment test. The second step is
required to be completed as soon as possible, but no later than the end of the
year of adoption. In the second step, the Company must compare the implied fair
value of the reporting unit goodwill with the carrying amount of the reporting
unit goodwill, both of which would be measured as of the date of adoption. The
implied fair value of goodwill is determined by allocating the fair value of the
reporting unit to all of the assets (recognized and unrecognized) and
liabilities of the reporting unit in a manner similar to a purchase price
allocation, in accordance with SFAS No. 141. The residual fair value after this
allocation is the implied fair value of the reporting unit goodwill. Any
transitional impairment loss will be recognized as the cumulative effect of a
change in accounting principle in the Company's statement of operations.

27

As of the date of adoption of SFAS No. 142, January 1, 2002, the Company
expects to have unamortized goodwill in the amount of $7.0 million, which will
be subject to the transition provisions of SFAS No. 141 and SFAS No. 142.
Amortization expense related to goodwill was $290,000 for Fiscal 2001 and 2000,
respectively. Because of the extensive effort needed to comply with adopting
SFAS No. 141 and SFAS No. 142, it is not practicable to reasonably estimate the
impact of adopting these Statements on the Company's consolidated financial
statements at the date of this report, including whether any transitional
impairment losses could be required to be recognized as the cumulative effect of
a change in accounting principle. In connection with the adoption of SFAS
No. 142, the Company has determined that each of its owned restaurants will
represent a reporting unit.

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations (SFAS No. 143). SFAS No. 143 requires the Company to record the fair
value of an asset retirement obligation as a liability in the period in which it
incurs a legal obligation associated with the retirement of tangible long-lived
assets that result from the acquisition, construction, development and/or normal
use of the assets. The Company also records a corresponding asset, which is
depreciated over the life of the asset. Subsequent to the initial measurement of
the asset retirement obligation, the obligation will be adjusted at the end of
each period to reflect the passage of time and changes in the estimated future
cash flows underlying the obligation. The Company is required to adopt SFAS
No. 143 on December 31, 2002.

In August 2001, the FASB issued SFAS No. 144, addressing financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 requires that long-lived assets be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is recognized by
the amount by which the carrying amount of the asset exceeds the fair value of
the asset. SFAS No. 144 requires companies to separately report discontinued
operations and extends that reporting to a component of an entity that either
has been disposed of (by sale, abandonment, or in a distribution to owners) or
is classified as held for sale. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell. The Company is
required to adopt SFAS No. 144 on January 1, 2002.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to changing interest rates on our outstanding mortgage in
relation to the Smith & Wollensky, Miami property, that bears interest at prime
rate plus 1%. The interest cost of our mortgage is affected by changes in the
prime rate. The table below provides information about the Company's
indebtedness that is sensitive to changes in interest rates. The table presents
cash flows with respect to principal on indebtedness and related weighted
average interest rates by expected maturity

28

dates. Weighted average rates are based on implied forward rates in the yield
curve at December 31, 2001.

We have no derivative financial or derivative commodity instruments. The
Company does not hold or issue financial instruments for trading purposes.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Reference is made to the Index on page F-1 of the Consolidated Financial
Statements of the Company and the Notes thereto contained herein.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None

PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

The information required by this Item 10 is set forth in the Company's
Notice of 2002 Annual Meeting of Shareholders and Proxy Statement, and is
incorporated herein by reference thereto.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item 11 is set forth in the Company's
Notice of 2002 Annual Meeting of Shareholders and Proxy Statement, and is
incorporated herein by reference thereto.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT RELATED
TO STOCKHOLERS MATTERS

The information required by this Item 12 is set forth in the Company's
Notice of 2002 Annual Meeting of Shareholders and Proxy Statement, and is
incorporated herein by reference thereto.

ITEM 13. RELATED PARTY TRANSACTIONS

The information required by this Item 13 is set forth in the Company's
Notice of 2002 Annual Meeting of Shareholders and Proxy Statement, and is
incorporated herein by reference thereto.

29

PART IV

ITEM 14.

(a) FINANCIAL STATEMENTS AND SCHEDULES

1. Consolidated Financial Statements of The Smith & Wollensky Restaurant
Group Inc. and Independent Auditors' Report included herein: See index on
page F-1.

2. Financial Statement Schedule
Schedule II--Valuation and Qualifying
Accounts...........................F-31

(i) All other schedules called for under Regulation S-X are not submitted
because they are not applicable or not required, or because the
required information is included in the financial statements or notes
thereto.

(b) REPORTS ON FORM 8-K

JANUARY 14, 2002 PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934

OTHER EVENTS.

On January 14, 2002, the Registrant issued a press release titled "Smith &
Wollensky Names Robert Villency to Board of Directors" in which the
Registrant announced that Robert D. Villency had been elected to the
Company's Board of Directors, bringing the total number of directors to
eight.

(c) EXHIBITS

See accompanying Index to Exhibits. The Company will furnish to any
stockholder, upon written request, any exhibit listed in the accompanying Index
to Exhibits upon payment by such stockholder of the Company's reasonable
expenses in furnishing any such exhibit.

30

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.

By: /s/ ALAN N. STILLMAN
-----------------------------------------
Alan N. Stillman
Name:
CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
Title:
March 29, 2002
Date:

By: /s/ ALAN M. MANDEL
-----------------------------------------
Alan M. Mandel
Name:
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
Title:
March 29, 2002
Date:

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.

31

INDEX TO EXHIBITS

- ------------------------

(1) Previously filed and incorporated by reference herein from the Registrant's
Registration Statement on Form S-1 (No. 33-57518)

(2) Previously filed and incorporated by reference herein from the Registrant's
Form SC TO-I dated February 4, 2002.

(3) Previously filed and incorporated by reference herein from the Registrant's
Form SC TO-I/A dated March 7, 2002.

(*) Management contract or compensatory plan or arrangement.

34

THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
(FORMERLY THE NEW YORK RESTAURANT GROUP, INC.)
AND SUBSIDIARIES

TABLE OF CONTENTS

F-1

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
The Smith & Wollensky Restaurant Group Inc.:

We have audited the financial statements of The Smith & Wollensky Restaurant
Group, Inc. (formerly The New York Restaurant Group, Inc.) and subsidiaries as
listed in the accompanying index on page F-1. In connection with our audits of
the consolidated financial statements, we also have audited the financial
statement schedule as listed in the accompanying index. These consolidated
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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
text 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Smith &
Wollensky Restaurant Group, Inc. and subsidiaries as of December 31, 2001 and
January 1, 2001, and the results of their operations and their cash flows for
the years ended December 31, 2001, January 1, 2001 and January 3, 2000, in
conformity with accounting principles generally accepted in the United States of
America. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.

KPMG LLP

New York, New York
March 6, 2002

F-2

THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
(FORMERLY THE NEW YORK RESTAURANT GROUP, INC.)
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

See accompanying notes to consolidated financial statements.

F-3

THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
(FORMERLY THE NEW YORK RESTAURANT GROUP, INC.)
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

YEARS ENDED DECEMBER 31, 2001, JANUARY 1, 2001 AND JANUARY 3, 2000

See accompanying notes to consolidated financial statements.

F-4

THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
(FORMERLY THE NEW YORK RESTAURANT GROUP, INC.)
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS)

YEARS ENDED DECEMBER 31, 2001, JANUARY 1, 2001 AND JANUARY 3, 2000

See accompanying notes to consolidated financial statements.

F-5

THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
(FORMERLY THE NEW YORK RESTAURANT GROUP, INC.)
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)

YEARS ENDED DECEMBER 31, 2001, JANUARY 1, 2001 AND JANUARY 3, 2000

See accompanying notes to consolidated financial statements.

F-6

THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
(FORMERLY THE NEW YORK RESTAURANT GROUP, INC.)
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2001 AND JANUARY 1, 2001
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE/UNIT AMOUNTS)

(1) ORGANIZATION AND DESCRIPTION OF BUSINESS

The Smith & Wollensky Restaurant Group, Inc. (formerly The New York
Restaurant Group, Inc.) and subsidiaries (collectively, the "Company") operate
in a single segment, which develops, owns, operates and manages a diversified
portfolio of upscale tablecloth restaurants. At December 31, 2001, the Company
owned and operated nine restaurants, including six Smith & Wollensky
restaurants, and manages five restaurants. The Company manages restaurants and
the food and beverage service for a hotel operation, pursuant to management
agreements.

The Smith & Wollensky Restaurant Group, Inc. (a C corporation) was formed in
connection with the consummation of that private placement offering described in
note 14. Upon consummation of such offering, The New York Restaurant
Group, Inc. was merged with The New York Restaurant Group, LLC, with The New
York Restaurant Group, Inc. surviving the merger (the "Merger"). Prior to the
Merger, the Company effected a three-for-two split of membership units. In
connection with the Merger, members of The New York Restaurant Group, LLC
received one share of the Company's common stock for every membership unit held
by them as of October 31, 1997.

The New York Restaurant Group, LLC was formed in August 1995 to act as a
holding company for a series of partnerships and limited liability companies
affiliated by a common control group (the "Predecessor Company") that operated
the Company-owned restaurants. In addition, the Predecessor Company managed
restaurants and a hotel food service business. The control group is defined as
Alan Stillman (the Company's Chairman) and his spouse (the "Control Group").
Pursuant to a Master Agreement dated September 29, 1995, in January 1996 the
Company and the operating entities entered into a group of related asset
contribution and merger agreements whereby the then owners of the operating
entities exchanged their underlying equity interests or the operating net assets
of their businesses for either cash or membership interests in the Company, at
their option.

Pursuant to these agreements, certain owners sold their equity interests in
the Predecessor Company for approximately $2,966 in cash, at a value of $10 per
membership unit, and certain owners and new investors purchased additional
membership units at the same price aggregating approximately $689.

The remaining Company membership units were allocated to the operating
entities owned at the proportional fair value of each individual operating
entity. The valuation of the Company was determined in conjunction with the
value assigned to a convertible note transaction in 1995 and valuations of the
individual operating entities prepared by Company management.

This transaction has been accounted for, in part, as a purchase transaction,
whereby the portion of the net assets representing the minority interests of the
Predecessor Company was recorded utilizing a fair value of $10 per membership
unit. Accordingly, goodwill of approximately $8,700, including $246 of
transaction costs, was recorded at January 1, 1996. The portion of the net
assets attributable to the Control Group was recorded at its proportional
underlying book value at January 1, 1996.

The Company completed an initial public offering ("IPO") of 5,295,972 shares
of common stock in May 2001, of which the Company sold 4,750,000 shares, at
$8.50 per share. Proceeds of the IPO were used to redeem all of the outstanding
debt under the Company's senior credit facility, a $10,000 senior subordinated
note and a $1,000 senior revolving credit facility, including accrued interest
and

F-7

THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
(FORMERLY THE NEW YORK RESTAURANT GROUP, INC.)
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2001 AND JANUARY 1, 2001
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE/UNIT AMOUNTS)

(1) ORGANIZATION AND DESCRIPTION OF BUSINESS (CONTINUED)
prepayment premiums, and to pay certain fees and expenses incurred relating to
the IPO. All shares of convertible redeemable preferred stock outstanding
automatically converted into 1,448,529 shares of common stock upon the closing
of the Company's IPO. On June 14, 2001, Magnetite, the party that held a $10,000
senior subordinated note, exercised their warrant to purchase 71,988 shares of
common stock at $.01 per share via a cashless exercise. In connection with the
exercise, the Company wrote-off the remaining unamortized fair value of these
warrants to additional paid in capital.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(A) REPORTING PERIOD

The Company utilizes a 52- or 53-week reporting period ending on the Monday
nearest to December 31st. The periods ended December 31, 2001 (Fiscal 2001) and
January 1, 2001 (Fiscal 2000) represent 52-week reporting periods, and the
period ended January 3, 2000 (Fiscal 1999) represents a 53-week reporting
period.

(B) PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of
the Company after elimination of all material intercompany balances and
transactions.

(C) CASH AND CASH EQUIVALENTS

The Company had cash and cash equivalents of $4,561 and $370 as of
December 31, 2001 and January 1, 2001, consisting of cash and overnight
repurchase agreements and certificates of deposit with an initial term of less
than three months.

(D) ACCOUNTS RECEIVABLE

Accounts receivable consists primarily of bank credit card accounts
receivable and management fees receivable.

(E) INVENTORY

Merchandise inventory consists primarily of restaurant food and beverages
and are stated at the lower of cost or market value. Cost is determined using
the first-in, first-out method.

(F) INVESTMENT SECURITIES

Investment securities at December 31, 2001 consist of corporate bonds and
equity securities. The Company classifies its debt and equity securities as
available-for-sale securities. The securities are recorded at fair value.
Unrealized holding gains and losses, net of the related tax effect, on
available-for-sale securities are excluded from earnings and are reported as a
separate component of stockholder's equity until realized. There were no
material unrealized holding gains or losses as of December 31, 2001. Realized
gains and losses from the sale of available-for-sale securities are determined
on a specific identification basis.

(G) PROPERTY AND EQUIPMENT

F-8

THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
(FORMERLY THE NEW YORK RESTAURANT GROUP, INC.)
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2001 AND JANUARY 1, 2001
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE/UNIT AMOUNTS)

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and equipment is stated at cost. Landlord allowances for leasehold
improvements, furniture, fixtures and equipment are offset against the related
property and equipment accounts. Depreciation is calculated on a straight-line
basis over the estimated useful lives of the assets. Leasehold improvements and
rights are amortized on the straight-line basis over the shorter of the lease
term (assuming renewal options) or the estimated useful life of the asset. The
estimated useful lives are as follows:

Building and building improvements.......................... 30 years
Machinery and equipment..................................... 5 to 7 years
Furniture and fixtures...................................... 7 years
Leasehold improvements...................................... 5 to 27 years
Leasehold rights............................................ 27 years

(H) ARTWORK

The Company occasionally purchases artwork and antiques for display in its
restaurants. The Company does not depreciate artwork and antiques since these
assets have cultural, aesthetic or historical value that is worth preserving
perpetually and the Company has the ability and intent to protect and preserve
these assets. Such assets are recorded at cost and are included in other assets
in the accompanying consolidated balance sheets.

(I) INTANGIBLE ASSETS

Goodwill, which represents the excess of fair value of minority interests
acquired in the formation of the Company over the book value of identifiable net
assets allocated to those minority interests, is being amortized on a
straight-line basis over the expected period to be benefited which is estimated
to be thirty years. The Company assesses the recoverability of this intangible
asset by determining whether the goodwill balance can be recovered through
undiscounted future operating cash flows of the acquired operation. The amount
of goodwill impairment, if any, is measured based on projected discounted future
operating cash flows using a discount rate reflecting the Company's average cost
of funds. The assessment of the recoverability of goodwill will be impacted if
estimated future operating cash flows are not achieved. The accumulated
amortization as of December 31, 2001 and January 1, 2001 was $1,740 and $1,450,
respectively.

Costs attributable to a sale and licensing agreement (the "Licensing
Agreement") entered into in 1996 consisted of a $2,500 payment (plus any
payments made upon the opening of additional units) and legal fees paid by the
Company to acquire the rights and license to use the names "Smith & Wollensky"
and "Wollensky's Grill" (collectively, the "Names") as described in Note 6. The
Licensing Agreement exists in perpetuity and the original $2,500 payment is
being amortized over the thirty year estimated useful life of the Names, using
the straight-line method. Any payments made upon the opening of additional units
are being amortized over the lesser of the life of the lease or the remaining
useful life of the Names, using the straight-line method.

The cost of the acquisition of the management contract for the Maloney &
Porcelli restaurant in New York City amounting to $1,500 is being amortized over
the fifteen-year period of the underlying

F-9

THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
(FORMERLY THE NEW YORK RESTAURANT GROUP, INC.)
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2001 AND JANUARY 1, 2001
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE/UNIT AMOUNTS)

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
operating lease, using the straight-line method. The accumulated amortization as
of December 31, 2001 and January 1, 2001 was $571 and $471, respectively.

The cost of the acquisition of the management contract for the ONEc.p.s.
restaurant amounted to $500 in 2000 and is being amortized over the ten year
period of the underlying management contract, using the straight-line method.
The accumulated amortization as of December 31, 2001 and January 1, 2001 was $65
and $15, respectively.

Amortization expense of intangible assets aggregated $630, $599 and $574 in
Fiscal 2001, 2000 and 1999, respectively, is included in general and
administrative expenses in the accompanying consolidated statements of
operations.

The Company has evaluated, and will continue to do so in the future, the
amortizable lives of its intangible assets on a periodic basis, giving
consideration to any events or circumstances impacting these amortizable lives.

(J) MARKETING AND PROMOTIONAL EXPENSES

Marketing and promotional expenses in the accompanying consolidated
statements of operations include advertising expenses of $1,814, $2,186 and
$1,502 for Fiscal 2001, 2000 and 1999, respectively. Marketing and promotional
costs are recorded as expense in the period incurred.

(K) PRE-OPENING COSTS

Pre-opening costs incurred in connection with the opening of new restaurants
are expensed as incurred and are included in general and administrative expenses
in the accompanying consolidated statements of operations.

(L) DEBT FINANCING COSTS

Deferred debt financing costs, which were included in other assets
(note 8), relate to costs incurred in connection with bank borrowings and other
long-term debt and are amortized over the term of the related borrowings.
Amortization expense of deferred financing costs was $113, $231 and $172 in
Fiscal 2001, 2000 and 1999, respectively.

(M) INCOME TAXES

Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.

(N) STOCK OPTION PLAN

The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES, and related

F-10

THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
(FORMERLY THE NEW YORK RESTAURANT GROUP, INC.)
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2001 AND JANUARY 1, 2001
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE/UNIT AMOUNTS)

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
interpretations including FASB Interpretation No. 44, ACCOUNTING FOR CERTAIN
TRANSACTIONS INVOLVING STOCK COMPENSATION AN INTERPRETATION OF APB OPINION
NO. 25 issued in March 2000, to account for its fixed plan stock options. Under
this method, compensation expense is recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price.
Statement of Financial Accounting Standard ("SFAS") No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, established accounting and disclosure requirements
using a fair value-based method of accounting for stock-based employee
compensation plans. As allowed by SFAS No. 123, the Company has elected to
continue to apply the intrinsic value-based method of accounting described
above, and has adopted the disclosure requirements of SFAS No. 123.

The Company has elected not to implement the fair value based accounting
method for employee stock options, but has elected to disclose the pro forma net
earnings and pro forma earnings per share for employee stock option grants as if
such method had been used to account for stock-based compensation cost. The pro
forma impact of options granted in Fiscal 2001, 1998 and 1996 would have been an
increase to compensation of $96, $99 and $99 for Fiscal years 2001, 2000 and
1999, respectively. No options were granted in Fiscal 2000 and 1999. See
Note 13.

(O) LONG-LIVED ASSETS

The Company reviews long-lived assets to be held and used or disposed of for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured on a restaurant by restaurant basis by a comparison
of the carrying amount of the asset to undiscounted future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets.

(P) USE OF ESTIMATES

The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.

(Q) FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying value of the Company's accounts receivable, accounts payable
and accrued expenses approximate their fair values based on the short-term
nature of such items. The carrying value of the mortgage included in long-term
debt approximates fair value since the interest rate is variable at terms
currently available to the Company. The fair value of the senior subordinated
note was estimated using a discounted cash flow analysis based on the Company's
incremental borrowing rate. The fair value of the senior subordinated note at
January 1, 2001 was approximately $9,200. Fair value of investments is
determined by the most recently traded price of each security at the balance
sheet date. Net realized gains or losses are determined on the specific
identification cost method.

F-11

THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
(FORMERLY THE NEW YORK RESTAURANT GROUP, INC.)
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2001 AND JANUARY 1, 2001
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE/UNIT AMOUNTS)

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(R) REVENUE RECOGNITION

Sales from owned restaurants are recognized as revenue at the point of the
delivery of meals and services. Management fee income is recognized as the
related management fee is earned, pursuant to the respective agreements.

(S) EFFECT OF NEW ACCOUNTING STANDARDS

In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
BUSINESS COMBINATIONS, and SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS.
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. SFAS No. 141 specifies
criteria that intangible assets acquired in a business combination must meet to
be recognized and reported separately from goodwill. SFAS No. 142 will require
that goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in accordance
with the provisions of SFAS No. 142 and that intangible assets with definite
useful lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF, and subsequently, SFAS No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, after its adoption. Goodwill and
intangible assets acquired in business combinations completed before July 1,
2001 will continue to be amortized prior to the adoption of SFAS No. 142. The
Company was required to adopt the provisions of SFAS No. 141 in the third
quarter of 2001 and SFAS No. 142 was effective January 1, 2002.

Upon adoption of SFAS No. 142, the Company is required to evaluate its
existing intangible assets and goodwill that were acquired in purchase business
combinations, and to make any necessary reclassifications in order to conform
with the new classification criteria in SFAS No. 141 for recognition separate
from goodwill. The Company will be required to reassess the useful lives and
residual values of all intangible assets acquired, and make any necessary
amortization period adjustments by the end of the first interim period after
adoption. If an intangible asset is identified as having an indefinite useful
life, the Company will be required to test the intangible asset for impairment
in accordance with the provisions of SFAS No. 142 within the first interim
period. Impairment is measured as the excess of carrying value over the fair
value of an intangible asset with an indefinite life. Any impairment loss will
be measured as of the date of adoption and recognized as the cumulative effect
of a change in accounting principle in the first interim period.

In connection with the transitional goodwill impairment evaluation, SFAS
No. 142 requires the Company to perform an assessment of whether there is an
indication that goodwill is impaired as of the date of adoption. To accomplish
this, the Company must identify its reporting units and determine the carrying
value of each reporting unit by assigning the assets and liabilities, including
the existing goodwill and intangible assets, to those reporting units as of
January 1, 2002. The Company will then have up to six months from January 1,
2002 to determine the fair value of each reporting unit and compare it to the
carrying amount of the reporting unit. To the extent the carrying amount of a
reporting unit exceeds the fair value of the reporting unit, an indication
exists that the reporting unit goodwill may be impaired and the Company must
perform the second step of the transitional

F-12

THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
(FORMERLY THE NEW YORK RESTAURANT GROUP, INC.)
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2001 AND JANUARY 1, 2001
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE/UNIT AMOUNTS)

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
impairment test. The second step is required to be completed as soon as
possible, but no later than the end of the year of adoption. In the second step,
the Company must compare the implied fair value of the reporting unit goodwill
with the carrying amount of the reporting unit goodwill, both of which would be
measured as of the date of adoption. The implied fair value of goodwill is
determined by allocating the fair value of the reporting unit to all of the
assets (recognized and unrecognized) and liabilities of the reporting unit in a
manner similar to a purchase price allocation, in accordance with SFAS No. 141.
The residual fair value after this allocation is the implied fair value of the
reporting unit goodwill. Any transitional impairment loss will be recognized as
the cumulative effect of a change in accounting principle in the Company's
statement of operations.

As of the date of adoption of SFAS No. 142, January 1, 2002, the Company
expects to have unamortized goodwill in the amount of $7,000, which will be
subject to the transition provisions of SFAS No. 141 and SFAS No. 142.
Amortization expense related to goodwill was $290 for Fiscal 2001 and 2000,
respectively. Because of the extensive effort needed to comply with adopting
SFAS No. 141 and SFAS No. 142, it is not practicable to reasonably estimate the
impact of adopting these Statements on the Company's consolidated financial
statements at the date of this report, including whether any transitional
impairment losses could be required to be recognized as the cumulative effect of
a change in accounting principle. In connection with the adoption of SFAS
No. 142, the Company has determined that each of its owned restaurants will
represent a reporting unit.

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations (SFAS No. 143). SFAS No. 143 requires the Company to record the fair
value of an asset retirement obligation as a liability in the period in which it
incurs a legal obligation associated with the retirement of tangible long-lived
assets that result from the acquisition, construction, development and/or normal
use of the assets. The Company also records a corresponding asset, which is
depreciated over the life of the asset. Subsequent to the initial measurement of
the asset retirement obligation, the obligation will be adjusted at the end of
each period to reflect the passage of time and changes in the estimated future
cash flows underlying the obligation. The Company is required to adopt SFAS
No. 143 on December 31, 2002.

In August 2001, the FASB issued SFAS No. 144, addressing financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 requires that long-lived assets be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is recognized by
the amount by which the carrying amount of the asset exceeds the fair value of
the asset. SFAS No. 144 requires companies to separately report discontinued
operations and extends that reporting to a component of an entity that either
has been disposed of (by sale, abandonment, or in a distribution to owners) or
is classified as held for sale. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell. The Company is
required to adopt SFAS No. 144 on January 1, 2002.

F-13

THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
(FORMERLY THE NEW YORK RESTAURANT GROUP, INC.)
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2001 AND JANUARY 1, 2001
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE/UNIT AMOUNTS)

(3) NET LOSS PER COMMON SHARE

The Company calculates earnings (loss) per common share in accordance with
SFAS No. 128, EARNINGS PER SHARE. Basic earnings (loss) per common share are
computed by dividing the net loss applicable to common shares by the weighted
average number of common shares outstanding. Diluted earnings (loss) per common
share assumes the conversion of the convertible redeemable preferred shares as
of the beginning of the year and the exercise of stock options and warrants
using the treasury stock method, if dilutive. Dilutive net loss per common share
for Fiscal 2001, Fiscal 2000 and Fiscal 1999 are the same as basic net loss per
common share due to the antidilutive effect of the assumed conversion of
preferred shares and exercise of stock options and warrants. Such options,
warrants and convertible preferred shares amounted to 728,016, 1,668,583, and
1,787,283 for Fiscal 2001, Fiscal 2000 and Fiscal 1999, respectively. The
preferred shares were converted into common stock simultaneously with the
Company's IPO.

The following table sets forth the calculation for earnings per share on a
weighted average basis:

- --------------------------

(1) Dilutive shares and basic shares are the same due to the antidilutive effect
of the assumed conversion of preferred shares and exercise of stock options
and warrants.

(4) INVESTMENT SECURITIES

The Company held corporate bonds as investments as of December 31, 2001 with
fair value of available-for-sale securities that equate to historical cost.

F-14

THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
(FORMERLY THE NEW YORK RESTAURANT GROUP, INC.)
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2001 AND JANUARY 1, 2001
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE/UNIT AMOUNTS)

(5) PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

Depreciation and amortization expense of property and equipment was $3,074,
$3,068 and $2,582 in Fiscal 2001, 2000 and 1999, respectively.

(6) LICENSING AGREEMENT

On August 16, 1996, the Company entered into a Licensing Agreement with St.
James Associates (St. James), the owner of the Smith & Wollensky restaurant in
New York. St. James is an entity related through common management and ownership
(note 16).

The Licensing Agreement provides the Company with the exclusive right to
utilize the Names throughout the United States and internationally, with the
exception of a reserved territory, as defined. Consequently, the Company may not
open additional Smith & Wollensky restaurants or otherwise utilize the Names in
the reserved territory. The Licensing Agreement requires the Company to make
additional payments to St. James as follows: (i) $200 for each new restaurant
opened (increasing annually commencing in 1999 by the lesser of the annual
increase in the Consumer Price Index or a 5% increase of the fee required in the
preceding year), (ii) a royalty fee of 2% based upon annual gross sales for each
restaurant utilizing the Names, as defined, subject to certain annual minimums,
and (iii) a royalty fee of 1% of annual gross sales for any steakhouses opened
in the future by the Company that does not utilize the Names. In addition,
should the Company terminate or default on the license, as defined, it is
subject to a fee of $2,000 upon termination or $2,500 to be paid over four
years.

There are future minimum royalty payments relating to (ii) and (iii) above
which are as follows:

F-15

THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
(FORMERLY THE NEW YORK RESTAURANT GROUP, INC.)
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2001 AND JANUARY 1, 2001
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE/UNIT AMOUNTS)

(6) LICENSING AGREEMENT (CONTINUED)
During Fiscal 2000 and Fiscal 1999, the Company paid $209 and $203,
respectively, in connection with the opening of Smith & Wollensky units in
Philadelphia and Washington, D.C.

(7) MANAGEMENT AGREEMENTS

The Company manages the Smith & Wollensky restaurant in New York City and
receives annual management fees of 2.3% of restaurant sales. An unrelated
general partner of St. James has the right to terminate the management agreement
if the Company's Chairman no longer directs the delivery of the management
services and if certain financial thresholds are not met.

Pursuant to the terms of a restaurant management agreement (the "Post
Agreement") dated October 29, 1996, as amended, the Company manages the Post
House Restaurant in the Lowell Hotel and the food and beverage service for the
Lowell Hotel. The Company receives a management fee of 6% of gross revenue, as
defined. The Post Agreement expires on January 23, 2003 and is subject to
cancellation by either party under specified conditions.

The Company manages the operations of the Maloney & Porcelli restaurant in
New York City pursuant to the terms of a restaurant management agreement (the
"Maloney Agreement") dated April 18, 1996. The Company paid $1,500 for the right
to provide these management services. Under the provisions of the Maloney
Agreement, the Company will receive a management fee equal to the sum of 3% of
restaurant sales and a percentage of net cash flows, as defined. The Maloney
Agreement can be terminated by either party for cause and the Company has a
right to purchase the restaurant under specified conditions. The restaurant
owner can preempt the purchase option by remitting a specified cash payment to
the Company. The Maloney Agreement expires on December 31, 2011.

The Maloney Agreement requires that the Company make the following minimum
distributions to the restaurant owner, after payment of the Company's management
fee:

Pursuant to a submanagement agreement (the "Doubletree Agreement") dated
June 9, 1995, with the contracted manager of the hotel the Company manages the
food and beverage service for the Doubletree Hotel in Chicago, Illinois. The
Company receives a management fee equal to the sum of 1.5% of sales and a
percentage of earnings, as defined. The Doubletree Agreement expires on the
earlier of December 31, 2004 or the termination of the related hotel management
agreement.

The Company manages the operations of the ONEc.p.s. restaurant, located in
the Plaza Hotel, New York, pursuant to the terms of a restaurant management
agreement between Plaza Operating Partners, Ltd. and Parade 59 Restaurant, LLC,
an entity the Company controls, dated September 7, 2000 (the "ONEc.p.s.
Agreement"). The Company paid $500 for the right to provide these

F-16

THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
(FORMERLY THE NEW YORK RESTAURANT GROUP, INC.)
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2001 AND JANUARY 1, 2001
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE/UNIT AMOUNTS)

(7) MANAGEMENT AGREEMENTS (CONTINUED)
management services. Under the provisions of the ONEc.p.s. Agreement, the
Company will receive a management fee equal to the sum of 4% of the gross
revenues recognized from services provided at ONEc.p.s plus an additional fee,
as set forth in the ONEc.p.s. agreement. The ONEc.p.s. Agreement expires on
September 12, 2010 and can be terminated by the restaurant owner (i) if the
Company fails to meet the agreement's performance goals, (ii) at any time, upon
90 days' notice to the Company and the payment of a fee, determined by a formula
in the ONEc.p.s. Agreement, which allows for a maximum payment to the Company of
four years of additional management fees or (iii) at any time, if the person who
controls the Company's day-to-day operations or has overall control and decision
making authority, is replaced by means other than in the ordinary course of the
Company's business operations. The ONEc.p.s. Agreement may be terminated by
Plaza Operating Partners, Ltd. at any time immediately upon notice to us, due to
the fact that pre-opening costs exceeded $5,250, although Plaza Operating
Partners has indicated to us that they do not have any present intention to
terminate the ONEc.p.s. Agreement. We are currently in negotiations with Plaza
Operating Partners, Ltd. to amend this agreement.

The Company is subject to various covenants and operating requirements in
these management agreements that, if not complied with or otherwise met, provide
for the right of the other party to terminate these agreements.

With respect to management agreements, the Company is subject to a right of
the other party to terminate, at any time, the agreement relating to ONEc.p.s.,
and we are in default under our agreement relating to the Park Avenue Cafe in
Chicago and Mrs. Park's Tavern, with respect to the requirement that our
chairman beneficially own more than 20% of the entity which manages the
facility, which could result in the loss of management fee income from these
restaurants. The Company has not been notified by the landlords that they plan
to terminate our lease agreements and management has no reason to believe that
the agreements will be terminated.

(8) OTHER ASSETS

Other assets consist of the following:

- ------------------------

(A) Smallwares consist of tableware, supplies and other miscellaneous items.

F-17

THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
(FORMERLY THE NEW YORK RESTAURANT GROUP, INC.)
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2001 AND JANUARY 1, 2001
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE/UNIT AMOUNTS)

(9) ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following:

F-18

THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
(FORMERLY THE NEW YORK RESTAURANT GROUP, INC.)
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2001 AND JANUARY 1, 2001
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE/UNIT AMOUNTS)

(10) LONG-TERM DEBT

Long-term debt consists of the following:

- ------------------------

a. Pursuant to the terms of a loan agreement, dated September 1, 1998, as
amended on June 8, 1999, June 29, 1999, February 29, 2000 and March 21,
2001, with a financial institution, the Company originally could borrow up
to a maximum of $15,000. The credit facility could be utilized for
restaurant construction and provided a maximum of $5,000 for working capital
purposes. The loan agreement provided the Company with the option of
selecting a rate of interest either at the prime rate plus 0.625% or 3.25%
above the LIBOR rate, as defined. On January 15, 2000 the facility was
converted to a three-year term loan, requiring monthly principal payments of
$67 plus interest. Payment of the remaining balance of $9,730 was originally
due January 2003. The amount available under the facility was also reduced
to $12,200 at the beginning of Fiscal 2000. The Company amended this
agreement on February 29, 2000, in order to establish a revolving credit
facility, which enabled the Company to borrow up to an additional of $1,000
within a year of the date of the amendment. The revolving credit facility
provided the Company with the option of selecting a rate of interest either
at the prime rate plus 0.625% or 3.25% above the LIBOR rate, as defined. The
amendment required the Company to repay any borrowings on the credit
facility by January 29, 2001, which was subsequently extended through an
amendment on March 21, 2001.

On May 29, 2001, the Company completed its IPO, proceeds of which were used
to repay all of the outstanding debt under the Company's senior credit
facility and the $1,000 senior revolving credit facility, together with all
accrued and unpaid interest due and payable. These repayments terminated the
senior credit facility and the senior revolving credit facility in
accordance with the terms of the March 21, 2001 amendment.

b. On June 29, 1999, the Company entered into an unsecured senior subordinated
note purchase agreement with another party. The senior subordinated note was
guaranteed by each of the subsidiaries of the Company. In connection with
this agreement, the Company issued $10,000 of senior subordinated notes
bearing interest at 12.5%. The notes were due in June 2006. The Company
could prepay the principal amount of the senior subordinated notes plus a
premium equal to a stated percent of the note as defined in the agreement
prior to June 29, 2002, only with the net proceeds of a qualified offering
of the Company's common stock, as defined. The Company could, at its option,
prepay the principal amount of the senior subordinated notes plus a premium
equal to a stated percent of the note as defined in the agreement at any
time after June 29, 2002. Pursuant to the warrant agreement in connection
with the issuance of senior

F-19

THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
(FORMERLY THE NEW YORK RESTAURANT GROUP, INC.)
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2001 AND JANUARY 1, 2001
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE/UNIT AMOUNTS)

subordinated notes, the Company issued warrants to purchase 71,988 shares of
the Company's common stock at an exercise price of $0.01. If the senior
subordinated notes had not been paid in full by June 29, 2001, the warrants
were exercisable for 95,984 shares of the Company's common stock at an
exercise price of $.01. The Company recorded the fair value of these
warrants of $550, as determined by an independent valuation as additional
paid-in capital and a debt discount. The effective interest rate for the
senior subordinated note, after taking into account the discount for the
warrants was 14% for Fiscal 2000.

On May 29, 2001, the Company completed its IPO, proceeds of which were used
to repay the $10,000 senior subordinated note including accrued interest and
prepayment premiums.

On June 14, 2001, Magnetite, the party that held the $10,000 senior
subordinated note, exercised its warrant to purchase 71,988 shares of common
stock at $.01 per share via a cashless exercise. In connection with the
exercise, the Company wrote-off the remaining unamortized fair value of
these warrants totaling $399 to additional paid in capital.

c. In Fiscal 1997, the Company assumed certain liabilities in connection with
the acquisition of leasehold rights relating to its Smith & Wollensky--Miami
location from two bankrupt corporations. Pursuant to the terms of the
bankruptcy resolution, the Company is obligated to make quarterly and annual
payments over a six-year period. These obligations generally bear interest
at rates ranging from 8% to 12%. The aggregate balance outstanding at
December 31, 2001 and January 1, 2001 was $259 and $425, respectively.

In addition, the Company assumed a mortgage on the property that requires
monthly payments, with a final principal payment of $958 in June 2004. The
mortgage bears interest at 8%. The Company also assumed a loan payable to a
financing institution that requires monthly payments through the year 2014,
and bears interest at 7.67%. The aggregate balance of the mortgage and loan
payable outstanding at December 31, 2001 and January 1, 2001 was $1,806 and
$1,869, respectively.

Principal payments on long-term debt are as follows:

(11) RESTAURANT RELATED COMMITMENTS

All of the Company's owned restaurants operate in leased premises, with the
exception of Smith & Wollensky, New Orleans, an owned property. Remaining lease
terms range from approximately 5 to 23 years, including anticipated renewal
options. The leases generally provide for minimum annual

F-20

THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
(FORMERLY THE NEW YORK RESTAURANT GROUP, INC.)
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2001 AND JANUARY 1, 2001
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE/UNIT AMOUNTS)

rental payments and are subject to escalations based upon increases in the
Consumer Price Index, real estate taxes and other costs. In addition, certain
leases contain contingent rental provisions based upon the sales of the
underlying restaurants. Certain leases also provide for rent deferral during the
initial term of such leases and/or scheduled minimum rent increases during the
terms of the leases. For financial reporting purposes, rent expense is recorded
on a straight-line basis over the life of the lease. Accordingly, included in
long-term liabilities in the accompanying consolidated balance sheets at
December 31, 2001 and January 1, 2001 are accruals related to such rent
deferrals and the pro rata portion of scheduled rent increases of approximately
$4,951 and $4,540, respectively. The Company attempted to sublease or assign its
lease rights to its closed Maloney & Porcelli location in Washington D.C. during
the year ended December 31, 2001, and subsequent to year-end entered into a
lease termination agreement with the landlord. (see note 19).

Future minimum annual rental commitments under all leases are as follows:

The Company is contingently liable under letters of credit aggregating $171
and $121 at December 31, 2001 and January 1, 2001, respectively, for deposits
with the landlord of one of its restaurants and the corporate office.

Rental expense consists of the following:

As of December 31, 2001, the Company had signed a lease and incurred certain
costs in connection with a planned Smith & Wollensky restaurant in Columbus,
Ohio.

F-21

THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
(FORMERLY THE NEW YORK RESTAURANT GROUP, INC.)
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2001 AND JANUARY 1, 2001
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE/UNIT AMOUNTS)

(12) INCOME TAXES

The Company had net losses for Fiscal 2001, Fiscal 2000 and Fiscal 1999. The
income tax provision represents current Federal alternative minimum tax in
Fiscal 2000 and Fiscal 1999 and certain state and local income taxes. The
provision for income taxes consists of the following:

Income tax expense differed from the amounts computed by applying the U.S.
Federal income tax rate of 34% to pretax loss as a result of the following:

F-22

THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
(FORMERLY THE NEW YORK RESTAURANT GROUP, INC.)
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2001 AND JANUARY 1, 2001
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE/UNIT AMOUNTS)

The tax effects of temporary differences that give rise to significant
components of deferred tax assets and liabilities are presented below:

In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which temporary differences become deductible and net operating losses and tax
credits can be carried forward. Management considers projected future taxable
income and tax planning strategies in making this assessment. After
consideration of the Company's operating losses in recent years, the recent
economic uncertainty that has effected the travel and restaurant industry, and
projections for future taxable income over the period, which the deferred tax
assets are deductible, a full valuation allowance has been established against
the Company's net deferred tax assets.

As of December 31, 2001, the Company has available $1,450 in tax credits,
which are available under certain circumstances to reduce income taxes due, and
approximately $3,000 in federal and state net operating loss carryforwards,
which are available to offset future taxable income in certain states. These
credits and net operating loss carryforwards will expire in various years from
2010 to 2019 and may be subject to certain annual limitations.

(13) COMMON STOCK

The Company adopted a stock option plan in 1996 (the "1996 Option Plan"),
which provided nonqualified options to purchase up to 256,350 shares of common
stock to officers and key employees of the Company. No future awards can be
granted under the 1996 Option Plan. The 1996 Option Plan is administered by the
Company's Chairman. The term of each option was generally ten years, subject to
earlier termination upon cessation of employment with the Company. Additionally,
the option

F-23

THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
(FORMERLY THE NEW YORK RESTAURANT GROUP, INC.)
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2001 AND JANUARY 1, 2001
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE/UNIT AMOUNTS)

agreements contain antidilution provisions and acceleration provisions for a
change in control, as defined. The exercise price for the 208,700 nonqualified
options granted was $10.00 per share, which was the fair market value of the
Company's shares at the date of grant. The options vested as follows: (i) 50% of
the total options granted vest ratably over a five-year period commencing from
the date of grant, (ii) the remaining 50% of the option award, defined as
performance-based units, were subject to certain restrictions, which may be
removed upon the attainment of defined operating earnings targets, as defined in
the agreement, but no later than December 31, 2000. If the earnings targets were
met in any of the years, a charge to earnings based on the fair value of the
shares would have been required. The Company did not attain these operating
earnings targets and therefore 50% or 100,000 of the options awarded were
cancelled during Fiscal 2000. In addition, 150 and 8,700 options were cancelled
due to employee terminations during Fiscal 2001 and Fiscal 2000, respectively.
As of December 31, 2001, 99,850 options remained outstanding under the 1996
stock option plan. See Note 21 for further information.

The Company also adopted a stock option plan in 1997 (the "1997 Option
Plan"), which provided for the issuance of non-qualified stock options to
purchase up to 166,666 shares of common stock. No future awards may be granted
under the 1997 Option Plan. The option provisions were similar to those
contained in the 1996 Option Plan. However, if performance targets were not met
related to the performance-based options, the options automatically vested after
six years. The exercise price of the 58,066 options granted in Fiscal 1998 was
$12.00 per share, the estimated fair market value at the date of grant. In
addition, 733 and 10,000 options were cancelled due to employee terminations
during Fiscal 2001 and Fiscal 2000, respectively. As of December 31, 2001,
47,333 options remained outstanding under the 1997 Option plan.

The Company adopted a stock option plan in 2001 (the "2001 Option Plan"),
which provides either incentive stock options or nonqualified options. The
maximum number of shares of our common stock initially available for awards
granted under the 2001 Option Plan is 583,333 shares. In addition, effective
January 1, 2002, and each January 1 thereafter during the term of the 2001
Option Plan, the number of shares of common stock available for awards shall be
increased automatically by an amount equal to 4% of the total number of issued
and outstanding shares. The maximum number of shares of common stock available
for grants of incentive stock options is fixed at 583,333 shares. All share
limit references are subject to adjustment for capital changes.

The 2001 Option Plan is administered by the full board of directors. The
board has the authority to adopt, amend and rescind rules and regulations,
which, in its opinion, may be advisable in the administration of the 2001 Option
Plan.

The Company is permitted to grant non-qualified options to our directors,
officers, employees, and consultants and the directors, officers, employees and
consultants of our subsidiaries under the 2001 Option Plan. The maximum number
of shares with respect to which options may be granted to any one employee in
any taxable year may not exceed 500,000 shares.

Under the 2001 Option Plan, the board of directors may grant stock awards to
employees and other key individuals engaged to provide services to the Company
or our subsidiaries. A stock award may be made in stock or denominated in stock
subject to such terms and conditions as the committee or board of directors may
establish.

F-24

THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
(FORMERLY THE NEW YORK RESTAURANT GROUP, INC.)
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2001 AND JANUARY 1, 2001
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE/UNIT AMOUNTS)

Each option granted under the 2001 Option Plan is evidenced by an option
agreement. Each option shall expire not more than ten (10) years from the date
of the granting thereof, but shall be subject to earlier termination as may be
provided in the option agreement.

The exercise price of a nonqualified stock option under the 2001 Option Plan
was determined by the board of directors, but cannot be less than 50% of the
fair market value of our common stock at the time the option was granted. The
exercise price of an incentive stock option may not be less than the fair market
value of our common stock on the date of grant. The fair market value of our
common stock is based on the average of the high and low sales prices as
reported in the NASDAQ National Market for the business day immediately
preceding the date of the grant of the option. The options and stock awards
granted under the 2001 Option Plan vest ratably over five years from the date of
grant.

The 2001 Option Plan also provides that the right of any option holder to
exercise an option granted to him or her shall not be assignable or transferable
by the option holder other than by will or the laws of descent and distribution,
except as otherwise permitted in the option grant agreement.

An option granted to an employee option holder who ceases to be an employee
of the Company or one of our subsidiaries shall be exercisable only to the
extent that the right to purchase shares under the option has accrued and is in
effect on the date the option holder ceases to be an employee of the Company or
one of our subsidiaries.

The exercise price of the options granted in Fiscal 2001 range from $5.70 to
$8.50 per share, the estimated fair market values at the dates of the grants. An
employee, who is the beneficial owner of more than 10% of the voting stock in
the Company, received an option grant, with a purchase price of $9.35 or 110% of
the options fair market value at the date of grant, in accordance with the terms
of the 2001 Option Plan. As of December 31, 2001, 580,833 options remained
outstanding under the 2001 Option Plan. See Note 21 for further information.

Activity relating to the Company's option plans was as follows:

As of December 31, 2001, the weighted average remaining contractual life of
options outstanding was eight and a half years. As of December 31, 2001, there
were 135,350 options exercisable at a range of $10.00 to $12.00 per share.

F-25

THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
(FORMERLY THE NEW YORK RESTAURANT GROUP, INC.)
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2001 AND JANUARY 1, 2001
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE/UNIT AMOUNTS)

(14) SERIES A CONVERTIBLE PREFERRED STOCK

On October 31, 1997, the Company completed a private placement offering (the
"Offering") of 2,172,794 shares of its Series A Convertible Preferred Stock (the
"Preferred Stock") at $9.65 per share.

Net proceeds to the Company from the Offering were $19,380 after deducting
related expenses of $1,588. The Company used $3,489 of the proceeds to redeem
361,569 shares of common stock held by the Company's Chairman.

The Preferred Stock provided for a cumulative annual dividend of 6.0%
payable in the event of the liquidation of the Company or the redemption of the
Preferred Stock. Holders of a majority of the outstanding shares of Preferred
Stock could elect, beginning on September 30, 2004, to have the Company redeem
all of the then outstanding shares of Preferred Stock at the original price plus
cumulative and unpaid dividends. As a result of this "put" provision, the
Preferred Stock had been classified outside of stockholders' equity in the
accompanying consolidated balance sheets. In addition, due to the Company's
accumulated deficit, the Offering-related expenses were being amortized directly
to additional paid-in capital on a straight-line basis through September 30,
2004. Dividends were accrued and charged directly to additional paid-in capital.
At January 1, 2001 cumulative unpaid dividends amounted to $2,724.

Upon liquidation, holders of the Preferred Stock were entitled to receive,
prior and in preference to the holders of common stock, the original purchase
price per share of Preferred Stock plus any cumulative unpaid dividends. Holders
of the Preferred Stock also had the right to convert, at any time, shares of the
Preferred Stock into an equal number of common shares, subject to the
anti-dilution provisions discussed below. The Preferred Stock automatically
converted into common stock upon the completion by the Company of a public
offering (subject to minimum proceeds requirements).

The conversion price of the Preferred Stock was subject to adjustment in the
event of (i) any subdivision or combination of the Company's outstanding common
stock, or (ii) any distribution by the Company of (a) a stock dividend, or
(b) assets (other than cash payable out of retained earnings) to holders of
common stock. Holders of the Preferred Stock also had certain registration
rights (after an initial public offering), co-sale rights (under certain
conditions in the event the Company's Chairman or certain other common
shareholders sell their shares) and preemptive rights (to participate on a
pro-rata basis in future sales of equity securities prior to an initial public
offering).

All shares of convertible redeemable preferred stock outstanding
automatically converted into 1,448,529 shares of common stock upon the closing
of the Company's IPO.

(15) EXTRAORDINARY ITEM

On May 29, 2001, the Company, with the proceeds from the IPO, retired
$11,000 principal amount of the senior credit facility, $10,000 principal amount
of the senior subordinated note and $1,000 principal amount of the senior
revolving credit facility. An extraordinary loss of $801, net of a tax benefit
of $280, was incurred as a result of the early retirement of debt, consisting of
$450 of retirement premiums and $631 for the write-off of the remaining
unamortized debt issuance costs.

F-26

THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
(FORMERLY THE NEW YORK RESTAURANT GROUP, INC.)
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2001 AND JANUARY 1, 2001
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE/UNIT AMOUNTS)

(16) RELATED PARTY TRANSACTIONS

The Company manages the Smith & Wollensky restaurant in New York City, and
receives annual management fees of 2.3% of restaurant sales. Certain
shareholders and officers of the Company are also limited partners of St. James,
which owns the Smith & Wollensky restaurant in New York and the Names in the
reserved territory, as well as general and limited partners of MW Realty
Associates, which owns the property on which the Smith & Wollensky restaurant is
located. An affiliate of the Company's Chairman is a general and limited partner
of St. James and MW Realty Associates. Management fee revenue relating to this
agreement amounted to approximately $556, $615 and $602 for Fiscal 2001, 2000
and 1999, respectively.

Pursuant to the Licensing Agreement with St. James, the Company obtained the
rights and license to use the Names for $2,500. The agreement also provides for
additional payments to St. James relating to new restaurant openings and also
contains a provision for the payment of a specified termination fee.

One of the Company's directors has also provided consulting services to the
Company since 1997 on an at-will basis for which he receives $500 per day plus
reimbursement for out-of-pocket expenses. In

Fiscal 2001, Fiscal 2000 and Fiscal 1999, the Company paid an aggregate of
$142, $164 and $140, respectively, for such consulting services.

(17) BENEFIT PLAN

The Company offers a 401(k) retirement savings plan to all full-time
employees age 21 or older upon completing one year of service (1,000 hours in
any 12-month period). Employees may contribute a percentage of their gross
salaries as defined in the plan, subject to limits prescribed by the IRS.
Company contributions are at the discretion of the board of directors.
Participants contributions and earnings are fully vested, the Company
contributions and earnings vest ratably over five years. For Fiscal 2001, Fiscal
2000 and Fiscal 1999, Company contributions to the plan amounted to
approximately $74, $53 and $44, respectively.

(18) LEGAL MATTERS

The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.

(19) CHARGE TO CLOSE OWNED RESTAURANT

As a result of operating losses due to low customer volume, during the
fourth quarter of 2000, the Company recorded a pre-tax charge of $2,423
representing the write-down of assets and accrual of lease exit costs associated
with the closure of the Maloney & Porcelli unit in Washington, D.C. The unit was
closed during January 2001.

F-27

THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
(FORMERLY THE NEW YORK RESTAURANT GROUP, INC.)
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2001 AND JANUARY 1, 2001
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE/UNIT AMOUNTS)

In connection with the charge in Fiscal 2000, the Company ascribed no value
to the leasehold improvements for this closed location as such assets inure to
the benefit of the landlord and estimated the net realizable value of furniture
and equipment based upon industry standards. The accrual for lease exit costs
was recorded based upon the remaining obligation that the Company estimated it
would be required to pay under the underlying lease. The accrual recorded in
Fiscal 2000 assumed it would take approximately one year to locate a new tenant.

In the third quarter of Fiscal 2001, as a result of the difficult economic
conditions, exacerbated by the terrorist acts on September 11, 2001 in New York
and Washington, D.C. the Company concluded that it would not be able to exit its
lease obligation by the end of the year. At that time, the Company recorded an
additional charge of $360 assuming a new tenant would not be identified until
approximately June 30, 2003.

Prior to the end of the year, the Company began negotiations to terminate
its remaining lease term with the landlord. On January 31, 2002, the Company
signed a lease termination agreement with the landlord of the Maloney and
Porcelli property in Washington D.C. reducing its remaining obligation under the
terms of the lease termination agreement to January 31, 2002. The Company
adjusted the accrual to record the remaining costs to be incurred under the
terms of the agreement, as well as to write-off the remaining value of the
property that it was now abandoning. As a result, the Company reversed
approximately $293 in the fourth quarter of Fiscal 2001.

The components of the Company's charges were as follows:

At December 31, 2001, included in "Accounts payable and accrued expenses" in
the accompanying consolidated balance sheet is approximately $30, representing
the remaining lease costs relating to the restaurant closing.

F-28

THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
(FORMERLY THE NEW YORK RESTAURANT GROUP, INC.)
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2001 AND JANUARY 1, 2001
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE/UNIT AMOUNTS)

(20) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following is a summary of the unaudited quarterly results of operations:

F-29

THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
(FORMERLY THE NEW YORK RESTAURANT GROUP, INC.)
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2001 AND JANUARY 1, 2001
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE/UNIT AMOUNTS)

(21) SUBSEQUENT EVENT

In February 2002, the Company implemented an option exchange program
allowing employees, officers and directors to exchange all stock options to
purchase common stock having an exercise price greater than $5.70 per share
granted under The Smith & Wollensky Restaurant Group, Inc. 1996 Stock Option
Plan (formerly known as The New York Restaurant Group, L.L.C. 1995 Option Plan),
as amended, The New York Restaurant Group, Inc. 1997 Stock Option Plan and The
Smith & Wollensky Restaurant Group, Inc. 2001 Stock Incentive Plan (the "2001
Option Plan") for new options to be granted under the 2001 Option Plan. Under
the exchange program, options to purchase approximately 447,183 shares of common
stock were tendered and cancelled. An equal number of new option shares will be
granted by the Company on or about September 5, 2002. The exercise price of each
option will be equal to 100% of the market price of one of our shares of common
stock on the date of grant of the new options, determined in accordance with the
terms of the 2001 Option Plan. Each new option granted will vest in accordance
with the vesting schedule of the cancelled options. The option exchange program
was designed to comply with Financial Accounting Standards Board Interpretation
No. 44, Accounting for Certain Transactions Involving Stock Compensation, and is
not expected to result in any additional compensation charges or variable award
accounting.

F-30

SMITH &WOLLENSKY RESTAURANT GROUUP, INC
(FORMERLY THE NEW YORK RESTARURANT GROUP, INC.)
AND SUBSIDIARIES

SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
(THOUSANDS OF DOLLARS)

F-31