SMITH & WOLLENSKY RESTAURANT GROUP INC - 10-Q Quarterly Report

Back to GetFilings.com

FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

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

FOR THE QUARTERLY PERIOD ENDED JULY 1, 2002
----------

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

THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
--------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 58-2350980
------------------------------------------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

1114 FIRST AVENUE, NEW YORK, NY 10021
-------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

212-838-2061
----------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

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 / /

As of August 15, 2002 the registrant had 9,354,266 Shares of its Common Stock,
$.01 par value, outstanding.

THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.

INDEX

2

THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

See accompanying notes to unaudited consolidated financial statements.

3

THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
AND SUBSIDIARIES

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

See accompanying notes to unaudited consolidated financial statements

4

THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
AND SUBSIDIARIES

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

SIX MONTHS ENDED JULY 2, 2001 AND JULY 1, 2002

See accompanying notes to unaudited consolidated financial statements.

5

THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)

6

THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JULY 1, 2002 AND JULY 2, 2001

(1) GENERAL

The accompanying unaudited consolidated financial statements include The
Smith & Wollensky Restaurant Group, Inc. and its wholly-owned subsidiaries
(collectively, the "Company"). They do not include all information and footnotes
normally included in financial statements prepared in conformity with accounting
principles generally accepted in the United States of America. In the opinion of
management, the unaudited consolidated financial statements for the interim
periods presented reflect all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the financial position and
results of operations as of and for such periods indicated. These unaudited
consolidated financial statements and notes thereto should be read in
conjunction with the consolidated financial statements of the Company for the
fiscal year ended December 31, 2001 filed by the Company on Form 10-K with the
Securities and Exchange Commission on March 29, 2002. Results for the interim
periods presented herein are not necessarily indicative of the results which may
be reported for any other interim period or for the entire fiscal year.

The preparation of the unaudited consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America 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.

The Company utilizes a 52- or 53-week reporting period ending on the Monday
nearest to December 31st. The three months ended July 1, 2002 and July 2, 2001
represent 13-week reporting periods and the six months ended July 1, 2002 and
July 2, 2001 represent 26-week reporting periods.

(2) NET INCOME (LOSS) PER COMMON SHARE

The Company calculates earnings income (loss) per common share in
accordance with Statement of Financial Accounting Standards, ("SFAS"), No. 128,
"Earnings Per Share". Basic earnings income (loss) per common share are computed
by dividing the net income (loss) applicable to common shares by the weighted
average number of common shares outstanding. Diluted earnings income (loss) per
common share assumes the conversion of the convertible redeemable preferred
shares as of the beginning January 2, 2001 and the exercise of stock options and
warrants using the treasury stock method, if dilutive. Dilutive net income
(loss) per common share for the three and six months ended July 2, 2001 are the
same as basic net income (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
1,967,967 for the three and six months ended July 2, 2001. The preferred shares
converted into common stock simultaneously with the IPO. Dilutive net income per
common share for the three months ended July 1, 2002 are the same as basic net
income per common share as the exercise of options would have been
anti-dilutive. For the six months ended July 1, 2002, diluted earnings per
common share are based upon the weighted average number of common shares
outstanding during the period assuming the issuance of common shares for all
dilutive potential common shares outstanding.

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

(3) LEGAL MATTERS

The Company is involved in various legal actions arising in the ordinary
course of business. Management is of the opinion, pursuant to the advice of
counsel, that the ultimate disposition of these matters will not have a material
adverse effect on the Company's consolidated financial position or results of
operations.

(4) GOODWILL

Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets."
Under SFAS No. 142, goodwill is no longer being amortized, but instead tested
for impairment at least annually in accordance with the provisions of SFAS No.
142. As of the date of adoption of SFAS No. 142, the Company has unamortized
goodwill in the amount of $7.0 million.

This statement also required an initial goodwill impairment assessment in
the year of adoption and at least annual impairment tests thereafter. Pursuant
to SFAS No. 142, the Company completed its impairment analysis for goodwill in
accordance with SFAS No. 142. The analysis did not result in an impairment
charge.

The following table reconciles previously reported net income as if the
provisions of SFAS No. 142 were in effect in 2001:

The effect on earnings per share if the provisions of SFAS No. 142 were in
effect in 2001 would have been $.01 for the three months ended and $.03 for the
six months ended July 2, 2001.

(5) EFFECT OF NEW ACCOUNTING STANDARDS

In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement No. 145 ("SFAS No. 145"), RESCISSION OF FASB STATEMENTS NO. 4, 44, AND
64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL CORRECTIONS, effective
for fiscal years beginning after May 15, 2002. SFAS No. 145 requires gains and
losses from extinguishments of debt to be classified as an extraordinary item if
they meet the criteria in Accounting Principles Board Opinion No. 30. SFAS No.
145 also amends FASB Statement No. 13 to require that certain lease
modifications that have economic effects similar to sale-leaseback transactions

8

be accounted for in the same manner as sale-leaseback transactions. The Company
does not expect that the implementation of this standard will have a material
impact on the Company's results of operations.

In July 2002, the FASB issued Statement No. 146 ("SFAS 146"), ACCOUNTING
FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES, effective for exit or
disposal activities that are initiated after December 31, 2002. This standard
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. The Company does not expect that the implementation of
this standard will have a material impact on the Company's results of
operations.

ITEM 2. 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. CERTAIN STATEMENTS IN
THIS FORM 10-Q, WHICH ARE NOT HISTORICAL FACTS, MAY CONSTITUTE FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. WITHOUT LIMITING THE FOREGOING, THE WORDS "BELIEVES", "THINKS",
"ANTICIPATES", "PLANS", "EXPECTS", AND SIMILAR EXPRESSIONS ARE INTENDED TO
IDENTIFY FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS INVOLVE KNOWN
AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS, WHICH MAY CAUSE THE
COMPANY'S ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS TO DIFFER MATERIALLY FROM
THE RESULTS PROJECTED IN SUCH FORWARD-LOOKING STATEMENTS. SUCH RISKS,
UNCERTAINTIES, AND OTHER FACTORS INCLUDE, BUT ARE NOT LIMITED TO: CHANGES IN
GENERAL ECONOMIC CONDITIONS WHICH AFFECT CONSUMER SPENDING FOR RESTAURANT DINING
OCCASIONS; INCREASING COMPETITION IN THE UPSCALE DINING SEGMENT OF THE
RESTAURANT INDUSTRY; ADVERSE WEATHER CONDITIONS WHICH IMPACT CUSTOMER TRAFFIC AT
THE COMPANY'S RESTAURANTS IN GENERAL AND WHICH CAUSE THE TEMPORARY
UNDERUTILIZATION OF OUTDOOR SEATING AVAILABLE AT SEVERAL OF THE COMPANY'S
RESTAURANTS; VARIOUS FACTORS WHICH INCREASE THE COST TO DEVELOP AND/OR DELAY THE
DEVELOPMENT AND OPENING OF THE COMPANY'S NEW RESTAURANTS, INCLUDING FACTORS
UNDER THE INFLUENCE AND CONTROL OF THE COMPANY'S LANDLORDS; CHANGES IN THE
AVAILABILITY AND/OR COST OF RAW MATERIALS, MANAGEMENT AND HOURLY LABOR, ENERGY
OR OTHER RESOURCES NECESSARY TO SUCCESSFULLY OPERATE THE COMPANY'S RESTAURANTS;
THE COMPANY'S ABILITY TO RAISE PRICES SUFFICIENTLY TO OFFSET COST INCREASES; THE
SUCCESS OF STRATEGIC AND OPERATING INITIATIVES, INCLUDING NEW RESTAURANT
CONCEPTS; ADVERSE PUBLICITY ABOUT THE COMPANY OR ITS RESTAURANTS; RELATIONS
BETWEEN THE COMPANY AND ITS EMPLOYEES; CHANGES IN, OR ANY FAILURE TO COMPLY
WITH, GOVERNMENTAL REGULATIONS; THE REVALUATION OF ANY OF THE COMPANY'S ASSETS;
THE AMOUNT OF, AND ANY CHANGES TO, TAX RATES; AND OTHER FACTORS REFERENCED IN
THIS FORM 10-Q AND THE COMPANY'S FORM 10-K FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.

GENERAL

We opened the first of our Smith & Wollensky prototype units in Columbus, Ohio
on June 3, 2002. This prototype unit, which encompasses 10,000 square feet of
floor space and has 389 seats, is the first scaled down Smith & Wollensky format
to suit small and medium-sized markets. As the first midsize unit, the Company
viewed pre-opening costs as an important and necessary investment in the future.

PREOPENING COSTS

We opened our Smith & Wollensky unit in Columbus, Ohio on June 3, 2002.
Preopening costs include incremental expenses directly related to the openings
of new restaurants that may not be capitalized. As a result of the nature of our
upscale, high volume concept, the restaurant preopening process is extensive.
The preopening cost for our restaurants usually includes costs to relocate
restaurant management employees prior to opening; costs to recruit and train
hourly restaurant employees; wages, travel and lodging costs for our opening
training team and other support employees; and costs related to practice meal
service. Preopening costs will vary between locations depending on a number of
factors, including the distance from existing restaurants and the corporate
office; the size and layout of each unit; the number of employees required to
open each restaurant; any difficulties in the staffing process; the cost of
travel and lodging for different metropolitan areas; and the extent of delays,
if any, in obtaining the required licenses and permits to open the restaurants.

Preopening costs, for the new Smith & Wollensky unit in Columbus, Ohio, were
higher than initially anticipated due to it being the first of our new prototype
concept and the additional attention it required to ensure a successful opening.
Significant preopening costs for a restaurant occur during the two-month period
immediately proceeding and the month of the restaurant's opening. We expense
preopening costs as incurred.

9

RESULTS OF OPERATIONS
(Dollars in Thousands)

Our operating results were as follows:

THREE MONTHS ENDED JULY 1, 2002 COMPARED TO THE THREE MONTHS ENDED JULY 2, 2001

OWNED RESTAURANT SALES. Owned restaurant sales increased $903,000 or 5.1%, to
$18.7 million for the three months ended July 1, 2002 from $17.8 million for the
three months ended July 2, 2001. The increase in sales was due to a $426,000
increase relating to the opening of the Smith & Wollensky unit in Columbus,
Ohio, combined with an increase of $477,000 for our comparable owned units open
for these entire periods. The increase in sales for the three months ended July
1, 2002 compared with the same period from 2001 is due to a slight recovery of
both tourist and business travel, a modest increase in banquet sales and the
initial recovery of the national economy.

FOOD AND BEVERAGE COSTS. Food and beverage costs increased $202,000 to $5.4
million for the three months ended July 1, 2002 from $5.2 million for the three
months ended July 2, 2001. The increase in food and beverage costs was primarily
due to the new Smith & Wollensky unit in Columbus, Ohio, and to a lesser extent
the increase in comparable store sales. Food and beverage costs as a percent of
owned restaurant sales decreased to 28.9% for the three months ended July 1,
2002 from 29.2% for the three months ended July 2, 2001, primarily due to lower
beef and seafood costs combined with the effort to buy commodities in volume,
and continued cost efficiencies at the units.

SALARIES AND RELATED BENEFITS. Salaries and related benefits increased $334,000
to $5.7 million for the three months ended July 1, 2002 from $5.3 million for
the three months ended July 2, 2001. The increase was primarily due to the
opening of the Smith & Wollensky unit in Columbus, Ohio. Salaries

10

and related benefits as a percent of owned restaurant sales increased to 30.3%
for the three months ended July 1, 2002 from 30.0% for the three months ended
July 2, 2001.

RESTAURANT OPERATING EXPENSES. Restaurant operating expenses increased $262,000
to $2.8 million for the three months ended July 1, 2002 from $2.6 million for
the three months ended July 2, 2001. Restaurant operating expenses as a percent
of owned restaurant sales increased to 15.0% for the three months ended July 1,
2002 from 14.3% for the three months ended July 2, 2001 primarily as a result of
the increases in utilities and repairs and maintenance expenses and to a lesser
extent the opening of the Smith & Wollensky unit in Columbus, Ohio.

OCCUPANCY AND RELATED EXPENSES. Occupancy and related expenses increased
$191,000 to $1.5 million for the three months ended July 1, 2002 from $1.3
million for the three months ended July 2, 2001. The increase in occupancy and
related expenses relates to the rent associated with the new Smith & Wollensky
unit in Columbus, Ohio, as well as a one-time payment resulting from an
assessment of property taxes for one of our units. Occupancy and related
expenses as a percent of owned restaurant sales increased to 7.9% for the three
months ended July 1, 2002 from 7.3% for the three months ended July 2, 2001.

MARKETING AND PROMOTIONAL EXPENSES. Marketing and promotional expenses decreased
$32,000 to $829,000 for the three months ended July 1, 2002 from $861,000 for
the three months ended July 2, 2001. The decrease in marketing and promotional
expenses relates primarily to managements' decision to select the media with the
greatest exposure for the company combined with a decrease in advertising rates.
This decrease was partially offset by the opening of the Smith & Wollensky unit
in Columbus, Ohio. Marketing and promotional expenses as a percent of owned
restaurant sales decreased to 4.4% for the three months ended July 1, 2002 from
4.8% for the three months ended July 2, 2001.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased $67,000
to $815,000 for the three months ended July 1, 2002 from $748,000 for the three
months ended July 2, 2001.

MANAGEMENT FEE INCOME. Management fee income decreased $62,000 to $641,000 for
the three months ended July 1, 2002 from $703,000 for the three months ended
July 2, 2001, primarily due to a net decrease in overall sales from managed
units.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $304,000 to $2.5 million for the three months ended July 1, 2002
from $2.2 million for the three months ended July 2, 2001. General and
administrative expenses as a percent of owned restaurant sales increased to
13.3% for the three months ended July 1, 2002 from 12.3% for the three months
ended July 2, 2001. 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 8.0% for the three months ended July 1, 2002 from 7.3% for
the three months ended July 2, 2001. The increase was primarily due to
preopening travel, accommodations and related expenditures for the Smith &
Wollensky unit in Columbus, Ohio of approximately $200,000, combined with
increases to directors and officers' liability insurance premiums and general
professional and consulting fees. This was partially offset by the elimination
of amortization of goodwill in conjunction with the Company's adoption of the
provisions of SFAS No. 142 for fiscal year 2002, effective January 1, 2002.

ROYALTY EXPENSE. Royalty expense increased $14,000 to $255,000 for the three
months ended July 1, 2002 from $241,000 for the three months ended July 2, 2001,
primarily due to a net increase in sales from the Smith $ Wollensky units of
approximately $763,000.

INTEREST EXPENSE--NET OF INTEREST INCOME. Interest expense, net of interest
income, decreased $428,000 to $9,000 of interest expense for the three months
ended July 1, 2002 from $437,000 of interest expense for the three months ended
July 2, 2001, 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 income tax provision for the three months ended
July 1, 2002 was based on state and local tax rates. The rate applied to the
three months ended July 2, 2001 comprises the federal and state statutory rates,
less any tax credits, based on the annual estimated effective tax rate for 2001.

SIX MONTHS ENDED JULY 1, 2002 COMPARED TO THE SIX MONTHS ENDED JULY 2, 2001

OWNED RESTAURANT SALES. Owned restaurant sales decreased $113,000, or 0.3%, to
$38.2 million for the six months ended July 1, 2002 from $38.4 million for the
six months ended July 2, 2002. The decrease in sales was primarily due to a
$461,000 decrease in sales for our comparable owned units open for these entire
periods. This was partially offset by the $426,000 increase in sales from the
opening of the Smith & Wollensky unit in Columbus, Ohio. The decrease in sales
for the six months ended July 1, 2002 compared with the same period from 2001 is
due to the lack of improvement in tourist and business travel and the national
economy in the first quarter of 2002, combined with the disruption caused by
continued road and bridge repairs adjacent to the Smith & Wollensky restaurant
in Chicago.

FOOD AND BEVERAGE COSTS. Food and beverage costs decreased $370,000 to $11.0
million for the six months ended July 1, 2002 from $11.3 million for the six
months ended July 2, 2001. Food and beverage costs as a percent of owned
restaurant sales decreased to 28.7% for the six months ended July 1, 2002 from
29.6% for the six months ended July 2, 2001, primarily due to lower beef and
seafood costs combined with the effort to buy commodities in volume, and
continued cost efficiencies at the units. The decrease in food and beverage
costs was partially offset by the opening of the Smith & Wollensky unit in
Columbus, Ohio.

SALARIES AND RELATED BENEFITS. Salaries and related benefits increased $58,000
to $11.2 million for the six months ended July 1, 2002 from $11.1 million for
the six months ended July 2, 2001. The increase was primarily due to the opening
of the Smith & Wollensky unit in Columbus, Ohio and was partially offset by cost
efficiencies achieved in stores opened for the entire period of both years.
Salaries and related benefits as a percent of owned restaurant sales increased
to 29.2% for the six months ended July 1, 2002 for 28.9% for the six months
ended July 2, 2001.

RESTAURANT OPERATING EXPENSES. Restaurant operating expenses increased $267,000
to $5.7 million for the six months ended July 1, 2002 from $5.5 million for the
six months ended July 2, 2001. Restaurant operating expenses as a percent of
owned restaurant sales increased to 15.0% for the six months

11

ended July 1, 2002 from 14.2% for the six months ended July 2, 2001 primarily as
a result of the increases in insurance premiums, operating supplies and repairs
and maintenance expenses and to a lesser extent the opening of the Smith &
Wollensky unit in Columbus, Ohio.

OCCUPANCY AND RELATED EXPENSES. Occupancy and related expenses increased
$307,000 to $2.8 million for the six months ended July 1, 2002 from $2.5 million
for the six months ended July 2, 2001. The increase in occupancy and related
expenses relates to the rent associated with the new Smith & Wollensky unit in
Columbus, Ohio, as well as a one-time payment resulting from an assessment of
property taxes for one of our units. Occupancy and related expenses as a percent
of owned restaurant sales increased to 7.5% for the six months ended July 1,
2002 from 6.6% for the six months ended July 2, 2001.

MARKETING AND PROMOTIONAL EXPENSES. Marketing and promotional expenses decreased
$169,000 to $1.5 million for the six months ended July 1, 2002 from $1.7 million
for the six months ended July 2, 2001. The decrease in marketing and promotional
expenses relates primarily to managements' decision to select the media with
the greatest exposure for the company combined with a decrease in advertising
rates. This decrease was partially offset by the opening of the Smith &
Wollensky unit in Columbus, Ohio. Marketing and promotional expenses as a
percent of owned restaurant sales decreased to 4.0% for the six months ended
July 1, 2002 from 4.4% for the six months ended July 2, 2001.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased $118,000
to $1.6 million for the six months ended July 1, 2002 from $1.5 million for the
six months ended July 2, 2001.

MANAGEMENT FEE INCOME. Management fee income decreased $188,000 to $1.3 million,
for the six months ended July 1, 2002 from $1.5 million for the six months ended
July 2, 2001, primarily due to a net decrease in overall sales from managed
units.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $441,000 to $4.8 million for the six months ended July 1, 2002 from
$4.4 million for the six months ended July 2, 2001. General and administrative
expenses as a percent of owned restaurant sales increased to 12.5% for the six
months ended July 2, 2002 from 11.3% for the six months ended July 2, 2001.
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 7.6% for the six months ended July 1, 2002 from 6.9% for the six
months ended July 2, 2001. The increase was primarily due to preopening travel,
accommodations and related expenditures for the Smith & Wollensky unit in
Columbus, Ohio of approximately $200,000, combined with increases to directors
and officers' liability insurance premiums and general professional and
consulting fees. This was partially offset by the elimination of amortization of
goodwill in conjunction with the Company's adoption of the provisions of SFAS
No.142 for fiscal year 2002, effective January 1, 2002.

ROYALTY EXPENSE. Royalty expense decreased $2,000 to $525,000 for the six months
ended July 1, 2002, from $527,000 for the six months ended July 2, 2001,
primarily due to a net decrease in sales from the Smith & Wollensky units of
approximately $61,000.

INTEREST EXPENSE--NET OF INTEREST INCOME. Interest expense, net of interest
income, decreased $1.2 million to $9,000 to interest income for the six months
ended July 1, 2002 from $1.1 million of interest expense for the six months
ended July 2, 2001, 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 income tax provision for the six months ended
July 1, 2002 was based on state and local tax rates. The rate applied to the six
months ended July 2, 2001 comprises the federal and state statutory rates, less
any tax credits, based on the annual estimated effective tax rate for 2001.

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 its 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 initial
public offering ("IPO"). Net cash provided by operating activities amounted
to $1.7 million for the six months ended July 1, 2002 and used in operating
activities amounted to $990,000 for the six months ended July 2, 2001.

Net cash used in financing activities was $158,000 for the six months ended
July 1, 2002 and net cash provided by financing activities was $13.3 million
for the six months ended July 2, 2001. Funds used in financing activities
represent principal payments on long-term debt for the six month period ended
July 1, 2002. 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 for the six month
period ended July 2, 2001.

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 $4.2 million for the six months ended July 1, 2002 and $837,000
for the six months ended July 2, 2001. Total capital expenditures were $2.7
million for the six months ended July 1, 2002 and $812,000 for the six months
ended July 2, 2001.

12

The remaining capital expenditures for the current fiscal year are expected to
be approximately $1.5 million in 2002, depending on the total units to be opened
in 2002. With regard to our future expansion, the Company is moving ahead
cautiously as management evaluates and monitors economic conditions. The Company
recently signed a conditional purchase agreement for an existing restaurant and
land in Dallas, Texas of approximately 13,000 square feet, which it plans to
convert to a Smith & Wollensky restaurant. Management expects the new restaurant
to open in early 2003. The Company completed construction on a 389 scat Smith &
Wollensky in Columbus, Ohio, which opened June 3, 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 note purchase agreement, we
issued a $10.0 million senior subordinated note bearing interest at 12.5%.
With the net proceeds of the IPO, on May 29, 2001 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 71,837 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 such liabilities was approximately $138,000 as of July 1, 2002. 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 5.75% 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 as of July 1, 2002.

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.

SEASONALITY

Our business in 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. 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.

EFFECT OF NEW ACCOUNTING STANDARDS

In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement No. 145 ("SFAS No. 145") RESCISSION OF FASB STATEMENTS NO. 4, 44, AND
64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL CORRECTIONS, effective for
fiscal years beginning after May 15, 2002. SFAS No. 145 requires gains and
losses from extinguishments of debt to be classified as an extraordinary item if
they meet the criteria in Accounting Principles Board Opinion No. 30. SFAS No.
145 also amends FASB Statement No. 13 to require that certain lease
modifications that have economic effects similar to sale-leaseback transactions
be accounted for in the same manner as sale-leaseback transactions. The Company
does not expect that the implementation of this standard will have a material
impact on the Company's results of operations.

In July 2002, the FASB issued Statement No. 146 ("SFAS 146"), ACCOUNTING
FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES, effective for exit or
disposal activities that are initiated after December 31, 2002. This standard
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. The Company does not expect that the implementation of
this standard will have a material impact on the Company's results of
operations.

PROPERTIES

We lease restaurant and office facilities and real property under operating
leases expiring in various years through 2024. As of July 1, 2002, our future
minimum lease payments of our headquarters and restaurants are as follows:
2002--$2.5 million; 2003--$5.2 million; 2004--$5.3 million; and
thereafter--$66.7 million. In addition, certain leases contain contingent rental
provisions based upon the sales of the underlying restaurants.

13

Item 3. 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 dates. Weighted average rates are
based on implied forward rates in the yield curve at July 1, 2002.

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company is involved in various legal actions arising in the ordinary
course of business. Management is of the opinion, pursuant to the advice of
counsel, that the ultimate disposition of these matters will not have a material
adverse effect on the Company's consolidated financial position or results of
operations.

Item 2. Changes in Securities and Use of Proceeds

(a) Inapplicable.

(b) Inapplicable.

(c) Inapplicable.

(d)

On May 23, 2001, the Securities and Exchange Commission declared
effective our registration statement on Form S-1 (No. 335-57518)
pursuant to which we offered and sold 4,750,000 shares of our common
stock for net proceeds to the Company of approximately $36.1 million
and certain of our stockholders sold 545,972 shares of our common
stock. The following table sets forth our cumulative use of the net
offering proceeds as of July 1, 2002.

Repayment of indebtedness..................................... $ 22.0 million
Construction and upgrading of facilities...................... $ 3.3 million
Purchase of fixed assets...................................... $ 1.7 million
Working capital............................................... $ 2.6 million
Total......................................................... $ 29.6 million

The remaining portion of the net offering proceeds have been
invested in cash and investment securities. The foregoing amounts
represent our best estimate of our use of proceeds for the period
indicated. No such payments were made to our officers, directors or
their associates, holders of 10% or more of any class of our equity
securities or to our affiliates, other than payments to officers for
salaries in the ordinary course of business.

Item 3. Defaults upon Senior Securities

None

14

Item 4. Submission of Matters to a Vote of Security Holders

Our Annual Meeting of Stockholders was held on May 23, 2002. The matter
submitted for a vote and the related election results are as follows:

1. The result of the vote to elect Directors is as follows:

JAY M. GREEN

RICHARD S. LeFRAK

Other directors whose term of office as a director continued after the
meeting are: Alan N. Stillman, James H. Dunn, Thomas H. Lee, Eugene I. Zuriff
and Robert D. Villency.

2. The result of the vote to amend The Smith & Wollensky Restaurant
Group, Inc. Certificate of Incorporation to decrease the number of shares of
common stock that the Company has the authority to issue from 90,000,000 to
40,000,000 is as follows:

3. The result of the vote to amend The Smith & Wollensky Restaurant
Group, Inc. 2001 Stock Incentive Plan to limit the total number of shares of
common stock available for grants thereunder is as follows:

4. The result of the vote to ratify the selection of KPMG LLP as the
independent certified public auditor of The Smith & Wollensky Restaurant Group,
Inc. for fiscal year 2002 is as follows:

15

Item 5. Other Information

None

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits
None.

(b) Reports on Form 8-K.

None.

16

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
(Registrant)

Date August 15, 2002 By: /s/ ALAN N. STILLMAN
------------------------
Alan N. Stillman
Chairman of the Board, Chief
Executive Officer and Director
(principal executive officer)

Date August 15, 2002 By: /s/ ALAN M. MANDEL
------------------------
Alan M. Mandel
Chief Financial Officer, Executive
Vice President of Finance, Secretary
and Treasurer (principal financial and
accounting officer)

17

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of The Smith & Wollensky Restaurant
Group, Inc. (the "Company") on Form 10-Q for the period ending July 1, 2002 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), we, Alan Stillman, Chief Executive Officer of the Company, and Alan
Mandel, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C.
section 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002,
that:

(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all
material respect, the financial condition and results of operations
of the Company.

Date August 15, 2002 By: /s/ ALAN N. STILLMAN
------------------------
Alan N. Stillman
Chairman of the Board, Chief
Executive Officer and Director
(principal executive officer)

Date August 15, 2002 By: /s/ ALAN M. MANDEL
------------------------
Alan M. Mandel
Chief Financial Officer, Executive
Vice President of Finance, Secretary
and Treasurer (principal financial and
accounting officer)

18