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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 SEPTEMBER 30, 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.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 58-2350980
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(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 November 14, 2002 the registrant had 9,354,266 Shares of its Common Stock,
$.01 par value, outstanding.
THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001 3
Consolidated Statements of Operations for the three- and nine-month periods ended
September 30, 2002 and October 1, 2001 4
Consolidated Statements of Stockholders' Equity for the nine-month periods ended
September 30, 2002 and October 1, 2001 5
Consolidated Statements of Cash Flows for the nine-month periods ended
September 30, 2002 and October 1, 2001 6
Notes to Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-13
Item 3. Quantitative and Qualitative Disclosure about Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 16
Signature 17
Certifications 18-20
2
THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2002 2001
-------------- --------------
(UNAUDITED) (AUDITED)
ASSETS
Current assets:
Cash $ 1,530 $ 4,561
Short-term investments 5,844 2,377
Accounts receivable, less allowance for doubtful accounts of $40 and
$340 at September 30, 2002 and December 31, 2001 2,789 3,599
Merchandise inventory 3,606 3,055
Prepaid expenses and other current assets 1,047 1,048
-------------- --------------
14,816 14,640
Property and equipment, net 42,359 41,306
Goodwill, net 6,961 6,961
Licensing agreement, net 3,292 3,173
Management contract, net 854 1,364
Long-term investments 1,244 1,033
Other assets 3,065 2,621
-------------- --------------
$ 72,591 $ 71,098
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 326 $ 218
Accounts payable and accrued expenses 7,567 7,498
-------------- --------------
7,893 7,716
Long-term debt, net of current portion 5,544 1,847
Deferred rent 5,158 4,951
-------------- --------------
18,595 14,514
Stockholders' equity:
Common stock (par value $.01; authorized 40,000,000 shares;
9,354,266 shares issued and outstanding at September 30, 2002 and
December 31, 2001) 94 94
Additional paid-in capital 69,854 69,854
Accumulated deficit (15,952) (13,364)
-------------- --------------
53,996 56,584
-------------- --------------
Commitments and contingencies $ 72,591 $ 71,098
============== ==============
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)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, OCTOBER 1, SEPTEMBER 30, OCTOBER 1,
2002 2001 2002 2001
-------------- -------------- -------------- --------------
Owned restaurant sales $ 17,213 $ 13,449 $ 55,455 $ 51,804
-------------- -------------- -------------- --------------
Cost of owned restaurant sales:
Food and beverage costs 5,047 3,987 16,015 15,327
Salaries and related benefit expenses 5,793 5,080 16,946 16,175
Restaurant operating expenses 3,021 2,531 8,750 7,992
Occupancy and related expenses 1,527 1,354 4,378 3,898
Marketing and promotional expenses 777 774 2,310 2,476
Depreciation and amortization expenses 856 742 2,464 2,232
Charge to close owned restaurant - 360 - 360
Write-off of site development costs - 283 - 283
-------------- -------------- -------------- --------------
Total cost of owned restaurant sales 17,021 15,111 50,863 48,743
-------------- -------------- -------------- --------------
Income (loss) from owned restaurant operations 192 (1,662) 4,592 3,061
Management fee income 502 479 1,764 1,929
-------------- -------------- -------------- --------------
Income (loss) from owned and managed restaurants 694 (1,183) 6,356 4,990
General and administrative expenses 2,489 2,292 7,273 6,644
Royalty expense 250 191 784 718
Charge for investment in managed restaurant 722 300 722 300
-------------- -------------- -------------- --------------
Operating loss (2,767) (3,966) (2,423) (2,672)
Interest expense (73) (59) (149) (1,146)
Amortization of deferred debt financing costs - - - (113)
Interest income 57 94 141 148
-------------- -------------- -------------- --------------
(16) 35 (8) (1,111)
Loss before provision for income taxes (2,783) (3,931) (2,431) (3,783)
Provision (benefit) for income taxes 56 (3) 157 49
-------------- -------------- -------------- --------------
Loss before extraordinary loss and
accrual of dividends and amortization of
issuance costs of preferred shares (2,839) (3,928) (2,588) (3,832)
Extraordinary loss on early retirement of
debt, net of tax benefit of $378 - - - 703
-------------- -------------- -------------- --------------
Net loss (2,839) (3,928) (2,588) (4,535)
Accrual of dividends and amortization of
issuance costs of preferred shares - - - (620)
-------------- -------------- -------------- --------------
Net loss applicable to common shares $ (2,839) $ (3,928) $ (2,588) $ (5,155)
============== ============== ============== ==============
Loss applicable to common shares - basic and diluted:
Loss applicable to common shares before
extraordinary item $ (.30) $ (.42) $ (.28) $ (.73)
Extraordinary loss on early retirement of
debt, net of tax benefit - - - .12
-------------- -------------- -------------- --------------
Net loss per common share $ (.30) $ (.42) $ (.28) $ (.85)
============== ============== ============== ==============
Weighted average common shares outstanding:
Basic and diluted 9,354,266 9,354,266 9,354,266 6,086,983
============== ============== ============== ==============
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)
NINE MONTHS ENDED OCTOBER 1, 2001 AND SEPTEMBER 30, 2002
ADDITIONAL
COMMON STOCK PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
------------ ------------ ------------ ------------ ------------
Balance at January 1, 2001 3,083,930 $ 31 $ 10,103 $ (9,069) $ 1,065
Accrued dividends on preferred shares (524) (524)
Amortization of issuance costs on preferred shares (96) (96)
Net proceeds from initial public offering 4,750,000 48 35,950 35,998
Conversion of $24,710 of convertible redeemable -
preferred stock into 1,448,499 shares of
common stock 1,448,499 14 24,696 24,710
Exercise of warrants and write-off of original
issue discount on warrants 71,837 1 (400) (399)
Net loss (4,535) (4,535)
------------ ------------ ------------ ------------ ------------
Balance at October 1, 2001 9,354,266 $ 94 $ 69,729 $ (13,604) $ 56,219
============ ============ ============ ============ ============
Balance at December 31, 2001 9,354,266 $ 94 $ 69,854 $ (13,364) $ 56,584
Net loss (2,588) (2,588)
------------ ------------ ------------ ------------ ------------
Balance at September 30, 2002 9,354,266 $ 94 $ 69,854 $ (15,952) $ 53,996
============ ============ ============ ============ ============
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)
SEPTEMBER 30, OCTOBER 1,
2002 2001
-----------------------------
Cash flows from operating activities:
Net loss $ (2,588) $ (4,535)
Adjustments to reconcile net loss to net cash (used in) provided by
provided by operating activities:
Depreciation and amortization 2,766 2,759
Amortization of debt discount - 33
Charge to close owned restaurant - 1,081
Changes in operating assets and labilities:
Accounts receivable 810 (1,052)
Merchandise inventory (551) 681
Prepaid expenses and other current assets 1 (521)
Other assets (254) (21)
Accounts payable and accrued expenses 69 (3,258)
Deferred rent 187 297
- -------------------------------------------------------------------- -----------------------------
Net cash (used in) provided by operating activities 440 (4,536)
- -------------------------------------------------------------------- -----------------------------
Cash flows from investing activity:
Purchase of property and equipment (3,597) (1,730)
Purchase of nondepreciable assets (216) (58)
Purchase of long-term investments (2,296) -
Purchase of short-term investments (3,324) -
Proceeds form the sale of short-term investments 2,376 -
Payments under licensing agreement (219) -
- -------------------------------------------------------------------- -----------------------------
Cash flows used in investing activity (7,276) (1,788)
- -------------------------------------------------------------------- -----------------------------
Cash flows from financing activities:
Principal payments of long-term debt (195) (22,460)
Net proceeds from initial public offering - 35,998
Premium payment on early retirement of debt - (450)
Proceeds from the issuance of long-term debt 4,000 -
- -------------------------------------------------------------------- -----------------------------
Cash flows provided by financing activity 3,805 13,088
- -------------------------------------------------------------------- -----------------------------
Net change in cash and cash equivalents (3,031) 6,764
Cash and cash equivalents at begining of period 4,561 370
- -------------------------------------------------------------------- -----------------------------
Cash and cash equivalents at end of period 1,530 $ 7,134
==================================================================== =============================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 121 $ 1,471
=============================
Income taxes $ 228 $ 328
=============================
Cash paid during the period for:
Accrued dividends on preferred shares $ - $ 524
=============================
Amortization of issuance costs on preferred shares $ - $ 96
=============================
See accompanying notes to unaudited consolidated financial statements.
6
THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 AND OCTOBER 1, 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 September 30, 2002 and October
1, 2001 represent 13-week reporting periods and the nine months ended September
30, 2002 and October 1, 2001 represent 39-week reporting periods.
(2) NET INCOME (LOSS) PER COMMON SHARE
The Company calculates net income (loss) per common share in accordance with
Statement of Financial Accounting Standards, ("SFAS"), No. 128, "Earnings Per
Share". Basic net 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 net 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 nine months ended October 1, 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 nine months ended October 1, 2001. The preferred shares converted into
common stock simultaneously with the IPO. Dilutive net income (loss) per common
share for the three and nine month periods ended September 30, 2002 are the same
as basic net income (loss) per common share due to the anti-dilutive effect of
the exercise of options.
The following table sets forth the calculation for net income (loss) per share
on a weighted average basis:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, OCTOBER 1, SEPTEMBER 30, OCTOBER 1,
2002 2001 2002 2001
------------- ------------- ------------- -------------
NUMERATOR:
Loss before extraordinary loss and
accrual of dividends and amortization of
issuance costs of preferred shares $ (2,839,000) $ (3,928,000) $ (2,588,000) $ (3,832,000)
Less: Accrual of dividends and amortization of
issuance costs of preferred shares - - - (620,000)
------------- ------------- ------------- -------------
Net loss available to common stockholders $ (2,839,000) (3,928,000) (2,588,000) (4,452,000)
Less: Extraordinary loss on early retirement of
debt, net of tax benefit - - - (703,000)
------------- ------------- ------------- -------------
Net loss available to common stockholders $ (2,839,000) $ (3,928,000) $ (2,588,000) $ (5,155,000)
============= ============= ============= =============
7
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, OCTOBER 1, SEPTEMBER 30, OCTOBER 1,
2002 2001 2002 2001
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
DENOMINATOR: TOTAL AVERAGE AVERAGE AVERAGE AVERAGE
SHARES SHARES SHARES SHARES SHARES
-------------- -------------- -------------- -------------- --------------
Beginning Common Shares 3,083,930 9,354,266 3,083,930 9,354,266 3,083,930
Conversion of Preferred Stock on May 23, 2001 1,448,499 1,448,499 695,082
Initial Public Offering on May 23, 2001 4,750,000 4,750,000 2,279,304
Warrants exercised on June 14, 2001 71,837 71,837 28,667
Weighted average common shares outstanding -
-------------- -------------- -------------- --------------
Basic and Diluted 9,354,266 9,354,266 9,354,266 6,086,983
============== ============== ============== ==============
PER COMMON SHARE - BASIC AND DILUTED:
Loss available to common stockholders $ (.30) $ (.42) $ (.28) $ (.73)
Extraordinary item - - - .12
-------------- -------------- -------------- --------------
Net loss available to common stockholders $ (.30) $ (.42) $ (.28) $ (.85)
============== ============== ============== ==============
(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 (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 loss as if the
provisions of SFAS No. 142 were in effect in 2001:
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- ------------------------------
SEPTEMBER OCTOBER SEPTEMBER OCTOBER
30, 2002 1, 2001 30,2002 1, 2001
------------- ------------- ------------- -------------
Reported net loss $ (2,839) $ (3,928) $ (2,588) $ (4,452)
Add back: Goodwill
amortization -- 73 218
------------- ------------- ------------- -------------
Adjusted net loss $ (2,839) $ (3,855) $ (2,588) $ (4,234)
============= ============= ============= =============
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 $.04 for the
nine months ended October 1, 2001.
(5) EFFECT OF NEW ACCOUNTING STANDARDS
In April 2002, the Financial Accounting Standards Board ("FASB") issued 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.
8
In July, 2002 SFAS No. 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.
(6) LONG-TERM DEBT
Pursuant to the terms of a loan agreement entered into on August 23, 2002
the Company completed a $14.0 million secured term loan agreement with Morgan
Stanley Dean Witter Commercial Financial Services, Inc. Under the agreement
the Company is the guarantor of borrowings by its wholly owned subsidiary,
S&W Las Vegas, LLC ("Borrower"). The Company has borrowed $4.0 million under
the agreement for general corporate purposes, including its new restaurant
development program. (See note 8 for further information.) This portion of
the loan pursuant to terms of the agreement bears interest at a fixed rate of
6.35% per annum. Principal payments for this portion of the loan commence
June 30, 2003, through the loan's maturity date of May 31, 2008. Pursuant to
the terms of the loan agreement, the Company is obligated to make monthly
principal payments of $33,333 commencing June 30, 2003 or quarterly and
annual payments of $ 100,000, and $ 400,000, respectively over the term of
the loan.
The balance of the funds available under the agreement will enable the Company
to, pursuant to the lease agreement, exercise its purchase option for the land
in Las Vegas where the Company operates its restaurant. The purchase option on
the property is exercisable upon six months' written notice to the landlord,
which the Company has provided on August 28, 2002. Accordingly, the planned
acquisition of the Las Vegas property is expected to be consummated on or after
February 26, 2003 with an estimated purchase price of $10 million.
The loan agreement contains financial covenants requiring the Company and the
Borrower to be in compliance as long as any portion of the loan remains unpaid.
The Borrower must be in compliance with the debt service coverage ratio, as
defined. The Company must be in compliance with the minimum liquidity covenant,
senior leverage ratio and interest coverage ratio, as defined. The Company shall
not be required to be in compliance with the covenants set forth in the senior
leverage or interest coverage ratios until September 30, 2003, provided that it
maintains compliance with the covenant set forth in minimum liquidity. The
financial covenants of the Company will be determined on the basis of the
consolidated results reflected on the Company's financial statements.
(7) COMMON STOCK
In September 2002, the Company completed 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 446,000 shares of common
stock were issued on September 5, 2002 at $ 3.88. The exercise price of each
option equaled to 100% of the Company's common stock on the date of grant of
the new options, determined in accordance with the terms of the 2001 Option
Plan. An additional 8,900 new shares were granted under the 2001 Option Plan.
Each new option granted will vest over a period of 4 months to 5 years. The
option exchange program did not result in any additional compensation charges
or variable award accounting.
(8) SUBSEQUENT EVENT
In October 2002, the Company purchased an existing restaurant in Dallas, Texas
that it will convert into a Smith & Wollensky restaurant. The purchase price for
the property, including 2.3 acres of land, was $3.75 million. The property,
which is located in the North Dallas area, has an approximately 12,000 square
foot building that will have a seating capacity of 330, plus an outdoor cafe
with an additional 30 seats. The Company plans to open the new restaurant in the
second quarter of 2003.
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.
9
RESULTS OF OPERATIONS
(Dollars in Thousands)
Our operating results were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------------------- ------------------------------------------
SEPTEMBER 30, 2002 OCTOBER 1, 2001 SEPTEMBER 30, 2002 OCTOBER 1, 2001
------------------- ------------------- ------------------- -------------------
Consolidated Statement of Operations Data:
Owned restaurant sales $ 17,213 100.0% $ 13,449 100.0% $ 55,455 100.0% $ 51,804 100.0%
Cost of owned restaurant sales:
Food and beverage costs 5,047 29.3% 3,987 29.6% 16,015 28.9% 15,327 29.6%
Salaries and related benefit expenses 5,793 33.7% 5,080 37.8% 16,946 30.6% 16,175 31.2%
Restaurant operating expenses 3,021 17.5% 2,531 18.8% 8,750 15.8% 7,992 15.4%
Occupancy and related expenses 1,527 8.9% 1,354 10.1% 4,378 7.9% 3,898 7.5%
Marketing and promotional expenses 777 4.5% 774 5.8% 2,310 4.2% 2,476 4.8%
Depreciation and amortization 856 5.0% 742 5.5% 2,464 4.4% 2,232 4.3%
Charge to close owned restaurant - - 360 2.7% - - 360 0.7%
Write-off of site development costs - - 283 2.1% - - 283 0.5%
------------------ ------------------- ------------------- -------------------
Total cost of owned restaurant sales 17,021 98.9% 15,111 112.4% 50,863 91.7% 48,743 94.1%
------------------ ------------------- ------------------- -------------------
Income (loss) from owned 192 1.1% (1,662) -12.4% 4,592 8.3% 3,061 5.9%
restaurant operations
Management fee income 502 2.9% 479 3.6% 1,764 3.2% 1,929 3.7%
------------------ ------------------- ------------------- -------------------
Income (loss) from owned and managed
restaurants 694 4.0% (1,183) -8.8% 6,356 11.5% 4,990 9.6%
General and administrative expenses 2,489 14.5% 2,292 17.0% 7,273 13.1% 6,644 12.8%
Royalty expense 250 1.5% 191 1.4% 784 1.4% 718 1.4%
Charge for investment in managed
restaurant 722 4.2% 300 2.2% 722 1.3% 300 0.6%
------------------ ------------------- ------------------- -------------------
Operating loss (2,767) -2.1% (3,966) -29.5% (2,423) -4.4% (2,672) -5.2%
Interest income (expense), net (16) -0.1% 35 0.3% (8) - (1,111) -2.1%
------------------ ------------------- ------------------- -------------------
Loss before provision for
income taxes (2,783) -16.2% (3,931) -29.2% (2,431) -4.4% (3,783) -7.3%
Provision for income taxes 56 0.3% (3) - 157 0.3% 49 0.1%
------------------ ------------------- ------------------- -------------------
Loss before extraordinary item,
net of tax benefit (2,839) -16.5% (3,928) -29.2% (2,588) -4.7% (3,832) -7.4%
Extraordinary loss on early retirement
of debt - - - - - - (703) -1.4%
------------------ ------------------- ------------------- -------------------
Net loss $ (2,839) -16.5% $ (3,928) -29.2% $ (2,588) -4.7% $ (4,535) -8.8%
================== =================== =================== ===================
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THE THREE MONTHS ENDED OCTOBER
1, 2001
OWNED RESTAURANT SALES. Owned restaurant sales increased $3.8 million or 28.0%,
to $17.2 million for the three months ended September 30, 2002 from $13.4
million for the three months ended October 1, 2001. The increase in sales was
due to a $1.8 million increase relating to the opening of the Smith & Wollensky
unit in Columbus, Ohio, combined with an increase of $2.0 million for our
comparable owned units open for these entire periods. The increase in sales for
the three months ended September 30, 2002 compared with the same period from
2001 is due in part to the $776,000 increase for our three owned New York units
and a $1.2 million increase for the other owned Smith & Wollensky units. The
improvement is a result of a modest increase in both tourist and business travel
and in banquet sales as compared to the three months ended October 1, 2001,
which included the tragic events of September 11, 2001 and its aftermath.
FOOD AND BEVERAGE COSTS. Food and beverage costs increased $1.0 million to $5.0
million for the three months ended September 30, 2002 from $4.0 million for the
three months ended October 1, 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 29.3% for the three months
ended September 30, 2002 from 29.6% for the three months ended October 1, 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 $713,000
to $5.8 million for the three months ended September 30, 2002 from $5.1 million
for the three months ended October 1, 2001. The increase was primarily due to
the opening of the Smith & Wollensky unit in Columbus, Ohio. Salaries and
related benefits as a percent of owned restaurant sales decreased to 33.7% for
the three months ended September 30, 2002 from 37.8% for the three months ended
October 1, 2001, primarily as the result of the leveraging affect of sales
increases on the fixed portion of restaurant salaries and related benefits.
RESTAURANT OPERATING EXPENSES. Restaurant operating expenses increased $490,000
to $3.0 million for the three months ended September 30, 2002 from $2.5 million
for the three months ended October 1, 2001. Cost increases are primarily a
result of the opening of the Smith & Wollensky unit in
10
Columbus, Ohio and to a lesser extent the increase in certain restaurant
operating expenses at comparable units as a result of the increased sales
volume. Restaurant operating expenses as a percent of owned restaurant sales
decreased to 17.5% for the three months ended September 30, 2002 from 18.8% for
the three months ended October 1, 2001 primarily as the result of the
distribution of the fixed portion of operating costs to an increase in sales
volume at comparable units.
OCCUPANCY AND RELATED EXPENSES. Occupancy and related expenses increased
$173,000 to $1.5 million for the three months ended September 30, 2002 from $1.4
million for the three months ended October 1, 2001. The increase in occupancy
and related expenses relates to the rent associated with the new Smith &
Wollensky unit in Columbus, Ohio, and to a lesser extent an increase in
percentage rent expense at certain locations as a result of the increase in
sales volume. Occupancy and related expenses as a percent of owned restaurant
sales decreased to 8.9% for the three months ended September 30, 2002 from 10.1%
for the three months ended October 1, 2001, primarily due to the distribution of
fixed rental costs over an increasing revenue base.
MARKETING AND PROMOTIONAL EXPENSES. Marketing and promotional expenses increased
$3,000 to $777,000 for the three months ended September 30, 2002 from $774,000
for the three months ended October 1, 2001. The increase in marketing and
promotional expenses relates primarily to costs associated with the opening of
the Smith & Wollensky unit in Columbus, Ohio, offset by a slight decrease in
advertising rates. Marketing and promotional expenses as a percent of owned
restaurant sales decreased to 4.5% for the three months ended September 30, 2002
from 5.8% for the three months ended October 1, 2001.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased $114,000
to $856,000 for the three months ended September 30, 2002 from $742,000 for the
three months ended October 1, 2001. The increase is primarily due to the
initiation of depreciation on assets placed in service at the Columbus, Ohio
unit.
MANAGEMENT FEE INCOME. Management fee income increased $23,000 to $502,000 for
the three months ended September 30, 2002 from $479,000 for the three months
ended October 1, 2001, primarily due to a net increase in overall sales from
managed units.
CHARGE TO CLOSE OWNED RESTAURANT. In the fourth quarter of 2000, we 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 exit costs
associated with the closure. In the third quarter of fiscal year 2001, we
recorded an additional pretax charge of $360,000. The expense represented an
increase in the costs we expected to incur under the remaining term of the
lease, less estimated sub-rental income, as a result of changes in the rental
market for restaurant properties and assumes the Company would be able to locate
another tenant, the lease was terminated per the lease termination agreement on
January 30, 2002.
WRITE-OFF OF SITE DEVELOPMENT COSTS. In the third quarter of fiscal year 2001,
based on the tragic events relating to the September 11, 2001 terrorist attacks
and overall economic conditions, we made a decision to write off the development
costs associated with a proposed Smith & Wollensky restaurant site. We
terminated the lease agreement for this site in October 2001. The write-off of
costs incurred amounted to $283,000.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $197,000 to $2.5 million for the three months ended September 30,
2002 from $2.3 million for the three months ended October 1, 2001. General and
administrative expenses as a percent of owned restaurant sales decreased to
14.5% for the three months ended September 30, 2002 from 17.0% for the three
months ended October 1, 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 decreased to 8.7% for the three months ended September 30, 2002
from 9.8% for the three months ended October 1, 2001. The percentage decrease
was primarily due to the distribution of costs over an increasing revenue base.
The increased expense is primarily due to travel, accommodations and related
expenditures for supporting existing locations and the development of new sites,
combined with increases to directors and officers' liability insurance premiums
and professional 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 $59,000 to $250,000 for the three
months ended September 30, 2002 from $191,000 for the three months ended October
1, 2001, primarily due to a net increase in sales from the Smith & Wollensky
units of approximately $2.9 million.
CHARGE FOR INVESTMENT IN MANAGED RESTAURANT. The charges for investment in
managed restaurant were $722,000 and $300,000 for the three month periods ended
September 30, 2002 and October 1,2001, respectively. The charge in 2002
represents the costs associated with an unsettled contractual dispute and
management's belief that its initial investment in this managed property is
impaired. Due to the economic uncertainties at the time, the Company
established a reserve of $300,000 during the three months ended October 1, 2001
against receivables related to this managed restaurant the Company deemed may
be uncollectable.
INTEREST EXPENSE--NET OF INTEREST INCOME. Interest expense, net of interest
income, increased $51,000 to $16,000 of interest expense for the three months
ended September 30, 2002 from $35,000 of interest income for the three months
ended October 1, 2001, primarily due to the $14.0 million secured term loan
agreement entered into on August 23, 2002.
PROVISION FOR INCOME TAXES. The income tax provision for the three months ended
September 30, 2002 was based on state and local tax rates. The rate applied to
the three months ended October 1, 2001 comprises the federal and state statutory
rates, less any tax credits, based on the annual estimated effective tax rate
for 2001.
11
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THE NINE MONTHS ENDED OCTOBER
1, 2001
OWNED RESTAURANT SALES. Owned restaurant sales increased $3.7 million, or 7.1%,
to $55.5 million for the nine months ended September 30, 2002 from $51.8 million
for the nine months ended October 1, 2001. The increase in sales was due to a
$2.2 million increase relating to the opening of the Smith & Wollensky unit in
Columbus, Ohio, combined with an increase of $1.5 million for our comparable
owned units open for these entire periods. The increase in comparable owned
units was due largely in part to the $802,000 increase for our three owned New
York units and a $693,000 increase for the other owned Smith & Wollensky units.
The improvement is a result of a modest increase in both tourist and business
travel and in banquet sales as compared to the nine months ended October 1,
2001, which included the tragic events of September 11, 2001 and its aftermath.
FOOD AND BEVERAGE COSTS. Food and beverage costs increased $688,000 to $16.0
million for the nine months ended September 30, 2002 from $15.3 million for the
nine months ended October 1, 2001. The increase in food and beverage costs was
due primarily to the opening of the Smith & Wollensky unit in Columbus, Ohio and
to a lesser extent the increase in sales. Food and beverage costs as a percent
of owned restaurant sales decreased to 28.9% for the nine months ended September
30, 2002 from 29.6% for the nine months ended October 1, 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 $771,000
to $16.9 million for the nine months ended September 30, 2002 from $16.2 million
for the nine months ended October 1, 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
decreased to 30.6% for the nine months ended September 30, 2002 from 31.2% for
the nine months ended October 1, 2001. The decrease is primarily the result of
the leveraging affect of sales increases on the fixed portion of restaurant
salaries and related benefits.
RESTAURANT OPERATING EXPENSES. Restaurant operating expenses increased $758,000
to $8.8 million for the nine months ended September 30, 2002 from $8.0 million
for the nine months ended October 1, 2001. Restaurant operating expenses as a
percent of owned restaurant sales increased to 15.8% for the nine months ended
September 30, 2002 from 15.4% for the nine months ended October 1, 2001 due
primarily to the opening of the Smith & Wollensky unit in Columbus, Ohio and to
a lesser extent as a result of the increases in insurance premiums, operating
supplies and repairs and maintenance expenses.
OCCUPANCY AND RELATED EXPENSES. Occupancy and related expenses increased
$480,000 to $4.4 million for the nine months ended September 30, 2002 from $3.9
million for the nine months ended October 1, 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 nine
months ended September 30, 2002 from 7.5% for the nine months ended October 1,
2001.
MARKETING AND PROMOTIONAL EXPENSES. Marketing and promotional expenses decreased
$166,000 to $2.3 million for the nine months ended September 30, 2002 from $2.5
million for the nine months ended October 1, 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.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased $232,000
to $2.5 million for the nine months ended September 30, 2002 from $2.2 million
for the nine months ended October 1, 2001.
CHARGE TO CLOSE OWNED RESTAURANT. In the fourth quarter of 2000, we 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 exit costs
associated with the closure. In the third quarter of fiscal year 2001, we
recorded an additional pretax charge of $360,000. The expense represented an
increase in the costs we expected to incur under the remaining term of the
lease, less estimated sub-rental income, as a result of changes in the rental
market for restaurant properties and assumes the Company would be able to locate
another tenant, the lease was terminated per the lease termination agreement on
January30, 2002.
WRITE-OFF OF SITE DEVELOPMENT COSTS. In the third quarter of fiscal year 2001,
based on the tragic events relating to the September 11, 2001 terrorist attacks
and overall economic conditions, we made a decision to write off the development
costs associated with a proposed Smith & Wollensky restaurant site. We
terminated the lease agreement for this site in October 2001. The write-off of
costs incurred amounted to $283,000.
MANAGEMENT FEE INCOME. Management fee income decreased $165,000 to $1.8 million,
for the nine months ended September 30, 2002 from $1.9 million for the nine
months ended October 1, 2001, primarily due to a net decrease in overall sales
from a managed unit.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $629,000 to $7.3 million for the nine months ended September 30,
2002 from $6.6 million for the nine months ended October 1, 2001. General and
administrative expenses as a percent of owned restaurant sales increased to
13.1% for the nine months ended September 30, 2002 from 12.8% for the nine
months ended October 1, 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 7.9% for the nine months ended September 30, 2002
from 7.7% for the nine months ended October 1, 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
professional 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 $66,000 to $784,000 for the nine
months ended September 30, 2002 from $718,000 for the nine months ended October
1, 2001, primarily due to a net increase in sales from the Smith & Wollensky
units of approximately $2.8 million.
12
CHARGE FOR INVESTMENT IN MANAGED RESTAURANT. The charges for investment in
managed restaurant were $722,000 and $300,000 for the nine-month periods ended
September 30, 2002 and October 1, 2001, respectively. The charge in 2002
represents the costs associated with an unsettled contractual dispute and
management's belief that its initial investment in this managed property is
impaired. Due to the economic uncertainties at the time, the Company for the
nine month period ended October 1, 2001 established a reserve of $300,000
against receivables related to this managed restaurant the Company deemed may be
uncollectable.
INTEREST EXPENSE--NET OF INTEREST INCOME. Interest expense, net of interest
income, decreased $1.1 million to $8,000 of interest expense for the nine months
ended September 30, 2002 from $1.1 million of interest expense for the nine
months ended October 1, 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 nine months ended
September 30, 2002 was based on state and local tax rates. The rate applied to
the nine months ended October 1, 2001 comprises the federal and state statutory
rates, less any tax credits, based on the annual estimated effective tax rate
for 2001.
EXTRAORDINARY LOSS ON EARLY RETIREMENT OF DEBT. For the nine month period ended
October 1, 2001, in connection with this offering and the retirement of the
outstanding debt, the Company recorded an extraordinary charge of $703,000, net
of $378,000 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.
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 $440,000
for the nine months ended September 30, 2002 and used in operating activities
amounted to $4.5 million for the nine months ended October 1, 2001.
Net cash provided by financing activities was $3.8 million for the nine months
ended September 30, 2002 and net cash provided by financing activities was $13.1
million for the nine months ended October 1, 2001. Funds provided by financing
activities includes the proceeds from the issuance of long-term debt for the
nine-month period ended September 30, 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 nine month
period ended October 1, 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 $7.3 million for the nine months ended September 30, 2002 and
$1.8 million for the nine months ended October 1, 2001. Total capital
expenditures were $3.6 million for the nine months ended September 30, 2002 and
$1.7 million for the nine months ended October 1, 2001. In October 2002 the
Company purchased an existing restaurant in Dallas, Texas that it will convert
into a Smith & Wollensky restaurant. The purchase price for the property,
including 2.3 acres of land, was $3.75 million. The property, which is
located in the North Dallas area and has an approximately 12,000 square foot
building that will have a seating capacity of 330, plus an outdoor cafe with
an additional 30 seats. The Company plans to open the new restaurant in the
second quarter of 2003.
The remaining capital expenditures for the current fiscal year are expected to
be approximately $850,000 in 2002. With regard to our future expansion, the
Company is moving ahead cautiously as management evaluates and monitors economic
conditions.
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, the Company 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, the Company 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 September 30, 2002. In
13
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 September 30, 2002.
Pursuant to the terms of a loan agreement entered into on August 23, 2002 the
Company completed a $14.0 million secured term loan agreement with Morgan
Stanley Dean Witter Commercial Financial Services, Inc. Under the agreement
the Company is the guarantor of borrowings by its wholly owned subsidiary,
S&W Las Vegas, LLC ("Borrower"). The Company has borrowed $4.0 million under
the agreement for general corporate purposes, including its new restaurant
development program. (See note 8 for further information.) This portion of
the loan pursuant to terms of the agreement bears interest at a fixed rate of
6.35% per annum. Principal payments for this portion of the loan commence
June 30, 2003, through the loan's maturity date of May 31, 2008. Pursuant to
the terms of the loan agreement, the Company is obligated to make monthly
principal payments of $33,333 commencing June 30, 2003 or quarterly and
annual payments of $100,000, and $400,000, respectively over the term of the
loan.
The balance of the funds available under the agreement will enable the
Company to, pursuant to the lease agreement, exercise its purchase option
for the land in Las Vegas where the Company operates its restaurant. The
purchase option on the property is exercisable upon six months' written
notice to the landlord, which the Company has provided on August 28, 2002.
Accordingly, the planned acquisition of the Las Vegas property is expected to
be consummated on or after February 26, 2003 with an estimated purchase price
of $10 million.
The loan agreement contains financial covenants requiring the Company and the
Borrower to be in compliance as long as any portion of the loan remains
unpaid. The Borrower must be in compliance with the debt service coverage
ratio, as defined. The Company must be in compliance with the minimum
liquidity covenant, senior leverage ratio and interest coverage ratio, as
defined. The Company shall not be required to be in compliance with the
covenants set forth in the senior leverage or interest coverage ratios until
September 30, 2003, provided that it maintains compliance with the covenant
set forth in minimum liquidity. The financial covenants of the Company will
be determined on the basis of the consolidated results reflected on the
Company's financial statements.
We believe that our cash and short-term investments on hand, cash expected from
operations and expected landlord construction contributions and borrowings under
the Company's loan agreement should be sufficient to finance our modified
planned capital expenditures and other operating activities beyond 2002. Changes
in our operating plans, acceleration of our expansion plans, the continuation of
general weakness in economic conditions resulting in lower than anticipated
sales, increased expenses, potential acquisitions or other events may cause us
to seek additional financing sooner than anticipated. If required to do so, 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 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. 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 September 30, 2002, our
future minimum lease payments of our headquarters and restaurants are as
follows: 2002--$1.3 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.
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 and term loan are 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 September 30,
2002.
14
FAIR
VALUE
SEPTEMBER
EXPECTED MATURITY DATE FOR FISCAL YEAR ENDED 30,
2002 2003 2004 2005 2006 THEREAFTER TOTAL 2002
------- ------- ------ ------ ------ ----------- ------- ---------
(Dollars in thousands)
DEBT
Long-term variable rate $ 7 $ 31 $ 957 $ - $ - $ - $ 995 $ 995
Average interest rate 9.5%
Long-term fixed rate $ 17 $ 383 $ 445 $ 449 $ 453 $ 3,128 $ 4,875 $ 5,516
Average interest rate 6.6%
-------------------
Total Debt $ 5,870 $ 6,511
===================
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. 333-57518)
pursuant to which we offered and sold 4,750,000 shares of our common
stock for net proceeds to the Company of approximately $36.1 million
and certain of our stockholders sold 545,972 shares of our common
stock. The following table sets forth our cumulative use of the net
offering proceeds as of September 30, 2002:
Repayment of indebtedness.........................$ 22.0 million
Construction and upgrading of facilities..........$ 3.8 million
Purchase of fixed assets..........................$ 2.1 million
Working capital...................................$ 3.6 million
Total.............................................$ 31.5 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
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
15
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.43 Term Loan Agreement by and between S&W of Las Vegas L.L.C.
as "Borrower", The Smith & Wollensky Restaurant Group Inc.
as "Guarantor" and Morgan Stanley Dean Witter Commercial
Financial Services, Inc. as the "Lender" dated as of
August 23, 2002, including Schedules and exhibits thereto.
10.44 Promissory Note by and between S&W of Las Vegas L.L.C. as
the "Borrower" and Morgan Stanley Dean Witter Commercial
Financial Services, Inc. as the "Lender" dated as of
August 23, 2002.
10.45 Leasehold Deed of Trust by and between S&W of Las Vegas
L.L.C. as the "Grantor" to First American Title Company of
Nevada, Inc. as "Trustee" for the benefit of Morgan
Stanley Dean Witter Commercial Financial Services, Inc. as
the "Beneficiary" and exhibits thereto dated as of August
23, 2002.
10.46 Guaranty of Payment by and between The Smith & Wollensky
Restaurant Group Inc. as "Guarantor" for S&W of Las Vegas
L.L.C. as the "Borrower" for the "Loan" with Morgan
Stanley Dean Witter Commercial Financial Services, Inc. as
the "Lender" and exhibits thereto dated as of August 23,
2002.
10.47 Security Agreement by and between S&W of Las Vegas L.L.C.
as the "Grantor" to Morgan Stanley Dean Witter Commercial
Financial Services, Inc. as the "Lender" and schedules
thereto dated as of August 23, 2002.
10.48 Absolute Assignment of Leases and Rents Agreement by and
between S&W of Las Vegas L.L.C. as the "Assignor" and
Morgan Stanley Dean Witter Commercial Financial Services,
Inc. as the "Assignee" and exhibits thereto dated as of
August 23, 2002.
10.49 Hazardous Material Guaranty and Indemnification Agreement
by and between S&W of Las Vegas L.L.C. as the "Borrower"
and Morgan Stanley Dean Witter Commercial Financial
Services, Inc. as the "Lender" and exhibits thereto dated
as of August 23, 2002.
(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 November 14, 2002 By: /s/ Alan N. Stillman
------------------------------
Alan N. Stillman
Chairman of the Board, Chief
Executive Officer and Director
(principal executive officer)
Date November 14, 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 September 30,
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 November 14, 2002 By: /s/ Alan N. Stillman
------------------------------
Alan N. Stillman
Chairman of the Board, Chief
Executive Officer and Director
(principal executive officer)
Date November 14, 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
CERTIFICATIONS
I, Alan N. Stillman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Smith &
Wollensky Restaurant Group Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
November 14, 2002 /s/ Alan N. Stillman
-----------------------------------------
Alan N. Stillman
Chairman and Chief Executive Officer
19
CERTIFICATIONS
I, Alan M. Mandel, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Smith &
Wollensky Restaurant Group Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
d) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
e) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
f) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
c) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses .
November 14, 2002 /s/ Alan M. Mandel
-----------------------------------------
Alan M. Mandel
Chief Financial Officer, Executive
Vice President of Finance, Secretary
and Treasurer
20