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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 4, 2005
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
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The Smith & Wollensky Restaurant Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 58 2350980
(State or other jurisdiction of (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 May 19, 2005, the registrant had 9,380,349 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 April 4, 2005 and January 3, 2005 4
Unaudited Consolidated Statements of Operations for the three month periods ended
April 4, 2005 and March 29, 2004 (as restated) 5
Unaudited Consolidated Statements of Stockholders' Equity for the three-month periods ended
April 4, 2005 and March 29, 2004 (as restated) 6
Unaudited Consolidated Statements of Cash Flows for the three-month periods ended
April 4, 2005 and March 29, 2004 (as restated) 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. 30
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. 30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 31
Item 3. Defaults Upon Senior Securities. 31
Item 4. Submission of Matters to a Vote of Security Holders. 31
Item 5. Other Information. 31
Item 6. Exhibits. 31
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 of 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 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)
April 4, January 3,
2005 2005
----- ----
Assets
Current assets:
Cash and cash equivalents................................................................. $ 812 $ 1,821
Short-term investments.................................................................... 207 195
Accounts receivable, less allowance for doubtful accounts of $78
at April 4, 2005 and January 3, 2005, respectively........................................ 2,673 2,366
Merchandise inventory..................................................................... 5,078 5,139
Prepaid expenses and other current assets................................................. 1,567 1,103
-------- --------
Total current assets........................................................................ 10,337 10,624
Property and equipment, net................................................................. 72,630 73,253
Goodwill, net............................................................................... 6,886 6,886
Licensing agreement, net.................................................................... 3,595 3,637
Other assets................................................................................ 4,758 4,728
-------- --------
Total assets.............................................................................. $ 98,206 $ 99,128
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt......................................................... $ 3,332 $ 3,329
Accounts payable and accrued expenses..................................................... 14,410 15,738
-------- --------
Total current liabilities................................................................. 17,742 19,067
Obligations under capital leases............................................................ 11,596 11,624
Long-term debt, net of current portion...................................................... 9,414 9,611
Deferred rent............................................................................... 8,694 8,647
-------- --------
Total liabilities......................................................................... 47,446 48,949
Interest in consolidated variable interest entity........................................... (460) (572)
Commitments and contingencies
Stockholders' equity:
Common stock (par value $.01; authorized 40,000,000 shares; 9,380,349 and 9,378,349 shares
issued and outstanding at April 4, 2005 and January 3, 2005, respectively)................ 94 94
Additional paid-in capital................................................................ 70,012 70,002
Accumulated deficit....................................................................... (18,980) (19,427)
Accumulated other comprehensive income ................................................... 94 82
-------- --------
51,220 50,751
-------- --------
Total liabilities and stockholders' equity................................................ $ 98,206 $ 99,128
======== ========
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 share and per share amounts)
Three Months Ended
April 4, March 29,
2005 2004
----- ----
Restated
--------
Consolidated restaurant sales...................................... $ 32,994 $ 30,652
---------- -----------
Cost of consolidated restaurant sales:
Food and beverage costs.......................................... 9,816 10,149
Salaries and related benefit expenses............................ 9,462 8,753
Restaurant operating expenses.................................... 5,483 4,798
Occupancy and related expenses................................... 1,880 1,506
Marketing and promotional expenses............................... 1,226 1,298
Depreciation and amortization expenses........................... 1,310 1,067
---------- -----------
Total cost of consolidated restaurant sales................... 29,177 27,571
---------- -----------
Income from consolidated restaurant operations..................... 3,817 3,081
Management fee income.............................................. 251 315
---------- -----------
Income from consolidated and managed restaurants................... 4,068 3,396
General and administrative expenses................................ 2,324 2,622
Royalty expense.................................................... 497 442
---------- -----------
Operating income .................................................. 1,247 332
Interest expense................................................... (430) (323)
Amortization of deferred debt financing costs...................... (32) (18)
Interest income.................................................... 1 -
---------- -----------
Interest and other expense, net.................................... (461) (341)
---------- -----------
Income (loss) before provision for income taxes.................... 786 (9)
Provision for income taxes......................................... 57 52
---------- -----------
Income (loss) before income of consolidated
variable interest entity....................................... 729 (61)
Income of consolidated variable interest entity.................... (282) (168)
---------- -----------
Net income (loss) ................................................. $ 447 $ (229)
========== ===========
Net income (loss) per common share:
Basic and diluted:............................................ $ 0.05 $ (0.02)
========== ===========
Weighted average common shares outstanding:
Basic.......................................................... 9,378,415 9,376,249
========= =========
Diluted........................................................ 9,841,596 9,376,249
========= =========
See accompanying notes to unaudited consolidated financial statements.
5
THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
AND SUBSIDIARIES
Unaudited Consolidated Statements of Stockholders' Equity
(dollar amounts in thousands)
Three months ended April 4, 2005 and March 29, 2004
Accumulated
Common Stock Additional other
paid-in Accumulated comprehensive Stockholders'
Shares Amount capital deficit income equity
------ ------ ------- ------- ------- ------
Balance at December 29, 2003
(Restated).................... 9,376,249 $94 $69,940 $(17,387) $ 16 $52,663
Comprehensive income on
investments, net of tax effect.... 33 33
Net loss ......................... -- -- -- (229) -- (229)
--------- ---- ------- --------- ----- -------
Total comprehensive loss (196)
-----
Balance at March 29, 2004
(Restated)........................ 9,376,249 $ 94 $69,940 $(17,616) $ 49 $52,467
========= ==== ======= ========= ===== =======
Balance at January 3, 2005........ 9,378,349 $94 $70,002 $(19,427) $82 $50,751
Stock options exercised........... 2,000 10 10
Comprehensive income on
investments, net of tax effect.... 12 12
Net income........................ -- -- -- 447 -- 447
--------- ----- ------- --------- ----- -------
Total comprehensive income 459
====
Balance at April 4, 2005.......... 9,380,349 $ 94 $70,012 $(18,980) $ 94 $51,220
========= ==== ======= ========= ==== =======
See accompanying notes to unaudited consolidated financial statements.
6
THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
(dollar amounts in thousands)
Three months ended April 4, 2005 and March 29, 2004
April 4, March 29,
2005 2004
---- ----
Restated
--------
Cash flows from operating activities:
Net income (loss)........................................................... $ 447 $ (229)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization........................................... 1,402 1,127
Amortization of debt discount........................................... 32 18
Deferred gain on sale and leaseback..................................... 151 -
Stock based compensation................................................ (7) -
Deferred rent........................................................... 47 134
Tenant improvement allowances ....................................... - 375
Accretive interest on capital lease obligation .......................... 32 37
Principal payments of capital lease obligation........................... (60) -
Income of consolidated variable interest entity.......................... 282 168
Consolidation of variable interest entity................................ - 284
Changes in operating assets and liabilities:
Accounts receivable................................................... (307) (690)
Merchandise inventory................................................. 61 (83)
Prepaid expenses and other current assets............................. (464) (470)
Other assets.......................................................... (66) (405)
Accounts payable and accrued expenses................................. (1,623) 893
-------- --------
Net cash provided by (used in) operating activities......... (73) 1,159
-------- --------
Cash flows from investing activities:
Purchase of property and equipment........................................ (582) (3,886)
Purchase of nondepreciable assets......................................... - (27)
Proceeds from sale of investments......................................... - 923
Payments under licensing agreement........................................ - (228)
-------- --------
Cash flows used in investing activities..................... (582) (3,218)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term debt................................... - 1,738
Principal payments of long-term debt....................................... (194) (171)
Net proceeds from exercise of options...................................... 10 -
Distribution to owners of consolidated variable interest entity............ (170) (80)
-------- --------
Cash flows provided by (used in) financing activities........ (354) 1,487
-------- --------
Net change in cash and cash equivalents.................................... (1,009) (572)
Cash and cash equivalents at beginning of period........................... 1,821 1,898
-------- --------
Cash and cash equivalents at end of period................... $ 812 $ 1,326
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest..................................................... $ 472 $ 112
======== ========
Income taxes................................................ $ 184 $ 68
======== ========
Noncash investing and financing activities:
Assets under capital lease.................................. $ 9,544 $ 8,044
======== ========
Obligations under capital lease............................. $ 11,596 $ 10,028
======== ========
Capitalization of deferred rent............................. $ - $ 75
======== ========
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)
April 4, 2005 and March 29, 2004
(1) General
The Smith & Wollensky Restaurant Group, Inc. (formerly The New York
Restaurant Group, Inc.) and subsidiaries (collectively, "SWRG" or the "Company")
operate in a single segment, which develops, owns, operates and manages a
diversified portfolio of upscale tablecloth restaurants. At April 4, 2005, SWRG
owned and operated thirteen restaurants, including ten Smith & Wollensky
restaurants, and managed three restaurants.
The accompanying unaudited consolidated financial statements of 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 January 3, 2005 filed by SWRG on Form 10-K
with the Securities and Exchange Commission on April 28, 2005. Results for the
interim periods presented herein are not necessarily indicative of the results
which may be reported for any other interim period or for the entire fiscal
year. The preparation of 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. Certain
reclassifications were made to prior period amounts to conform to current period
classifications.
SWRG utilizes a 52- or 53-week reporting period ending on the Monday
nearest to December 31st. The three months ended April 4, 2005 and March 29,
2004 represent 13-week reporting periods.
(2) Restatements
(a) On October 29, 2004, it was determined that the accounting treatment
for the April 2003 amendment to the lease for SWRG's Las Vegas property ("April
2003 Amendment") was inaccurately reflected in SWRG's financial statements for
the quarter and fiscal year ended December 29, 2003 included in its Annual
Report on Form 10-K for the fiscal year ended December 29, 2003, and for the
quarterly periods ended June 30, 2003, September 29, 2003, March 29, 2004 and
June 28, 2004, included in its Quarterly Reports on Form 10-Q for the respective
quarters ended June 30, 2003, September 29, 2003, March 29, 2004 and June 28,
2004 and that, therefore, a restatement of SWRG's financial statements for the
periods referenced above was required. In connection with the April 2003
Amendment, it was originally determined that the deferred rent liability
outstanding as of April 26, 2003 relating to the Las Vegas property should be
amortized on a straight-line basis through April 2008. This amortization was
included as a reduction to occupancy and related expenses and was derived from
the reduction in deferred rent liability. The deferred rent liability should
have been treated as a reduction to the value of the land under the capital
lease at April 26, 2003. The impact of this restatement on SWRG's statement of
operations was to increase its net loss for the quarter ending March 29, 2004 by
$93, or $.01 per share. On November 3, 2004, a letter was signed by Morgan
Stanley confirming the exclusion of the elimination of the non-cash income
derived from the amortization of the deferred rent liability relating to the Las
Vegas lease from the financial covenants contained in SWRG's term loan
agreements and line of credit facilities for the periods referenced above. SWRG
filed a Current Report on Form 8-K on November 4, 2004 describing this
restatement and the impact on its financial statements.
(b) On February 23, 2005, after analyzing the views expressed by the Office
of the Chief Accountant of the Securities and Exchange Commission ("SEC") in a
letter issued in February 2005 to the American Institute of Certified Public
Accountants guiding all affected public companies regarding certain operating
lease accounting issues and their application under generally accepted
accounting principles, it was determined that the accounting treatment for
leasehold improvements funded by landlord incentives or allowances under
operating leases (tenant improvement allowances) was inaccurately reflected in
SWRG's financial statements included in its Annual Report on Form 10-K for the
fiscal years ended December 30, 2002 and December 29, 2003, and its Quarterly
Reports on Form 10-Q for the quarterly periods ended March 31, 2003, June 30,
2003, September 29, 2003, March 29, 2004, June 28, 2004 and September 27, 2004
and that, therefore, a restatement of SWRG's financial statements for the
periods referenced above was required. Under the previous accounting treatment,
tenant improvement allowances received by SWRG from the landlord were recorded
as a reduction to leasehold improvements. These cash payments received by SWRG
should have been treated as an increase to deferred rent liability, as of the
date we took control over the leased premises, and amortized over the initial
term of the lease, including renewal
8
periods. The impact of this restatement was a reclassification of $375 from
leasehold improvements to deferred rent liability at March 29, 2004 and a
reclassification from occupancy and related expenses to depreciation and
amortization expense of $12 for the quarter ended March 29, 2004. SWRG filed a
Current Report on Form 8-K/A on March 10, 2005 describing this restatement and
the impact on its financial statements.
(c) On April 20, 2005, after doing additional analysis in accordance with
the guidelines from the SEC regarding lease accounting, as described above, it
was determined that SWRG's accounting for lease terms was inaccurately reflected
in the financial statements included in its Annual Report on Form 10-K for the
fiscal years ended December 31, 2001, December 30, 2002 and December 29, 2003,
and its Quarterly Reports on Form 10-Q for the quarterly periods ended March 31,
2003, June 30, 2003, September 29, 2003, March 29, 2004, June 28, 2004 and
September 27, 2004 and that, therefore, a restatement of SWRG's financial
statements for the periods referenced above was required. Under the previous
accounting treatment, for certain restaurants, SWRG recorded rent on a
straight-line basis, commencing on the date the restaurant opened. SWRG should
have recognized rent on a straight-line basis from the date that it took control
over the leased premise and should have capitalized the rent into leasehold
improvements and amortized it on a straight-line basis over the life of the
initial lease term, including renewal periods. In addition, SWRG also determined
that it had amortized leasehold improvements on a straight-line basis over the
life of the initial lease term, including renewal periods, but had, in certain
instances, amortized the deferred rent liability relating to the same leased
premises over only the life of the initial lease term. SWRG should have
amortized the deferred rent liability over the life of the initial lease term,
including renewal periods. SWRG filed a Current Report on Form 8-K on April 26,
2005 describing this restatement and its impact on its financial statements.
The total impact of the restatements discussed above in (b) and (c) was to
decrease SWRG's net loss for the quarter ended March 29, 2004 by $19, or $.00
per share.
(d) On April 20, 2005, it was determined that SWRG had incorrectly
calculated its estimate of gift certificates that were sold and deemed to have
expired and not redeemed in the financial statements included in the Annual
Report on Form 10-K for the fiscal years ended December 31, 2001 and December
30, 2002 and that, therefore, a restatement of SWRG's financial statements for
the periods referenced above was required. In addition, it was also determined
that SWRG had not properly recorded expenses related to certain promotions that
ran from the fiscal year ended January 1, 2001 through January 3, 2005, for
which gift certificates were issued at either a full or partial discount. These
expenses should have been included in the financial statements for the fiscal
years ended January 1, 2001, December 31, 2001, December 30, 2002 and December
21, 2003 included in SWRG's Annual Report on Form 10-K for the fiscal year ended
December 29, 2003 and the Quarterly Reports on Form 10-Q for the quarterly
periods ended March 31, 2003, June 30, 2003, September 29, 2003, March 29, 2004,
June 28, 2004 and September 27, 2004 and that, therefore, a restatement of
SWRG's financial statements for the periods referenced above was required. The
total impact of this restatement on SWRG's financial statements was to increase
its net loss for the quarter ended March 29, 2004 by $85, or $.01 per share.
SWRG filed a Current Report on Form 8-K on April 26, 2005 describing this
restatement and its impact on its financial statements.
The effect of the restatements changed the amounts previously reported
under cash provided from operating activities and cash used for investing
activities by $375 for the quarter ended March 29, 2004.
In connection with the above, a letter was signed by Morgan Stanley
confirming the exclusion of the restatement adjustments relating to certain of
our leases and the accounting for gift certificates from the financial covenants
contained in SWRG's term loan agreements and line of credit facilities for the
quarterly periods ended June 30, 2003, September 29, 2003, December 29, 2003,
March 29, 2004, June 28, 2004, September 27, 2004 and January 3, 2005.
9
As a result of the corrections of the errors described above, SWRG will
file a restated Quarterly Report on Form 10-Q/A for the quarterly periods ended
March 29, 2004, June 28, 2004 and September 27, 2004, as soon as practicable.
SWRG restated its annual results for the fiscal years ended January 1, 2001,
December 31, 2001, December 30, 2002 and December 29, 2003 in its Annual Report
on Form 10-K for the fiscal year ended January 3, 2005, which was filed on April
28, 2005. SWRG restated its financial statements for the period ended March 29,
2004, which includes the unaudited consolidated statement of operations included
in this Quarterly Report on Form 10-Q as follows:
THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
AND SUBSIDIARIES
Unaudited Consolidated Statement of Operations
(dollar amounts in thousands, except share and per share amounts)
Three months ended March 29, 2004
March 29, March 29,
2004 Adjustments 2004
-------------- -------------- -------------
As previously Restated
reported
Consolidated restaurant sales.......................... $ 30,652 $ -- $ 30,652
Cost of consolidated restaurant sales:
Food and beverage costs............................. 10,149 -- 10,149
Salaries and related benefit expenses............... 8,753 -- 8,753
Restaurant operating expenses....................... 4,798 -- 4,798
Occupancy and related expenses...................... 1,437 69 (a)(b)(c) 1,506
Marketing and promotional expenses.................. 1,298 -- 1,298
Depreciation and amortization expenses.............. 1,062 5 (b)(c) 1,067
-------------- -------------- -------------
Total cost of consolidated restaurant sales......... 27,497 74 27,571
-------------- -------------- -------------
Income from consolidated restaurant operations......... 3,155 (74) 3,081
Management fee income.................................. 315 - 315
-------------- -------------- -------------
Income from consolidated and managed restaurants....... 3,470 (74) 3,396
General and administrative expenses.................... 2,537 85 (d) 2,622
Royalty expense........................................ 442 -- 442
-------------- -------------- -------------
Operating income (loss)................................ 4,491 (159) 332
Interest expense, net of interest income............... 341 -- 341
-------------- -------------- -------------
Loss before provision for income taxes................. 150 (159) (9)
Provision for income taxes............................. 52 -- 52
-------------- -------------- -------------
Loss before income of consolidated variable interest
entity.............................................. 98 (159) (61)
Income of consolidated variable interest entity........ (168) -- (168)
-------------- -------------- -------------
Net loss............................................... $ (70) $ (159) $ (229)
============== ============== =============
Net loss per share:
Basic and diluted................................. $ (0.01) $ (0.02) $ (0.02)
============== ============== =============
Weighted average common shares outstanding:
Basic and diluted................................. 9,376,249 9,376,249 9,376,249
============== ============== =============
(a) Includes restatement adjustment for the October 29, 2004 restatement
relating to the Las Vegas Property, as described above.
(b) Includes restatement adjustment for the February 23, 2005 restatement
relating to tenant improvement allowances, as described above.
(c) Includes restatement adjustment for the April 20, 2005 restatement relating
to lease accounting, as described above.
(d) Includes restatement adjustment for the April 20, 2005 restatement relating
to gift certificate accounting, as described above.
(3) Effect of Adoption of Financial Accounting Standards Board ("FASB")
Interpretation No. 46 (revised December 2003) "Consolidation of Variable
Interest Entities" ("FIN 46(R)")
In accordance with FIN 46(R), SWRG's consolidated financial statements for
the quarterly periods ended April 4, 2005 and March 29, 2004, and the fiscal
year ended January 3, 2005 include the accounts and results of the entity that
owns Maloney & Porcelli ("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, were
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 FIN 46(R) if, by design, as a group, the holders of the equity
10
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 accounts and results of the entity that owns M&P
because the holders of the equity investment lacked one of the above
characteristics.
In connection with the adoption of 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. The consolidation of the entity
that owns M&P has increased SWRG's current assets by $142 and $185, non-current
assets by $180 and $168 current liabilities by $407 and $499, and non-current
liabilities by $420 and $427 at April 4, 2005 and January 3, 2005, respectively.
The consolidation of the entity that owns M&P increased consolidated sales by
$2,889 and $2,758, and increased restaurant operating costs by $2,296 and $2,227
for the three months ended April 4, 2005 and March 29, 2004, respectively.
On April 21, 2005, it was determined that the cumulative effect of change
in accounting principle relating to the adoption of FIN46(R) was inaccurately
reflected in the financial statements included in SWRG's Quarterly Reports on
Form 10-Q for the quarterly periods ended March 29, 2004, June 28, 2004 and
September 27, 2004 and that, therefore, a restatement of its financial
statements for the periods referenced above was required. Under the previous
accounting treatment, the accumulated amortization of $771,000 relating to the
$1.5 million paid by SWRG in fiscal 1996 for the right to provide management
services for M&P was recorded as a cumulative effect of accounting change
pursuant to the adoption of FIN 46(R). The entity that owns M&P recorded the
$1.5 million, but did not record the associated amortization. A correction of an
error should have been recorded on the unaudited accounts and results of the
entity that owns M&P to recognize the accumulated amortization relating to the
$1.5 million. The $1.5 million and the related accumulated amortization would
then both be eliminated in the consolidation of M&P. The impact of this
restatement on the financial statements included in SWRG's Quarterly Reports on
Form 10-Q for the quarterly periods ended March 29, 2004, June 28, 2004 and
September 27, 2004 is to increase the interest in consolidated variable interest
entity by $771,000 and to increase the accumulated deficit by $771,000.
In addition, the financial statements for the quarterly periods ended March
31, 2003, June 30, 2003 and September 29, 2003, included in SWRG's Quarterly
Reports on Form 10-Q for the quarterly periods ended March 29, 2004, June 28,
2004 and September 27, 2004, are being restated to exclude the accounts and
results of the entity that owns M&P due to the impracticality associated with
having to restate prior years as well as there being no impact from this
restatement on its net income (loss) and earnings (loss) per share for those
periods. SWRG and its audit committee have discussed the above errors and
adjustments with its predecessor and current independent registered public
accounting firms and have determined that a restatement is necessary for the
periods described above. SWRG will file its Quarterly Reports on Form 10-Q/A for
the quarterly periods ended March 29, 2004, June 28, 2004 and September 27, 2004
as soon as practicable in connection with this restatement. SWRG filed a Current
Report on Form 8-K on April 26, 2005 describing this restatement and its impact
on its financial statements.
(4) Recently Issued Accounting Pronouncements
In November 2004, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 151, "Inventory Costs," an amendment of Accounting
Research Bulletin ("ARB") No. 43, Chapter 4 ("SFAS No. 151"). Under SFAS No.
151, all abnormal amounts of idle facility expense, freight, handling costs, and
wasted materials (spoilage) should be recognized as current-period charges by
requiring the allocation of fixed production overheads to inventory based on the
normal capacity of the production facilities. SFAS No. 151 is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005. The
adoption of this pronouncement is not expected to have a material impact on
SWRG's consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment."
SFAS No. 123R revises SFAS No. 123, and generally requires the cost associated
with employee services received in exchange for an award of equity instruments
be measured based on the grant-date fair value of the award and recognized in
the financial statements over the period during which employees are required to
provide services in exchange for the award. SFAS No. 123R also provides guidance
on how to determine the grant-date fair value for awards of equity instruments
as well as alternative methods of adopting its requirements. SFAS No. 123R is
effective for the beginning of the first annual reporting period after June 15,
2005 and applies to all outstanding and unvested share-based payment awards at a
company's adoption date. We are currently assessing the impact of this statement
on SWRG's consolidated financial statements.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets". SFAS No. 153 amends the guidance in Accounting Principles Board (APB)
Opinion No. 29, "Accounting for Nonmonetary Transactions" to eliminate certain
exceptions to the principle that exchanges of nonmonetary assets be measured
based on the fair value of the assets exchanged. SFAS No. 153 eliminates the
exception for nonmonetary exchanges of similar productive assets and replaces it
with a general exception for exchanges of nonmonetary assets that do not have
commercial substance. This statement is effective for nonmonetary asset
exchanges in fiscal years beginning after June 15, 2005. The adoption of SFAS
153 is not expected to have a material impact on SWRG's consolidated financial
statements.
11
(5) Net Income (Loss) per Common Share
SWRG calculates net income (loss) per common share in accordance with
SFAS No. 128, Earnings Per Share. Basic net income (loss) per common share is
computed by dividing the net income (loss) by the weighted average number of
common shares outstanding. Diluted net income (loss) per common share assumes
the exercise of stock options using the treasury stock method, if dilutive.
Dilutive net income (loss) per common share for the three month- periods ended
April 4, 2005 and March 29, 2004, respectively, was the same as basic net income
(loss) per common share.
The following table sets forth the calculation for net income (loss) per common
share on a weighted average basis:
Three Months Ended
- -----------------------------------------------------------------------------------------------------
April 4, March 29,
2005 2004
---- ----
Restated
--------
Numerator:
Net income (loss).................................................. $ 447 $ (229)
====== ========
Total Weighted Weighted
----- -------- --------
Shares Average Average
------ ------- -------
Shares Shares
------ ------
Denominator - Weighted Average Shares:
Beginning common shares.............................. 9,378,349 9,378,349 9,376,249
Options excercised during the three months ended
April 4, 2005...................................... 2,000 66 --
--------- -------- ---------
Basic................................................ 9,380,349 9,378,415 9,376,249
=========
Dilutive options..................................... 463,181 -
------- -
Diluted ............................................. 9,841,596 9,376,249
========= =========
Per common share:
Basic and diluted.................................... $ 0.05 $ (0.02)
========= =========
SWRG excluded options to purchase approximately 757,000 shares of common stock
for the three-months ended March 29, 2004 because they are considered
anti-dilutive.
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 ("FIN 44"), to account
for its fixed plan stock options. Under this method, compensation expense is
recorded on the date of grant only if the current market price of the underlying
stock exceeded the exercise price. SFAS No. 123, Accounting for Stock-Based
Compensation, established accounting and disclosure requirements using a fair
value-based method of accounting for stock-based employee compensation plans. In
December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure, an amendment of FASB Statement No. 123.
This Statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide 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, Accounting for Stock-Based Compensation. Options given to a board member
who was also a consultant of SWRG became variable options under FIN 44.SWRG took
an initial non-cash compensation charge and will continue to record such
charges, or revenues, associated with the value of the stock underlying these
options through the earlier of their exercise, forfeiture or expiration dates.
The change in fair value of these options for the period ended April 4, 2005
resulted in a recovery of compensation of $7.
12
The following table illustrates the effect on the net income (loss) as if SWRG
had applied the fair value recognition provisions of SFAS No. 123 to stock based
compensation:
Three Months Ended
------------------
April 4, 2005 March 29, 2004
------------- --------------
Restated
--------
Net income (loss) .................................. $ 447 $ (229)
========= =========
Add (deduct) stock-based employee compensation expense
(recovery) included in reported net income
(loss)..................................... (7) -
Deduct total stock-based employee compensation expense
determined under fair value based method for all awards, net
of tax........................................................ (73) (84)
--------- ---------
Pro forma net income (loss)........... .................... $ 367 $ (313)
========= =========
Pro forma net income (loss) per common share (Y)
Basic and diluted........................................... $ 0.04 $ (0.03)
========= =========
Weighted average common shares outstanding:
Basic....................................................... 9,378,415 9,376,249
========= =========
Dilutive.................................................. 9,841,596 9,376,249
========= =========
The per share weighted-average fair value of stock options granted from
fiscal 2001 to fiscal 2004 range from $2.14 to $3.45 on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions: expected dividend yield of 0%, risk free rate of approximately 6%,
expected stock volatility of 50% and an expected life of five years.
(6) 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 April 4, 2005 was as follows:
Amortized Gross unrealized Gross unrealized Fair value
---------------- ---------------- ----------
Cost holding gains holding losses
---- ------------- --------------
At April 4, 2005
Available for sale short-term:
Equity securities $113 $94 $-- $207
==== === === ====
Proceeds from the sale of investment securities available for
sale were $923 for the three months ended March 29, 2004 and the gross realized
loss for the three months ended March 29, 2004 was $10.
(7) Property and Equipment
Property and equipment consists of the following:
13
April 4, 2005 January 3, 2005
------------- ---------------
Land............................................... $11,262 $ 11,262
Building and building improvements................. 7,317 7,317
Machinery and equipment............................ 13,574 13,312
Furniture and fixtures............................. 8,881 8,730
Leasehold improvements............................. 57,721 57,552
Leasehold rights................................... 3,376 3,376
----- -----
102,131 101,549
Less accumulated depreciation and amortization..... (29,501) (28,296)
-------- --------
$ 72,630 $ 73,253
======== ========
Land includes $8,044 of assets under capital lease and machinery and
equipment includes assets with a net book value of $1,446 under capital lease.
Depreciation and amortization expense of property and equipment was $1,356 and
$1,085, for the three months ended April 4, 2005 and March 29, 2004,
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 fiscal year ended January 3, 2005, SWRG capitalized $123 of interest
costs, respectively, in accordance with SFAS No. 34, Capitalization of Interest
Cost.
(8) Las Vegas Capital Lease Commitment
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 $10,000 at May 1, 2003, and escalates to
approximately $12,100 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
$10,500. The down payments for the purchase of the land over the next four years
as of April 4, 2005 will be as follows:
Fiscal year
-----------
2005.......................................................... $ 228
2006.......................................................... 328
2007.......................................................... 360
2008.......................................................... 123
--------
$ 1,039
========
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 payments already made 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.
On October 29, 2004, it was determined that the accounting treatment for
the Agreement was inaccurately reflected in SWRG's financial statements included
in its Annual Report on Form 10-K for the fiscal year ended December 29, 2003,
and its Quarterly Reports on Form 10-Q for the respective quarters ended June
30, 2003, September 29, 2003, March 29, 2004 and June 28, 2004. In connection
with the Agreement, it was originally determined that the deferred rent
liability outstanding as of April 26, 2003 relating to the Las Vegas property
should be amortized on a straight-line basis through April 2008. This
amortization was included as a reduction
14
to occupancy and related expenses and was derived from the reduction in deferred
rent liability. The deferred rent liability should have been treated as a
reduction to the value of the land under the capital lease at April 26, 2003.
On March 23, 2005, S&W of Las Vegas, LLC (the "Borrower") entered into a
Contract of Sale (the "Las Vegas Agreement") with Metroflag SW, LLC (the
"Buyer") pursuant to which, simultaneously upon closing, (i) the Borrower will
assign to the Buyer its existing ground lease (the " Existing Lease") in respect
of the property located at 3767 Las Vegas Boulevard South, Las Vegas, Nevada
(the "Las Vegas Property"), (ii) the Buyer will purchase the Las Vegas Property
pursuant to an option contained in the Existing Lease and (iii) the Borrower
will lease the Las Vegas Property from the Buyer in accordance with the terms of
a lease-back lease (the "New Lease"). The aggregate purchase price is expected
to equal $30,000, payable as follows: (a) approximately $10,700 to the existing
fee owner/ground lessor of the Las Vegas Property, and (b) the difference
between $30,000 and the amount payable to the fee owner/ground lessor of the Las
Vegas Property to the Borrower (approximately $19,300). The Borrower expects to
receive net proceeds from the transactions equal to approximately $19,100
(before taxes) and is required to use approximately $8,700 of the net proceeds
from the transactions to repay existing indebtedness. Any gain recognized would
be deferred and recognized over the life of the lease.
The New Lease will have a 40 year term and require the Borrower to pay a
negotiated rent, subject to certain increases over time. The Las Vegas Agreement
contains, and the New Lease is expected to contain, representations, warranties,
covenants and indemnities that are typical for transactions of this kind.
Although the transactions are expected to close by the end of May 2005, the
transactions are subject to a number of closing conditions and there can be no
assurance that the transactions will be consummated. The Borrower is currently
evaluating the accounting treatment for this transaction.
(9) Commitments and Contingencies
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 on April 9, 2004 and the final payment of $300 on
April 11, 2005.
On December 22, 2004, Parade 59, LLC ("Parade"), a wholly owned subsidiary
of SWRG that managed the ONEc.p.s. restaurant in the Plaza Hotel, filed suit
against Plaza Operating Partners ELAD Properties, LLC and CPS1, LLC
(collectively the "Defendants") alleging that the Defendants (1) failed to pay a
base management fee to Parade as provided for in the restaurant management
agreement described above, (2) failed to pay hotel, guest, room and credit
account charges to Parade, and (3) failed to pay termination costs to Parade in
connection with the termination of the restaurant management agreement. On
February 28, 2005, the Defendants served their answers and counterclaims against
Parade alleging, among other things, that Parade (1) failed to make payments,
(2) breached a memorandum of understanding and other agreements and (3) is
liable for attorney fees and costs, with damages totaling no less than $3.5
million. SWRG believes that it will likely prevail in these matters and that the
risk of material loss is not probable. Accordingly, SWRG has not established a
reserve for loss in connection with the counterclaims. If Parade were to lose
the counterclaims, its financial position, results of operations and cash flows
could be adversely affected.
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.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
As of April 4, 2005, we operated 16 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. We currently do not have any leases signed other than leases
relating to our existing locations and will not actively pursue new locations in
2005. We plan to move ahead cautiously with our future expansion as management
evaluates and monitors economic conditions and the availability of capital. We
expect to resume our new restaurant growth in 2006 or early 2007. We expect
additional locations to have seating capacities ranging from 375 to 450 seats,
but would consider locations with larger or smaller seating capacities where
appropriate. We believe these new restaurants will require, on average, a total
cash investment of $2.0 million to $5.0 million net of landlord contributions
and excluding pre-opening expenses. This range assumes that the property on
which the new unit is located is being leased and is dependent on the size of
the location and the amount of the landlord contribution. Our most recent unit
in Boston significantly exceeded this range primarily because of its physical
size and 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. 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 operate, but do not
own, the original Smith & Wollensky, Maloney & Porcelli, and The Post House
restaurants in New York.
Consolidated restaurant sales include gross sales less sales taxes and
other discounts. Cost 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
written sub-management agreement ("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 required us to provide management services to support that location.
In exchange for the use of the Mrs. Park's Tavern name and related management
support the Company received an annual fee of $50,000. During 2004, we agreed to
reduce the annual fee to $12,000 for the continued use by HSR of the name Mrs.
Parks Tavern, but no longer provide management services to support the location.
Management fee income also included fees received from ONEc.p.s. for the
three months ended March 29, 2004. On December 31, 2003, we amended the
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 was
credited against any management fee that we earned under the agreement. This
amendment also gave either party the right to fund or refuse to fund any
necessary working capital requirements. If neither party was willing to fund the
required additional working capital contributions, as defined, then either party
could have terminated the agreement. Plaza Operating Partners agreed to fund
until October 16, 2004, the date that we were notified by Plaza Operating
Partners that it sold the Plaza Hotel, the property in which the restaurant was
located, and directed us to advise the employees of ONEc.p.s. of the closing. We
funded the cash requirements of ONEc.p.s. until January 1, 2005, the date on
which we were required to close the restaurant at the direction of the new
owner. On November 1, 2004, we informed certain of our employees that ONEc.p.s.
would close effective January 1, 2005. As a result, we are no longer accruing
additional quarterly management fees under our agreement with Plaza Operating
Partners with respect to any periods following January 1, 2005.
16
General and administrative expenses include all corporate and
administrative functions that support existing owned and managed operations and
provide infrastructure to our organization. General and administrative expenses
are comprised of management, supervisory and staff salaries and employee
benefits, travel costs, information systems, training costs, corporate rent,
corporate insurance and professional and consulting fees. Pre-opening costs
incurred in connection with the opening of new restaurants are expensed as
incurred and are included in general and administrative expenses. General and
administrative expenses also include the depreciation of corporate-level
property and equipment and the amortization of corporate intangible assets, such
as licensing agreements and management contracts.
Royalty expense represents fees paid pursuant to a licensing agreement with
St. James Associates, based upon 2.0% of sales, as defined, for restaurants
utilizing the Smith & Wollensky name.
Restatements
(a) On October 29, 2004, it was determined that the accounting treatment
for the April 2003 amendment to the lease for our Las Vegas property ("April
2003 Amendment") was inaccurately reflected in our financial statements for the
quarter and fiscal year ended December 29, 2003 included in its Annual Report on
Form 10-K for the fiscal year ended December 29, 2003, and for the quarterly
periods ended June 30, 2003, September 29, 2003, March 29, 2004 and June 28,
2004, included in our Quarterly Reports on Form 10-Q for the respective quarters
ended June 30, 2003, September 29, 2003, March 29, 2004 and June 28, 2004 and
that, therefore, a restatement of our financial statements for the periods
referenced above was required. In connection with the April 2003 Amendment, it
was originally determined that the deferred rent liability outstanding as of
April 26, 2003 relating to the Las Vegas property should be amortized on a
straight-line basis through April 2008. This amortization was included as a
reduction to occupancy and related expenses and was derived from the reduction
in deferred rent liability. The deferred rent liability should have been treated
as a reduction to the value of the land under the capital lease at April 26,
2003. The impact of this restatement on our statement of operations was to
increase our net loss for the quarter ended March 29, 2004 by $93,000, or $.01
per share. On November 3, 2004, a letter was signed by Morgan Stanley confirming
the exclusion of the elimination of the non-cash income derived from the
amortization of the deferred rent liability relating to the Las Vegas lease from
the financial covenants contained in our term loan agreements and line of credit
facilities for the periods referenced above. We filed a Current Report on Form
8-K on November 4, 2004 describing this restatement and the impact on our
financial statements.
(b) On February 23, 2005, after analyzing the views expressed by the Office
of the Chief Accountant of the Securities and Exchange Commission ("SEC") in a
letter issued in February 2005 to the American Institute of Certified Public
Accountants guiding all affected public companies regarding certain operating
lease accounting issues and their application under generally accepted
accounting principles, it was determined that the accounting treatment for
leasehold improvements funded by landlord incentives or allowances under
operating leases (tenant improvement allowances) was inaccurately reflected in
our financial statements included in our Annual Report on Form 10-K for the
fiscal years ended December 30, 2002 and December 29, 2003, and our Quarterly
Reports on Form 10-Q for the quarterly periods ended March 31, 2003, June 30,
2003, September 29, 2003, March 29, 2004, June 28, 2004 and September 27, 2004
and that, therefore, a restatement of our financial statements for the periods
referenced above was required. Under the previous accounting treatment, tenant
improvement allowances received by us from the landlord were recorded as a
reduction to leasehold improvements. These cash payments received by us should
have been treated as an increase to deferred rent liability, as of the date we
took control over the leased premises, and amortized over the initial term of
the lease, including renewal periods. The impact of this restatement was a
reclassification of $375,000 from leasehold improvements to deferred rent
liability at March 29, 2004 and a reclassification from occupancy and related
expenses to depreciation and amortization expense of $12,000 for the quarter
ended March 29, 2004. We filed a Current Report on Form 8-K/A on March 10, 2005
describing this restatement and the impact on our financial statements.
(c) On April 20, 2005, after doing additional analysis in accordance with
the guidelines from the SEC regarding lease accounting, as described above, it
was determined that our accounting for lease terms was inaccurately reflected in
the financial statements included in our Annual Report on Form 10-K for the
fiscal years ended December 31, 2001, December 30, 2002 and December 29, 2003,
and our Quarterly Reports on Form 10-Q for the quarterly periods ended March 31,
2003, June 30, 2003, September 29, 2003, March 29, 2004, June 28, 2004 and
September 27, 2004 and that, therefore, a restatement of our financial
statements for the periods referenced above was required. Under the previous
accounting treatment, for certain restaurants, we recorded rent on a
straight-line basis, commencing on the date the restaurant opened. We should
have recognized rent on a straight-line basis from the date that it took control
over the leased premise and should have capitalized the rent into leasehold
improvements and amortize it on a straight-line basis over the life of the
initial lease term, including renewal periods. In addition, we also determined
that we had amortized leasehold improvements on a straight-line basis over the
life of the initial lease term, including renewal periods, but had, in certain
instances, amortized the deferred rent liability relating to the same leased
premises over only the life of the initial lease term. We should have amortized
the deferred rent liability over the life of the initial lease term, including
renewal periods. We filed a Current Report on Form 8-K on April 26, 2005
describing this restatement and its impact on our financial statements.
17
The total impact of the restatements discussed above in (b) and (c) was to
decrease our net loss for the quarter ended March 29, 2004 by $19,000, or $.00
per share.
(d) On April 20, 2005, it was determined that we had incorrectly calculated
our estimate of gift certificates that were sold and deemed to have expired and
not redeemed in the financial statements included in the Annual Report on Form
10-K for the fiscal years ended December 31, 2001 and December 30, 2002 and
that, therefore, a restatement of our financial statements for the periods
referenced above was required. In addition, it was also determined that we had
not properly recorded expenses related to certain promotions that ran from the
fiscal year ended January 1, 2001 through January 3, 2005, for which gift
certificates were issued at either a full or partial discount. These expenses
should have been included in the financial statements for the fiscal years ended
January 1, 2001, December 31, 2001, December 30, 2002 and December 21, 2003
included in our Annual Report on Form 10-K for the fiscal year ended December
29, 2003 and our Quarterly Reports on Form 10-Q for the quarterly periods ended
March 31, 2003, June 30, 2003, September 29, 2003, March 29, 2004, June 28, 2004
and September 27, 2004 and that, therefore, a restatement of our financial
statements for the periods referenced above was required. The total impact of
this restatement on our financial statements was to increase our net loss for
the quarter ended March 29, 2004 by $85,000, or $.01 per share. We filed a
Current Report on Form 8-K on April 26, 2005 describing this restatement and its
impact on our financial statements.
The effect of the restatements changed the amounts previously reported
under cash provided from operating activities and the cash used for investing
activities by $375,000 for the quarter ended March 29, 2004.
In connection with the above, a letter was signed by Morgan Stanley
confirming the exclusion of the restatement adjustments relating to certain of
our leases and the accounting for gift certificates from the financial covenants
contained in our term loan agreements and line of credit facilities for the
quarterly periods ended June 30, 2003, September 29, 2003, December 29, 2003,
March 29, 2004, June 28, 2004, September 27, 2004 and January 3, 2005.
18
As a result of the corrections of the errors described above, we will file
a restated Quarterly Report on Form 10-Q/A for the quarterly periods ended March
29, 2004, June 28, 2004 and September 27, 2004, as soon as practicable. We
restated our annual results for the fiscal years ended January 1, 2001, December
31, 2001, December 30, 2002 and December 29, 2003 in our Annual Report on Form
10-K for the fiscal year ended January 3, 2005, which was filed on April 28,
2005. We restated our financial statements for the period ended March 29, 2004,
which included the unaudited consolidated statement of operations included in
this Quarterly Report on Form 10-Q as follows:
THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
AND SUBSIDIARIES
Unaudited Consolidated Statement of Operations
(dollar amounts in thousands, except share and per share amounts)
Three months ended March 29, 2004
March 29, March 29,
2004 Adjustments 2004
-------------- ----------- -------------
As previously Restated
reported
Consolidated restaurant sales.......................... $ 30,652 $ -- $ 30,652
Cost of consolidated restaurant sales:
Food and beverage costs............................. 10,149 -- 10,149
Salaries and related benefit expenses............... 8,753 -- 8,753
Restaurant operating expenses....................... 4,798 -- 4,798
Occupancy and related expenses...................... 1,437 69 (a)(b)(c) 1,506
Marketing and promotional expenses.................. 1,298 -- 1,298
Depreciation and amortization expenses.............. 1,062 5 (b)(c) 1,067
-------------- ----------- -------------
Total cost of consolidated restaurant sales......... 27,497 74 27,571
-------------- ----------- -------------
Income from consolidated restaurant operations......... 3,155 (74) 3,081
Management fee income.................................. 315 - 315
-------------- ----------- -------------
Income from consolidated and managed restaurants....... 3,470 (74) 3,396
General and administrative expenses.................... 2,537 85 (d) 2,622
Royalty expense........................................ 442 -- 442
-------------- ----------- -------------
Operating income (loss)................................ 4,491 (159) 332
Interest expense, net of interest income............... 341 -- 341
-------------- ----------- -------------
Loss before provision for income taxes................. 150 (159) (9)
Provision for income taxes............................. 52 -- 52
-------------- ----------- -------------
Loss before income of consolidated variable interest
entity.............................................. 98 (159) (61)
Income of consolidated variable interest entity........ (168) -- (168)
-------------- ----------- -------------
Net loss............................................... $ (70) $ (159) $ (229)
============== =========== =============
Net loss per share:
Basic and diluted................................. $ (0.01) $ (0.02) $ (0.02)
============== =========== =============
Weighted average common shares outstanding:
Basic and diluted................................. 9,376,249 9,376,249 9,376,249
============== =========== =============
(a) Includes restatement adjustment for the October 29, 2004 restatement
relating to the Las Vegas Property, as described above.
(b) Includes restatement adjustment for the February 23, 2005 restatement
relating to tenant improvement allowances, as described above.
(c) Includes restatement adjustment for the April 20, 2005 restatement relating
to lease accounting, as described above.
(d) Includes restatement adjustment for the April 20, 2005 restatement relating
to gift certificate accounting, as described above.
Effect of Adoption of Financial Accounting Standards Board ("FASB")
Interpretation No. 46 (revised December 2003) "Consolidation of Variable
Interest Entities" ("FIN 46(R)")
In accordance with FIN 46(R), our consolidated financial statements for the
quarterly periods ended April 4, 2005 and March 29, 2004, and the fiscal year
ended January 3, 2005 include the accounts and results of the entity that owns
Maloney & Porcelli ("M&P"). We manage 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, were
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 FIN 46(R) 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
19
occur; or (3) the right to receive the expected residual returns of the entity
if they occur. We consolidated the accounts and results of the entity that owns
M&P because the holders of the equity investment lacked one of the above
characteristics.
In connection with the adoption of 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 M&P are presented. The consolidation of the entity
that owns M&P has increased our current assets by $142,000 and $185,000,
non-current assets by $180,000 and $168,000, current liabilities by $407,000 and
$499,000, and non-current liabilities by $420,000 and $427,000 at April 4, 2005
and January 3, 2005, respectively. The consolidation of the entity that owns M&P
increased consolidated sales by $2.9 million and $2.8 million, and increased
restaurant operating costs by $2.3 million and $2.2 million for the three months
ended April 4, 2005 and March 29, 2004, respectively.
On April 21, 2005, it was determined that the cumulative effect of change
in accounting principle relating to the adoption of FIN46(R) was inaccurately
reflected in the financial statements included in our Quarterly Reports on Form
10-Q for the quarterly periods ended March 29, 2004, June 28, 2004 and September
27, 2004 and that, therefore, a restatement of our financial statements for the
periods referenced above was required. Under the previous accounting treatment,
the accumulated amortization of $771,000 relating to the $1.5 million paid by us
in fiscal 1996 for the right to provide management services for M&P was recorded
as a cumulative effect of accounting change pursuant to the adoption of FIN
46(R). The entity that owns M&P recorded the $1.5 million, but did not record
the associated amortization. A correction of an error should have been recorded
on the unaudited accounts and results of the entity that owns M&P to recognize
the accumulated amortization relating to the $1.5 million. The $1.5 million and
the related accumulated amortization would then both be eliminated in the
consolidation of M&P. The impact of this restatement on the financial statements
included in our Quarterly Reports on Form 10-Q for the quarterly periods ended
March 29, 2004, June 28, 2004 and September 27, 2004 is to increase the interest
in consolidated variable interest entity by $771,000 and to increase the
accumulated deficit by $771,000.
In addition, the financial statements for the quarterly periods ended March
31, 2003, June 30, 2003 and September 29, 2003, included in our Quarterly
Reports on Form 10-Q for the quarterly periods ended March 29, 2004, June 28,
2004 and September 27, 2004, are being restated to exclude the accounts and
results of the entity that owns M&P due to the impracticality associated with
having to restate prior years as well there being no impact from this
restatement on its net income (loss) and earnings (loss) per share for those
periods. We and our audit committee have discussed the above errors and
adjustments with its predecessor and current independent registered public
accounting firms and have determined that a restatement is necessary for the
periods described above. We will file our Quarterly Reports on Form 10-Q/A for
the quarterly periods ended March 29, 2004, June 28, 2004 and September 27, 2004
as soon as practicable in connection with this restatement. We filed a Current
Report on Form 8-K on April 26, 2005 describing this restatement and its impact
on our financial statements.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of
operations are based upon our 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, gift certificate liability, lease accounting, 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.
We believe the following is a summary of our critical accounting policies:
Revenue recognition: Sales from consolidated restaurants are recognized as
revenue at the point of the delivery of meals and services. Management fee
income is recognized as the related management fee is earned pursuant to the
respective agreements.
Allowance for doubtful accounts: Substantially all of our accounts
receivable are due from 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. Our allowance for doubtful accounts remained constant at $78,000 at
April 4, 2005 and January 3, 2005. We estimate an allowance for doubtful
accounts based upon the actual payment history of each individual customer, as
well as considering changes that occur in the financial condition or the local
economy of a particular customer that could affect our bad debt expenses and
allowance for doubtful accounts.
20
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 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. Upon adoption of SFAS No. 142, we had originally determined
that certain of our restaurants with assigned goodwill were separate reporting
units. As a result of the consensus reached in September 2004 by the Emerging
Issues Task Force ("EITF") in regard to determining whether to aggregate
operating segments of an enterprise, we concluded that the entities that were
previously viewed as separate reporting entities could now be viewed as one
single reporting entity for purposes of assessing goodwill. As such, we compared
the fair value of the single reporting entity to the total equity (carrying
value) to determine if impairment exists. The fair value is calculated using
various methods, including an analysis based on projected discounted future
operating cash flows of the single reporting entity using a discount rate
reflecting our weighted average cost of capital. We limit assumptions about such
factors as sales and margin improvements to those that are supportable based
upon our plans for the single reporting entity. 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. Prior to 2004, we had recorded an
impairment of goodwill of $75,000 during 2002 related to our Mrs. Parks
Management Company reporting unit. This impairment related to lower than
anticipated future cash flow for us from the closing by the hotel owner of the
Park Avenue Cafe restaurant in Chicago. The carrying value of goodwill as of
April 4, 2005 and January 3, 2005 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 assets 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. For our
intangible assets, the fair value is in excess of the recorded carrying value.
The net carrying value of these intangible assets as of April 4, 2005 and
January 3, 2005 was $3.6 million.
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 April
4, 2005 and January 3, 2005 was $2.1 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, or less, to our financial results.
Gift Certificate Liability: We record a gift certificate liability for gift
certificates sold to customers to be redeemed at a future date. The liability is
relieved and revenue is recognized when the gift certificates are redeemed.
Lease accounting: We use the lease term plus any renewal period in
determining the life of a lease. The renewal period is included in the life
because we base our original willingness to invest in a new location on our plan
to maximize our return on investment over the entire period available (which
includes the renewal period). We only select locations where we can obtain
long-term leases, including renewal options. If we gain access to the premise
prior to the commencement of the lease, then this additional period is added to
the original lease term. We amortize certain costs associated with the lease
over the life of the lease plus the renewal period. These costs include, but are
not limited to, the amortization of leasehold improvements and the amortization
of deferred rent liability. We include tenant allowances received by us from the
landlord as an increase to our deferred rent liability. The amortization
21
period for deferred rent is over the life of the accounting lease, which
includes, the date from which we obtain control over the premises to the ending
date of the legal lease document, which includes the renewal period. Any rent or
deferred rent expense incurred during the construction period is capitalized as
a part of leasehold improvements and is amortized on a straight-line basis from
the date operations commence over the remaining life of the lease, which
includes the renewal period.
FIN 46 (R): FIN 46(R) addresses the consolidation by business enterprises
of variable interest entities. All variable interest entities, regardless of
when created, were 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 perform a detailed
analysis of all of our management arrangements to determine if any of the equity
investments lack one of the above characteristics. We consolidated the accounts
and results of the entity that owns Maloney & Porcelli for the fiscal year ended
January 3, 2005 because the holders of the equity investment lacked one of the
above characteristics.
Legal proceedings: We are involved in various claims and legal actions, the
outcomes of which are not within our complete control and may not be known for
prolonged periods of time. In some actions, the claimants seek damages, which,
if granted, would require significant expenditures. We record a liability in our
consolidated financial statements when a loss is known or considered probable
and the amount can be reasonably estimated. If the reasonable estimate of a
known or probable loss is a range, and no amount within the range is a better
estimate, the minimum amount of the range is accrued. If a loss is not 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 April 4, 2005, we have recorded a valuation allowance of $9.8 million to
reduce our net operating loss and tax credit carryforwards of $8.4 million and
other timing differences of $1.4 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.
22
Unaudited Results of Operations
Three Months Ended
April 4, March 29,
2005 2004
Restated
(Dollars in thousands)
Consolidated Statement of Operations Data:
Consolidated restaurant sales $ 32,994 100.0% $ 30,652 100.0%
Cost of consolidated restaurant sales:
Food and beverage costs 9,816 29.8 10,149 33.1
Salaries and related benefit 9,462 8,753
expenses 28.7 28.6
Restaurant operating expenses 5,483 16.6 4,798 15.7
Occupancy and related expenses 1,880 5.7 1,506 4.9
Marketing and promotional 1,226 1,298
expenses 3.7 4.2
Depreciation and amortization expenses 1,310 4.0 1,067 3.4
-------- ------ ------- -----
Total cost of consolidated restaurant sales 29,177 88.5 27,571 89.9
-------- ------ ------- -----
Income from consolidated restaurant
operations 3,817 11.5 3,081 10.1
Management fee income 251 0.8 315 1.0
-------- ------ ------- -----
Income from consolidated and managed
Restaurants 4,068 12.3 3,396 11.1
General and administrative expenses 2,324 7.0 2,622 8.6
Royalty expense 497 1.5 442 1.4
-------- ------ ------- -----
Operating income 1,247 3.8 332 1.1
Interest expense, net of interest income (461) (1.4) (341) (1.1)
-------- ------ ------- -----
Income (loss) before provision for income taxes 786 2.4 (9) -
Provision for income taxes 57 0.2 52 0.2
-------- ------ ------- -----
Income (loss) before income of consolidated
variable interest entity 729 2.2 (61) (0.2)
Income of consolidated variable interest
entity (282) (0.8) (168) (0.5)
-------- ------ ------- -----
Net income (loss) $ 447 1.4% $ (229) (0.7)%
========= ===== ======= =======
Three Months Ended April 4, 2005 Compared to the Three Months Ended March 29,
2004
Consolidated Restaurant Sales. Consolidated restaurant sales increased $2.3
million, or 7.6%, to $33.0 million for the three months ended April 4, 2005 from
$30.7 million for the three months ended March 29, 2004. The increase in
consolidated restaurant sales was primarily due to a net increase of $2.3
million from our new Smith & Wollensky units in Houston, Texas, which opened in
January 2004, and Boston, Massachusetts, which opened in September 2004. The
increase in consolidated restaurant sales was also due to a net increase in
comparable consolidated restaurant sales of $50,000, or 0.2%. The increase in
comparable consolidated restaurant sales was primarily due to a net increase in
sales of $290,000 from our Smith & Wollensky units open the entire period. The
improvement is due to an increase in the average check, related primarily to
price increases, and, to a lesser extent, an increase in business travel,
tourism and banquet sales. The increase in consolidated restaurant sales from
our Smith & Wollensky units was partially offset by a net decrease of $240,000
at our consolidated restaurants in New York, which includes the increase in
sales of $132,000 from the entity that owns Maloney & Porcelli, which is
consolidated pursuant to our adoption of FIN 46(R). The increase in sales for
the entity that owns Maloney & Porcelli was attributable to an increase in
volume, average check and, to a lesser extent, banquet sales.
23
Food and Beverage Costs. Food and beverage costs decreased $333,000 to $9.8
million for the three months ended April 4, 2005 from $10.1 million for the
three months ended March 29, 2004. Food and beverage costs as a percentage of
consolidated restaurant sales decreased to 29.8% for the three months ended
April 4, 2005 from 33.1% for the three months ended March 29, 2004. The decrease
in food and beverage costs related primarily to the decrease in food cost at our
comparable units of approximately $745,000 related primarily to the significant
decrease in the cost of beef during the three months ended April 4, 2005, as
compared to the three months ended March 29, 2004. This decrease was partially
offset by an increase of approximately $864,000 million in food and beverage
costs for the new Smith & Wollensky unit in Boston, Massachusetts, which opened
in September 2004. The new Smith & Wollensky unit in Boston 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 Boston matures, 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
$709,000 to $9.5 million for the three months ended April 4, 2005 from $8.8
million for the three months ended March 29, 2004. This increase was primarily
due to our new Smith & Wollensky unit in Boston Massachusetts, which opened in
September 2004. Salaries and related benefits as a percent of consolidated
restaurant sales increased to 28.7% for the three months ended April 4, 2005
from 28.6% for the three months ended March 29, 2004. The increase in salaries
and related benefits was primarily due to the additional staffing required at
the new Smith & Wollensky unit in Boston, Massachusetts during the units
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, 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, an increase in the
minimum wage rate in certain states, 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
$685,000 to $5.5 million for the three months ended April 4, 2005 from $4.8
million for the three months ended March 29, 2004. The increase was primarily
related to our new Smith & Wollensky unit in Boston, Massachusetts. The
remaining increase is related to certain costs that are directly related to the
increased sales volume such as operating supplies of approximately $65,000 at
the units open the entire period. Restaurant operating expenses as a percentage
of consolidated restaurant sales increased to 16.6% for the three months ended
April 4, 2005 from 15.7% for the three months ended March 29, 2004.
Occupancy and Related Expenses. Occupancy and related expenses increased
$374,000 to $1.9 million for the three months ended April 4, 2005 from $1.5
million for the three months ended March 29, 2004, primarily due to the
occupancy and related expenses including real estate and occupancy taxes for the
new Smith & Wollensky unit in Boston, Massachusetts, and to a lesser extent, an
increase in percentage of sales rent at applicable units. Occupancy and related
expenses as a percentage of consolidated restaurant sales increased to 5.7% for
the three months ended April 4, 2005 from 4.9% for the three months ended March
29, 2004.
Marketing and Promotional Expenses. Marketing and promotional expenses
decreased $72,000 to $1.2 million for the three months ended April 4, 2005 from
$1.3 million for the three months ended March 29, 2004. Marketing and
promotional expenses as a percent of consolidated restaurant sales decreased to
3.7% for the three months ended April 4, 2005 from 4.2% for the three months
ended March 29, 2004.
Depreciation and Amortization. Depreciation and amortization increased
$243,000 to $1.3 million for the three months ended April 4, 2005 from $1.1
million for the three months ended March 29, 2004, primarily due to the property
and equipment additions for the new Smith & Wollensky unit in Boston,
Massachusetts.
Management Fee Income. Management fee income decreased $64,000 to $251,000
for the three months ended April 4, 2005 from $315,000 for the three months
ended March 29, 2004. The decrease related primarily to the closing of ONEc.p.s.
General and Administrative Expenses. General and administrative expenses
decreased $298,000 to $2.3 million for the three months ended April 4, 2005 from
$2.6 million for the three months ended March 29, 2004. General and
administrative expenses as a percent of consolidated restaurant sales decreased
to 7.0% for the three months ended April 4, 2005 from 8.6% for the three month
period ended March 29, 2004. 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 5.6% for the three months ended April 4,
2005 from 6.5% for the three months ended March 29, 2004. The decrease in
general and administrative expenses was primarily due to a decrease in travel
expenditures related to not incurring any opening costs during the three months
ended April 4, 2005, as compared to the costs associated with the opening of the
Smith & Wollensky in Houston, Texas in January 2004. In addition, there was a
decrease in payroll and consulting expenses related to corporate matters.
Royalty Expense. Royalty expense increased $55,000 to $497,000 for the
three months ended April 4, 2005 from $442,000 for the three months ended March
29, 2004, due to the combined net increase in sales of $2.3 million from our
Smith & Wollensky unit in Houston, Texas, which opened in January 2004 and our
unit in Boston, Massachusetts, which opened in September 2004, and, to a lesser
extent, an increase in sales of $290,000 from our owned Smith & Wollensky units
open for the comparable period.
24
Interest Expense--Net of Interest Income. Interest expense, net of interest
income, increased $120,000 to $461,000 for the three months ended April 4, 2005
from $341,000 for the three months ended March 29, 2004, primarily due to the
interest expense on debt incurred in connection with the financing of our new
Smith & Wollensky units in Houston, Texas, and Boston, Massachusetts.
Provision for Income Taxes. The income tax provisions for the three months
ended April 4, 2005 and March 29, 2004 represent certain state and local taxes.
Income of Consolidated Variable Interest Entity. In accordance with our
adoption of FIN 46 (R), the operating results of the entity that owns Maloney &
Porcelli 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
contained 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 were subject to the right of
Plaza Operating Partners to terminate, at any time, the agreement relating to
ONEc.p.s. We were notified by Plaza Operating Partners during October 2004 that
it sold the Plaza Hotel, the property in which ONEc.p.s, a restaurant we
managed, was located. We were directed by the new owners to close the restaurant
by January 1, 2005 and to advise the employees of ONEc.p.s. of the closing. On
November 1, 2004, we informed certain of our employees that ONEc.p.s. would
close effective January 1, 2005. As a result, we no longer accrue additional
quarterly management fees under our agreement with Plaza Operating Partners with
respect to any periods following January 1, 2005.
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 this requirement, 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
Cash Flows
We have funded our capital requirements in recent years through cash flow
from operations and third party financings. Net cash provided by / (used in)
operating activities amounted to ($73,000) and $1.2 million for the three months
ended April 4, 2005 and March 29, 2004, respectively. During the three months
ended April 4, 2005, we used cash flows provided by operations primarily to
reduce outstanding payables.
Net cash provided by / (used in) financing activities was ($354,000) and
$1.5 million for the three months ended April 4, 2005 and March 29, 2005,
respectively. Net cash used in financing activities for the three months ended
April 4, 2005 includes $194,000 in principal payments on long-term debt and
distributions of $170,000 to the minority interest in the consolidated variable
interest entity. Net cash provided by financing activities for the three months
ended March 29, 2004 includes $1.7 million in proceeds from our line of credit
facilities with Morgan Stanley Dean Witter Commercial Financial Services, Inc.
("Morgan Stanley") less $171,000 of principal payments on long-term debt and
distributions of $80,000 to the minority interest in the consolidated variable
interest entity
During the three months ended April 4, 2005, we used cash primarily to fund
the expansion of existing restaurants and the completion of the Smith &
Wollensky in Boston. Net cash used in investing activities was $582,000 and $3.2
million for the three months ended April 4, 2005 and March 29, 2004,
respectively. Total capital expenditures were $582,000 and $3.9 million for the
three months ended April 4, 2005 and March 29, 2004, respectively. Other cash
provided by in investing activities consisted primarily of net proceeds from the
sale of investments of $923,000 for the three months ended March 29, 2004.
Capital Expenditures
Total capital expenditures are expected to be approximately $800,000 for
the remainder of fiscal 2005 and will consist of maintenance capital expenditure
in respect of existing restaurants. We currently do not have any leases signed
other than leases relating to our existing locations and will not actively
pursue new locations in 2005. We plan to move ahead cautiously with our future
expansion as management evaluates and monitors economic conditions and the
availability of capital. We expect to resume our new restaurant growth in 2006
or early 2007. We expect additional locations to have seating capacities ranging
from 375 to 450 seats, but would consider locations with larger or smaller
seating capacities where appropriate. We intend to develop restaurants that will
25
require, on average, a total cash investment of $2.0 million to $5.0 million net
of landlord contributions and excluding pre-opening costs. This range assumes
that the property on which the new unit is located is being leased and is
dependent on the size of the location and the amount of the landlord
contribution. Our newest unit in Boston significantly exceeded this range
primarily because of its physical size and 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. 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.
Indebtedness
In fiscal 1997, we assumed certain liabilities in connection with the
acquisition of leasehold rights relating to our Smith & Wollensky Miami location
from two bankrupt corporations. Pursuant to the terms of the bankruptcy
resolution, we assumed a mortgage on the property that requires monthly payments
and bears interest at prime rate plus 1%. 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, we also assumed a loan payable to a financing institution that requires
monthly payments through 2014, and bears interest at a fixed rate of 7.67% per
year. The aggregate balance of the mortgage and loan payable was approximately
$1.5 million and $1.6 million at April 4, 2005 and January 3, 2005,
respectively.
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 (the "Borrower").
We, through the Borrower, 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 approximately $33,333 for this portion of the loan over the term of the loan
and 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 the Borrower. 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. The balance of the term loan was approximately $3.3 million and $3.4
million at April 4, 2005 and January 3, 2005, respectively.
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. 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 ours. This loan bears interest at 8% per annum and requires annual
principal payments of $550,000 with the first installment being prepaid on March
4, 2003, and the subsequent two installments originally due on October 9, 2004
and October 9, 2005, respectively. We received a 60-day extension on the
installment due on October 9, 2004, which we paid on December 9, 2004. The
promissory note is secured by a first mortgage relating to the Dallas property.
The balance of the promissory note was $550,000 at April 4, 2005 and January 3,
2005.
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 of ours, are the guarantors of borrowings by the
Borrower. Of the $1.9 million borrowed by us, through the Borrower, 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
$966,000 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 balance of the term loan was approximately $1.5 million at April
4, 2005 and January 3, 2005.
On January 30, 2004, we entered into a $2.0 million secured line of credit
facility with Morgan Stanley. Under the agreement, we are the guarantor of
borrowings by the Borrower. Through the Borrower, 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, which was
2.4% at December 31, 2004, 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 the Borrower. The balance of the secured
line of credit facility was $2.0 million at April 4, 2005 and January 3, 2005.
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 loan
agreements and line of credit facilities, as a result of the settlement of a
legal dispute between the Company and a third party.
26
On May 26, 2004, S&W New Orleans, L.L.C. ("New Orleans"), a wholly owned
subsidiary of ours, signed a $2.0 million promissory note in favor of Hibernia
National Bank ("Hibernia"). 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 approximately $17,000 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 January 3, 2005, New
Orleans was in compliance with the financial covenant contained in the loan
agreement between New Orleans and Hibernia. The balance of the promissory note
was approximately $1.9 million and $2.0 million at April 4, 2005 and January 3,
2005, respectively.
On July 21, 2004, we entered into a $2.0 million secured line of credit
facility with Morgan Stanley. Under the agreement, the Company and Smith &
Wollensky of Boston LLC are the guarantors of borrowings by the Borrower. The
$2.0 million was used by us for construction costs related to the new Smith &
Wollensky restaurant in Boston. Advances under this line of credit 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 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. The balance of the secured
line of credit facility was $2.0 million at April 4, 2005 and January 3, 2005.
On November 3, 2004, a letter was signed by Morgan Stanley confirming the
exclusion of the elimination of the non-cash income derived from the
amortization of the deferred rent liability relating to the Las Vegas lease from
the financial covenants contained in our term loan agreements and line of credit
facilities for the periods described in Note 2 to the Notes to Unaudited
Consolidated Financial Statements. On November 11, 2004, Morgan Stanley amended,
among other things, the interest coverage ratio covenant of the term loan
agreements and line of credit facilities effective as of September 27, 2004. The
costs in connection with the amendment were approximately $20,000. At April 4,
2005, we were in compliance with all the financial covenants contained in the
amended term loan agreements and line of credit facilities. On April 26, 2005, a
letter was signed by Morgan Stanley confirming the exclusion of the restatement
adjustments relating to certain of our leases and the accounting for gift
certificates from the financial covenants contained in our term loan agreements
and line of credit facilities for the periods described in Note 2 to the Notes
to Unaudited Consolidated Financial Statements.
On December 23, 2004, Smith & Wollensky of Boston, LLC, Houston S&W,
L.P. and Dallas S&W, L.P. (collectively, the "Lessees"), each a wholly-owned
subsidiary of the Company, entered into a Master Lease Agreement and related
schedules (the "Lease") with General Electric Capital Corporation, which
subsequently assigned its rights, interests and obligations under the Lease to
Ameritech Credit Corporation, d/b/a SBC Capital Services ("SBC"), pursuant to
which SBC acquired certain equipment and then leased such equipment to the
Lessees. The transaction enabled the Lessees to finance approximately $1.5
million of existing equipment. Subject to adjustment in certain circumstances,
the monthly rent payable under the Lease is $30,672. The Lessees are treating
this transaction as a sale-leaseback transaction with the lease being classified
as a capital lease and the gain recorded on the sale of approximately $151,000
was deferred and is being amortized over the life of the Lease. The $1.5 million
was used for construction costs related to the Smith & Wollensky restaurant in
Boston. The monthly payments were calculated using an annual interest rate of
approximately 7.2%. In connection with the transaction, the Company entered into
a Corporate Guaranty on December 23, 2004 to guarantee the Lessees' obligations
under the Lease. The Lessees may after 48 months, and after giving 30 days
notice, purchase back all the equipment listed under the Lease at a cost of
approximately $405,000.
Pursuant to the terms of our secured term loan agreements and secured line
of credit facilities, we cannot declare or pay any dividends if any portions of
the loans are outstanding.
Las Vegas Lease
On April 29, 2003, we signed the April 2003 Amendment with The Somphone
Limited Partnership ("Lessor"), the owner of the land that the restaurant in Las
Vegas is located on (the "Las Vegas Property"). The April 2003 Amendment, which
is being accounted for as a capital lease, adjusted 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 April 2003 Amendment also amended 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 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 four years as of April 4, 2005 will be as follows:
27
Fiscal year (dollar amounts in thousands)
----------- ---------------------------
2005................................ $ 228
2006................................ 328
2007................................ 360
2008................................ 123
--------
$ 1,039
========
If we exercised the option, the Lessor would be 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 April 2003 Amendment also provided 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 would be obligated to provide us with
financing in the amount of the purchase price applicable at that time. We would
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 April 2003 Amendment as a capital lease did not violate the
debt restriction covenant of our secured term loan agreements and that the
capital lease and any imputed interest related to the capital lease could be
excluded from the calculation of the financial covenants.
On October 29, 2004, it was determined that the accounting treatment for
the April 2003 Amendment was inaccurately reflected in our financial statements
for the fiscal year ended December 29, 2003 included in our Annual Report on
Form 10-K for the fiscal year ended December 29, 2003, and for the quarterly
periods ended June 30, 2003, September 29, 2003, March 29, 2004 and June 28,
2004, included in our Quarterly Reports on Form 10-Q for the respective quarters
ended June 30, 2003, September 29, 2003, March 29, 2004 and June 28, 2004 and
that, therefore, a restatement of our financial statements for the periods
referenced above was required. In connection with the April 2003 Amendment, it
was originally determined that the deferred rent liability outstanding as of
April 26, 2003 relating to the Las Vegas property should be amortized on a
straight-line basis through April 2008. This amortization was included as a
reduction to occupancy and related expenses and was derived from the reduction
in deferred rent liability. The deferred rent liability should have been treated
as a reduction to the value of the land under the capital lease at April 26,
2003. We filed a Report on Form 8-K on November 4, 2004 describing this
restatement and its impact on our financial statements. We restated our annual
results for the fiscal year ended December 29, 2003 in our Annual Report on Form
10-K for the fiscal year ended January 3, 2005, which was filed on April 28,
2005. We will file a restated Quarterly Report on Form 10-Q/A for the quarterly
periods ended March 29, 2004 and June 28, 2004, as soon as practicable. See
Notes to Consolidated Financial Statements, Notes 2 and 8.
On March 23, 2005, S&W of Las Vegas, LLC (the "Borrower") entered into a
Contract of Sale (the "Vegas Agreement") with the Buyer pursuant to which,
simultaneously upon closing, (i) the Borrower will assign to the Buyer the
Existing Lease in respect of the Las Vegas Property, (ii) the Buyer will
purchase the Las Vegas Property pursuant to an option contained in the Existing
Lease and (iii) the Borrower will lease the Las Vegas Property from the Buyer in
accordance with the terms of the New Lease. The aggregate purchase price is
expected to equal $30,000,000, payable as follows: (a) approximately $10,700,000
to the existing fee owner/ground lessor of the Las Vegas Property, and (b) the
difference between $30,000,000 and the amount payable to the fee owner/ground
lessor of the Las Vegas Property to the Borrower (approximately $19,300,000).
The Borrower expects to receive net proceeds from the transactions equal to
approximately $19,100,000 (before taxes) and is required to use approximately
$8,700,000 of the net proceeds from the transactions to repay existing
indebtedness. Any gain recognized would be deferred and recognized over the life
of the lease.
The New Lease will have a 40 year term and require the Borrower to pay a
negotiated rent, subject to certain increases over time. The Vegas Agreement
contains, and the New Lease is expected to contain, representations, warranties,
covenants and indemnities that are typical for transactions of this kind.
Although the transactions are expected to close by the end of May 2005, the
transactions are subject to a number of closing conditions and there can be no
assurance that the transactions will be consummated. The Borrower is currently
evaluating the accounting treatment for this transaction.
Liquidity
We believe that our cash and short-term investments on hand, projected cash
flow from operations and proceeds from the sale of the Las Vegas Property should
be sufficient to finance our maintenance capital expenditures in respect of
existing units and operations throughout 2005, 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, failure to consummate the sale of the Las Vegas
Property, or other events could cause us to seek alternative financing or
reschedule our maintenance capital expenditure plans as early as January 2006.
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.
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.
Effect of New Accounting Standards
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs," an
amendment of Accounting Research Bulletin ("ARB") No. 43, Chapter 4 ("SFAS No.
151"). Under SFAS No. 151, all abnormal amounts of idle facility expense,
freight, handling costs, and wasted materials (spoilage) should be recognized as
current-period charges by requiring the allocation of fixed production overheads
to inventory based on the normal capacity of the production facilities. SFAS No.
151 is effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. The adoption of this pronouncement is not expected to have
a material impact on our consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment."
SFAS No. 123R revises SFAS No. 123, and generally requires the cost associated
with employee services received in exchange for an award of equity instruments
be measured based on the grant-date fair value of the award and recognized in
the financial statements over the period during which employees are required to
provide services in exchange for the award. SFAS No. 123R also provides guidance
on how to determine the grant-date fair value for awards of equity instruments
as well as alternative methods of adopting its requirements. SFAS No. 123R is
effective for the beginning of the first annual reporting period after June 15,
2005 and applies to all outstanding and unvested share-based payment awards at a
company's adoption date. We are currently assessing the impact of this statement
on our consolidated financial statements.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets". SFAS No. 153 amends the guidance in Accounting Principles Board (APB)
Opinion No. 29, "Accounting for Nonmonetary Transactions" to eliminate certain
exceptions to the principle that exchanges of nonmonetary assets be measured
based on the fair value of the assets exchanged. SFAS No. 153 eliminates the
exception for nonmonetary exchanges of similar productive assets and replaces it
with a general exception for exchanges of nonmonetary assets that do not have
commercial substance. This statement is effective for nonmonetary asset
exchanges in fiscal years beginning after June 15, 2005. The adoption of SFAS
153 is not expected to have a material impact on our consolidated financial
statements.
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 April 4, 2005.
Expected Maturity Date
Fiscal Year Ended
------------------------------------------------------------------------------
Fair Value
January 3,
Debt 2005 2006 2007 2008 2009 Thereafter Total 2005
- ------ -------- ------ -------- -------- -------- ---------- ---------- -----------
(Dollars in thousands)
Long-term variable rate.......... $ 2,040 $ 56 $ 2,777 $ 4,873 $ 4,873
Average interest rate............ 5.0%
Long-term fixed rate............. $ 1,096 $ 737 $ 1,696 $ 2,333 $ 1,634 $ 377 $ 7,873 $ 8,903
Average interest rate............ 6.6%
----------
Total Debt....................... $ 12,746 $ 13,776
========== =========
We have no derivative financial or derivative commodity instruments. We do
not hold or issue financial instruments for trading purposes.
29
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. In connection with such
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our "disclosure controls and procedures" are not effective based
on the restatement described below.
Restatement of Previously Issued Financial Statements
On April 20, 2005, it was determined that we had incorrectly calculated our
estimate of gift certificates that were sold and deemed to have expired and not
redeemed during fiscal 2001 and fiscal 2002. In addition, it was also determined
that we had not properly recorded expenses related to certain promotions that we
ran from fiscal 2000 through fiscal 2004, for which gift certificates were
issued at either a full or partial discount. These expenses should have been
included in the financial statements for the fiscal years ended January 1, 2001,
December 31, 2001, December 30, 2002 and December 29, 2003 included in our
Annual Report on Form 10-K for the fiscal year ended December 29, 2003, and our
Quarterly Report on Form 10-Q for the quarterly periods ended March 29, 2004,
June 28, 2004 and September 27, 2004 and that, therefore, a restatement of our
financial statements for the periods referenced above was required. The total
impact of this restatement on our financial statements was to increase our
accumulated deficit at December 31, 2001 by $590,000, increase our net loss for
the fiscal year ended December 30, 2002, by $66,000, or $.01 per share, and
increase our net loss for the fiscal year ended December 29, 2003 by $83,000, or
$.01 per share. We filed a Report on Form 8-K on April 26, 2005 describing this
restatement and its impact on our financial statements. This Quarterly Report on
Form 10-Q for the period ended April 4, 2005 reflects the changes for the
quarterly results for the period ended March 29, 2004. We will file a restated
Quarterly Report on Form 10-Q/A for the quarterly periods ended March 29, 2004,
June 28, 2004 and September 27, 2004, as soon as practicable. We restated our
annual results for the fiscal years ended January 1, 2001, December 31, 2001,
December 30, 2002 and December 29, 2003 in our Annual Report on Form 10-K for
the fiscal year ended January 3, 2005, which was filed on April 28, 2005.
Remediation of Material Weaknesses
During the first quarter of 2005, to remedy the material weakness in our
internal control over financial reporting, we established procedures to
specifically track every gift certificate sold and redeemed in order to
recognize any potential expenses and the deferred revenue in the appropriate
periods. These procedures were implemented at the beginning of the second
quarter of 2005.
Changes in Internal Controls
Other than as described above, 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 us alleging that we 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 $525,000 and a reserve of $525,000
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, we made the
first payment of $225,000 on April 9, 2004 and the final payment of $300,000 on
April 11, 2005.
On December 22, 2004, Parade 59, LLC ("Parade"), a wholly owned subsidiary
of the Company that managed the ONEc.p.s. restaurant in the Plaza Hotel, filed
suit against Plaza Operating Partners, ELAD Properties, LLC and CPS1, LLC
(collectively the "Defendants") alleging that the Defendants (1) failed to pay a
base management fee to Parade as provided for in the restaurant
30
management agreement described above, (2) failed to pay hotel guest, room and
credit account charges to Parade, and (3) failed to pay termination costs to
Parade in connection with the termination of the restaurant management
agreement. On February 28, 2005, the Defendants served their answers and
counterclaims against Parade alleging, among other things, that Parade (1)
failed to make payments, (2) breached a memorandum of understanding and other
agreements and (3) is liable for attorney fees and costs, with damages totaling
no less than $3.5 million. We believe that we will likely prevail in these
matters and that the risk of material loss is not probable. Accordingly, we have
not established a reserve for loss in connection with the counterclaims. If
Parade were to lose the counterclaims, our financial position, results of
operations and cash flows could be adversely affected.
We are involved in various other claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on our
consolidated financial position, results of operations or liquidity.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE TO SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
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
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
May 19, 2005 By: /s/ ALAN N. STILLMAN
---------------------
Name: Alan N. Stillman
Title: Chairman of the Board, Chief Executive
Officer and Director
(Principal Executive Officer)
May 19, 2005 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)
32
Exhibit No. Description of Document
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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.
33