Back to GetFilings.com
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 June 28, 2004
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 (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 |_|
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 August 11, 2004, the registrant had 9,378,349 shares of Common Stock, $.01
par value per share, outstanding.
THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements.
Unaudited Consolidated Balance Sheets as of June 28, 2004 and December 29, 2003 4
Unaudited Consolidated Statements of Operations for the three- and six-month periods ended
June 28, 2004 and June 30, 2003 5
Unaudited Consolidated Statements of Stockholders' Equity for the six-month periods ended
June 28, 2004 and June 30, 2003 6
Unaudited Consolidated Statements of Cash Flows for the six-month periods ended
June 28, 2004 and June 30, 2003 7
Notes to Unaudited Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 29
Item 4. Controls and Procedures. 29
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. 30
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities. 30
Item 3. Defaults Upon Senior Securities. 30
Item 4. Submission of Matters to a Vote of Security Holders. 30
Item 5. Other Information. 31
Item 6. Exhibits and Reports on Form 8-K. 31
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," "hopes", "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 or subject area. In
addition to the items specifically discussed above, our business, results of
operations and financial position and your investment in our common stock are
subject to the risks and uncertainties described in Exhibit 99.1 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,
10-Q 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
Unaudited Consolidated Balance Sheets
(dollar amounts in thousands, except share and per share data)
June 28, December 29,
2004 2003 (a)
---- --------
Assets
Current assets:
Cash and cash equivalents................................................. $ 1,033 $ 2,181
Short-term investments.................................................... 168 1,055
Accounts receivable, less allowance for doubtful accounts of $94 and $95
at June 28, 2004 and December 29, 2003, respectively...................... 2,818 2,680
Merchandise inventory..................................................... 4,867 4,749
Prepaid expenses and other current assets................................. 1,376 845
-------- --------
Total current assets...................................................... 10,262 11,510
Property and equipment, net................................................. 68,527 63,386
Goodwill, net............................................................... 6,886 6,886
Licensing agreement, net.................................................... 3,489 3,338
Other assets................................................................ 4,241 3,941
-------- --------
Total assets.............................................................. $ 93,405 $ 89,061
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt......................................... $ 1,323 $ 2,121
Accounts payable and accrued expenses..................................... 12,206 11,922
-------- --------
Total current liabilities................................................. 13,529 14,043
Obligations under capital lease............................................. 10,062 9,991
Long-term debt, net of current portion...................................... 10,497 6,099
Deferred rent............................................................... 6,481 6,400
-------- --------
Total liabilities......................................................... 40,569 36,533
Interest in consolidated variable interest entity........................... (1,601) (1,680)
Commitments and contingencies
Stockholders' equity:
Common stock (par value $.01; authorized 40,000,000 shares; 9,376,249
shares issued and outstanding at June 28, 2004 and December 29,2003,
respectively)............................................................. 94 94
Additional paid-in capital................................................ 69,940 69,940
Accumulated deficit....................................................... (15,649) (15,842)
Accumulated other comprehensive income ................................... 52 16
-------- --------
54,437 54,208
-------- --------
Total liabilities and stockholders' equity................................ $ 93,405 $ 89,061
======== ========
(a) Restated to reflect the adoption of FASB Interpretation No. 46 (revised
December 2003), "Consolidation of Variable Interest Entities" ("FIN 46
(R)").
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 Six Months Ended
June 28, June 30, June 28, June 30,
2004 2003 (a) 2004 2003 (a)
---- -------- ---- --------
Consolidated restaurant sales.......................... $ 30,010 $ 26,081 $ 60,662 $ 51,440
-------- -------- -------- --------
Cost of consolidated restaurant sales:
Food and beverage costs.............................. 9,366 7,989 19,515 15,671
Salaries and related benefit expenses................ 8,669 7,369 17,422 14,469
Restaurant operating expenses........................ 4,758 4,233 9,557 8,176
Occupancy and related expenses....................... 1,458 1,313 2,894 3,027
Marketing and promotional expenses................... 1,326 1,010 2,624 1,992
Depreciation and amortization expenses............... 1,016 996 2,078 1,949
-------- -------- -------- --------
Total cost of consolidated restaurant sales....... 26,593 22,910 54,090 45,284
-------- -------- -------- --------
Income from consolidated restaurant operations......... 3,417 3,171 6,572 6,156
Management fee income.................................. 316 232 632 444
-------- -------- -------- --------
Income from consolidated and managed restaurants....... 3,733 3,403 7,204 6,600
General and administrative expenses.................... 2,367 2,389 4,908 5,086
Royalty expense........................................ 432 369 871 717
-------- -------- -------- --------
Operating income ...................................... 934 645 1,425 797
Interest expense....................................... (333) (277) (656) (403)
Amortization of deferred debt financing costs.......... (26) (13) (44) (26)
Interest income........................................ -- 31 -- 74
-------- -------- -------- --------
Interest and other expense, net........................ (359) (259) (700) (355)
-------- -------- -------- --------
Income before provision for income taxes............... 575 386 725 442
Provision for income taxes............................. 51 75 103 125
-------- -------- -------- --------
Income before (income) loss of consolidated
variable interest entity........................... 524 311 622 317
(Income) loss of consolidated variable interest entity (261) (71) (429) 6
-------- -------- -------- --------
Net income.............................................. $ 263 $ 240 $ 193 $ 323
======== ======== ======== ========
Net income per common share:
Basic:............................................ $ 0.03 $ 0.03 $ 0.02 $ 0.03
======== ======== ======== ========
Diluted:.......................................... $ 0.03 $ 0.02 $ 0.02 $ 0.03
======== ======== ======== ========
Weighted average common shares outstanding:
Basic............................................. 9,376,249 9,354,481 9,376,249 9,354,374
========== ========= ========== =========
Diluted........................................... 10,131,915 9,806,731 10,131,915 9,667,470
========== ========= ========== =========
(a) Restated to reflect the adoption of FIN 46 (R).
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)
Six months ended June 28, 2004 and June 30, 2003
Accumulated
Common Stock Additional other
paid-in Accumulated comprehensive Stockholders'
Shares Amount capital deficit income (loss) equity
------ ------ ------- ------- ------------- ------
Balance at December 30,
2002(a) 9,354,266 $94 $69,854 $(14,820) $ (51) $55,077
Stock options exercised...... 1,633 7 7
Comprehensive income on
investments, net of tax
effect....................... 70 70
Net income................... -- -- -- 323 -- 323
--------- --- ------- --------- ------- -------
Total comprehensive income 393
---
Balance at June 30, 2003(a).. 9,355,899 $ 94 $69,861 $(14,497) $ 19 $55,477
========= ==== ======= ========= ===== =======
Balance at December 29,
2003(a) 9,376,249 $94 $69,940 $(15,842) $16 $54,208
Comprehensive income on
investments, net of tax
effect....................... 36 36
Net income................... -- -- -- 193 -- 193
--------- --- ------- --------- ------- -------
Total comprehensive income 229
=======
Balance at June 28, 2004..... 9,376,249 $ 94 $69,940 $(15,649) $ 52 $54,437
========= ==== ======= ========= ==== =======
(a) Restated to reflect the adoption of FIN 46 (R).
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)
Six months ended June 28, 2004 and June 30, 2003
June 28, June 30,
2004 2003 (a)
---- --------
Cash flows from operating activities:
Net income ................................................... $ 193 $ 323
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................... 2,251 2,117
Amortization of deferred financing costs................... 44 26
Accretive interest on capital lease obligation.............. 71 23
Income (loss) of consolidated variable interest entity..... 429 (6)
Changes in operating assets and liabilities:
Accounts receivable...................................... (165) (537)
Merchandise inventory.................................... (118) (73)
Prepaid expenses and other current assets................ (531) 165
Other assets............................................. (321) (163)
Accounts payable and accrued expenses.................... 280 614
Deferred rent............................................ 81 (13)
------- --------
Net cash provided by operating activities...... 2,214 2,476
Cash flows from investing activities:
Purchase of property and equipment........................... (7,274) (4,118)
Purchase of nondepreciable assets............................ (34) (99)
Purchase of investments...................................... - (2,568)
Proceeds from sale of investments............................ 925 4,504
Payments under licensing agreement........................... (229) (224)
------- --------
Cash flows used in investing activities........ (6,612) (2,505)
Cash flows from financing activities:
Proceeds from issuance of long-term debt...................... 3,959 -
Principal payments of long-term debt.......................... (359) (826)
Net proceeds from exercise of options - 7
------- --------
Distribution to owners of consolidated variable interest
entity...................................................... (350) (150)
------- --------
Cash flows provided by (used in) financing
activities.................................... 3,250 (969)
------- --------
Net change in cash and cash equivalents....................... (1,148) (998)
Cash and cash equivalents at beginning of period.............. 2,181 4,226
------- --------
Cash and cash equivalents at end of period..... $ 1,033 $ 3,228
======= ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest........................................ $ 504 $ 328
====== ======
Income taxes.................................... $ 73 $ 44
===== ======
Noncash investing and financing activities:
Assets under capital lease...................... $71 $ 9,898
==== =======
Obligations under capital lease................. - $ 9,921
= =======
Capitalization of deferred rent................... $150 $ -
==== =======
(a) Restated to reflect the adoption of FIN 46 (R).
See accompanying notes to unaudited consolidated financial statements.
7
THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts and where noted)
June 28, 2004 and June 30, 2003
(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 29, 2003 filed by SWRG on Form 10-K with the
Securities and Exchange Commission on March 26, 2004. 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 29,
2003 was derived from SWRG's consolidated financial statements for the fiscal
year then ended and includes the effect of consolidating the entity that owns
the Maloney & Porcelli restaurant ("M&P") that SWRG manages in New York City,
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.
The consolidated financial statements of SWRG include the accounts and
results of SWRG and, as a result of Financial Accounting Standards Board
("FASB") Interpretation No. 46 (revised December 2003), Consolidation of
Variable Interest Entities, ("FIN 46(R)"), the accounts and results of the
entity that owns M&P. SWRG manages the operations of M&P pursuant to the terms
of a restaurant management agreement (the "Maloney Agreement"). FIN 46(R)
addresses the consolidation by business enterprises of variable interest
entities. All variable interest entities, regardless of when created, are
required to be evaluated under FIN 46(R) no later than the first period ending
after March 15, 2004. An entity shall be subject to consolidation according to
the provisions of this Interpretation if, by design, as a group, the holders of
the equity investment at risk lack any one of the following three
characteristics of a controlling financial interest: (1) the direct or indirect
ability to make decisions about an entity's activities through voting rights or
similar rights; (2) the obligation to absorb the expected losses of the entity
if they occur; or (3) the right to receive the expected residual returns of the
entity if they occur. SWRG consolidated the financial statements of the entity
that owns M&P because the holders of the equity investment lacked one of the
above characteristics.
The presented consolidated financial statements relating to prior
periods have been restated to consolidate the accounts and results of the entity
that owns M&P as a direct result of the adoption of FIN 46(R). In connection
with the restatement under FIN 46(R), SWRG's net investment in the Maloney
Agreement, previously classified under "Management contract, net" and management
fees and miscellaneous charges receivable classified under "Accounts receivable"
have been eliminated in consolidation and, instead, the separable assets and
liabilities of M&P are presented. In connection with the restatement under FIN
46(R), the consolidated statements of operations for the fiscal year ended
December 30, 2002 reflect a cumulative effect of an accounting change. In
addition, amortization expense related to the Maloney Agreement for previous
periods classified under "General and administrative expense", and fees received
pursuant to the Maloney Agreement and classified under "Management fee income"
have been removed from the consolidated statements of operations. The
consolidation of the entity that owns M&P has changed SWRG's current assets by
($81) and $144, non-current assets by ($577) and ($305) current liabilities by
$551 and $840, and non-current liabilities by $390 and $392 at June 28, 2004 and
December 29, 2003, respectively. The consolidation of the entity that owns M&P
increased consolidated sales by $2,724 and $2,402, and increased restaurant
operating costs by $2,262 and $2,059 for the three months ended June 28, 2004
and June 30, 2003, respectively. The consolidation of the entity that owns M&P
increased consolidated sales by $5,482 and $4,769, and increased restaurant
operating costs by $4,459 and $4,212 for the six months ended June 28, 2004 and
June 30, 2003, respectively. Certain reclassifications were made to prior period
amounts to conform to current period classifications.
8
SWRG utilizes a 52- or 53-week reporting period ending on the Monday
nearest to December 31st. The three months ended June 28, 2004 and June 30, 2003
represent 13-week reporting periods and the six months ended June 28, 2004 and
June 30, 2003 represent 26-week reporting periods. SWRG develops, owns, operates
and manages a diversified portfolio of upscale tablecloth restaurants. At June
28, 2004, SWRG owned and operated twelve restaurants, including nine Smith &
Wollensky restaurants. The newest restaurant, a 400 seat Smith & Wollensky in
Houston, Texas, opened on January 19, 2004. SWRG also manages five restaurants.
(2) Net Income per Common Share
SWRG calculates net income per common share in accordance with Statement
of Financial Accounting Standard ("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.
The following table sets forth the calculation for net income per common
share on a weighted average basis:
Three Months Ended Six Months Ended
- -------------------------------------------------------------------------------------------------------------------
June 28, June 30, June 28, June 30,
2004 2003 (a) 2004 2003 (a)
---- -------- ---- --------
Numerator:
Net income............................................. $263 $240 $ 193 $323
==== ==== ===== ====
Denominator - Weighted Average Shares:
Basic.................................... 9,376,249 9,354,481 9,376,249 9,354,374
Dilutive Options......................... 755,666 452,250 755,666 313,096
---------- --------- ---------- ---------
Diluted ................................. 10,131,915 9,806,731 10,131,915 9,667,470
========== --------- ========== =========
Per common share:
Basic.................................... $ 0.03 $ 0.03 $ 0.02 $ 0.03
======== ========= ======== ========
Diluted ................................. $ 0.03 $ 0.02 $ 0.02 $ 0.03
======== ========= ======== ========
(a) Restated to reflect the adoption of FIN 46(R).
SWRG applies the intrinsic value-based method of accounting prescribed by
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations, including FASB Interpretation No. 44,
Accounting for Certain Transactions involving Stock Compensation, an
interpretation of APB Opinion No. 25, issued in March 2000, to account for its
stock based employee compensation. Under this method, compensation expense is
recorded on the date of grant of the option only if the current market price of
the underlying stock exceeded the exercise price of the option. SFAS No. 123,
Accounting for Stock-Based Compensation ("SFAS No. 123"), established accounting
and disclosure requirements using a fair value-based method of accounting for
stock-based employee compensation plans. In December 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based Compensation Transition and Disclosure, an
amendment of SFAS No. 123. This Statement provides alternative methods of
transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation. SWRG has adopted the pro forma disclosure
requirements of SFAS No. 123. The following table illustrates the effect on net
income as if SWRG had applied the fair value recognition provisions of SFAS No.
123 to its stock-based employee compensation:
9
Three Months Ended Six Months Ended
------------------ ----------------
June 28, 2004 June 30, 2003 June 28, 2004 June 30, 2003
------------- ------------- ------------- -------------
Net income , as reported for 2004 and as restated for 2003 to
reflect the adoption of FIN 46(R)............................. $ 263 $ 240 $ 193 $ 323
========== ========= ========== =========
Add stock-based employee compensation expense included in
reported net income - 22 - 22
Deduct total stock-based employee compensation expense
determined under fair value based method for all awards, net
of tax...................................................... (86) (131) (172) (262)
---------- --------- ---------- ---------
Pro forma net income (loss)................................... $ 177 $ (131) $21 $ 83
========== ========= ========== =========
Pro forma net income (loss) Per common share -
Basic and diluted.......................................... $ 0.02 $(0.01) $0.00 $ 0.01
Weighted average common shares outstanding:
Basic......................................................... 9,376,249 9,354,481 9,376,249 9,354,374
Dilutive options.............................................. 755,666 452,250 755,666 313,096
---------- --------- ---------- ---------
Diluted....................................................... 10,131,915 9,806,731 10,131,915 9,667,470
========== ========= ========== =========
(3) Investment Securities
The amortized cost, gross unrealized holding gains, gross unrealized
holding losses, and fair value of available for sale debt securities by major
security type and class of security at June 28, 2004 was as follows:
Amortized Gross unrealized Gross unrealized Fair value
--------- ---------------- ---------------- ----------
Cost holding gains holding losses
---- ------------- --------------
At June 28, 2004
Available for sale short-term:
Equity securities $116 $52 $-- $168
==== === === ====
Proceeds from the sale of investment securities available for
sale were $925 and $4,504 for the six months ended June 28, 2004 and June 30,
2003, respectively, and gross realized gains and (losses) included in general
and administrative expenses for the six months ended June 28, 2004 and June 30,
2003, respectively, were $20 and $(13), respectively.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities ("SFAS No. 149"). SFAS No.
149 amends and clarifies accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133. In particular, SFAS No. 149 clarifies under what
circumstances a contract within an initial net investment meets the
characteristic of a derivative and when a derivative contains a financing
component that warrants special reporting in the statement of cash flows. SFAS
No. 149 was generally effective for contracts entered into or modified after
June 30, 2003. SWRG is exposed to market fluctuations in the prices of various
commodities. SWRG closely monitors the potential impacts of price changes in
beef and, where appropriate, enters into contracts to protect margins for a
portion of future sales. SWRG used commodity instruments, such as futures and
options, as economic hedges for beef purchases. SWRG hedged exposures to the
price variability of beef for a maximum of 10 months. The amount recognized for
transactions that did not qualify as cash flow hedges was a loss of $77 for the
year ending December 29, 2003. SWRG sold all its derivative instruments during
the three months ended March 29, 2004. The realized gain on the sale of these
instruments was $61 for the three-month period ended March 29, 2004. SWRG had no
derivative instruments or hedging activities during the three months ended June
28, 2004.
10
(4) Property and Equipment
Property and equipment consists of the following:
June 28, 2004 December 29,
------------- ------------
2003 (a)
--------
Land.................................................. $13,115 $13,115
Building and building improvements.................... 7,317 7,317
Machinery and equipment............................... 11,252 10,183
Furniture and fixtures................................ 8,004 7,399
Leasehold improvements................................ 46,111 40,814
Leasehold rights...................................... 3,376 3,376
Construction-in-progress.............................. 5,120 4,787
-------- --------
94,295 86,991
Less accumulated depreciation and amortization........ (25,768) (23,605)
-------- --------
$ 68,527 $ 63,386
======== ========
(a) Restated to reflect the adoption of FIN 46 (R).
Land includes $9,898 of assets under capital lease (note 8).
Depreciation and amortization expense of property and equipment was $2,163 and
$4,028, for the six months ended June 28, 2004 and the fiscal year ended
December 29, 2003, respectively. SWRG capitalizes interest cost as a component
of the cost of construction in progress. In connection with SWRG's assets under
construction for the six months ended June 28, 2004 and the fiscal year ended
December 29, 2003, SWRG capitalized $40 and $111 of interest costs,
respectively, in accordance with SFAS No. 34, Capitalization of Interest Cost.
(5) 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 to SWRG through common management and
ownership.
The Licensing Agreement provides SWRG with the exclusive right to
utilize the names "Smith & Wollensky" and "Wollensky's Grill" (the "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 do 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.
The future minimum royalty payments as of June 28, 2004 relating
to (ii) and (iii) above are as follows:
Fiscal year:
2004............................................................. $ --
2005............................................................. 800
2006............................................................. 800
2007............................................................. 800
2008............................................................. 800
2009 and each year thereafter.................................... 800
11
During the six-month period ended June 28, 2004, SWRG paid $229 in
connection with the opening of the Smith & Wollensky unit in Houston, Texas.
(6) Long-Term Debt
Long-term debt consists of the following:
June 28, December 29,
2004 2003
---- ----
Mortgage and loan payable (a)........................ $1,596 $1,643
Term loan(b)......................................... 3,567 3,767
Promissory note(c)................................... 1,100 1,100
Term loan(d)......................................... 1,615 1,710
Line of credit (e)................................... 1,959 -
Promissory note (f).................................. 1,983 -
------ ------
11,820 8,220
Less current portion................................. 1,323 2,121
------ ------
$10,497 $6,099
======= ======
- -----------
a. 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 was obligated to make quarterly and annual
payments over a six-year period. These obligations generally bore
interest at rates ranging from 9% to 12%. The final payment for these
obligations was made in 2003. In addition, SWRG assumed a mortgage on
the property that requires monthly payments and bears interest at 5.25%
per year. On April 30, 2004, a letter was signed by the financial
institution that holds the mortgage for the property extending the term
of the mortgage three additional years, with the final principal payment
due in June 2007. The extension became effective June 2004. In Fiscal
1997, SWRG also assumed a loan payable to a financing institution that
requires monthly payments through the year 2014, and bears interest at
7.67% per year.
b. 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, borrowed $4.0 million under
the agreement for general corporate purposes, including its new
restaurant 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 commenced June 30, 2003. Pursuant to the terms of the loan
agreement, SWRG is obligated to make monthly principal payments of
approximately $33 for this portion of the loan over the term of the loan
and a balloon payment of approximately $2,033 on May 31, 2008, the
maturity date of the loan. The term loan is secured by a leasehold
mortgage relating to the Las Vegas property and all of the personal
property and fixtures of the Borrower. 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. The ability to draw down this balance
expired on May 31, 2003. SWRG did not draw down the remaining balance
because, as an alternative to purchasing the land, SWRG signed an
amendment to its lease agreement, as discussed in Note 8. On September
28, 2003, Morgan Stanley amended, among other things, the interest
coverage ratio covenant of the term loan agreement. The costs in
connection with the amendment were not material. At June 28, 2004, SWRG
was in compliance with all the financial covenants contained in this
amended loan agreement.
12
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. A portion 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 originally due on October 9, 2004 and October 9, 2005,
respectively. SWRG received a 60-day extension on the installment due on
October 9, 2004. The promissory note is secured by a first mortgage
relating to the Dallas property.
d. 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 of SWRG, are the guarantors of
borrowings by the Borrower. Of the $1.9 million borrowed by SWRG,
through the Borrower, under the agreement, $1.35 million was used for
its new restaurant development program, and $550 was used for the first
principal installment on the $1.65 million promissory note with Toll
Road Texas Land Company, L.P. described above. This loan bears interest
at a fixed rate of 6.36% per annum. Principal payments for this loan
commenced January 24, 2003. Pursuant to the terms of the loan agreement,
SWRG is obligated to make monthly principal payments of $16 for this
loan over the term of the loan and a balloon payment of approximately
$966 on December 24, 2007, the maturity date of the loan. 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. On September 28, 2003, Morgan
Stanley amended, among other things, the interest coverage ratio
covenant of the term loan agreement. The costs in connection with the
amendment were not material. At June 28, 2004, SWRG was in compliance
with all the financial covenants contained in the amended loan
agreement.
e. On January 30, 2004, SWRG entered into a $2.0 million secured line of
credit facility with Morgan Stanley. Under the agreement, SWRG is the
guarantor of borrowings by the Borrower. Through the Borrower, SWRG has
the ability to borrow up to $2.0 million under the agreement for working
capital purposes. Advances under this line of credit will bear interest
at a fixed rate of LIBOR plus 3% per annum, payable on a monthly basis.
SWRG is also subject to an unused availability fee of 1.75% for any
unused portion of this line, payable on a quarterly basis. SWRG may at
anytime repay advances on this line without penalty. SWRG is obligated
to repay the principal portion of this line on January 30, 2006, the
termination date of this line. This line is secured by a leasehold
mortgage relating to the Las Vegas property and all of the personal
property and fixtures of the Borrower. At June 28, 2004, SWRG was in
compliance with all the financial covenants contained in the line of
credit facility.
f. On May 26, 2004, S&W New Orleans, L.L.C. ("New Orleans"), a wholly owned
subsidiary of SWRG, signed a $2.0 million promissory note with Hibernia
National Bank ("Hibernia"). The $2.0 million was used by SWRG for
construction costs related to the new Smith & Wollensky restaurant in
Boston. The note bears interest at a fixed rate of 6.27% per annum.
Principal payments for this note commenced June 26, 2004. Pursuant to
the terms of the promissory note, New Orleans is obligated to make
monthly payments of $17 for this note over the term of the note with a
balloon payment of approximately $1,548 on May 26, 2009, the maturity
date of the note. This note is secured by a first mortgage relating to
the New Orleans property. At June 28, 2004, New Orleans was in
compliance with the financial covenant contained in the loan agreement
between New Orleans and Hibernia.
(7) Capital Lease Obligation
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 for the Las Vegas restaurant. The Agreement, which is being treated
as a capital lease, adjusts the annual fixed payment to $400 per year from May
1, 2003 to April 30, 2008 and to $860 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 was approximately $10.0 million at May 1, 2003, and escalates to
approximately $12.1 million at the end of five years. SWRG is required to make
down payments on the purchase price of the property. Those payments, which
escalate annually, are payable in monthly installments into a collateralized
sinking fund based on the table below, and 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, the Lessor receives the down payments that accumulated
in the sinking fund, and thereafter the purchase price for the property would
equal $10.5 million. The down payments for the purchase of the land over the
next five years as of June 28, 2004 will be as follows:
13
Fiscal year
-----------
2004 $142
2005 298
2006 328
2007 360
2008 123
-----
$1,251
======
If SWRG exercises the option, the Lessor is obligated to 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. In the event of the
exercise of the put option, the Lessor is obligated to provide SWRG with
financing in the amount of the purchase price applicable at that time. 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.
(8) Restaurant Related Commitments
All of SWRG's consolidated restaurants operate in leased premises, with
the exception of the Smith & Wollensky locations in New Orleans and Dallas,
which are owned properties. Remaining lease terms range from approximately 3 to
25 years, including anticipated renewal options. The leases generally provide
for minimum annual rental payments and are subject to escalations based upon
increases in the Consumer Price Index, real estate taxes and other costs. In
addition, certain leases contain contingent rental provisions based upon the
sales of the underlying restaurants. Certain leases also provide for rent
deferral during the initial term of such leases and/or scheduled minimum rent
increases during the terms of the leases. For financial reporting purposes, rent
expense is recorded on a straight-line basis over the life of the lease.
Accordingly, included in long-term liabilities in the accompanying consolidated
balance sheets at June 28, 2004 and December 29, 2003 are accruals related to
such rent deferrals and the pro rata portion of scheduled rent increases of
approximately $6,481 and $6,400, respectively. Future minimum annual rental
commitments under all leases are as follows:
Fiscal year: (a)
----------------
2004......................................................... $2,210
2005......................................................... 4,493
2006......................................................... 4,346
2007......................................................... 4,026
2008......................................................... 4,145
Thereafter................................................... 50,308
------
$69,528
=======
(a) Restated to reflect the adoption of FIN 46 (R).
SWRG is contingently liable under letters of credit aggregating $151 at
June 28, 2004 and December 29, 2003, respectively, for deposits with the
landlord of one of its restaurants and the corporate office.
(9) Common Stock
The 2001 Stock Incentive Plan ("2001 Stock Incentive Plan") provides for
the granting of options to purchase shares of our Common Stock and stock awards.
Options may be incentive stock options, as defined in Section 422 of the
Internal Revenue Code (the "Code"), granted only to our employees (including
officers who are also employees) or non-qualified stock options granted to our
employees, directors, officers and consultants. Stock awards may be granted to
employees of, and other key individuals engaged to
14
provide services to, SWRG and its subsidiaries. The 2001 Stock Incentive Plan
was adopted and approved by our directors in March 2001 and our stockholders in
April 2001.
The 2001 Stock Incentive Plan may be administered by our Board of
Directors or by our Compensation Committee, either of which may decide who will
receive stock option or stock awards, the amount of the awards, and the terms
and conditions associated with the awards. These include the price at which
stock options may be exercised, the conditions for vesting or accelerated
vesting, acceptable methods for paying for shares, the effect of corporate
transactions or changes in control, and the events triggering expiration or
forfeiture of a participant's rights. The maximum term for stock options may not
exceed ten years, provided that no incentive stock options may be granted to any
employee who owns ten percent or more of SWRG with a term exceeding five years.
The maximum number of shares of Common Stock available for issuance
under the 2001 Stock Incentive Plan is 583,333 shares, increased by 4% of the
total number of issued and outstanding shares of Common Stock (including shares
held in treasury) as of the close of business on December 31 of the preceding
year on each January 1, beginning with January 1, 2002, during the term of the
2001 Stock Incentive Plan. However, the number of shares available for all
grants under the 2001 Stock Incentive Plan is limited to 11% of SWRG's issued
and outstanding shares of capital stock on a fully-diluted basis. Accordingly,
the maximum number of options to purchase shares of Common Stock available for
issuance in 2004 is approximately 357,000 shares. In addition, options may not
be granted to any individual with respect to more than 500,000 total shares of
Common Stock in any single taxable year (taking into account options that were
terminated, repriced, or otherwise adjusted during such taxable year).
The 2001 Stock Incentive Plan provides that proportionate adjustments
shall be made to the number of authorized shares which may be granted under the
2001 Stock Incentive Plan and as to which outstanding options, or portions of
outstanding options, then unexercised shall be exercisable as a result of
increases or decreases in SWRG's outstanding shares of common stock due to
reorganization, merger, consolidation, recapitalization, reclassification, stock
split-up, combination of shares, or dividends payable in capital stock, such
that the proportionate interest of the option holder shall be maintained as
before the occurrence of such event. Upon the sale or conveyance to another
entity of all or substantially all of the property and assets of SWRG, including
by way of a merger or consolidation or a Change in Control of SWRG, as defined
in the 2001 Stock Incentive Plan, our Board of Directors shall have the power
and the right to accelerate the exercisability of any options.
Unless sooner terminated by our Board of Directors, the 2001 Stock
Incentive Plan will terminate on April 30, 2011, ten years from the date on
which the 2001 Stock Incentive Plan was adopted by our Board of Directors All
options granted under the 2001 Stock Incentive Plan shall terminate immediately
prior to the dissolution or liquidation of SWRG; provided, that prior to such
dissolution or liquidation, the vesting of any option shall automatically
accelerate as if such dissolution or liquidation is deemed a Change of Control,
as defined in the 2001 Stock Incentive Plan.
On September 5, 2002 SWRG granted options pursuant to an option exchange
program (the "Option Exchange Program") that SWRG initiated in February 2002 in
order to allow employees, officers and directors to cancel all or some stock
options to purchase its common stock having an exercise price greater than $5.70
per share granted under its 1996 Stock Option Plan, its 1997 Stock Option Plan
and its 2001 Stock Incentive Plan in exchange for new options granted under the
2001 Stock Incentive Plan. Under the Option Exchange Program, the new options
were issued on September 5, 2002 with an exercise price of $3.88. The exercise
price of each option received under the exchange program equaled 100% of the
price of SWRG's common stock on the date of grant of the new options, determined
in accordance with the terms of the 2001 Stock Incentive Plan. An employee
received options under the exchange program with an exercise price of $4.27, or
110% of the fair market value of SWRG's common stock on the date of grant. The
new options vest over periods ranging from four months to five years, in
accordance with the vesting schedule of the cancelled options. SWRG structured
the Option Exchange Program in a manner that did not result in any additional
compensation charges or variable award accounting. As of December 30, 2002,
options to purchase 726,033 shares of common stock remained outstanding under
the 2001 Stock Incentive Plan.
In June and July 2003, SWRG granted options to purchase 127,000 shares
of common stock under the 2001 Stock Incentive Plan. The weighted average
exercise price of the options granted was $5.05 per share, the estimated fair
market value of the underlying common shares at the date of grant. Each option
granted in June and July 2003 will vest over a period of five years. As of June
28, 2004, options to purchase 755,666 shares of common stock were outstanding
under the 2001 Stock Incentive Plan.
Activity relating to SWRG's option plans was as follows:
15
Weighted average
exercise price
Number per share of
of options common stock
---------- ------------
Options outstanding at December 30, 2002............. 726,033 $4.56
Options forfeited during Fiscal 2003................. (73,267) 5.64
Options granted during Fiscal 2003................... 127,000 5.05
Options exercised during Fiscal 2003................. (21,983) 3.91
-------- ----
Options outstanding at December 29, 2003............. 757,783 4.56
Options forfeited during the six months ended June
28, 2004........................................... (2,117) 4.91
-------- ----
Options outstanding at June 28, 2004................. 755,666 $4.55
======= =====
As of June 28, 2004 the weighted average remaining contractual life of
options outstanding was six years. As of June 28, 2004, there were options
covering approximately 408,000 shares of common stock exercisable at a range of
$3.88 to $5.70 per share.
(10) Legal Matters
On or about September 5, 2001, Mondo's of Scottsdale, L.C. ("Mondo's")
filed a suit against SWRG alleging that it 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 had been set to go to jury trial in March 2004. The plaintiff
requested damages of approximately $2.0 million. On March 18, 2004 the parties
tentatively agreed to settle the matter for $525 and a reserve of $525 was
established as of December 29, 2003. On April 9, 2004 a final settlement was
reached between the parties and, in accordance with the settlement, SWRG made
the first payment of $225, with the final payment of $300 due on April 11, 2005.
SWRG is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on SWRG's
consolidated financial position, results of operations or liquidity.
(11) Subsequent Events
On July 21, 2004, SWRG entered into a $2.0 million secured line of
credit facility with Morgan Stanley. Under the agreement, SWRG and Smith &
Wollensky of Boston LLC are the guarantors of borrowings by the Borrower.
Through the Borrower, SWRG has the ability to borrow up to $2.0 million under
the agreement for working capital purposes. Advances under this line of credit
will bear interest at a fixed rate of LIBOR plus 3% per annum, payable on a
monthly basis. SWRG is also subject to an unused availability fee of 1.75% for
any unused portion of this line, payable on a quarterly basis. SWRG may at
anytime repay advances on this line without penalty. SWRG is obligated to repay
the principal portion of this line on May 31, 2005, the termination date of this
line. This line is secured by a leasehold mortgage relating to the Las Vegas
property and all of the personal property and fixtures of the Borrower.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
As of June 28, 2004, we operated 17 high-end, high volume restaurants in
the United States. We believe that the particularly large size of the markets we
entered warranted investment in restaurants with seating capacities ranging from
290 to 675. On January 19, 2004, we opened a 400 seat Smith & Wollensky in
Houston, Texas. We expect to open another Smith & Wollensky restaurant in early
fall of 2004 in Boston, Massachusetts. We expect the restaurant in Boston to
have approximately 450 seats on four levels. Although we currently do not have
any leases signed other than leases relating to our existing and planned
locations and will not actively pursue new locations in 2005, we would consider
opening a new Smith & Wollensky restaurant in a high caliber location under
highly favorable investment terms. We plan to move ahead cautiously with our
future expansion as management evaluates and monitors economic and
16
security conditions, and we expect to resume our new restaurant growth in 2006.
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 $5.3 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 and is dependent on the size of
the location and the amount of the landlord contribution. Although our newest
unit in Houston falls within this range, the restaurant we plan to open in
Boston is expected to significantly exceed this range primarily because of its
physical size. Some locations that we choose will be outside our preferred cash
investment range, but are nevertheless accepted based on our evaluation of the
potential returns.
As a result of our recent expansion and when our locations opened,
period-to-period comparisons of our financial results may not be meaningful.
When a new restaurant opens, we typically incur higher than normal levels of
food and labor costs as a percentage of sales during the first year of its
operation. In calculating comparable restaurant sales, we introduce a restaurant
into our comparable restaurant base once it has been in operation for 15 months.
Pursuant to management contracts and arrangements, we also operate, but
do not own, the original Smith & Wollensky, The Post House, Maloney & Porcelli
and ONEc.p.s. restaurants in New York and the Mrs. Parks Tavern in Chicago.
The consolidated financial statements include our accounts and results
and, as a result of Financial Accounting Standards Board ("FASB") Interpretation
No.46 (revised December 2003), Consolidation of Variable Interest Entities
("FIN46(R)"), the accounts and results of the entity that owns the Maloney &
Porcelli restaurant ("M&P") that we manage in New York City. We manage the
operations of M&P pursuant to the terms of a restaurant management agreement
(the "Maloney Agreement"). Under the provisions of the Maloney Agreement, we
receive a management fee equal to the sum of 3% of restaurant sales and a fee
equal to 50% of the unit's net operating cash flow generated during each fiscal
year, provided that the M&P owner receives a minimum amount of operating cash
flow per year ranging from $360,000 to $480,000. Either party can terminate the
Maloney Agreement for cause and we have a right to purchase the restaurant under
specified conditions and amounts. The restaurant owner can preempt the purchase
option by remitting a specified cash payment to us. The Maloney Agreement
expires on December 31, 2011.
Consolidated restaurant sales include gross sales less sales taxes and
other discounts. Costs of consolidated 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%. 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 was to expire 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 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 we 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 also could include fees from ONEc.p.s.
equal to 40% of the restaurant's operating cash flows, if any, 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. On December 31, 2003,
we amended our agreement with Plaza Operating Partners, Ltd. (the "Plaza
Operating Partners"). Effective January 1, 2004, Plaza Operating Partners agreed
to pay us $50,000 per quarter as a minimum base management fee. The minimum base
management fee will be credited against any management fee that we earn under
the agreement. This amendment also gives either party the right to fund or
refuse to fund any necessary working capital requirements. If neither party is
willing to fund the required additional working capital contributions, as
defined, then either party may terminate the agreement.
General and administrative expenses include all corporate and
administrative functions that support existing consolidated and managed
operations and provide infrastructure to our organization. General and
administrative expenses are comprised of management,
17
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, as defined, 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.
Change in accounting principles: The presented consolidated financial
statements relating to prior periods have been restated to consolidate the
accounts and results of the entity that owns M&P as a direct result of the
adoption of FIN 46(R). FIN 46(R) addresses the consolidation by business
enterprises of variable interest entities. All variable interest entities,
regardless of when created, are required to be evaluated under FIN 46 (R) no
later than the first period ending after March 15, 2004. An entity shall be
subject to consolidation according to the provisions of this Interpretation if,
by design, as a group the holders of the equity investment at risk lack any one
of the following three characteristics of a controlling financial interest: (1)
the direct or indirect ability to make decisions about an entity's activities
through voting rights or similar rights; (2) the obligation to absorb the
expected losses of the entity if they occur; or (3) the right to receive the
expected residual returns of the entity if they occur. We consolidated the
financial statements of the entity that owns M&P because the holders of the
equity investment lacked one of the above characteristics.
In connection with the restatement under FIN 46 (R), our net investment
in the Maloney Agreement, previously classified under "Management contract, net"
and management fees and miscellaneous charges receivable classified under
"Accounts receivable" have been eliminated in consolidation and, instead, the
separable assets and liabilities of the entity that owns M&P are presented. In
connection with the restatement under FIN 46 (R), the consolidated statements of
operations for the fiscal year ended December 30, 2002 reflect a cumulative
effect of an accounting change. In addition, amortization expense related to the
Maloney Agreement for previous periods classified under "General and
administrative expense", and fees received pursuant to the Maloney Agreement and
classified under "Management fee income" have been removed from the consolidated
statements of operations. The consolidation of the entity that owns M&P has
changed our current assets by ($81) and $144, non-current assets by ($577) and
($305) current liabilities by $551 and $840, and non-current liabilities by $390
and $392 at June 28, 2004 and December 29, 2003, respectively. The consolidation
of the entity that owns M&P increased consolidated sales by $2,724 and $2,402,
and increased restaurant operating costs by $2,262 and $2,059 for the three
months ended June 28, 2004 and June 30, 2003, respectively. The consolidation of
the entity that owns M&P increased consolidated sales by $5,482 and $4,769, and
increased restaurant operating costs by $4,459 and $4,212 for the six months
ended June 28, 2004 and June 30, 2003, respectively. Certain reclassifications
were made to prior period amounts to conform to current period classifications.
We believe the following is a summary of our critical accounting policies:
Revenue recognition: Consolidated restaurant sales 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.
18
Allowance for doubtful accounts: Substantially all of our accounts
receivable are due from credit card processing companies or individuals that
have 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 through
future undiscounted net cash flows to be generated by the assets. 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
intangibles 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 evaluation 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
June 28, 2004 and December 29, 2003 was $6.9 million.
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 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 June 28, 2004 and December 29, 2003 was
$3.5 million and $3.3 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. The net carrying value of our artwork as of June
28, 2004 and December 29, 2003 was $2.0 million.
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 a change of
approximately $50,000 to our financial results.
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
19
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
remote and can be reasonably estimated, a liability is recorded in the
consolidated financial statements.
Income taxes and income tax valuation allowances: We estimate certain
components of our provision for income taxes. These estimates include, but are
not limited to, effective state and local income tax rates, estimates related to
depreciation expense allowable for tax purposes and estimates related to the
ultimate realization of net operating losses and tax credit carryforwards and
other deferred tax assets. 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.
At June 28, 2004, we have recorded a valuation allowance of $8.0 million
to reduce our net operating loss and tax credit carryforwards of $6.5 million
and other timing differences of $1.5 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.
20
Results of Operations
Three Months Ended Six Months Ended
June 28, 2004 June 30, 2003 (a) June 28, 2004 June 30, 2003 (a)
Consolidated restaurant sales $ 30,010 100.0% $ 26,081 100.0% $ 60,662 100.0% $ 51,440 100.0%
Cost of consolidated restaurant sales:
Food and beverage costs 9,366 31.2 7,989 30.6 19,515 32.2 15,671 30.4
Salaries and related benefit expenses 8,669 28.8 7,369 28.2 17,422 28.7 14,469 28.1
Restaurant operating expenses 4,758 15.9 4,233 16.4 9,557 15.8 8,176 15.9
Occupancy and related expenses 1,458 4.9 1,313 4.9 2,894 4.8 3,027 5.9
Marketing and promotional expenses 1,326 4.4 1,010 3.9 2,624 4.3 1,992 3.9
Depreciation and amortization expenses 1,016 3.4 996 3.8 2,078 3.4 1,949 3.8
------ ------ ------ ------ ------ ------ ------ ------
Total cost of consolidated restaurant sales 26,593 88.6 22,910 87.8 54,090 89.2 45,284 88.0
------ ------ ------ ------ ------ ------ ------ ------
Income from consolidated restaurant operations 3,417 11.4 3,171 12.2 6,572 10.8 6,156 12.0
Management fee income 316 1.0 232 0.9 632 1.1 444 0.9
------ ------ ------ ------ ------ ------ ------ ------
Income from consolidated and managed
Restaurants 3,733 12.4 3,403 13.1 7,204 11.9 6,600 12.9
General and administrative expenses 2,367 7.8 2,389 9.2 4,908 8.1 5,086 9.9
Royalty expense 432 1.4 369 1.4 871 1.4 717 1.5
Operating income 934 3.2 645 2.5 1,425 2.4 797 1.5
Interest and other expense, net (359) (1.2) (259) (1.0) (700) (1.2) (355) (0.7)
------ ------ ------ ------ ------ ------ ------ ------
Income before provision for income taxes 575 2.0 386 1.5 725 1.2 442 0.8
Provision for income taxes 51 0.2 75 0.3 103 0.2 125 0.2
------ ------ ------ ------ ------ ------ ------ ------
Income before (income) loss of consolidated
variable interest entity 524 1.8 311 1.2 622 1.0 317 0.6
(Income) loss of consolidated variable
interest entity (261) (0.9) (71) (0.3) (429) (0.7) 6 0.0
------ ------ ------ ------ ------ ------ ------ ------
Net income $ 263 0.9% $ 240 0.9% $ 193 0.3% $ 323 0.6%
====== ====== ====== ====== ====== ====== ====== ======
(a) Restated to reflect the adoption of FIN 46 (R).
Three Months Ended June 28, 2004 Compared to the Three Months Ended June 30,
2003
Consolidated Restaurant Sales. Consolidated restaurant sales increased $3.9
million, or 15.1%, to $30.0 million for the three months ended June 28, 2004
from $26.1 million for the three months ended June 30, 2003. The increase in
consolidated restaurant sales was partially due to a net increase in comparable
consolidated unit sales of $2.3 million, or 9.3%. The net increase in comparable
consolidated unit sales was due to an increase in sales of $1.8 million from our
owned Smith & Wollensky units open for the entire period. The improvement is
primarily a result of an increase in our average check, due primarily to price
increases, and, to a lesser extent, tourism, business travel and banquet sales
at our units outside of New York. This increase in comparable consolidated unit
sales was also partially due to an increase in sales of $444,000 from our
consolidated New York units, which includes the sales of the entity that owns
M&P. This increase was attributable to an increase in our average check and, to
a lesser extent, an increase in banquet sales and an improvement in tourism in
the New York metropolitan area. The increase in consolidated restaurant sales
also includes a combined net sales increase of $1.7 million from our Smith &
Wollensky unit in Dallas, Texas, which opened in March 2003, and our unit in
Houston, Texas, which opened in January 2004.
Food and Beverage Costs. Food and beverage costs increased $1.4 million to $9.4
million for the three months ended June 28, 2004 from $8.0 million for the three
months ended June 30, 2003. Food and beverage costs as a percentage of
consolidated restaurant sales increased to 31.2% in 2004 from 30.6% in 2003. The
increase in cost is primarily related to an increase in food cost at our
comparable
21
consolidated units of approximately $876,000. This increase related primarily to
a net increase in customer volume at our comparable units and, to a lesser
extent, the continued increase in the cost of beef during the three months ended
June 28, 2004 as compared to the three months ended June 30, 2003. The increase
in food and beverage costs also related to approximately $501,000 in food and
beverage costs for the new Smith & Wollensky units in Dallas, Texas, which
opened in March 2003, and Houston, Texas, which opened in January 2004. The new
Smith & Wollensky unit in Houston 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. As the Smith & Wollensky unit in
Houston matures and revenues increase, operating efficiencies are expected to
continue 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 $1.3
million to $8.7 million for the three months ended June 28, 2004 from $7.4
million for the three months ended June 30, 2003. This increase was partially
due to the new Smith & Wollensky units in Dallas, Texas, which opened in March
2003 and Houston, Texas, which opened in January 2004. The increase relating to
these new units was $581,000. Salaries and related benefits as a percent of
consolidated restaurant sales increased to 28.8% for the three months ended June
28, 2004 from 28.2% for the three months ended June 30, 2003. The increase in
salaries and related benefits as a percentage of consolidated restaurant sales
was primarily due to the additional staffing required at the new Smith &
Wollensky unit in Houston, 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
consolidated sales for that unit will decrease due to the lower staffing
requirement and higher revenue base. The increase in salaries and related
benefits is also attributable to the payroll and related benefits associated
with the increase in comparable consolidated unit sales, to an increase in the
cost of health insurance provided to employees and paid for in part by us and
increases in employer contributions for other payroll taxes.
Restaurant Operating Expenses. Restaurant operating expenses increased $525,000
to $4.8 million for the three months ended June 28, 2004 from $4.2 million for
the three months ended June 30, 2003. The increase includes $253,000 that was
due to the opening of the new Smith & Wollensky units in Dallas, Texas and
Houston, Texas. The remaining increase is related to certain costs associated
with upgrades of operating supplies, ongoing repairs and maintenance, certain
costs that are directly related to the increased sales volume such as credit
card charges, linen costs and increases in property and liability insurance
premiums at the units open the entire period. Restaurant operating expenses as a
percentage of consolidated restaurant sales decreased to 15.9% for 2004 from
16.4% in 2003.
Occupancy and Related Expenses. Occupancy and related expenses increased
$145,000 to $1.5 million for the three months ended June 28, 2004 from $1.3
million for the three months ended June 30, 2003 primarily due to the combined
increase of $171,000 in occupancy and related expenses including real estate and
occupancy taxes for the new Smith & Wollensky units in Dallas, Texas and
Houston, Texas and by increases in percentage of sales rent at applicable units.
The increase was partially offset by the reduction in rent and deferred rent of
$72,000 for the Smith & Wollensky unit in Las Vegas, Nevada, which is now
treated as a capital lease due to the amendment to the lease on April 29, 2003.
Occupancy and related expenses as a percentage of consolidated restaurant sales
was 4.9% for both the three months ended June 28, 2004 and June 30, 2003,
respectively.
Marketing and Promotional Expenses. Marketing and promotional expenses increased
$316,000 to $1.3 million for the three months ended June 28, 2004 from $1.0
million for the three months ended June 30, 2003. The increase was related
primarily to the opening of the Smith & Wollensky units in Dallas, Texas, and
Houston, Texas and, to a lesser extent, an increase in advertising in support of
our owned New York restaurants. Marketing and promotional expenses as a percent
of consolidated restaurant sales increased to 4.4% for the three months ended
June 28, 2004 from 3.9% for the three months ended June 30, 2003.
Depreciation and Amortization. Depreciation and amortization was $1.0 million
for the three months ended June 28, 2004 and June 30, 2003, respectively.
Management Fee Income. Management fee income increased $84,000 to $316,000 for
the three months ended June 28, 2004 from $232,000 for the three months ended
June 30, 2003, primarily due to an increase in fees received from one of our
managed units relating to a minimum base management fee that we began receiving
during the three months ended March 29, 2004.
General and Administrative Expenses. General and administrative expenses was
$2.4 million for the three months ended June 28, 2004 and June 30, 2003,
respectively. General and administrative expenses as a percent of consolidated
restaurant sales decreased to 7.8% for the three months ended June 28, 2004 from
9.2% for three months ended June 30, 2003. 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
consolidated and managed restaurant sales decreased to 5.9% for the three months
ended June 28, 2004 from 6.9% for the three months ended June 30, 2003.
22
Royalty Expense. Royalty expense increased $63,000 to $432,000 for the three
months ended June 28, 2004 from $369,000 for the three months ended June 30,
2003 primarily due to the increase in sales of $1.8 million from our owned Smith
& Wollensky units open for the comparable period together with a combined
increase in sales of $1.7 million from our Smith & Wollensky unit in Dallas,
Texas, which opened in March 2003 and our new unit in Houston, Texas, which
opened in January 2004.
Interest and Other Expense -Net of Interest Income. Interest and other expense,
net of interest income, increased $100,000 to $359,000 for the three months
ended June 28, 2004 from $259,000 for the three months ended June 30, 2003,
primarily due to the interest related to the capital lease for the Smith &
Wollensky unit in Las Vegas, Nevada and, to a lesser extent, the interest
expense on debt incurred for general corporate purposes and in connection with
the financing of our new Smith & Wollensky units in Dallas, Texas, and Houston,
Texas. Interest and other expense, net of interest income, was also impacted by
the reduction in interest income related to the use of cash for capital
improvements, which had been invested in short and long term interest bearing
investments during the three months ended June 30, 2003.
Provision for Income Taxes. The income tax provision for the three months ended
June 28, 2004 and June 30, 2003, respectively, represents certain state and
local taxes.
(Income) Loss in Consolidated Variable Interest Entity. In accordance with our
adoption of FIN 46 (R), the operating results of the entity that owns M&P are
now consolidated and the net (income) or loss of this variable interest entity
is presented as a separate item after the provision for income taxes.
Six Months Ended June 28, 2004 Compared to the Six Months Ended June 30, 2003
Consolidated Restaurant Sales. Consolidated restaurant sales increased $9.3
million, or 17.9%, to $60.7 million for the six months ended June 28, 2004 from
$51.4 million for the six months ended June 30, 2003. The increase in
consolidated restaurant sales was partially due to a net increase in comparable
consolidated unit sales of $4.6 million, or 9.4%. The net increase in comparable
owned unit sales was due to an increase in sales of $3.7 million from our owned
Smith & Wollensky units open for the entire period. The improvement is primarily
a result of an increase in our average check, due primarily to price increases,
and, to a lesser extent, tourism, business travel and banquet sales at our units
outside of New York. This increase in comparable owned unit sales was also
partially due to an increase in sales of $1.0 million from our consolidated New
York units, which includes the sales of the entity that owns M&P. This increase
was attributable to an increase in our average check and, to a lesser extent, an
increase in banquet sales and an improvement in tourism in the New York
metropolitan area. The increase in consolidated restaurant sales also includes a
combined sales increase of $4.5 million from our Smith & Wollensky unit in
Dallas, Texas, which opened in March 2003, and our unit in Houston, Texas, which
opened in January 2004.
Food and Beverage Costs. Food and beverage costs increased $3.8 million to $19.5
million for the six months ended June 28, 2004 from $15.7 million for the six
months ended June 30, 2003. Food and beverage costs as a percentage of
consolidated restaurant sales increased to 32.2% in 2004 from 30.4% in 2003. The
increase in cost is primarily related to an increase in food cost at our
comparable units of approximately $2.2 million. This increase related primarily
to the continued increase in the cost of beef during the six months ended June
28, 2004 as compared to the six months ended June 30, 2003, and to a net
increase in customer volume at our comparable units. The increase in food and
beverage costs also related to approximately $1.6 million in food and beverage
costs for the new Smith & Wollensky units in Dallas, Texas, which opened in
March 2003, and Houston, Texas, which opened in January 2004. The new Smith &
Wollensky unit in Houston 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. As the Smith & Wollensky unit in Houston matures and
revenues increase, operating efficiencies are expected to continue 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 $2.9
million to $17.4 million for the six months ended June 28, 2004 from $14.5
million for the six months ended June 30, 2003. This increase was partially due
to the new Smith & Wollensky units in Dallas, Texas, which opened in March 2003
and Houston, Texas, which opened in January 2004. The increase relating to these
new units was $1.5 million. Salaries and related benefits as a percent of
consolidated restaurant sales increased to 28.7% for the six months ended June
28, 2004 from 28.1% for the six months ended June 30, 2003. The increase in
salaries and related benefits as a percentage of consolidated restaurant sales
was primarily due to the additional staffing required at the new Smith &
Wollensky unit in Houston, 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
consolidated sales for that unit will decrease due to the lower staffing
requirement and higher revenue base. The increase in salaries and related
benefits is also attributable to the payroll and related benefits associated
with the increase in comparable unit sales, to an increase in the cost of health
insurance provided to employees and paid for in part by us and to increases in
employer contributions for other payroll taxes.
23
Restaurant Operating Expenses. Restaurant operating expenses increased $1.4
million to $9.6 million for the six months ended June 28, 2004 from $8.2 million
for the six months ended June 30, 2003. The increase includes $698,000 that was
due to the opening of the new Smith & Wollensky units in Dallas, Texas and
Houston, Texas. The remaining increase is related to certain costs associated
with upgrades of operating supplies, ongoing repairs and maintenance, certain
costs that are directly related to the increased sales volume such as credit
card charges, linen costs and increases in property and liability insurance
premiums at the units open the entire period. Restaurant operating expenses as a
percentage of consolidated restaurant sales decreased to 15.8% for 2004 from
15.9% in 2003.
Occupancy and Related Expenses. Occupancy and related expenses decreased
$133,000 to $2.9 million for the six months ended June 28, 2004 from $3.0
million for the six months ended June 30, 2003 primarily due to the reduction in
rent and deferred rent of $485,000 for the Smith & Wollensky unit in Las Vegas,
Nevada, which is now treated as a capital lease due to the amendment to the
lease on April 29, 2003. The decrease was partially offset by the combined
increase of $315,000 in occupancy and related expenses including real estate and
occupancy taxes for the new Smith & Wollensky units in Dallas, Texas and
Houston, Texas. The decrease was also partially offset by increases in
percentage of sales rent at applicable units and increased real estate and
property taxes. Occupancy and related expenses as a percentage of consolidated
restaurant sales decreased to 4.8% for the six months ended June 28, 2004 from
5.9% for the six months ended June 30, 2003.
Marketing and Promotional Expenses. Marketing and promotional expenses increased
$632,000 to $2.6 million for the six months ended June 28, 2004 from $2.0
million for the six months ended June 30, 2003. The increase was related
primarily to the opening of the Smith & Wollensky units in Dallas, Texas, and
Houston, Texas and, to a lesser extent, an increase in advertising in support of
our owned New York restaurants. Marketing and promotional expenses as a percent
of consolidated restaurant sales increased to 4.3% for the six months ended June
28, 2004 from 3.9% for the six months ended June 30, 2003.
Depreciation and Amortization. Depreciation and amortization increased $129,000
to $2.1 million for the six months ended June 28, 2004 from, $2.0 million for
the six months ended June 30, 2003, primarily due to the increase relating to
the property and equipment additions for the new Smith & Wollensky units in
Dallas, Texas and Houston, Texas, being offset by a reduction in depreciation
from items which became fully depreciated during 2003.
Management Fee Income. Management fee income increased $188,000 to $632,000 for
the six months ended June 28, 2004 from $444,000 for the six months ended June
30, 2003, primarily due to an increase in fees received from one of our managed
units relating to a minimum base management fee that we began receiving during
the six months ended June 28, 2004 and increased sales volume in the other
managed units.
General and Administrative Expenses. General and administrative expenses
decreased $178,000 to $4.9 million for the six months ended June 28, 2004 from
$5.1 million for the six months ended June 30, 2003. General and administrative
expenses as a percent of consolidated restaurant sales decreased to 8.1% for the
six months ended June 28, 2004 from 9.9% for six months ended June 30, 2003.
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 consolidated and managed restaurant
sales decreased to 6.1% for the six months ended June 28, 2004 from 7.5% for the
six months ended June 30, 2003. The decrease was primarily due to a decrease in
certain professional fees, consulting expenses, and travel and related
expenditures.
Royalty Expense. Royalty expense increased $154,000 to $871,000 for the six
months ended June 28, 2004 from $717,000 for the six months ended June 30, 2003
primarily due to the increase in sales of $3.7 million from our owned Smith &
Wollensky units open for the comparable period together with a combined increase
in sales of $4.5 million from our Smith & Wollensky unit in Dallas, Texas, which
opened in March 2003 and our new unit in Houston, Texas, which opened in January
2004.
Interest and Other Expense -Net of Interest Income. Interest and other expense,
net of interest income, increased $345,000 to $700,000 for the six months ended
June 28, 2004 from $355,000 for the six months ended June 30, 2003, primarily
due to the interest related to the capital lease for the Smith & Wollensky unit
in Las Vegas, Nevada and, to a lesser extent, the interest expense on debt
incurred for general corporate purposes and in connection with the financing of
our new Smith & Wollensky units in Dallas, Texas, and Houston, Texas. Interest
and other expense, net of interest income, was also impacted by the reduction in
interest income related to the use of cash for capital improvements, which had
been invested in short and long term interest bearing investments during the six
months ended June 30, 2003.
Provision for Income Taxes. The income tax provision for the six months ended
June 28, 2004 and June 30, 2003, respectively, represents certain state and
local taxes.
24
(Income) Loss in Consolidated Variable Interest Entity. In accordance with our
adoption of FIN 46 (R), the operating results of the entity that owns M&P are
now consolidated and the net (income) or loss of this variable interest entity
is presented as a separate item after the provision for income taxes.
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. We
have not been notified by the other party 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 the lease agreement which would result in the
loss of the 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 the lease agreement has taken any
action to terminate the 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, third-party financing and an IPO. Net cash provided by
operating activities amounted to $2.2 million for the six months ended June 28,
2004 and $2.5 million for the six month period ended June 30, 2003.
Net cash provided by financing activities was $3.3 million for the six
month period ended June 28, 2004 and net cash used in financing activities was
($969,000) for the six month period ended June 30, 2003. Net cash provided by
financing activities for the six month period ended June 28, 2004 includes $2.0
million in proceeds from the line of credit facility with Morgan Stanley Dean
Witter Commercial Financial Services, Inc. ("Morgan Stanley"), $2.0 million in
proceeds from the promissory note with Hibernia National Bank ("Hibernia"),
$359,000 of principal payments on long-term debt and distributions of $350,000
to the minority interest in the consolidated variable interest entity. Net cash
used in financing activities for the six month period ended June 30, 2003
includes $826,000 of principal payments on long-term debt and distributions of
$150,000 to the minority interest in the consolidated variable interest entity.
We used cash primarily to fund the development and construction of new
restaurants and expansion of existing restaurants. Net cash used in investing
activities was $6.6 million and $2.5 million for the six months ended June 28,
2004 and June 30, 2003, respectively. The total capital expenditures were $7.3
million and $4.1 million for the six months ended June 28, 2004 and June 30,
2003, respectively. Other cash used in investing activities consisted primarily
of net proceeds from the sale of investments of $925,000 and $4.5 million for
the six months ended June 28, 2004 and June 30, 2003, respectively, and net
purchases of investments of $2.6 million for the six months ended June 30, 2003.
On January 19, 2004, we opened our newest Smith & Wollensky unit in
Houston, Texas. We expect to open another Smith & Wollensky restaurant in early
fall of 2004 in Boston, Massachusetts. We expect the restaurant to have
approximately 450 seats on four levels. As of June 28, 2004, total remaining
capital expenditures for 2004 were expected to be approximately $3.6 million and
will be used primarily to complete the construction of our new restaurant in
Boston, Massachusetts, and for general maintenance of existing restaurants.
Although we currently do not have any leases signed other than leases relating
to our existing and planned locations and will not actively pursue new locations
in 2005, we would consider opening a new Smith & Wollensky restaurant in a high
caliber location under highly favorable
25
investment terms. We plan to move ahead cautiously with our future expansion as
management evaluates and monitors economic and security conditions, and we
expect to resume our new restaurant growth in 2006. As of June 28, 2004, the
average cost of opening the last three Smith & Wollensky restaurants, net of
landlord contributions, has been approximately $3.7 million, excluding the
purchase of land and pre-opening costs. 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 $5.3 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 and is dependent on the size of the location and the amount of the
landlord contribution. Although our newest unit in Houston falls within this
range, the restaurant we plan to open in Boston is expected to significantly
exceed this range primarily because of its physical size. Some locations that we
choose will be outside our preferred cash investment range, but are nevertheless
accepted based on our evaluation of the potential returns.
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
bore interest at rates ranging from 9.0% to 12.0%. The final payment for these
obligations was made in 2003. In addition, we assumed a mortgage on the Miami
property that requires monthly payments and bears interest at 5.25% per year. On
April 30, 2004, a letter was signed by the financial institution that holds the
mortgage for the property extending the term of the mortgage three additional
years, with the final principal payment due in June 2007. The extension became
effective June 18, 2004. In 1997, we also 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 $1.6 million on June 28, 2004.
On August 23, 2002, we entered into a $14.0 million secured term loan
agreement with Morgan Stanley. Under the agreement we are the guarantor 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 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
commenced June 30, 2003. 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 maturity date of the loan. 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. 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 expired on May 31, 2003. We did not draw down
the remaining balance because, as an alternative to purchasing the land, we
signed an amendment to our lease agreement, as discussed below. On September 28,
2003, Morgan Stanley amended, among other things, the interest coverage ratio
covenant of the term loan agreement. The costs in connection with the amendment
were not material. At June 28, 2004, we were in compliance with all the
financial covenants contained in this amended loan agreement.
On April 29, 2003, we signed a second amendment to lease agreement
("Agreement") with The Somphone Limited Partnership ("Lessor"), the owner of the
property for our Las Vegas restaurant. The Agreement, which has been 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 us 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 was approximately $10.0 million at May 1, 2003, and escalates
to approximately $12.1 million at the end of five years. We are required to make
down payments on the purchase price of the property. Those payments, which
escalate annually, are payable in monthly installments into a collateralized
sinking fund based on the table below, and will be applied against the purchase
price at the closing of the option. If at the end of the five years we do not
exercise the option, the Lessor receives the down payments that accumulated in
the sinking fund, and thereafter the purchase price for the property would equal
$10.5 million. The down payments for the purchase of the land over the next five
years as of June 28, 2004 will be as follows:
Fiscal year (dollar amounts in thousands)
----------- -----------------------------
2004........................... $142
2005........................... 298
2006........................... 328
2007........................... 360
2008........................... 123
---
$1,251
======
26
If we exercise the option, the Lessor is obligated to provide us with
financing in the amount of the purchase price applicable at the time of the
closing, less any down payments already made, 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 us to purchase the property at any time after
June 15, 2008 at the then applicable purchase price. In the event of the
exercise of the put option, the Lessor is obligated to provide us with financing
in the amount of the purchase price applicable at that time. 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. The first installment was prepaid on March 4, 2003, and
the subsequent two installments are due on October 9, 2004 and October 9, 2005,
respectively. We received a 60-day extension on the installment due on October
9, 2004. 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. Under the agreement, the Company and Dallas S&W
L.P., a wholly owned subsidiary, are the guarantors of borrowings by our wholly
owned subsidiary, S&W Las Vegas, LLC. Of the $1.9 million borrowed by us under
the agreement, $1.35 million was used for our new restaurant development
program, and $550,000 was used for the first principal installment on the $1.65
million promissory note with Toll Road Texas Land Company, L.P. described above.
This loan bears interest at a fixed rate of 6.36% per annum. Principal payments
for this loan commenced January 24, 2003. Pursuant to the terms of the loan
agreement, we are obligated to make monthly principal payments of $15,833 for
this loan over the term of the loan and a balloon payment of approximately $1.0
million on December 24, 2007, the maturity date of the loan. 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 aggregate outstanding balance of this term loan was approximately
$1.6 million as of June 28, 2004. On September 28, 2003, Morgan Stanley amended,
among other things, the interest coverage ratio covenant of the term loan
agreement. The costs in connection with the amendment were not material. At June
28, 2004, we were in compliance with the financial covenants contained in the
amended loan agreement.
On January 30, 2004, we entered into a $2.0 million secured line of
credit facility with Morgan Stanley ("January Financing"). Under the agreement
we are the guarantor of borrowings by our wholly owned subsidiary, S&W Las
Vegas, LLC. Through S&W Las Vegas, we have the ability to borrow up to $2.0
million under the agreement for working capital purposes. Advances under this
line of credit will bear interest at a fixed rate of LIBOR plus 3% per annum,
payable on a monthly basis. We are also subject to an unused availability fee of
1.75% for any unused portion of this line, payable on a quarterly basis. We may
at anytime repay advances on this line without penalty. We are obligated to
repay the principal portion of this line on January 30, 2006, the termination
date of this line. This line 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 aggregate outstanding balance of this line of credit facility
was approximately $2.0 million as of June 28, 2004. At June 28, 2004 we were in
compliance with the financial covenants contained in the line of credit
facility.
On March 17, 2004, we signed a first amendment to covenants agreement
with Morgan Stanley. The amendment increased to $525,000 the amount that we may
exclude from the determination of any of our covenants, under our term loans and
line of credit facility, as a result of the settlement of the legal dispute
between the Company and Mondo's.
On May 26, 2004, S&W New Orleans, L.L.C. ("New Orleans"), a wholly owned
subsidiary, signed a $2.0 million promissory note with Hibernia ("May
Financing"). The $2.0 million was used by us for construction costs related to
the new Smith & Wollensky restaurant in Boston. The note bears interest at a
fixed rate of 6.27% per annum. Principal payments for this note commenced June
26, 2004. Pursuant to the terms of the promissory note, New Orleans is obligated
to make monthly payments of $17,272 for this note over the term of the note with
a balloon payment of approximately $1.5 million on May 26, 2009, the maturity
date of the note. This note is secured by a first mortgage relating to the New
Orleans property. At June 28, 2004, New Orleans was in compliance with the
financial covenant contained in the loan agreement between New Orleans and
Hibernia.
27
During 2003, we incurred a net loss of $1.1 million, primarily related
to the costs incurred for litigation and accrual of settlement costs on a
disputed lease matter and the costs incurred for the opening of a new restaurant
in Dallas. We used cash during 2003 primarily for the purchase of property and
equipment at our Dallas location and our Houston location. While we generated
cash from operating activities of $3.7 million for the year ended December 29,
2003, cash of $4.9 million and $1.1 million was used for investing and financing
activities, respectively, leaving us with cash and cash equivalents of
approximately $1.9 million as of December 29, 2003. As of June 28, 2004, we
project remaining capital expenditures for 2004 to total approximately $3.6
million, primarily related to the planned restaurant in Boston, which is
scheduled for opening early fall of 2004. The increase in the remaining capital
expenditures for Boston from those previously disclosed relates primarily to
undetected defects directly associated with the renovations to the building,
which is over 100 years old and which has been lightly used over the last 20
years, as well as the additional cost related to the adherence to a stricter
building code than originally anticipated. The Houston location was opened in
January 2004. We incurred approximately $1.6 million in capital expenditures to
complete this project during the first quarter of 2004.
Because of these developments, we obtained the January Financing, May
Financing, and obtained an additional $2.0 million secured line of credit
facility on July 21, 2004 ("July Financing"). Under this agreement, we are the
guarantors of borrowings by our wholly owned subsidiary, S&W Las Vegas, LLC.
Through S&W Las Vegas, LLC, we have the ability to borrow up to $2.0 million
under the agreement for working capital purposes. Advances under this line of
credit will bear interest at a fixed rate of LIBOR plus 3% per annum, payable on
a monthly basis. We are also subject to an unused availability fee of 1.75% for
any unused portion of this line, payable on a quarterly basis. We may at any
time repay advances on this line without penalty. We are obligated to repay the
principal portion of this line on May 31, 2005, the termination date of this
line. This line 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. We also
renegotiated the mortgage related to the Miami restaurant property and extended
the term of this mortgage, which now has a final principal payment due in June
2007. As of June 28, 2004, we had drawn down the entire $4.0 million available
to us under the January Financing and the May Financing. These funds were used
to pay the construction costs relating to the Smith & Wollensky restaurants in
Houston and Boston.
As of June 28, 2004, we believe that our cash and short-term investments
on hand, funds received under the July Financing described above, projected cash
flow from operations and expected landlord construction contributions should be
sufficient to finance our planned capital expenditures and operations throughout
2004, as well as allow us to meet our debt service obligations under our loan
agreements. Our cash resources, and therefore our liquidity, are dependent upon
the level of internally generated cash from operations. Changes in our operating
plans, lower than anticipated sales, increased expenses, weak initial opening
for the Boston location or other events would cause us to seek alternative
financing or cease our capital expenditure plans as early as September 2004.
While we would seek to obtain additional funds through commercial borrowings or
the private or public issuance of debt or equity securities, there can be no
assurance that such funds would be available when needed or be available on
terms acceptable to us.
The following table discloses aggregate information as of June
28, 2004 about our contractual obligations and the periods in which payments in
respect of the obligations are due:
PAYMENTS DUE BY PERIOD
----------------------
Contractual Obligations: Total Less than 1-3 years 3-5 years More than
- ------------------------ ----- 1 year --------- --------- 5 years
------ -------
(dollars in thousands)
Minimum royalty payments licensing agreement(1) $ 4,000 $ 0 $ 1,600 $1,600 $800(2)
Minimum distributions management agreement(1).. $ 3,490 $ 130 $ 960 $ 960 $ 1,440
Minimum payments on employment agreements(1)... $ 2,661 $ 607 $ 2,054 $ 0 $ 0
Principal payments on long-term debt(1)........ $11,820 $ 935 $ 2,120 $6,765 $ 2,000
Payments under capital lease(1)................ $11,380 $ 337 $ 1,426 $1,590 $ 8,027
Minimum annual rental commitments(1)(3)........ $69,528 $2,209 $ 8,839 $8,171 $50,309
------- ------ ------- ------ -------
Total.......................................... $102,879 $4,218 $16,999 $19,086 $62,576
======== ====== ======= ======= =======
(1) Please refer to the discussion in the "Liquidity and Capital
Resources" section above and the Notes to Unaudited Consolidated
Financial Statements for additional disclosures regarding these
obligations.
(2) 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 5.
(3) Restated to reflect the adoption of FIN 46 (R).
28
Seasonality
Our business is seasonal in nature depending on the region of the United
States in which a particular restaurant is located, with revenues generally
being less in the third quarter than in other quarters due to reduced summer
volume and highest in the fourth quarter due to year-end and holiday events. As
we continue to expand in other locations, the seasonality pattern may change.
Inflation
Components of our operations subject to inflation include food,
beverage, lease and labor costs. Our leases require us to pay taxes,
maintenance, repairs, insurance, and utilities, all of which are subject to
inflationary increases. We believe inflation has not had a material impact on
our results of operations in recent years.
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 June 28, 2004.
Expected Maturity Date
----------------------
Fiscal Year Ended
-----------------
Fair Value
June 28,
Debt 2004 2005 2006 2007 2008 Thereafter Total 2004
- ---- ---- ---- ---- ---- ---- ---------- ----- ----
(dollars in thousands)
Long-term variable rate... $23 $53 $56 $2,736 $ - $ - $2,868 $2,868
Average interest rate..... 4.6%
Long-term fixed rate...... $912 $1,276 $736 $1,696 $2,333 $1,999 8,952 10,124
Average interest rate..... 6.6%
------ ------
Total debt................ $11,820 $12,992
======= =======
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-15(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end
of the period covered by this Quarterly Report on Form 10-Q was made under the
supervision and with the participation of management, including our Chief
Executive Officer and Chief Financial Officer. Based upon this evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that, as of
the end of the period covered by this Quarterly Report on Form 10-Q, 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
29
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
There was no change in our internal controls over financial reporting
(as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the
period covered by this report that has materially affected, or is reasonably
likely to materially affect, our internal controls over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On or about September 5, 2001, Mondo's of Scottsdale, L.C. ("Mondo's")
filed a suit against SWRG alleging that it 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 had been set to go to jury trial in March 2004. The plaintiff
requested damages of approximately $2.0 million. On March 18, 2004 the parties
tentatively agreed to settle the matter for $525 and a reserve of $525 was
established as of December 29, 2003. On April 9, 2004 a final settlement was
reached between the parties and, in accordance with the settlement, SWRG made
the first payment of $225, with the final payment of $300 due on April 11, 2005.
SWRG is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on SWRG's
consolidated financial position, results of operations or liquidity.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE TO SECURITY HOLDERS.
The Company's Annual Meeting of Stockholders was held on May 20, 2004.
The proposal submitted to the stockholders for a vote was:
1. Proposal to elect Alan N. Stillman and Thomas H. Lee as
Class III directors to serve for a three year term and until
their successors are duly elected and qualified.
The following sets forth the number of votes for, the number of votes
against, the number of abstentions (or votes withheld in the case of the
election of directors) and broker non-votes with respect to each of the
forgoing proposals.
Votes Abstentions Broker
Votes For Against (withheld) Non-Votes
--------- ------- ---------- ---------
Alan N. Stillman 8,217,647 -- 20,348 --
Thomas H. Lee 8,219,895 -- 18,100 --
30
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.86 Business Loan Agreement by and between S&W New Orleans, L.L.C. as
"Borrower" and Hibernia National Bank as "Lender" dated as of May
26, 2004
10.87 Multiple Indebtedness Mortgage by and between S&W New Orleans,
L.L.C. as "Mortgagor" and Hibernia National Bank as "Mortgagee"
dated as of May 26, 2004
10.88 Promissory Note by and between S&W New Orleans, L.L.C. as
"Borrower" and Hibernia National Bank as "Lender" dated as of May
26, 2004
10.89 Commercial Guaranty by and between S&W New Orleans, L.L.C. as
"Borrower", The Smith & Wollensky Restaurant Group, Inc. as
"Guarantor" and Hibernia National Bank as "Lender" dated as of
May 26, 2004
10.90 Line of Credit 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 July 21, 2004,
including schedules and exhibits thereto
10.91 Guaranty of Payment 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
July 21, 2004
10.92 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 July 21, 2004
10.93 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 July 21, 2004
10.94 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 July 21, 2004
10.95 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 July 21, 2004
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes - Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes - Oxley Act of 2002.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1 Risk Factors.
31
(b) Reports on Form 8-K
Report on Form 8-K dated May 28, 2004 furnishing under Items
4 and 7 disclosing that effective May 21, 2004, the Audit
Committee of the Board of Directors of the Company replaced
KPMG LLP as its independent accounting firm with BDO Seidman,
LLP.
Report on Form 8-K dated June 10, 2004 furnishing under Item
9 disclosing that effective May 28, 2004, Mr. Alan Stillman,
Chairman, Chief Executive Officer and Chief Operating Officer
of the Company purchased additional shares of Thursday's
Supper Pub, Inc., a corporation whose sole asset is 385,400
shares of common stock of the Company.
32
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.
August 11, 2004 By: /s/ ALAN N. STILLMAN
---------------------
Name: Alan N. Stillman
Title: Chairman of the Board, Chief
Executive Officer and
Director
(Principal Executive Officer)
August 11, 2004 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)
33
Exhibit No. Description of Document
- ----------- -----------------------
10.86 Business Loan Agreement by and between S&W New Orleans, L.L.C. as
"Borrower" and Hibernia National Bank as "Lender" dated as of May
26, 2004
10.87 Multiple Indebtedness Mortgage by and between S&W New Orleans,
L.L.C. as "Mortgagor" and Hibernia National Bank as "Mortgagee"
dated as of May 26, 2004
10.88 Promissory Note by and between S&W New Orleans, L.L.C. as
"Borrower" and Hibernia National Bank as "Lender" dated as of May
26, 2004
10.89 Commercial Guaranty by and between S&W New Orleans, L.L.C. as
"Borrower", The Smith & Wollensky Restaurant Group, Inc. as
"Guarantor" and Hibernia National Bank as "Lender" dated as of
May 26, 2004
10.90 Line of Credit 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 July 21, 2004,
including schedules and exhibits thereto
10.91 Guaranty of Payment 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
July 21, 2004
10.92 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 July 21, 2004
10.93 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 July 21, 2004
10.94 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 July 21, 2004
10.95 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 July 21, 2004
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes - Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes - Oxley Act of 2002.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1 Risk Factors.
* Management contract or compensatory plan or arrangement
34