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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
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 Number: 1-16505
----------------------
The Smith & Wollensky Restaurant Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 58 2350980
(State or other jurisdiction of incorporation (I.R.S. Employer
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of May 15, 2003, the registrant had 9,354,266 shares of Common Stock, $.01
par value per share, outstanding.
1
THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2003 (unaudited) and
December 30, 2002 4
Unaudited Consolidated Statements of Operations for the three-month
periods ended March 31, 2003 and April 1, 2002 5
Unaudited Consolidated Statements of Stockholders' Equity for the
three-month periods ended March 31, 2003 and April 1, 2002 6
Unaudited Consolidated Statements of Cash Flows for the three-month
periods ended March 31, 2003 and April 1, 2002 7
Notes to Unaudited Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23
Item 4. Controls and Procedures 23
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 24
2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
On one or more occasions, we may make statements in this Quarterly Report
on Form 10-Q regarding our assumptions, projections, expectations, targets,
intentions or beliefs about future events. All statements other than statements
of historical facts, included or incorporated by reference herein relating to
management's current expectations of future financial performance, continued
growth and changes in economic conditions or capital markets are forward looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934.
Words or phrases such as "anticipates," "believes," "estimates," "expects,"
"intends," "plans," "predicts," "projects," "targets," "will likely result,"
"hope", "will continue" or similar expressions identify forward looking
statements. Forward-looking statements involve risks and uncertainties, which
could cause actual results or outcomes to differ materially from those
expressed. We caution that while we make such statements in good faith and we
believe such statements are based on reasonable assumptions, including without
limitation, management's examination of historical operating trends, data
contained in records and other data available from third parties, we cannot
assure you that our projections will be achieved. Factors that may cause such
differences include: economic conditions generally and in each of the markets in
which we are located, the amount of sales contributed by new and existing
restaurants, labor costs for our personnel, fluctuations in the cost of food
products, changes in consumer preferences, the level of competition from
existing or new competitors in the high-end segment of the restaurant industry
and our success in implementing our growth strategy.
We have attempted to identify, in context, certain of the factors that we
believe may cause actual future experience and results to differ materially from
our current expectation regarding the relevant matter of subject area. In
addition to the items specifically discussed above, our business and results of
operations are subject to the risks and uncertainties described in Exhibit 99.2
of this Quarterly Report on Form 10-Q.
From time to time, oral or written forward-looking statements are also
included in our reports on Forms 10-K, 10-Q and 8-K, our Schedule 14A, our press
releases and other materials released to the public. Although we believe that at
the time made, the expectations reflected in all of these forward-looking
statements are and will be reasonable, any or all of the forward-looking
statements in this Quarterly Report on Form 10-Q, our reports on Forms 10-K and
8-K, our Schedule 14A and any other public statements that are made by us may
prove to be incorrect. This may occur as a result of inaccurate assumptions or
as a consequence of known or unknown risks and uncertainties. Many factors
discussed in this Quarterly Report on Form 10-Q, certain of which are beyond our
control, will be important in determining our future performance. Consequently,
actual results may differ materially from those that might be anticipated from
forward-looking statements. In light of these and other uncertainties, you
should not regard the inclusion of a forward-looking statement in this Quarterly
Report on Form 10-Q or other public communications that we might make as a
representation by us that our plans and objectives will be achieved, and you
should not place undue reliance on such forward-looking statements.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
However, your attention is directed to any further disclosures made on related
subjects in our subsequent periodic reports filed with the Securities and
Exchange Commission on Forms 10-K, 10-Q and 8-K and Schedule 14A.
Unless the context requires otherwise, references to "we," "us," "our,"
"SWRG" and the "Company" refer specifically to The Smith & Wollensky Restaurant
Group, Inc. and its subsidiaries and predecessor entities.
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
(dollar amounts in thousands, except per share data)
March 31, December 30,
2003 2002
---- ----
(unaudited)
Assets
Current assets:
Cash and cash equivalents................................................. $ 899 $ 4,158
Short-term investments.................................................... 3,230 3,636
Accounts receivable, less allowance for doubtful accounts of
$55 at March 31, 2003 and December 30, 2002, respectively................. 3,241 2,261
Merchandise inventory..................................................... 3,790 3,578
Prepaid expenses and other current assets................................. 1,073 1,465
------- -------
Total current assets...................................................... 12,233 15,098
Property and equipment, net................................................. 48,352 46,693
Goodwill, net............................................................... 6,886 6,886
Licensing agreement, net.................................................... 3,448 3,258
Management contract, net.................................................... 804 829
Long-term investments....................................................... 1,695 1,684
Other assets................................................................ 3,624 3,407
------- -------
Total assets.............................................................. $ 77,042 $ 77,855
======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt......................................... $ 621 $ 1,157
Accounts payable and accrued expenses..................................... 8,614 8,851
------- -------
Total current liabilities................................................. 9,235 10,008
Long-term debt, net of current portion...................................... 8,051 8,232
Deferred rent............................................................... 5,238 5,209
------- -------
Total liabilities......................................................... 22,524 23,449
Stockholders' equity:
Common stock (par value $.01; authorized 40,000,000 shares; 9,354,266
shares issued and outstanding at March 31, 2003 and December 30, 2002).... 94 94
Additional paid-in capital................................................ 69,854 69,854
Accumulated deficit....................................................... (15,433) (15,491)
Accumulated other comprehensive income (loss)............................. 3 (51)
------- -------
54,518 54,406
------- -------
Commitments and contingencies
Total liabilities and stockholders' equity................................ $ 77,042 $ 77,855
======= =======
See accompanying notes to unaudited consolidated financial statements.
4
THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
AND SUBSIDIARIES
Unaudited Consolidated Statements of Operations
(dollar amounts in thousands, except per share amounts)
Three months ended March 31, 2003 and April 1, 2002
March 31, April 1,
2003 2002
---- ----
Owned restaurant sales........................................ $ 22,992 $ 19,517
-------- --------
Cost of owned restaurant sales:
Food and beverage costs..................................... 7,045 5,566
Salaries and related benefit expenses....................... 6,365 5,481
Restaurant operating expenses............................... 3,537 2,912
Occupancy and related expenses.............................. 1,473 1,366
Marketing and promotional expenses.......................... 904 704
Depreciation and amortization expenses...................... 903 793
-------- --------
Total cost of owned restaurant sales..................... 20,227 16,822
-------- --------
Income from owned restaurant operations....................... 2,765 2,695
Management fee income......................................... 508 621
-------- --------
Income from owned and managed restaurants..................... 3,273 3,316
General and administrative expenses........................... 2,724 2,304
Royalty expense............................................... 345 270
-------- --------
Operating income.............................................. 204 742
Interest expense.............................................. (126) (39)
Amortization of deferred debt financing costs................. (13) _
Interest income............................................... 43 57
-------- --------
Interest income (expense), net................................ (96) 18
-------- --------
Income before provision for income taxes...................... 108 760
Provision for income taxes.................................... 50 50
-------- --------
Net income ................................................... $ 58 $ 710
======== =======
Net income per common share - basic and diluted:.............. $ 0.01 $ 0.08
======== =======
Weighted average common shares outstanding:
Basic 9,354,266 9,354,266
========= =========
Diluted 9,529,151 9,354,266
========= =========
See accompanying notes to unaudited consolidated financial statements.
5
THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
AND SUBSIDIARIES
Unaudited Consolidated Statements of Stockholders' Equity
(dollar amounts in thousands)
Three months ended March 31, 2003 and April 1, 2002
Accumulated
Common Stock Additional other
------------ paid-in Accumulated comprehensive Stockholders'
Shares Amount capital deficit income (loss) equity
------ ------ --------- ---------- ------------- -------------
Balance at December 31,
2001 9,354,266 $ 94 $ 69,854 $ (13,364) $ -- $ 56,584
Net income.............. 710 710
-------- ----------
Balance at April 1,
2002.................. 9,354,266 $ 94 $ 69,854 $ (12,654) $ -- $ 57,294
========= ====== ========== ========= ======== ===========
Balance at December 30,
2002.................. 9,354,266 $ 94 $ 69,854 $ (15,491) $ (51) $ 54,406
Unrealized gain on
investments........... 54 54
Net income.......... 58 58
--------- ------ ---------- --------- -------- -----------
Total comprehensive income 112
===========
Balance at March 31,
2003................ 9,354,266 $ 94 $ 69,854 $ (15,433) $ 3 $ 54,518
========= ====== ========== ========= ======== ===========
See accompanying notes to unaudited consolidated financial statements
6
THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
(dollar amounts in thousands)
Three months ended March 31, 2003 and April 1, 2002
March 31, April 1,
2003 2002
---- ----
Cash flows from operating activities:
Net income.................................................... $ 58 $ 710
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization............................... 1,003 905
Amortization of debt discount.............................. 13 --
Changes in operating assets and liabilities:
Accounts receivable...................................... (980) 539
Merchandise inventory.................................... (212) (107)
Prepaid expenses and other current assets................ 392 (135)
Other assets............................................. (159) 81
Accounts payable and accrued expenses.................... (238) 453
Deferred rent............................................ 22 41
----- -----
Net cash provided by (used in) operating
activities.......................................... (101) 2,487
Cash flows from investing activities:
Purchase of property and equipment........................... (2,568) (1,338)
Purchase of nondepreciable assets............................ (99) (98)
Purchase of investments...................................... (1,718) (1,634)
Proceeds from sale of investments............................ 2,168 2,377
Payments under licensing agreement........................... (224) --
----- -----
Cash flows used in investing activities.................. (2,441) (693)
Cash flows from financing activities:
Principal payments of long-term debt.......................... (717) (114)
----- -----
Cash flows used in financing activities.................. (717) (114)
----- -----
Net change in cash and cash equivalents....................... (3,259) 1,680
Cash and cash equivalents at beginning of period.............. 4,158 4,561
----- -----
Cash and cash equivalents at end of period............... $ 899 $ 6,241
====== ======
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest................................................. $ 112 $ 37
====== ======
Income taxes............................................. $ 68 $ 80
====== ======
See accompanying notes to unaudited consolidated financial statements.
7
THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
March 31, 2003 and April 1, 2002
(1) General
The accompanying unaudited consolidated financial statements of The Smith &
Wollensky Restaurant Group, Inc. and its wholly-owned subsidiaries
(collectively, "SWRG") do not include all information and footnotes normally
included in financial statements prepared in conformity with accounting
principles generally accepted in the United States. 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 related notes should be read in
conjunction with the audited consolidated financial statements of SWRG for the
fiscal year ended December 30, 2002 filed by SWRG on Form 10-K with the
Securities and Exchange Commission on March 31, 2003. 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 consolidated balance sheet data presented herein for December 30, 2002
was derived from SWRG's audited consolidated financial statements for the fiscal
year then ended, but does not include all disclosures required by accounting
principles generally accepted in the United States. The preparation of unaudited
financial statements in accordance with accounting principles generally accepted
in the United States requires SWRG to make certain estimates and assumptions for
the reporting periods covered by the financial statements. These estimates and
assumptions affect the reported amounts of assets, liabilities, revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
SWRG utilizes a 52- or 53-week reporting period ending on the Monday
nearest to December 31st. The three months ended March 31, 2003 and April 1,
2002 represent 13-week reporting periods. SWRG develops, owns, operates and
manages a diversified portfolio of upscale tablecloth restaurants. At March 31,
2003, SWRG owned and operated eleven restaurants, including eight Smith &
Wollensky restaurants. The newest restaurant, a 400 seat Smith & Wollensky in
Dallas, Texas, opened on March 17, 2003. SWRG also manages five restaurants.
(2) Effect of New Accounting Standards
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS No. 145 amends existing guidance on reporting gains and losses
on the extinguishment of debt to prohibit the classification of the gain or loss
as extraordinary, as the use of such extinguishments have become part of the
risk management strategy of many companies. SFAS No. 145 also amends SFAS No. 13
to require sale-leaseback accounting for certain lease modifications that have
economic effects similar to sale-leaseback transactions. The provisions of the
Statement related to the rescission of Statement No. 4 is applied in fiscal
years beginning after May 15, 2002. The provisions of the Statement related to
Statement No. 13 were effective for transactions occurring after May 15, 2002.
The implementation of this standard had no material impact on SWRG's results of
operations.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34. This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. The Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The disclosure requirements are effective for financial
statements of interim and annual periods ending after December 31, 2002. The
initial recognition and measurement
8
provisions of the Interpretation are applicable to guarantees issued or modified
after December 31, 2002 and had no material effect on SWRG's financial
statements.
SWRG accounts for stock-based compensation using the intrinsic value method
in accordance with Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees. SWRG has adopted the pro forma disclosure
requirements of SFAS No. 123, Accounting for Stock-Based Compensation. The
following table illustrates the effect on the net income as if SWRG had applied
the fair value recognition provisions of SFAS No. 123 to stock based
compensation:
2003 2002
-------- --------
Net income, as reported $ 58 710
Add stock-based employee compensation
expense included in reported net
income, net of tax - 12
Pro forma net income $ 58 722
======== ========
Per common share - basic and diluted:
Pro forma net income $ 0.01 0.08
======== ========
In January 2003, the FASB issued Interpretation No.46, Consolidation of
Variable Interest Entities, an interpretation of Accounting Research Bulletin
No. 51. This Interpretation addresses the consolidation by business enterprises
of variable interest entities as defined in the Interpretation. The
Interpretation applies immediately to variable interests in variable interest
entities created after January 31, 2003, and to variable interests in variable
interest entities obtained after January 31, 2003. For enterprises, such as
SWRG, with a variable interest in a variable interest entity created before
February 1, 2003, the Interpretation is applied to the enterprise no later than
the end of the first annual reporting period beginning after June 15, 2003. SWRG
is currently evaluating the impact of the application of this Interpretation and
the effect it may have on SWRG's financial statements.
(3) Net Income per Common Share
SWRG calculates net income per common share in accordance with SFAS No.
128, Earnings Per Share. Basic net income per common share is computed by
dividing the net income by the weighted average number of common shares
outstanding. Diluted net income per common share assumes the exercise of stock
options using the treasury stock method, if dilutive. Dilutive net income per
common share for the three months ended March 31, 2003, was the same as basic
net income per common share.
The following table sets forth the calculation for net income per common
share on a weighted average basis:
Three Months Ended
March 31, April 1,
2003 2002
---- ----
Numerator:
Net income........................... $ 58 $ 710
======= =========
9
Weighted Weighted
Average Shares Average Shares
-------------- --------------
Denominator:
Basic 9,354,266 9,354,266
========= =========
Anti-dilutive options 174,855 -
--------- ---------
Diluted............................... 9,529,151 9,354,266
========= =========
Per common share-basic and diluted:
Net income............................. $ 0.01 $ 0.08
========= =========
(4) Licensing Agreements
On August 16, 1996, SWRG entered into a Licensing Agreement with St. James
Associates ("St. James"), the owner of the Smith & Wollensky restaurant in New
York. St. James is an entity related through common management and ownership.
The Licensing Agreement provides SWRG with the exclusive right to utilize
the names "Smith & Wollensky" and "Wollensky's Grill" ("Names") throughout the
United States and internationally, with the exception of a reserved territory,
as defined. Consequently, SWRG may not open additional Smith & Wollensky
restaurants or otherwise utilize the Names in the reserved territory. The
Licensing Agreement requires SWRG to make additional payments to St. James as
follows: (i) $200 for each new restaurant opened (increasing annually commencing
in 1999 by the lesser of the annual increase in the Consumer Price Index or a 5%
increase of the fee required in the preceding year), (ii) a royalty fee of 2%
based upon annual gross sales for each restaurant utilizing the Names, as
defined, subject to certain annual minimums, and (iii) a royalty fee of 1% of
annual gross sales for any steakhouses opened in the future by SWRG that does
not utilize the Names. In addition, should SWRG terminate or default on the
license, as defined, it is subject to a fee of $2,000 upon termination or $2,500
to be paid over four years.
There are future minimum royalty payments relating to (ii) and (iii) above
which are as follows:
Fiscal year:
- ------------
2003 $525
2004 800
2005 800
2006 800
2007 800
2008 and each year thereafter........................ 800
During the three-month period ended March 31, 2003, SWRG paid $224 in
connection with the opening of the Smith & Wollensky unit in Dallas, Texas.
(5) Management Agreements
Prior to December 2002, SWRG operated Park Avenue Cafe in Chicago, Mrs.
Park's Tavern and the other services of the food and beverage department of the
Doubletree Hotel in Chicago ("Doubletree") pursuant to a sub-management
agreement (the "Doubletree Agreement"). SWRG received a management fee equal to
the sum of 1.5% of sales and a percentage of earnings, as defined. The
Doubletree Agreement expires on the earlier of December 31, 2004 or the
termination of the related hotel management agreement, between Chicago HSR
Limited Partnership ("HSR"), the owner of the Doubletree, and Doubletree
Partners, the manager of the
10
Doubletree. During December 2002, HSR closed the Park Avenue Cafe restaurant in
Chicago and discontinued SWRG's requirement to provide other food and beverage
department service for the Doubletree . As a result, SWRG is no longer receiving
the fees described above. During the three-month period ended March 31, 2003,
SWRG reached an agreement with HSR. The agreement provides for the continued use
by HSR of the name Mrs. Parks Tavern and requires SWRG to provide management
services to support that location. In exchange for the use of the Mrs. Park's
Tavern name and related management support SWRG will receive an annual fee of
$50. The agreement will automatically renew each year, unless notification of
cancellation is given, by either party, at least 90 days prior to December 31.
(6) Long-Term Debt
Long-term debt consists of the following:
Mar. 31, Dec. 30,
2003 2002
--------- ---------
Term loan(a).............................. $4,000 $4,000
Term loan(b).............................. 1,853 1,900
Promissory note(c)........................ 1,100 1,650
Other(d).................................. 1,719 1,839
--------- ---------
8,672 9,389
Less current portion...................... 621 1,157
--------- ---------
$8,051 $8,232
========= =========
- -----------
a. On August 23, 2002, SWRG entered into a $14.0 million secured term loan
agreement with Morgan Stanley Dean Witter Commercial Financial Services,
Inc. ("Morgan Stanley") Under the agreement SWRG is the guarantor of
borrowings by its wholly owned subsidiary, S&W Las Vegas, LLC ("Borrower").
SWRG, through the Borrower, has borrowed $4.0 million under the agreement
for general corporate purposes, including its new restaurant development
program. 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, SWRG is
obligated to make monthly principal payments of approximately $33
commencing June 30, 2003 over the term of the loan with a balloon payment
of approximately $2,033 on May 31, 2008. The term loan is secured by a
leasehold mortgage relating to the Las Vegas property and all of the
personal property and fixtures of S&W Las Vegas, LLC. The term loan is
guaranteed by SWRG. At March 31, 2003 SWRG was in compliance with the debt
service coverage ratio and minimum liquidity financial covenants. SWRG was
not required to be in compliance with the senior leverage ratio and
interest coverage ratio since SWRG was in compliance with the minimum
liquidity covenant. As previously disclosed, the balance of the funds
available under the agreement had been intended to be used by SWRG to
exercise its purchase option for the land and building at 3767 Las Vegas
Blvd. where SWRG operates its 675-seat, 30,000 square foot restaurant. SWRG
exercised its option to purchase the land in 2002. SWRG no longer intends
to draw down the remaining balance because as an alternative to purchasing
the land, SWRG signed a second amendment to its lease agreement as
discussed in Note 8. The ability to draw down this balance expires on May
31, 2003.
b. On December 24, 2002 SWRG entered into a $1.9 million secured term loan
agreement with Morgan Stanley. Under the agreement SWRG and Dallas S&W
L.P., a wholly owned subsidiary, is the guarantor of borrowings by the
Borrower. Of the $1.9 million borrowed by SWRG, through the Borrower, under
the agreement, $1.35 million will be used for its new restaurant
development program, and $550 will be used for the first principal
installment on the $1.65 million promissory note with Toll Road Texas Land
Company, L.P. Pursuant to the terms of the agreement, this loan bears
interest at a fixed rate of 6.36% per annum. Principal payments for this
loan commenced January 24, 2003, through the loan's maturity date of
December 24, 2007. Pursuant to the terms of the loan agreement, SWRG is
obligated to make monthly principal payments of $16 commencing January 24,
2003 over the term of the loan with a balloon payment of approximately $966
on December 24, 2007. The term loan is secured by a second mortgage
11
relating to the Dallas property and a security interest in all of the
personal property and fixtures of Dallas S&W L.P. The term loan is also
secured by the leasehold mortgage relating to the Las Vegas property. The
term loan is guaranteed by SWRG. At March 31, 2003 SWRG was in compliance
with the financial covenants as described above.
c. On October 9, 2002, SWRG purchased the property for the Smith & Wollensky
unit in Dallas. The purchase price for this property was $3.75 million.
Part of the purchase price for this property was financed through a $1.65
million promissory note that was signed by Dallas S&W, L.P., a wholly owned
subsidiary of SWRG. This loan bears interest at 8% per annum and requires
annual principal payments of $550 with the first installment being prepaid
on March 4, 2003, and the subsequent two installments due on October 9,
2004 and October 9, 2005, respectively. The promissory note is secured by a
first mortgage relating to the Dallas property.
d. In fiscal 1997, SWRG assumed certain liabilities in connection with the
acquisition of leasehold rights relating to its Smith & Wollensky Miami
location from two bankrupt corporations. Pursuant to the terms of the
bankruptcy resolution, SWRG is obligated to make quarterly and annual
payments over a six-year period. These obligations generally bear interest
at rates ranging from 9% to 12%. The aggregate balance outstanding at March
31, 2003 and December 30, 2002 was $12 and $110, respectively. In addition,
SWRG assumed a mortgage on the property that requires monthly payments,
with a final principal payment of $958 in June 2004. The mortgage bears
interest at 5.75%. SWRG also assumed a loan payable to a financing
institution that requires monthly payments through the year 2014, and bears
interest at 7.67%. The aggregate balance of the mortgage and loan payable
outstanding at March 31, 2003 and December 30, 2002 was $1,708 and $1,729,
respectively.
Principal payments on long-term debt are as follows:
Fiscal year:
------------
2003..................................... $452
2004..................................... 2,121
2005..................................... 1,189
2006..................................... 643
2007..................................... 3,763
Thereafter............................... 504
--------
$8,672
========
(7) Legal Matters
On or about September 5, 2001, Mondo's of Scottsdale, L.C. filed a suit
against SWRG alleging that SWRG had entered into an agreement to purchase all of
the leasehold interest in, and certain fixtures and equipment located at,
Mondo's restaurant located in Scottsdale, Arizona. The suit was filed in the
Superior Court of the State of Arizona in and for the County of Maricopa and has
been set to go to jury trial in October 2003. The plaintiff requested damages of
approximately $2.0 million. SWRG is vigorously contesting this suit. Management
believes, based on advice from local counsel, that SWRG has a significant
likelihood of prevailing in the suit and that the risk of loss is not probable.
Accordingly, SWRG has not established a reserve for loss in connection with this
suit. If SWRG were to lose the suit, the financial position, results of
operation and cash flows of SWRG may be adversely affected. There have been no
material changes with respect to this matter.
SWRG is involved in various other claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on SWRG's
consolidated financial position, results of operations or liquidity.
(8) Subsequent Event
12
On April 29, 2003, SWRG signed a second amendment to its lease agreement
(the "Agreement") with The Somphone Limited Partnership ("Lessor"), the owner of
the property that its restaurant in Las Vegas is located on. The Agreement,
which will be treated as a capital lease, adjusts the annual fixed payment to
$400,000 per year from May 1, 2003 to April 30, 2008 and to $860,000 per year
from May 1, 2008 to April 30, 2018. The Agreement also amends the amount of the
purchase price option available to SWRG effective May 1, 2003. SWRG will have
the option to purchase the property over the next five years at an escalating
purchase price. The purchase price is approximately $10.0 million, at May 1,
2003, and escalates to approximately $12.1 million at the end of five years. The
down payment for the purchase price of the property escalates monthly, but is
not due and payable until the time of the purchase. The down payment will be
applied against the purchase price at the closing of the option. If at the end
of the five years SWRG does not exercise the option, SWRG must pay the then
applicable down payment, which will be applied to the purchase price once SWRG
purchases the property. The minimum down payments for the purchase of the land
over the next five years will be as follows:
Fiscal year
-----------
2003 $166,616
2004 268,876
2005 298,024
2006 328,260
2007 359,612
Thereafter 123,396
----------
$1,544,784
==========
If SWRG exercises the option, the Lessor will provide SWRG with financing in the
amount of the purchase price applicable at the time of the closing, less the
down payment payable by SWRG, at an interest rate of 8% per annum, payable over
ten years.
The Agreement also provides the Lessor with a put right that would give the
Lessor the ability to require SWRG to purchase the property at any time after
June 15, 2008 at the then applicable purchase price. SWRG will then have two
months to close on the purchase of the property.
On May 14, 2003, a letter was signed by Morgan Stanley confirming that the
treatment of the Agreement as a capital lease does not violate the debt
restriction covenant of the secured term loan agreement and that the capital
lease and any imputed interest related to the capital lease are excluded from
the calculation of the financial covenants.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
As of March 31, 2003, we operated 16 high-end, high volume restaurants in
the United States. We believe that the size of each market we entered warranted
investment in restaurants with seating capacities ranging from 290 to 675. On
March 17, 2003, we opened a 400 seat Smith & Wollensky in Dallas, Texas. We
expect to open another Smith & Wollensky restaurant in the fourth quarter of
2003 in Houston, Texas. We expect the restaurant in Houston, Texas to have
approximately 425 seats on two levels. Although we expect to open two new Smith
& Wollensky restaurants in 2004 and two to three per year starting in 2005, we
plan to move ahead cautiously with our future expansion as management evaluates
and monitors economic and national security conditions. We expect additional
locations to have seating capacities ranging from 375 to 450 seats, but would
consider locations with larger seating capacities where appropriate. We believe
these new restaurants will require, on average, a total cash investment of $2.0
million to $5.0 million net of landlord contributions and excluding pre-opening
expenses. This range assumes that the property on which the new unit is located
is being leased.
As a result of our recent expansion, period-to-period comparisons of our
financial results may be less meaningful. When a new restaurant opens, we
typically incur higher than normal levels of food and labor costs as a
percentage of sales during the first year of its operation. In calculating
comparable restaurant sales, we introduce a restaurant into our comparable
quarterly restaurant base once it has been in operation for 15 months.
Pursuant to management contracts and arrangements, we operate, but do not
own, the original Smith & Wollensky, Maloney & Porcelli, The Post House and
ONEc.p.s. restaurants in New York and Mrs. Parks Tavern in Chicago.
13
Owned restaurant sales include gross sales less sales taxes and other
discounts. Cost of owned restaurant sales include food and beverage costs,
salaries and related benefits, restaurant operating expenses, occupancy and
related expenses, marketing and promotional expenses and restaurant level
depreciation and amortization. Salaries and related benefits include components
of restaurant labor, including direct hourly and management wages, bonuses,
fringe benefits and related payroll taxes. Restaurant operating expenses include
operating supplies, utilities, maintenance and repairs and other operating
expenses. Occupancy and related expenses include rent, real estate taxes and
other occupancy costs.
Management fee income relates to fees that we receive from our managed
units. These fees are based on a percentage of sales from the managed units,
ranging from 2.3% to 6.0%. Management fee income also includes fees from Maloney
& Porcelli equal to 50% of the unit's net operating cash flow generated during
each fiscal year, provided that the Maloney & Porcelli owner receives a minimum
amount of operating cash flow per year ranging from $360,000 to $480,000. Prior
to December 2002, we operated Park Avenue Cafe in Chicago, Mrs. Park's Tavern
and the other services of the food and beverage department of the Doubletree
Hotel in Chicago ("Doubletree") pursuant to a sub-management agreement (the
"Doubletree Agreement"). We received a management fee equal to the sum of 1.5%
of sales and a percentage of earnings, as defined. The Doubletree Agreement
expires on the earlier of December 31, 2004 or the termination of the related
hotel management agreement between Chicago HSR Limited Partenrship ("HSR"), the
owner of the Doubletree, and Doubletree Partners, the manager of the Doubletree.
During December 2002, HSR closed the Park Avenue Cafe restaurant in Chicago and
discontinued our requirement to provide other food and beverage department
service for the Doubletree . As a result, we no longer receive the fees
described above. During the three-month period ended March 31, 2003, we reached
an agreement with HSR. The agreement provides for the continued use by HSR of
the name Mrs. Parks Tavern and requires us to provide management services to
support that location. In exchange for the use of the Mrs. Park's Tavern name
and related management support the Company will receive an annual fee of
$50,000. The agreement will automatically renew each year, unless notification
of cancellation is given, by either party, at least 90 days prior to December
31. Management fee income from ONEc.p.s. is equal to 40% of the restaurant's
operating cash flows, as reduced by the repayment of project costs and working
capital contributions. After all the project costs and working capital
contributions have been repaid, the fee will increase to 50% of the restaurant's
operating cash flows.
General and administrative expenses include all corporate and
administrative functions that support existing owned and managed operations and
provide infrastructure to facilitate our growth. General and administrative
expenses are comprised of management, supervisory and staff salaries and
employee benefits, travel costs, information systems, training costs, corporate
rent, corporate insurance and professional and consulting fees. Pre-opening
costs incurred in connection with the opening of new restaurants are expensed as
incurred and are included in general and administrative expenses. General and
administrative expenses also include the depreciation of corporate-level
property and equipment and the amortization of corporate intangible assets, such
as licensing agreements and management contracts.
Royalty expense represents fees paid pursuant to a licensing agreement with
St. James Associates, based upon 2.0% of sales for restaurants utilizing the
Smith & Wollensky name.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of
operations are based upon our unaudited consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements require us
to make significant estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities.
On an on-going basis, we evaluate our estimates and assumptions, including
those related to revenue recognition, allowance for doubtful accounts, valuation
of inventories, valuation of long-lived assets, goodwill and other intangible
assets, income taxes, income tax valuation allowances and legal proceedings. We
base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that can not readily be determined from other sources. There can be
no assurance that actual results will not differ from those estimates.
14
We believe the following is a summary of our critical accounting policies:
Revenue recognition: Sales from owned restaurants are recognized as revenue
at the point of the delivery of meals and services. Management fee income is
recognized as the related management fee is earned pursuant to the respective
agreements.
Allowance for doubtful accounts: Substantially all of our accounts
receivable are due from companies or individuals with good historical track
records of payment. Accounts receivable are reduced by an allowance for amounts
that may become uncollectible in the future. Such allowance is established
through a charge to the provision for bad debt expenses.
Long-lived assets: We review long-lived assets to be held and used or to be
disposed of for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by restaurant comparing the carrying
amount of the restaurant's assets to undiscounted future net cash flows expected
to be generated by such assets. We limit assumptions about such factors as sales
and margin improvements to those that are supportable based upon our plans for
the unit, its individual results and actual results at comparable restaurants.
If such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Fair value would be calculated on a discounted cash
flow basis.
Goodwill: Goodwill represents the excess of fair value of certain reporting
units acquired in the formation of the Company over the book value of those
reporting units' identifiable net assets. Goodwill is tested for impairment at
least annually in accordance with the provisions of SFAS No. 142, Goodwill and
Other Intangible Assets. SFAS No. 142 also requires that intangible assets with
estimable useful lives be amortized over their respective estimated useful lives
to their estimated residual values, and reviewed for impairment in accordance
with SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets.
We assess the recoverability of goodwill at the end of each year through a fair
value valuation performed for each reporting unit that has goodwill. The fair
value valuation is calculated using various methods, including an analysis based
on projected discounted future operating cash flows of each reporting unit using
a discount rate reflecting our average cost of funds. We limit assumptions about
such factors as sales and margin improvements to those that are supportable
based upon our plans for the unit and actual results at comparable restaurants.
The assessment of the recoverability of goodwill will be impacted if estimated
future operating cash flows are negatively modified by us as a result of changes
in economic conditions, significant events that occur or other factors arising
after the preparation of any previous analysis. . The net carrying value of
goodwill as of March 31, 2003 and December 30, 2002 was $6.9 million,
respectively.
Other intangible assets: We review other intangible assets, which include
costs attributable to a sale and licensing agreement and the cost of the
acquisition of management contracts, for impairment at a minimum, whenever
events or changes in circumstances indicate the carrying value of an asset may
not be recoverable. Recoverability of our intangible assets will be assessed by
comparing the carrying amount of the asset to the undiscounted expected net cash
flows to be generated by such assets. An intangible asset would be considered
impaired if the sum of undiscounted future cash flows is less than the book
value of the assets generating those cash flows. We limit assumptions about such
factors as sales and margin improvements to those that are supportable based
upon our plans for the unit and actual results at comparable restaurants. If
intangible assets are considered to be impaired, the impairment to be recognized
will be measured by the amount by which the carrying amount of the asset exceeds
the fair value of the assets. Fair value would be calculated on a discounted
cash flow basis. The assessment of the recoverability of these intangible assets
will be impacted if estimated future operating cash flows are negatively
modified by us as a result of changes in economic conditions, significant events
that occur or other factors arising after the preparation of any previous
analysis. The net carrying value of our intangible assets as of March 31, 2003
and December 30, 2002 was $4.3 million and $4.1 million, respectively.
Artwork: We purchase artwork and antiques for display in our restaurants.
We do not depreciate artwork and antiques since these assets have cultural,
aesthetic or historical value that is worth preserving perpetually and we have
the ability and intent to protect and preserve these assets. Such assets are
recorded at cost and are included in other assets in the accompanying
consolidated balance sheets.
Self-insurance liability: We are self insured for our employee health
program. We maintain stop loss insurance to limit our total exposure and
individual claims. The liability associated with this program is based on our
estimate of the ultimate costs to be incurred to settle known claims and claims
incurred but not reported as of the balance sheet date. Our estimated liability
is not discounted and is based on a number of assumptions and factors, including
historical medical claim patterns and known economic conditions. If actual
trends, including the severity or frequency of claims, differ from our
estimates, our financial results could be impacted. However, we believe that a
change in our current accrual requirement of 10% or less would cause an
immaterial change to our financial results.
15
Legal proceedings: We are involved in various claims and legal actions, the
outcomes of which are not within our complete control and may not be known for
prolonged periods of time. In some actions, the claimants seek damages, which,
if granted, would require significant expenditures. We record a liability in our
consolidated financial statements when a loss is known or considered probable
and the amount can be reasonably estimated. If the reasonable estimate of a
known or probable loss is a range, and no amount within the range is a better
estimate, the minimum amount of the range is accrued. If a loss is not probable
or cannot be reasonably estimated, a liability is not recorded in the
consolidated financial statements.
Income taxes and income tax valuation allowances: We estimate certain
components of our quarterly provision for income taxes. These estimates include,
but are not limited to, effective state and local income tax rates and estimates
related to depreciation expense allowable for tax purposes. Our estimates are
made based on the best available information at the time that we prepare the
provision. We usually file our income tax returns several months after our
fiscal year-end. All tax returns are subject to audit by federal and state
governments, usually years after the returns are filed and could be subject to
differing interpretations of the tax laws.
On March 31, 2003, we have a valuation allowance of $8.5 million to reduce
our net operating loss and tax credit carryforwards of $6.2 million and other
timing differences of $2.3 million to an amount that will more likely than not
be realized. These net operating loss and tax credit carryforwards exist in
federal and certain state jurisdictions and have varying carryforward periods
and restrictions on usage. The estimation of future taxable income for federal
and state purposes and our resulting ability to utilize net operating loss and
tax credit carryforwards can significantly change based on future events and
operating results. Thus, recorded valuation allowances may be subject to
material future changes.
This discussion and analysis should be read in conjunction with the
unaudited consolidated financial statements and related notes included elsewhere
in this Quarterly Report on Form 10-Q.
Results of Operations
Three Months Ended
March 31, 2003 April 1, 2002
-------------- -------------
Consolidated Statement of Operations Data:
Owned restaurant sales............................. $22,992 100.0% $19,517 100.0%
Cost of owned restaurant sales:
Food and beverage costs.......................... 7,045 30.6 5,566 28.5
Salaries and related benefit expenses............ 6,365 27.7 5,481 28.1
Restaurant operating expenses.................... 3,537 15.4 2,912 14.9
Occupancy and related expenses................... 1,473 6.4 1,366 7.0
Marketing and promotional expenses............... 904 4.0 704 3.6
Depreciation and amortization.................... 903 3.9 793 4.1
------- ------- ------- -------
Total cost of owned restaurant sales......... 20,227 88.0 16,822 86.2
------- ------- ------- -------
Income from owned restaurant operations.............. 2,765 12.0 2,695 13.8
Management fee income................................ 508 2.2 621 3.2
------- ------- ------- -------
Income from owned and managed restaurants............ 3,273 14.2 3,316 17.0
General and administrative expenses.................. 2,724 11.8 2,304 11.8
Royalty expense...................................... 345 1.5 270 1.4
------- ------- ------- -------
Operating income..................................... 204 0.9 742 3.8
16
Interest (expense) income, net....................... (96) (0.4) 18 0.1
------- ------- ------- -------
Income before provision for income taxes............. 108 0.5 760 3.9
Provision for income taxes........................... 50 0.2 50 0.3
------- ------- ------- -------
Net income........................................... $ 58 0.3% $ 710 3.6%
======= ======= ======= =======
Three Months Ended March 31, 2003 Compared to the Three Months Ended April 1,
2002
Owned Restaurant Sales. Owned restaurant sales increased $3.5 million, or 17.8%,
to $23.0 million for the three months ended March 31, 2003 from $19.5 million
for the three months ended April 1, 2002. The increase in owned restaurant sales
related primarily to an increase in comparable owned unit sales of $2.0 million,
or 10.2%. This included a net increase in sales of $2.4 million from our owned
Smith & Wollensky units open for the entire period. The improvement is primarily
a result of an increase in tourism and banquet sales at those locations as
compared to 2002. The comparable owned unit sales net increases were offset by a
decrease in sales of $374,000 from our three owned New York units due to the
continued economic slowdown and decreased tourism that continues in the New York
metropolitan area. The sales increase also includes new unit sales of $1.5
million for the Smith & Wollensky units in Columbus, Ohio and Dallas, Texas.
Comparisons also benefited from the Passover and Easter holidays falling in the
second quarter of 2003 as compared to the first quarter of 2002 and the
inclusion of New Year's Eve in January 2003.
Food and Beverage Costs. Food and beverage costs increased $1.5 million to $7.0
million for the three months ended March 31, 2003 from $5.6 million for the
three months ended April 1, 2002. Food and beverage costs as a percentage of
owned restaurant sales increased to 30.6% in 2003 from 28.5% in 2002. The
increase was primarily due to the continued higher beef costs for prime beef and
certain shellfish in the first quarter of 2003 that began in the fourth quarter
of 2002 as compared to the three months ended April 1, 2002. Increased costs
also relate to a lesser extent to the new Smith & Wollensky units in Columbus,
Ohio, and in Dallas, Texas, which were not open in the comparable three months
ended April 1, 2002. Food and beverage costs related to the new units accounted
for $558,000 of the increase for the three months ended March 31, 2003. The new
Smith & Wollensky unit in Dallas, Texas experienced higher than normal food and
beverage costs as a percentage of sales as a result of initial startup
inefficiencies and a lower revenue base. It is common for our new units to
experience higher than normal food and beverage costs in the first six months of
operations. Generally, as the unit matures and revenues increase, operating
efficiency is expected to improve and the food and beverage costs as a
percentage of sales for that unit are expected to decrease.
Salaries and Related Benefits. Salaries and related benefits increased $884,000
to $6.4 million for the three months ended March 31, 2003 from $5.5 million for
the three months ended April 1, 2002. This increase was primarily due to the
salaries and related benefits for the new Smith & Wollensky units in Columbus,
Ohio, and in Dallas, Texas, which were not open in the comparable three months
ended April 1, 2002. The increase relating to these new units was $744,000.
Salaries and related benefits as a percent of owned restaurant sales decreased
to 27.7% for the three months ended March 31, 2003 from 28.1% for the three
months ended April 1, 2002. The decrease in salaries and related benefits as a
percentage of owned restaurant sales was primarily due to the leveraging effect
of sales increases on the fixed portion of restaurant salaries and related
benefits and to a lesser extent improved results in the costs of claims for
health insurance under our self-insurance policy. This decrease was partially
offset by the additional staffing required at the new Smith & Wollensky unit in
Dallas, Texas during the unit opening. It is common for our new restaurants to
experience increased costs for additional staffing in the first six months of
operations. Generally, as the unit matures and revenues increase, operating
efficiency is expected to improve as we expect that staffing will be reduced
through efficiencies and salaries and wages as a percentage of sales for that
unit will decrease due to the lower staffing requirement and higher revenue
base.
Restaurant Operating Expenses. Restaurant operating expenses increased $625,000
to $3.5 million for the three months ended March 31, 2003 from $2.9 million for
the three months ended April 1, 2002. Restaurant operating expenses as a
percentage of owned restaurant sales increased to 15.4% for 2003 from 14.9% in
2002 primarily due to the opening of the Smith & Wollensky units in Columbus,
Ohio and Dallas, Texas. The increase relating to these new units was $319,000.
The increase to a lesser extent relates to costs associated with upgrades of
operating supplies and increases in insurance premiums at the units open the
entire period.
17
Occupancy and Related Expenses. Occupancy and related expenses increased
$107,000 to $1.5 million for the three months ended March 31, 2003 from $1.4
million for the three months ended April 1, 2002 primarily due to the Smith &
Wollensky unit in Columbus, Ohio, that had not been open during the comparable
three months ended April 1, 2002. Pursuant to an interim rent agreement, we
benefited from a reduction of rent of $83,000 during the negotiations of the
amendment entered into on April 29, 2003 relating to the Smith & Wollensky unit
in Las Vegas. Occupancy and related expenses as a percentage of owned restaurant
sales decreased to 6.4% for the three months ended March 31, 2003 from 7.0% for
the three months ended April 1, 2002, primarily due to the distribution of fixed
rental costs over an increasing revenue base.
Marketing and Promotional Expenses. Marketing and promotional expenses increased
$200,000 to $904,000 for the three months ended March 31, 2003 from $704,000 for
the three months ended April 1, 2002. Marketing and promotional expenses as a
percent of owned restaurant sales increased to 4.0% for the three months ended
March 31, 2003 from 3.6% for the three months ended April 1, 2002, primarily due
to the advertising and promotional costs related to the opening of the new Smith
& Wollensky units in Columbus, Ohio and Dallas, Texas, which were not open in
the comparable three months ended April 1, 2002. The increase to a lesser extent
was due to the additional public relations expenditures during the three-month
period ended March 31, 2003, at the comparable units.
Depreciation and Amortization. Depreciation and amortization increased $110,000
to $903,000 for the three months ended March 31, 2003 from $793,000 for the
three months ended April 1, 2002, primarily due to the property and equipment
additions for the Smith & Wollensky unit in Columbus, Ohio, which was not open
in the comparable three months ended April 1, 2002.
Management Fee Income. Management fee income decreased $113,000 to $508,000 for
the three months ended March 31, 2003 from $621,000 for the three months ended
April 1, 2002, primarily due to a net decrease in overall sales from managed
units and to a lesser extent the decrease in the annual management fee we
receive from the Chicago HSR Limited Partnership. In exchange for the use of the
Mrs. Park's Tavern name and related management support services, we will receive
an annual fee of $50,000.
General and Administrative Expenses. General and administrative expenses
increased by $420,000 to $2.7 million for the three months ended March 31, 2003
from $2.3 million for the three months ended April 1, 2002. General and
administrative expenses as a percent of owned restaurant sales remained constant
at 11.8% for the three months ended March 31, 2003 and April 1, 2002,
respectively. General and administrative expenses include corporate payroll and
other expenditures that benefit both owned and managed units. General and
administrative expenses as a percentage of owned and managed restaurant sales
increased to 8.1% for the three months ended March 31, 2003 from 7.2% for the
three months ended April 1, 2002. The increase was primarily due to an increase
in travel and related expenditures relating to the opening of the Smith &
Wollensky unit in Dallas, Texas, as well as increases in insurance, professional
fees and other miscellaneous expenses.
Royalty Expense. Royalty expense increased $75,000 to $345,000 for the three
months ended March 31, 2003 from $270,000 for the three months ended April 1,
2002 primarily due to the increase in sales of $2.4 million from our owned Smith
& Wollensky units open for the comparable period together with the sales from
the opening of the new Smith & Wollensky units in Columbus, Ohio and Dallas,
Texas, which were not open in the comparable three months ended April 1, 2002.
Interest Expense -Net of Interest Income. Interest expense, net of interest
income, increased $114,000 to $96,000 of interest expense for the three months
ended March 31, 2003 from $18,000 of interest income for the three months ended
April 1, 2002, primarily due to the interest expense on debt incurred for
general corporate purposes and in connection with our new restaurant development
program.
Provision for Income Taxes. The income tax provision for the three months ended
March 31, 2003 and April 1, 2002, respectively, represents certain state and
local taxes. No federal income tax was provided for the three months ended March
31, 2003 and April 1, 2002, respectively, due to the net operating loss
carryforward.
Risk Related to Certain Management Agreements and Lease Agreements
18
We are subject to a right of the other party to terminate, at any time, the
agreement relating to ONEc.p.s. We have not been notified by the other parties
to this agreement that they plan to terminate the agreement and management has
no reason to believe that the agreement will be terminated.
Pursuant to our lease agreement for Cite with Rockefeller Center North,
Inc., Rockefeller Center may terminate the lease agreement if Mr. Stillman does
not own at least 35% of the shares of each class of the tenants stock, or if
there is a failure to obtain their consent to an assignment of the lease. We are
currently in default with respect to these requirements, although Rockefeller
Center has not given us notice of default. Rockefeller Center may also terminate
the lease agreement if Mr. Stillman does not have effective working control of
the business of the tenant. The default existing under the lease agreement for
Cite could subject us to renegotiation of the financial terms of the lease, or
could result in a termination of this agreement which would result in the loss
of this restaurant at this location. This event could have a material adverse
effect on our business and our financial condition and results of operations. To
date, none of the parties to this agreement has taken any action to terminate
this agreement and management has no reason to believe that the agreement will
be terminated.
Liquidity and Capital Resources
We have funded our capital requirements in recent years through cash flow
from operations, a private placement of preferred stock, the sale of
subordinated notes, bank debt and an initial public offering of our common
stock. Net cash (used in) / provided by operating activities amounted to
($101,000) and $2.5 million for the three months ended March 31, 2003 and three
months ended April 1, 2002, respectively.
Net cash used in financing activities was $717,000 and $114,000 for the
three months ended March 31, 2003 and three months ended April 1, 2002,
respectively. Funds used in financing activities represents principal payments
on our long-term debt for the three months ended March 31, 2003 and three months
ended April 1, 2002, respectively.
We used cash primarily to fund the development and construction of new
restaurants and remodeling of existing restaurants. Net cash used in investing
activities was $2.4 million and $693,000 for the three months ended March 31,
2003 and three months ended April 1, 2002, respectively. Total capital
expenditures were $2.6 million and $1.3 million for the three months ended March
31, 2003 and three months ended April 1, 2002, respectively. On March 17, 2003,
we opened the Smith & Wollensky unit in Dallas, Texas.
The remaining capital expenditures are expected to be approximately $5.4
million in 2003. The increase in the remaining capital expenditures from those
previously disclosed relates primarily to an increase in the square footage and
seating capacity for the new Smith & Wollensky restaurant that we plan to open
in the fourth quarter of 2003 in Houston, Texas. We expect the restaurant to
have approximately 425 seats on two levels. Although we plan to open two new
Smith & Wollensky restaurants in 2004 and two to three per year starting in
2005, we plan to move ahead cautiously with our future expansion as management
evaluates and monitors economic and security conditions. We expect additional
locations to have seating capacities ranging from 375 to 450 seats, but would
consider locations with larger seating capacities where appropriate. We intend
to develop restaurants that will require, on average, a total cash investment of
$2.0 million to $5.0 million net of landlord contributions and excluding
pre-opening costs. This range assumes that the property on which the new unit is
located is being leased. The average cost of opening the last three Smith &
Wollensky restaurants, net of landlord contributions, has been approximately
$2.8 million, excluding the purchase of land and pre-opening costs.
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 9.0% to 12.0%. The aggregate outstanding balance
of such liabilities was approximately $12,000 as of March 31, 2003. 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 $1.7
million on March 31, 2003.
On August 23, 2002, we entered into a $14.0 million secured term loan
agreement with Morgan Stanley Dean Witter Commercial Financial Services, Inc.
Under the agreement we are the guarantors of borrowings by our wholly owned
subsidiary, S&W Las Vegas, LLC. We have borrowed $4.0 million under the
agreement for general corporate purposes, including our new restaurant
19
development program. This portion of the loan bears interest at a fixed rate of
6.35% per annum. Principal payments for this portion of the loan commence June
30, 2003 and the loan matures on May 31, 2008. Pursuant to the terms of the loan
agreement, we are obligated to make monthly principal payments of $33,333
commencing June 30, 2003 over the term of the loan with a balloon payment of
approximately $2.0 million on May 31, 2008. The term loan is secured by a
leasehold mortgage relating to the Las Vegas property and all of the personal
property and fixtures of S&W Las Vegas, LLC. The term loan is guaranteed by us.
At March 31, 2003 we were in compliance with the debt service coverage ratio and
minimum liquidity financial covenants contained in the loan agreement. We were
not required to be in compliance with the senior leverage ratio and interest
coverage ratio since we were in compliance with the minimum liquidity covenant.
As previously disclosed, the balance of the funds available under the agreement
had been intended to be used by us to exercise our purchase option for the land
and building at 3767 Las Vegas Blvd. where we operate our 675-seat, 30,000
square foot restaurant. The ability to draw down this balance expires on May 31,
2003. We exercised our option with the owner to purchase the land in 2002. The
Company no longer intends to draw down the remaining balance because on April
29, 2003, as an alternative to purchasing the land, we signed a second amendment
to lease agreement ("Agreement") with The Somphone Limited Partnership
("Lessor"), the owner of the land. The Agreement, which will be accounted for as
a capital lease, adjusts the annual fixed payment to $400,000 per year from May
1, 2003 to April 30, 2008 and to $860,000 per year from May 1, 2008 to April 30,
2018. The Agreement also amends the amount of the purchase price option
available to the Company effective from May 1, 2003. We will have the option to
purchase the property over the next five years at an escalating purchase price.
The purchase price is approximately $10.0 million, at May 1, 2003, and escalates
to approximately $12.1 million at the end of five years. The down payment for
the purchase of the property escalates monthly, but is not due and payable until
the time of purchase. The down payment will be applied against the purchase
price at the closing of the option. If at the end of the five years the Company
does not exercise the option, it must pay the then applicable down payment,
which will be applied to the purchase price once we purchase the property. The
Lessor will retain the down payments. The minimum down payments for the purchase
of the land over the next five years will be as follows:
Fiscal year
-----------
2003 $166,616
2004 268,876
2005 298,024
2006 328,260
2007 359,612
Thereafter 123,396
---------
$1,544,784
=========
If we exercises the option, the Lessor will provide the Company with
financing in the amount of the purchase price applicable at the time of the
closing, less the down payment payable by SWRG, at an interest rate of 8% per
annum, payable over ten years.
The Agreement also provides the Lessor with a put right that would give the
Lessor the ability to require the Company to purchase the property at any time
after June 15, 2008 at the then applicable purchase price. We will then have two
months to close on the purchase of the property.
On May 14, 2003, a letter was signed by Morgan Stanley confirming that the
treatment of the Agreement as a capital lease does not violate the debt
restriction covenant of the secured term loan agreement and that the capital
lease and any imputed interest related to the capital lease are excluded from
the calculation of the financial covenants.
On October 9, 2002, we purchased the property for the Smith & Wollensky
unit in Dallas. The purchase price for this property was $3.75 million. Part of
the purchase price for this property was financed through a $1.65 million
promissory note that was signed by Dallas S&W, L.P., a wholly owned subsidiary
of SWRG. This loan bears interest at 8% per annum and requires annual principal
payments of $550,000 with the first installment being prepaid on March 4, 2003,
and the subsequent two installments due on October 9, 2004 and October 9, 2005,
respectively. The promissory note is secured by a first mortgage relating to the
Dallas property.
On December 24, 2002 we entered into a $1.9 million secured term loan
agreement with Morgan Stanley Dean Witter Commercial Financial Services, Inc.
Under the agreement SWRG and Dallas S&W L.P., a wholly owned subsidiary, are the
guarantors of borrowings by SWRG's wholly owned subsidiary, S&W Las Vegas, LLC.
Of the $1.9 million borrowed by us under the agreement, $1.35 million will be
used for its new restaurant development program, and $550,000 will be used for
the first principal installment on the $1.65 million promissory note with Toll
Road Texas Land Company, L.P. Pursuant to the terms of the agreement, this loan
bears interest at a fixed rate of 6.36% per annum. Principal payments for this
loan commenced January 24, 2003, and continue through the loan's maturity date
of December 24, 2007. Pursuant to the terms of the loan agreement, we are
obligated to make monthly principal payments of $15,833 over the term of the
loan with a balloon payment of approximately $1.0 million on December 24, 2007.
The term loan is secured by a second mortgage relating to the Dallas property
and a security interest in all of the personal property and fixtures of Dallas
S&W L.P. The term loan is also secured by the leasehold mortgage relating to the
Las Vegas property. The term loan is guaranteed by the
20
Company. The aggregate outstanding balance of this term loan was approximately
$1.9 million as of March 31, 2003. At March 31, 2003 we were in compliance with
the financial covenants as described above.
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 planned capital expenditures and other operating
activities, including funding working capital, throughout the remainder of 2003.
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 2003 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.
Below is a summary of certain of our contractual obligations as of March
31, 2003. Please refer to the discussion above and the Notes to Unaudited
Consolidated Financial Statements for additional disclosures regarding the
obligations described in the table below:
Less than More than
Total 1 year 1-3 years 3-5 years 5 years
----- --------- --------- --------- ---------
PAYMENTS DUE BY PERIOD
----------------------
Minimum royalty payments licensing agreement .. $4,525 $525 $1,600 $1,600 $800(1)
Minimum distributions management agreement .... $3,630 $270 $960 $960 $1,440
Minimum payments on employment agreements ..... $5,182 $1,021 $2,758 $1,403 $0
Principal payments on long-term debt .......... $8,672 $452 $3,310 $4,406 $504
Payments under capital lease................... $12,145 $433 $1,367 $1,488 $8,857
Minimum annual rental commitments ............. $64,784 $3,675 $8,355 $7,279 $45,475
---------- --------- --------- --------- ----------
$98,938 $6,376 $18,350 $17,136 $57,076
- -----------
(1) The license agreement is irrevocable and perpetual unless terminated in
accordance with the terms of the agreement. See Notes to the Unaudited
Consolidated Financial Statements, Note 4.
Properties
We lease restaurant and office facilities and real property under operating
leases expiring in various years through 2028. As of March 31, 2003, our future
minimum lease payments of our headquarters and restaurants are as follows:
2003--$3.7 million; 2004--$4.2 million; 2005--$4.2 million; and
thereafter--$52.8 million. In addition, certain leases contain contingent rental
provisions based upon the sales of the underlying restaurants.
Seasonality
Our business is seasonal in nature depending on the region of the United
States in which a particular restaurant is located, with revenues generally
being less in the third quarter than in other quarters due to reduced summer
volume and highest in the fourth quarter due to year-end and holiday events. As
we continue to expand in other locations, the seasonality pattern may change.
21
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 of Financial Accounting Standards ("SFAS") No. 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS No. 145 amends existing guidance on reporting gains and losses
on the extinguishment of debt to prohibit the classification of the gain or loss
as extraordinary, as the use of such extinguishments have become part of the
risk management strategy of many companies. SFAS No. 145 also amends SFAS No. 13
to require sale-leaseback accounting for certain lease modifications that have
economic effects similar to sale-leaseback transactions. The provisions of the
Statement related to the rescission of Statement No. 4 is applied in fiscal
years beginning after May 15, 2002. The provisions of the Statement related to
Statement No. 13 were effective for transactions occurring after May 15, 2002.
The implementation of this standard had no material impact on our results of
operations.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34. This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. The Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The disclosure requirements are effective for financial
statements of interim and annual periods ending after December 31, 2002. The
initial recognition and measurement provisions of the Interpretation are
applicable to guarantees issued or modified after December 31, 2002 and had no
material effect on our financial statements.
SWRG accounts for stock-based compensation using the intrinsic value method
in accordance with Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees. SWRG has adopted the pro forma disclosure
requirements of SFAS No. 123, Accounting for Stock-Based Compensation. The
following table illustrates the effect on the net income as if SWRG had applied
the fair value recognition provisions of SFAS No. 123 to stock based
compensation:
2003 2002
---- ----
Net income, as reported $ 58 710
Add stock-based employee compensation expense
included in reported net income, net of tax - 12
------ ----
Pro forma net income $ 58 722
Per common share - basic and diluted:
Pro forma net income $ 0.01 0.08
====== ====
In January 2003, the FASB issued Interpretation No.46, Consolidation of
Variable Interest Entities, an interpretation of Accounting Research Bulletin
No. 51. This Interpretation addresses the consolidation by business enterprises
of variable interest entities as defined in the Interpretation. The
Interpretation applies immediately to variable interests in variable interest
entities created after January 31, 2003, and to variable interests in variable
interest entities obtained after January 31, 2003. For enterprises, such as the
Company, with a variable interest in a variable interest entity created before
February 1, 2003, the Interpretation is applied to the enterprise no later than
the end of the first annual reporting period beginning after June 15, 2003. The
Company is currently evaluating the impact of the application of this
Interpretation and the effect it may have on its financial statements.
22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 our 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 March 31, 2003.
Expected Maturity Date
Fiscal Year Ended
-----------------
Fair Value
March 31,
Debt 2003 2004 2005 2006 2007 Thereafter Total 2003
- ---- ---- ---- ---- ---- ---- ---------- ----- ----
(Dollars in thousands)
Long-term variable rate... $20 $949 $969 $969
Average interest rate..... 5.8%
Long-term fixed rate...... $432 $1,172 $1,189 $643 $3,763 $504 7,703 8,703
Average interest rate..... 6.7%
Total Debt................ $8,672 $9,672
We have no derivative financial or derivative commodity instruments. We do
not hold or issue financial instruments for trading purposes.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
An evaluation of the effectiveness of the design and operation of our
"disclosure controls and procedures" (as defined in Rule 13a-14(c) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) was carried
out within 90 days prior to the filing date of this Report on Form 10-Q. This
evaluation was made under the supervision and with the participation of
management, including its Chief Executive Officer and Chief Financial Officer.
Based upon this evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures (a) are
effective to ensure that information required to be disclosed by us in reports
filed or submitted under the Exchange Act is timely recorded, processed,
summarized and reported and (b) include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by us in
reports filed or submitted under the Exchange Act is accumulated and
communicated to management, including its Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
Changes in Internal Controls
23
There have been no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
our evaluation.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.67 Second Amendment Lease Agreement with an Option to Purchase dated
April 29, 2003, by and between The Somphone Limited Partnership,
a Nevada limited partnership, and S & W of Las Vegas, L.L.C., a
Delaware limited liability company.
10.68 Letter from Morgan Stanley Dean Witter Commercial Services, Inc.
dated May 14, 2003.
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Risk Factors.
(b) Reports on Form 8-K.
Report on Form 8-K dated April 3, 2003 furnishing under Item 9 a
copy of the Company's press release dated April 3, 2003,
describing selected financial results of the Company for the
three months ended March 31, 2003 and the year ended December 30,
2002.
Report on Form 8-K dated May 8, 2003 furnishing under Item 9 a
copy of the Company's press release dated May 8, 2003, describing
selected financial results of the Company for the three months
ended March 30, 2003.
24
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.
May 15, 2003 By: /s/ ALAN N. STILLMAN
---------------------
Name: Alan N. Stillman
Title: Chairman of the Board, Chief
Executive Officer and Director
Principal Executive Officer)
May 15, 2003 By: /s/ ALAN M. MANDEL
-------------------
Name: Alan M. Mandel
Title: Chief Financial Officer,
Executive Vice President of
Finance, Secretary and Treasurer
(Principal Financial and
Accounting Officer)
25
CERTIFICATIONS
I, Alan N. Stillman, Chairman of the Board and Chief Executive Officer of The
Smith & Wollensky Restaurant Group, Inc. 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 officers 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 officers 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.
May 15, 2003
/s/ ALAN N.STILLMAN
-------------------
Alan N. Stillman
Chairman of the Board and Chief Executive Officer
26
CERTIFICATIONS
I, Alan M. Mandel, Chief Financial Officer, Executive Vice President of Finance,
Secretary and Treasurer of The Smith & Wollensky Restaurant Group, Inc. 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 officers 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 officers 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.
May 15, 2003
/s/ ALAN M. MANDEL
------------------
Alan M. Mandel
Chief Financial Officer, Executive
Vice President of Finance, Secretary
and Treasurer
27
Exhibit No. Description of Documents
- ----------- ------------------------
10.67 Second Amendment Lease Agreement with an Option to Purchase dated
April 29, 2003, by and between The Somphone Limited Partnership,
a Nevada limited partnership, and S & W of Las Vegas, L.L.C., a
Delaware limited liability company.
10.68 Letter from Morgan Stanley Dean Witter Commercial Services, Inc.
dated May 14, 2003.
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Risk Factors.
28