Exhibit 13.1
SELECTED FINANCIAL INFORMATION
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS INFORMATION FISCAL YEARS
- ----------------------------------- -------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Restaurant Revenues (Combined Morton's and
Bertolini's) $ 206.9 $ 189.8 $ 164.3 $ 139.0 $ 109.0
Restaurant Revenues (All) 206.9 189.8 172.7 193.4 173.4
EBITDA (1) 25.8 24.5 20.7 17.5 11.2
Income Before Income Taxes and Nonrecurring
Charges and Cumulative Effect of a Change in
an Accounting Principle 14.2 13.8 11.5 8.8 3.1
Income (Loss) Before Income Taxes and Cumulative
Effect of a Change in an Accounting Principle 14.3(2) (6.1)(4) 9.2(5) (2.7)(6) (14.7)(7)
Income (Loss) Before Cumulative Effect of a
Change in an Accounting Principle 10.7(2) (1.9)(4) 6.9(5) 1.8 (6) (13.9)(7)
Net Income (Loss) 8.5(2)(3) (1.9)(4) 6.9(5) 1.8 (6) (13.9)(7)
Net Income (Loss) Per Share Before Cumulative
Effect of a Change in an Accounting Principle:
Basic 1.81(2) (0.28)(4) 1.06(5) 0.28(6) (2.18)(7)
Diluted $ 1.77(2) $ (0.28)(4) $ 1.00(5) $ 0.26(6) $ (2.18)(7)
Net Income (Loss) Per Share:
Basic 1.42(2)(3) (0.28)(4) 1.06(5) 0.28(6) (2.18)(7)
Diluted $ 1.39(2)(3) $ (0.28)(4) $ 1.00(5) $ 0.26(6) $ (2.18)(7)
BALANCE SHEET INFORMATION
- -------------------------
FISCAL YEARS
-------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Current Assets $ 22.5 $ 19.3 $ 18.6 $ 27.3(8) $ 35.4(8)
Property and Equipment, Net 66.7 45.8 34.6 24.7 19.4
Total Assets 114.4 95.0 81.9 77.0 73.2
Current Liabilities 34.5 28.2 21.4 25.3(9) 26.4(9)
Long-Term Debt 53.2 36.8 24.9 24.9 23.7
Stockholders' Equity $ 12.1 $ 23.0 $ 28.6 $ 21.1 $ 19.0
(1) Represents earnings before interest, taxes, depreciation, amortization,
pre-opening costs, non-cash charges and nonrecurring (benefit) charges.
(2) Includes nonrecurring, pre-tax litigation benefit of $0.2 million.
(3) Includes a $2.3 million charge, net of income taxes, representing the
cumulative effect of the requisite change in accounting for pre-opening
costs.
(4) Includes nonrecurring, pre-tax charge of $19.9 million representing the
write-down of impaired Bertolini's restaurant assets and the write-down and
accrual of lease exit costs associated with the closure of specified
Bertolini's restaurants, as well as the remaining interests in Mick's and
Peasant restaurants.
(5) Includes nonrecurring, pre-tax litigation charge of $2.3 million.
(6) Includes nonrecurring, pre-tax charge of $11.5 million to write-down the
Atlanta-based Mick's and Peasant restaurants recorded in conjunction with
the sale of such restaurants.
(7) Includes nonrecurring, pre-tax charges of $15.5 million representing a
write-down and related charges for net assets held for sale and $2.2
million related to the settlement of a lawsuit.
(8) Includes assets held for sale of $12.5 million and $22.6 million for fiscal
1996 and 1995, respectively.
(9) Includes liabilities related to assets held for sale of $12.1 million and
$14.0 million for fiscal 1996 and 1995, respectively.
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
RESULTS OF OPERATIONS
1999 COMPARED TO 1998
Revenues increased $17.1 million, or 9.0%, to $206.9 million for fiscal
1999, from $189.8 million for fiscal 1998. Of the increase in revenues, $15.3
million was attributable to incremental restaurant revenues from thirteen new
restaurants opened after December 28, 1997 and $4.6 million, or 2.7%, was
attributable to additional comparable revenues from restaurants open all of both
periods. Included in 1999 revenues is approximately $0.4 million of consulting
fee income and included in 1998 revenues is approximately $0.1 million of
consulting fee income. Average revenue per restaurant open for a full period
increased 2.4%. Higher revenues for fiscal 1999 reflect the impact of menu price
increases of approximately 1% in September 1999. Additionally, as reflected in
the table below, certain Bertolini's restaurants have generated lower than
anticipated revenues, which have adversely impacted average restaurant revenues,
earnings and earnings trends. As discussed in Note 3 to the Company's
consolidated financial statements, during fiscal 1998 the Company recorded a
nonrecurring, pre-tax charge of $19.9 million representing the write-down of
impaired Bertolini's restaurant assets and the write-down and accrual of lease
exit costs associated with the closure of specified Bertolini's restaurants, as
well as the remaining interests in Mick's and Peasant restaurants. Revenues for
the four closed Bertolini's restaurants decreased by $2.8 million compared to
fiscal 1998. As of January 2, 2000, the Company operated 58 restaurants (50
Morton's and 8 Bertolini's) and as of January 3, 1999, 55 restaurants (43
Morton's and 12 Bertolini's).
Percentage changes in comparable restaurant revenues for fiscal 1999
versus fiscal 1998 for restaurants open all of both periods are as follows:
Percentage Change
-----------------
Morton's 3.9%
Bertolini's -4.6%
Total 2.7%
1
Food and beverage costs increased from $64.9 million for fiscal 1998 to
$69.9 million for fiscal 1999. These costs as a percentage of related revenues
decreased 0.4% for the period as a result of lower meat costs.
Restaurant operating expenses which include labor, occupancy and other
operating expenses increased from $81.8 million for fiscal 1998 to $90.0 million
for fiscal 1999. Those costs as a percentage of revenues increased 0.4% from
43.1% for fiscal 1998 to 43.5% for fiscal 1999 primarily due to a more
competitive labor market.
Pre-opening costs, depreciation, amortization and non-cash charges
decreased from $8.4 million for fiscal 1998 to $7.6 million for fiscal 1999 and
decreased from 4.4% of revenues to 3.7%, respectively. Beginning in fiscal 1999,
in accordance with its adoption of SOP 98-5 (see Note 2 to the Company's
consolidated financial statements), the Company expenses all costs incurred
during start-up activities, including pre-opening costs, as incurred.
Pre-opening costs incurred and recorded as expense for fiscal 1999 were $3.1
million. The amount of pre-opening costs recorded for fiscal 1998 and fiscal
1997 represents the amortization of pre-opening costs over the 12 months
following restaurant openings. Such amortization expense for fiscal 1998 and
fiscal 1997 was $4.3 million and $3.2 million, respectively. The timing of
restaurant openings, as well as costs per restaurant, affected the amount of
such costs.
General and administrative expenses for fiscal 1999 were $15.5 million,
an increase of $2.1 million, from $13.4 million for fiscal 1998. Such costs as a
percentage of revenues were 7.5% for fiscal 1999, an increase of 0.4% from
fiscal 1998. The increase in such costs is driven by incremental costs
associated with restaurant development, training and salary costs.
Marketing and promotional expenses were $5.7 million, or 2.7% of
revenues, for fiscal 1999 versus $5.1 million, or 2.7% of revenues, for fiscal
1998.
Interest expense, net of interest income, increased $1.8 million, from $2.3
million for fiscal 1998 to $4.1 million for fiscal 1999. This increase in
interest expense was due to both increased borrowings and higher interest rates.
During fiscal 1999, the Company settled all claims relating to a
lawsuit, which was previously provided for in fiscal 1997, for approximately
$2.3 million. The final amount of the settlement, including
2
all related legal and other costs, resulted in the Company recording a
nonrecurring, pre-tax benefit of approximately $159,000. See Note 3 to the
Company's consolidated financial statements.
During fiscal 1998, the Company recorded a nonrecurring, pre-tax charge
of $19.9 million representing the write-down of impaired Bertolini's restaurant
assets and the write-down and accrual of lease exit costs associated with the
closure of specified Bertolini's restaurants, as well as the write-down of the
Company's remaining interest in Mick's and Peasant. In fiscal 1999, four
Bertolini's restaurants were closed. See Note 3 to the Company's consolidated
financial statements.
Income tax expense of $3.6 million for fiscal 1999 represents Federal
income taxes, which were partially offset by the establishment of FICA and other
tax credits that were generated during fiscal 1999, as well as state income
taxes. See Note 7 to the Company's consolidated financial statements.
1998 COMPARED TO 1997
The following table represents the unaudited combined results of
operations for Morton's Restaurant Group (Company), Morton's of Chicago
Steakhouses (Morton's) and Bertolini's Authentic Trattorias (Bertolini's),
excluding Mick's Restaurants, Inc. (Mick's) and The Peasant Restaurants, Inc.
(Peasant). As discussed in Note 3 to the Company's consolidated financial
statements, the Company completed the sale of its Atlanta-based Mick's and
Peasant restaurants on February 6, 1997 and closed, sold, or otherwise disposed
of all other remaining Mick's and Peasant restaurants during fiscal 1997.
Morton's Restaurant Group, Inc., Morton's and Bertolini's (excluding
Mick's and Peasant):
January 3, December 28,
1999 1997
--------- -----------
(amounts in thousands)
Revenues $ 189,779 $ 164,272
Food and beverage costs 64,946 56,628
Restaurant operating expenses 81,796 70,659
Depreciation, amortization and other non-cash charges 8,360 6,823
General and administrative expenses 13,432 12,329
Marketing and promotional expenses 5,125 4,011
Interest expense, net 2,325 2,396
Nonrecurring charge for the write-down and related
charges for impaired assets 19,925 --
Nonrecurring charge for litigation and related expenses -- 2,300
--------- ---------
3
Income (loss) before income taxes $ (6,130) $ 9,126
========= =========
The following represents the unaudited combined results of operations for
Mick's and Peasant. Interest expense was not allocated to Mick's and Peasant.
Mick's and Peasant Restaurants:
January 3, December 28,
1999 1997
-----------------------------------
(amounts in thousands)
Revenues $ - $ 8,453
Food and beverage costs - 2,561
Restaurant operating expenses - 5,120
Depreciation, amortization and other non-cash charges - 6
General and administrative expenses - 556
Marketing and promotional expenses - 157
----------- ---------
Income before income taxes $ - $ 53
=========== =========
Revenues increased $17.1 million, or 9.9%, to $189.8 million for fiscal
1998, from $172.7 million for fiscal 1997. Revenues from Morton's and
Bertolini's increased $25.5 million, or 15.5%, to $189.8 million for fiscal
1998, from $164.3 million during the comparable 1997 period. Of the increase in
Morton's and Bertolini's revenues, $21.1 million was attributable to incremental
restaurant revenues from fourteen new restaurants opened after January 1, 1997
and $5.0 million, or 3.3%, was attributable to additional comparable revenues
from restaurants open all of both periods. Included in 1998 revenues is
approximately $0.1 million in consulting fee income and included in 1997
revenues is approximately $0.7 million of investment and consulting fee income.
Average Morton's and Bertolini's revenues per restaurant open for a full period
increased 2.0%. As discussed in Note 3 to the Company's consolidated financial
statements, the Company completed the sale of its Atlanta-based Mick's and
Peasant restaurants on February 6, 1997. Nine other non-Atlanta Mick's and
Peasant restaurants were closed, sold or otherwise disposed of during fiscal
1996 and the remaining seven Mick's were closed, sold or otherwise disposed of
during fiscal 1997. As a result, revenues for the Mick's and Peasant restaurants
decreased approximately $8.5 million in the fiscal 1998 period versus the
comparable period of fiscal 1997. Additionally, as reflected in the table below,
certain Bertolini's restaurants have generated lower than anticipated revenues,
which have adversely impacted average restaurant revenues, earnings and earnings
trends. As discussed in Note 3 to the Company's consolidated financial
statements, the Company recorded a nonrecurring, pre-tax charge of $19.9 million
representing the write-down of impaired Bertolini's restaurant assets and the
write-down and accrual of lease exit costs associated with the closure of
specified Bertolini's restaurants, as well as the remaining interests in Mick's
and Peasant restaurants.
4
As of January 3, 1999, the Company operated 55 restaurants (43 Morton's and 12
Bertolini's) and as of December 28, 1997, 48 restaurants (38 Morton's and 10
Bertolini's).
Percentage changes in comparable restaurant revenues for fiscal 1998
versus fiscal 1997 for restaurants open all of both periods are as follows:
Percentage Change
-----------------
Morton's 4.4 %
Bertolini's -2.7 %
Total 3.3 %
Food and beverage costs increased from $59.2 million for fiscal 1997 to
$64.9 million for fiscal 1998. Food and beverage costs, excluding all Mick's and
Peasant restaurants, increased $8.3 million to $64.9 million for fiscal 1998
from $56.6 million recorded for fiscal 1997. These costs as a percentage of
related revenues decreased 0.3% for the period. As a result of the sale and
closings of the Mick's and Peasant restaurants, as discussed in Note 3 to the
Company's consolidated financial statements, there was a reduction in food and
beverage costs of approximately $2.6 million for fiscal 1998.
Restaurant operating expenses which include labor, occupancy and other
operating expenses increased from $75.8 million for fiscal 1997 to $81.8 million
for fiscal 1998, an increase of $6.0 million. Restaurant operating expenses,
excluding all Mick's and Peasant restaurants, increased from $70.7 million for
fiscal 1997 to $81.8 million for fiscal 1998. Those costs, excluding Mick's and
Peasant, as a percentage of revenues increased 0.1% from 43.0% for fiscal 1997
to 43.1% for fiscal 1998. Offsetting the increase in total restaurant operating
expenses was a reduction of approximately $5.1 million during fiscal 1998 versus
the comparable 1997 period, due to the sale and closings of Mick's and Peasant
restaurants as discussed in Note 3 to the Company's consolidated financial
statements.
Depreciation, amortization and other non-cash charges increased from
$6.8 million for fiscal 1997 to $8.4 million for fiscal 1998 and increased from
4.0% of revenues to 4.4%, respectively. Through fiscal 1998, pre-opening costs
associated with the opening of new restaurants were amortized over the 12 months
following opening. The timing of restaurant openings, as well as costs per
restaurant, affected the amount of such costs.
5
General and administrative expenses for fiscal 1998 were $13.4 million,
an increase of $0.5 million, from $12.9 million for fiscal 1997. General and
administrative expenses, excluding all Mick's and Peasant restaurants, increased
$1.1 million from $12.3 million for fiscal 1997 to $13.4 million for fiscal
1998. Such costs, excluding Mick's and Peasant, as a percentage of revenues were
7.1% for fiscal 1998, a decrease of 0.4% from fiscal 1997. The increase in such
absolute costs is driven by incremental costs associated with restaurant
development. General and administrative expenses relating to the Mick's and
Peasant restaurant groups decreased $0.6 million during fiscal 1998 versus the
comparable 1997 period as a result of the sale and closings of Mick's and
Peasant restaurants as discussed in Note 3.
Marketing and promotional expenses were $5.1 million, or 2.7% of
revenues, for fiscal 1998 versus $4.2 million, or 2.4% of revenues, for fiscal
1997. Marketing and promotional expenses, excluding Mick's and Peasant, were
$5.1 million, or 2.7% of revenues, for fiscal 1998, as compared to $4.0 million,
or 2.4% of revenues, for fiscal 1997. The increase is driven by incremental
costs associated with restaurant development and program specific costs related
to Morton's twentieth anniversary. Mick's and Peasant marketing and promotional
expenses decreased $0.2 million during fiscal 1998 versus fiscal 1997.
Interest expense, net of interest income, decreased $0.1 million, from
$2.4 million for fiscal 1997 to $2.3 million for fiscal 1998. This decrease was
due to a reduction in the Company's weighted average interest rate on bank
borrowings offset by additional borrowings.
During fiscal 1998, the Company recorded a nonrecurring, pre-tax charge
of $19.9 million representing the write-down of impaired Bertolini's restaurant
assets and the write-down and accrual of lease exit costs associated with the
closure of specified Bertolini's restaurants, as well as the write-down of the
Company's remaining interest in Mick's and Peasant. See Note 3 to the Company's
consolidated financial statements.
During fiscal 1997, the Company recorded a charge of approximately $2.3
million related to a judgment against the Company in the United States District
Court for the Northern District of California. See Note 3 to the Company's
consolidated financial statements.
6
An income tax benefit of $4.3 million for fiscal 1998 represents the
recovery of FICA and other tax credits that were generated during fiscal 1998
and the recognition of additional deferred tax benefits associated with the
Company's fiscal 1998 loss, as well as the partial reversal of the deferred tax
valuation allowance associated with the implementation of certain state tax
planning strategies.
LIQUIDITY AND CAPITAL RESOURCES
At present and in the past, the Company has had, and may have in the
future, negative working capital balances. The working capital deficit is
produced principally as a result of the Company's investment in long-term
restaurant operating assets and real estate. The Company does not have
significant receivables or inventories and receives trade credit based upon
negotiated terms in purchasing food and supplies. Funds available from cash
sales not immediately needed to pay for food and supplies or to finance
receivables or inventories are used for noncurrent capital expenditures and or
payments of long-term debt balances under revolving credit agreements.
The Company and Fleet National Bank ("Fleet") (formerly BankBoston,
N.A.) entered into the Second Amended and Restated Revolving Credit and Term
Loan Agreement, dated June 19, 1995, as amended, from time to time (the "Credit
Agreement"), pursuant to which the Company's credit facility (the "Credit
Facility") is $75,000,000, which reflects an increase of $30,000,000 in fiscal
1999. The Credit Facility consists of a $25,000,000 term loan (the "Term Loan")
and a $50,000,000 revolving credit facility (the "Revolving Credit"). Loans made
pursuant to the Credit Agreement bear interest at a rate equal to the lender's
base rate (plus applicable margin) or, at the Company's option, the Eurodollar
Rate (plus applicable margin). At January 2, 2000, calculated pursuant to the
Credit Agreement, the Company's applicable margin on the Revolving Credit was
0.00% on base rate loans and 2.00% on Eurodollar Rate loans and the Company's
applicable margin on the Term Loan was 0.25% on base rate loans and 2.25% on
Eurodollar Rate loans. In addition, the Company is obligated to pay fees of
0.25% on unused loan commitments less than $10,000,000, 0.375% on unused loan
commitments greater than $10,000,000 and a per annum letter of credit fee (based
on the face amount thereof) equal to the applicable margin on the Eurodollar
Rate loans. Fleet has syndicated portions of the Credit Facility to First Union
Corporation, Imperial Bank and Chase Manhattan Bank.
At the end of fiscal 1999 and fiscal 1998, the Company had outstanding
borrowings of $41,625,000 and $29,475,000, respectively, under the Credit
Agreement. At January 2, 2000, $185,000
7
was restricted for letters of credit issued by the lender on behalf of the
Company. Unrestricted and undrawn funds available to the Company under the
Credit Agreement were $33,190,000 and the weighted average interest rate on all
borrowings under the Credit Facility was 8.2% on January 2, 2000.
Quarterly principal installments on the Term Loan of $250,000 will be
due at the end of each calendar quarter from March 31, 2000 through December 31,
2002; $2,500,000 from March 31, 2003 through December 31, 2003; and $3,000,000
from March 31, 2004 through December 31, 2004. The Revolving Credit will be
payable in full on December 31, 2004. Total amounts of principal payable by the
Company under the Credit Agreement during the five years subsequent to January
2, 2000 amount to $1,000,000 in 2000, $1,000,000 in 2001, $1,000,000 in 2002,
$10,000,000 in 2003 and $28,625,000 in 2004. Borrowings under the Credit
Agreement have been classified as noncurrent on the Company's consolidated
balance sheet since the Company may borrow amounts due under the Term Loan from
the Revolving Credit, including the Term Loan principal payments commencing in
March 2000.
Borrowings under the Credit Agreement are secured by all tangible and
intangible assets of the Company. The Credit Agreement contains certain
restrictive covenants with respect to the Company that, among other things,
create limitations (subject to certain exceptions) on: (i) the incurrence or
existence of additional indebtedness or the granting of liens on assets or
contingent obligations; (ii) the making of certain investments; (iii) mergers,
dispositions of assets or consolidations; (iv) prepayment of certain other
indebtedness; (v) making capital expenditures above specified amounts; (vi) the
repurchase of the Company's outstanding common stock; and (vii) the ability to
make certain fundamental changes or to change materially the present method of
conducting the Company's business. The Credit Agreement also requires the
Company to satisfy certain financial ratios and tests. As of January 2, 2000,
the Company believes it was in compliance with such covenants.
On April 7, 1998 and May 29, 1998, the Company entered into interest
rate swap agreements with Fleet on notional amounts of $10,000,000 each.
Interest rate swap agreements are used to reduce the potential impact of
interest rate fluctuations relating to $20,000,000 of variable rate debt. The
term of the agreements are for three years and may be extended for an additional
two years at the option of Fleet. At January 2, 2000, the Company estimates the
fair value of the agreements to be approximately $212,000.
In March 1997, a subsidiary of the Company and CNL Financial I, Inc.
("CNL") entered into a $2,500,000 loan agreement (the "CNL Loan") which matures
on April 1, 2007 and has a 10.002% per
8
annum interest rate. Principal and interest payments will be made over the term
of the loan. At January 2, 2000 and January 3, 1999 the outstanding principal
balance of the CNL Loan was approximately $2,039,000 and $2,221,000,
respectively, of which approximately $202,000 and $167,000, respectively, has
been included in "Current portion of obligations to financial institutions and
capital leases" in the accompanying consolidated balance sheets.
During 1999 and 1998, various subsidiaries of the Company and FFCA
Acquisition Corporation ("FFCA") entered into loan commitments, aggregating
$27,000,000, to fund the purchases of land and construction of restaurants.
During 1999 and 1998, $4,757,000 and $5,315,000, respectively, was funded, with
the interest rates ranging from 7.68% to 8.06% per annum. Monthly principal and
interest payments have been scheduled over twenty-year periods. At January 2,
2000 and January 3, 1999 the aggregate outstanding principal balance due to FFCA
was approximately $9,943,000 and $5,305,000, respectively, of which
approximately $206,000 and $67,000, respectively, of principal is included in
"Current portion of obligations to financial institutions and capital leases" in
the accompanying consolidated balance sheets.
During the third quarter of fiscal 1999, the Company entered into
sale-leaseback transactions whereby the Company sold, and leased back, existing
restaurant equipment at 15 of its restaurant locations. Aggregate proceeds of
$6,000,000 were used to reduce the Company's revolving credit facility. These
transactions are being accounted for as financing arrangements. Recorded in the
accompanying consolidated balance sheet as of January 2, 2000 are such capital
lease obligations, related equipment of $5,547,000, and a deferred gain of
approximately $5,020,000, each of which are being recognized over the three year
lives of such transactions.
During fiscal 1999, the Company's net investment in fixed assets and
related investment costs, net of equipment lease and mortgage financings,
approximated $18.5 million. The Company estimates that it will expend up to an
aggregate of $16.0 million in 2000 to finance ordinary refurbishment of existing
restaurants and capital expenditures, net of landlord development and or rent
allowances and net of equipment lease and mortgage financing, for new
restaurants. The Company has entered into various equipment lease,
sale-leaseback and mortgage financing agreements with several financial
institutions of which approximately $20.1 million, in the aggregate, is
available for future fundings. The Company anticipates that funds generated
through operations and funds available through equipment lease and
9
mortgage financing commitments, as well as funds available under the Credit
Agreement will be sufficient to fund planned expansion.
In fiscal 1998, the Company's board of directors authorized a repurchase
of up to 20%, or approximately 1,330,600 shares, of the Company's outstanding
common stock. In November 1999, the board of directors increased the Company's
authorization by an additional 600,000 shares. As of January 2, 2000, the
Company had repurchased 1,381,190 shares at an average stock price of $17.10.
At January 2, 2000, the Company had various state income tax net
operating loss carryforwards which expire in various periods through 2017. As of
January 2, 2000, the Company had approximately $7.3 million in FICA and other
tax credits expiring in various periods through 2014 available to reduce income
taxes payable in future years. Approximately $3.4 million of the Company's
deferred tax asset represents capital losses. In assessing the realizability of
deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will be realized. The
ultimate realization of deferred tax assets is dependent upon generating future
taxable income during the periods in which temporary differences become
deductible and net operating losses can be carried forward. Management considers
the scheduled reversal of deferred tax assets, projected future taxable income
and tax planning strategies in making this assessment. See Note 7 to the
Company's consolidated financial statements.
YEAR 2000
The Company is not aware of any year 2000 issues that have affected
operations. In preparation for the year 2000, the Company incurred internal
staff costs as well as consulting and other expenses. Year 2000 expenses did not
have a material adverse effect on the Company's consolidated financial position,
results of operations or cash flows. It is possible that the computer systems of
the Company, or third parties with which the Company does business, could be
affected in the future by the year 2000 issue. System failures resulting from
these issues could cause significant disruption to the Company's operations.
10
ACCOUNTING STANDARDS TO BE ADOPTED
Statement of Financial Accounting Standards ("SFAS") No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of SFAS No. 133" ("Statement 137") amends Statement 133
"Accounting for Derivative Instruments and Hedging Activities" ("Statement
133"), which was issued in June 1998 and was to be effective for fiscal quarters
beginning after June 15, 1999. Statement 137 defers the effective date of
Statement 133 to all fiscal quarters of fiscal years beginning after June 15,
2000. Statement 133 standardizes the accounting for derivative instruments and
requires that all derivative instruments be carried at fair value. The Company
has not determined the impact that Statement 133 will have on its consolidated
financial statements and believes that such determination will not be meaningful
until closer to the date of initial adoption in January 2001.
INFLATION
The impact of inflation on labor, food and occupancy costs can
significantly affect the Company's operations. Many of the Company's employees
are paid hourly rates related to the Federal minimum wage. Food costs as a
percentage of net sales have been somewhat stable due to procurement
efficiencies and menu price adjustments. The Company currently does not engage
in any futures contracts and all purchases are made at prevailing market or
contracted prices. Costs for construction, taxes, repairs, maintenance and
insurance all impact the Company's occupancy costs, which increased during the
period. Management believes the current practice of maintaining operating
margins through a combination of menu price increases, cost controls, careful
evaluation of property and equipment needs, and efficient purchasing practices
is its most effective tool for dealing with inflation.
SEASONALITY
The Company's business is somewhat seasonal in nature, with revenues
being less in the third quarter primarily due to Morton's reduced summer volume.
The following table sets forth historical, unaudited quarterly revenues for the
Company's Morton's and Bertolini's restaurants which were open for the entire
period from January 4, 1999 to January 2, 2000 (45 restaurants), and for the
entire period from December 29, 1997 to January 3, 1999 (41 restaurants):
11
Comparable Restaurant Revenues
(in thousands)
1999 1998 1998 1997
---- ---- ---- ----
45 restaurants 41 restaurants
-------------- --------------
$ % $ % $ % $ %
First Quarter 46,159 25.9 46,033 26.5 41,018 26.3 39,156 26.0
Second Quarter 42,970 24.1 42,941 24.7 38,309 24.6 37,166 24.6
Third Quarter 39,425 22.1 37,377 21.6 33,679 21.6 32,917 21.8
Fourth Quarter 49,655 27.9 47,216 27.2 42,863 27.5 41,663 27.6
------- ----- ------- ----- ------- ----- ------- -----
178,209 100.0 173,567 100.0 155,869 100.0 150,902 100.0
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The inherent risk in market risk sensitive instruments and positions
primarily relates to potential losses arising from adverse changes in foreign
currency exchange rates and interest rates.
As of January 2, 2000, the Company operated three international
locations, one in Singapore (opened May 1998), one in Toronto (opened September
1998), and one in Hong Kong (opened December 1999). As a result, the Company is
subject to risk from changes in foreign exchange rates. These changes result in
cumulative translation adjustments which are included in other comprehensive
income. The potential loss resulting from a hypothetical 10% adverse change in
quoted foreign currency exchange rates, as of January 2, 2000, is not considered
material.
The Company is subject to market risk from exposure to changes in
interest rates based on its financing activities. This exposure relates to
borrowings under the Company's Credit Facility which are payable at floating
rates of interest. The Company has entered into interest rate swap agreements to
manage some of its exposure to interest rate fluctuations. The change in fair
value of our long-term debt resulting from a hypothetical 10% fluctuation as of
January 2, 2000 is not considered material.
FORWARD-LOOKING STATEMENTS
This annual report contains various "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking
statements, written, oral or otherwise made, represent the Company's
12
expectation or belief concerning future events. Without limiting the foregoing,
the words "believes," "thinks," "anticipates," "plans," expects," and similar
expressions are intended to identify forward-looking statements. The Company
cautions that these statements are further qualified by important economic and
competitive factors that could cause actual results to differ materially, or
otherwise, from those in the forward-looking statements, including, without
limitation, risks of the restaurant industry, including a highly competitive
environment and industry with many well-established competitors with greater
financial and other resources than the Company, and the impact of changes in
consumer tastes, local, regional and national economic and market conditions,
restaurant profitability levels, expansion plans, demographic trends, traffic
patterns, employee availability and benefits, cost increases, and other risks
detailed from time to time in the Company's periodic earnings releases and
reports filed with the Securities and Exchange Commission. In addition, the
Company's ability to expand is dependent upon various factors, such as the
availability of attractive sites for new restaurants, the ability to negotiate
suitable lease terms, the ability to generate or borrow funds to develop new
restaurants and obtain various government permits and licenses and the
recruitment and training of skilled management and restaurant employees.
Accordingly, such forward-looking statements do not purport to be predictions of
future events or circumstances and therefore there can be no assurance that any
forward-looking statement contained herein will prove to be accurate.
13
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Morton's Restaurant Group, Inc.:
We have audited the accompanying consolidated balance sheets of Morton's
Restaurant Group, Inc. and subsidiaries as of January 2, 2000 and January 3,
1999 and the related consolidated statements of operations, stockholders' equity
and cash flows for each of the years in the three-year period ended January 2,
2000. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Morton's Restaurant
Group, Inc. and subsidiaries as of January 2, 2000 and January 3, 1999 and the
results of their operations and their cash flows for each of the years in the
three-year period ended January 2, 2000, in conformity with generally accepted
accounting principles.
KPMG LLP
Melville, New York
January 27, 2000
14
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
January 2, 2000 and January 3, 1999
(amounts in thousands, except share data)
January 2, January 3,
ASSETS 2000 1999
- ------ ---- ----
Current assets:
Cash and cash equivalents $ 5,806 $ 2,117
Accounts receivable 1,093 894
Inventories 7,134 6,400
Landlord construction receivables,
prepaid expenses and other current assets 2,724 3,920
Deferred income taxes 5,699 6,005
-------- --------
Total current assets 22,456 19,336
-------- --------
Property and equipment, net 66,715 45,811
Intangible assets, net of accumulated amortization of $4,286 at
January 2, 2000 and $3,861 at January 3, 1999 11,709 12,134
Other assets and deferred expenses, net of accumulated amortization
of $698 at January 2, 2000 and $2,075 at January 3, 1999 5,970 9,237
Deferred income taxes 7,511 8,466
-------- --------
$114,361 $ 94,984
======== ========
15
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
January 2, 2000 and January 3, 1999
(amounts in thousands, except share data)
January 2, January 3,
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999
- ------------------------------------ ---- ----
Current liabilities:
Accounts payable $ 7,870 $ 6,553
Accrued expenses 22,036 19,466
Current portion of obligations to financial institutions and capital
leases 4,422 1,801
Accrued incomes taxes 140 372
--------- ---------
Total current liabilities 34,468 28,192
--------- ---------
Obligations to financial institutions and capital leases, less current
maturities 60,970 40,254
Other liabilities 6,855 3,581
--------- ---------
Total liabilities 102,293 72,027
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value per share. Authorized 3,000,000
shares, no shares issued or outstanding -- --
Common stock, $0.01 par value per share. Authorized 25,000,000
shares, issued and outstanding 6,758,200 at January 2, 2000
and 6,661,370 at January 3, 1999 68 67
Nonvoting common stock, $0.01 par value per share. Authorized
3,000,000 shares, no shares issued or outstanding -- --
Additional paid-in capital 62,849 62,717
Accumulated other comprehensive income (loss) (79) (34)
Accumulated deficit (27,146) (35,597)
Less treasury stock, at cost, 1,381,190 shares at January 2, 2000 and
234,400 shares at January 3, 1999 (23,624) (4,196)
--------- ---------
Total stockholders' equity 12,068 22,957
--------- ---------
$ 114,361 $ 94,984
========= =========
See accompanying notes to consolidated financial statements.
16
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended January 2, 2000, January 3, 1999 and December 28, 1997
(amounts in thousands, except per share data)
January 2, January 3, December 28,
2000 1999 1997
---- ---- ----
Revenues $ 206,869 $ 189,779 $ 172,725
Food and beverage costs 69,873 64,946 59,189
Restaurant operating expenses 89,988 81,796 75,779
Pre-opening costs, depreciation, amortization and non-cash charges 7,592 8,360 6,829
General and administrative expenses 15,497 13,432 12,885
Marketing and promotional expenses 5,669 5,125 4,168
Interest expense, net 4,100 2,325 2,396
Nonrecurring (benefit) charges (159) 19,925 2,300
--------- --------- ---------
Income (loss) before income taxes and cumulative
effect of a change in an accounting principle 14,309 (6,130) 9,179
Income tax expense (benefit) 3,577 (4,258) 2,295
--------- --------- ---------
Income (loss) before cumulative effect of a change
in an accounting principle 10,732 (1,872) 6,884
Cumulative effect of a change in an accounting principle,
net of income tax benefit of $1,357 2,281 -- --
--------- --------- ---------
Net income (loss) $ 8,451 $ (1,872) $ 6,884
========= ========= =========
Net income (loss) per share - basic:
Before cumulative effect of a change in an accounting principle $ 1.81 $ (0.28) $ 1.06
Cumulative effect of a change in an accounting principle (0.39) -- --
--------- --------- ---------
Net income (loss) $ 1.42 $ (0.28) $ 1.06
========= ========= =========
Net income (loss) per share - diluted:
Before cumulative effect of a change in an accounting principle $ 1.77 $ (0.28) $ 1.00
Cumulative effect of a change in an accounting principle (0.38) -- --
--------- --------- ---------
Net income (loss) $ 1.39 $ (0.28) $ 1.00
========= ========= =========
Weighted average common and potential common shares outstanding:
Basic 5,938 6,617 6,498
========= ========= =========
Diluted 6,078 6,617 6,886
========= ========= =========
See accompanying notes to consolidated financial statements.
17
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended January 2, 2000, January 3, 1999 and December 28, 1997
(amounts in thousands, except share and per share data)
Accumulated Total
Additional Other Treasury Stock-
Common Paid-In Accumulated Comprehensive Stock at holders'
Stock Capital Deficit Income (Loss) Cost Equity
----- ------- ------- ------------- ---- ------
Balance at December 29, 1996 $ 64 $ 61,632 $(40,609) $ -- $ -- $ 21,087
Exercise of stock options 2 582 -- -- -- 584
Net income -- -- 6,884 -- -- 6,884
-------- -------- -------- -------- -------- --------
Balance at December 28, 1997 66 62,214 (33,725) -- -- 28,555
Comprehensive income (loss):
Net loss -- -- (1,872) -- --
Foreign currency translation
adjustments -- -- -- (34) --
--------
Total comprehensive income (loss) (1,906)
--------
Exercise of stock options 1 503 -- -- -- 504
Purchase of 234,400 shares of
common stock (average cost
of $17.90 per share) -- -- -- -- (4,196) (4,196)
-------- -------- -------- -------- -------- --------
Balance at January 3, 1999 67 62,717 (35,597) (34) (4,196) 22,957
Comprehensive income (loss):
Net income -- -- 8,451 -- --
Foreign currency translation
adjustments -- -- -- (45) --
--------
Total comprehensive income (loss) 8,406
--------
Exercise of stock options 1 132 -- -- -- 133
Purchase of 1,146,790 shares of
common stock (average cost
of $16.94 per share) -- -- -- -- (19,428) (19,428)
-------- -------- -------- -------- -------- --------
Balance at January 2, 2000 $ 68 $ 62,849 $(27,146) $ (79) $(23,624) $ 12,068
======== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
18
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended January 2, 2000, January 3, 1999 and December 28, 1997
(amounts in thousands)
Years Ended
------------------------------------------
January 2, January 3, December 28,
2000 1999 1997
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ 8,451 $ (1,872) $ 6,884
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Cumulative effect of a change in an accounting principle, net of
income tax benefit 2,281 -- --
Depreciation of property and equipment 3,844 3,117 2,127
Amortization of intangible assets, deferred occupancy costs and
other deferred expenses 667 5,243 4,702
Deferred income taxes 2,618 (5,361) 827
Nonrecurring (benefit) charges (159) 19,925 2,300
Change in assets and liabilities:
Accounts receivable (197) 777 447
Inventories (730) (976) (1,166)
Landlord construction receivables, prepaid expenses and
other current assets 258 (1,609) (4,219)
Accounts payable, accrued expenses and other liabilities 7,666 (1,074) 404
Accrued income taxes (232) (284) (44)
-------- -------- --------
Net cash provided by operating activities 24,467 17,886 12,262
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment (15,432) (23,259) (9,914)
Capitalized payments for pre-opening costs, licenses and other
deferred expenses -- (4,205) (6,274)
Proceeds from sale of Mick's and Peasant restaurants -- -- 4,308
-------- -------- --------
Net cash used by investing activities (15,432) (27,464) (11,880)
-------- -------- --------
19
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
(amounts in thousands)
January 2, January 3, December 28,
2000 1999 1997
---- ---- ----
Cash flows from financing activities:
Principal reduction on obligations to financial institutions
and capital leases $(13,952) $ (8,425) $(10,005)
Proceeds from obligations to financial institutions and
capital leases 27,958 20,365 10,200
Purchases of treasury stock (19,428) (4,196) --
Net proceeds from issuance of stock 133 504 584
-------- -------- --------
Net cash (used) provided by financing activities (5,289) 8,248 779
-------- -------- --------
Effect of exchange rate changes on cash (57) 10 --
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 3,689 (1,320) 1,161
Cash and cash equivalents at beginning of year 2,117 3,437 2,276
-------- -------- --------
Cash and cash equivalents at end of year $ 5,806 $ 2,117 $ 3,437
======== ======== ========
See accompanying notes to consolidated financial statements.
20
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 2, 2000, January 3, 1999 and December 28, 1997
(1) ORGANIZATION AND OTHER MATTERS
Morton's Restaurant Group, Inc. (the "Company") was incorporated as a
Delaware corporation in October 1988 and is engaged in the business of owning
and operating restaurants under the names Morton's of Chicago ("Morton's") and
Bertolini's Authentic Trattorias ("Bertolini's"). As of January 2, 2000, the
Company owned and operated 58 restaurants (50 Morton's and 8 Bertolini's).
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a)PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts and results of
operations of the Company and its subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
(b) REPORTING PERIOD
The Company uses a fiscal year which consists of 52 weeks. Approximately
every six or seven years, a 53rd week will be added. Fiscal 1998 consisted of 53
weeks.
(c) INVENTORIES
Inventories consist of food, beverages, and supplies and are recorded at
the lower of cost or market. Cost is determined using the first-in, first-out
(FIFO) method.
(d) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the related assets.
Improvements to leased premises and property under capital leases are amortized
on the straight-line method over the shorter of the lease term, including
planned extensions, or estimated useful lives of the improvements. In fiscal
1999, 1998 and 1997, interest costs capitalized during the construction period
for leasehold improvements were approximately $350,000, $428,000 and $270,000,
respectively.
(e) OTHER ASSETS AND DEFERRED EXPENSES
Beginning in fiscal 1999, in accordance with its adoption of SOP 98-5,
the Company expenses all costs incurred during start-up activities, including
pre-opening costs, as incurred. In connection with the adoption, the Company
recorded a charge for the cumulative effect of an accounting change of
approximately $2,281,000, net of income tax benefits of approximately
$1,357,000. Pre-opening costs incurred and recorded as expense for fiscal
1999 were $3,081,000. Through 1998, the Company deferred certain
organizational and pre-opening costs associated with the opening of each new
21
restaurant. Such costs were amortized over the 12 months following the
restaurant's opening. Unamortized pre-opening costs of $3,053,000 at the end of
fiscal 1998 are included in "Other assets and deferred expenses" in the
accompanying consolidated balance sheets. Also included in "Other assets and
deferred expenses" are smallwares of $2,367,000 at the end of fiscal 1999 and
$2,085,000 at the end of fiscal 1998.
(f) INCOME TAXES
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes" ("Statement 109"). Statement 109 requires
a change from the deferred method of accounting for income taxes of APB Opinion
11 to the asset and liability method of accounting for income taxes. Under the
asset and liability method of Statement 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. Under Statement 109, the effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes the
enactment date.
(g) INTANGIBLE ASSETS
Intangible assets represent goodwill which arose from the acquisition of
Morton's. Amortization is being recognized on a straight-line basis over forty
years for goodwill. The Company assesses the recoverability of this intangible
asset by determining whether the amortization of the goodwill balance over its
remaining life can be recovered through undiscounted future operating cash flows
of the acquired operation. The amount of goodwill impairment, if any, is
measured based on projected discounted future operating cash flows using a
discount rate reflecting the Company's average cost of funds. The assessment of
the recoverability of goodwill will be impacted if estimated future operating
cash flows are not achieved.
(h) DERIVATIVE FINANCIAL INSTRUMENTS
Amounts receivable or payable under interest rate swap agreements are
accounted for as adjustments to interest expense.
(i) MARKETING AND PROMOTIONAL EXPENSES
Marketing and promotional expenses in the accompanying consolidated
statements of operations include advertising expenses of $3,296,000, $3,526,000
and $3,022,000 for fiscal 1999, 1998 and 1997, respectively. Advertising costs
are expensed as incurred.
(j) STATEMENTS OF CASH FLOWS
For the purposes of the consolidated statements of cash flows, the Company
considers all highly liquid instruments purchased with a maturity of three
months or less to be cash equivalents. The Company paid cash interest and fees,
net of amounts capitalized, of approximately $3,774,000, $2,204,000 and
$2,062,000, and income taxes of approximately $1,179,000, $1,386,000 and
$1,133,000
22
for fiscal 1999, 1998 and 1997, respectively. During fiscal 1999, 1998 and 1997,
the Company entered into capital lease finance agreements of approximately
$3,290,000, $1,836,000 and $2,184,000, respectively, for restaurant equipment.
In addition, during fiscal 1999 the Company entered into sale-leaseback
transactions aggregating $6,000,000 for existing restaurant equipment (see Note
11).
(k) EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share" ("Statement 128"). Statement 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of stock options. Dilutive earnings per
share is calculated in a manner similar to the previously reported fully diluted
earnings per share. Earnings per share amounts for all periods have been
presented and, where appropriate, restated to conform to the Statement 128
requirements (see Note 9).
(l) USE OF ESTIMATES
Management of the Company has made certain estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(m) LONG-LIVED ASSETS
The Company's accounting policies relating to the recording of long-lived
assets, including property and equipment and intangibles, are discussed above.
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("Statement 121") requires, among other things, that long-lived assets held and
used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be generated by
the asset. 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
exceed the fair values of the assets. Assets to be disposed of or sold are
reported at the lower of the carrying amount or fair value less costs to sell.
(n) STOCK-BASED COMPENSATION
Effective January 1, 1996, the Company adopted the provisions of SFAS
Statement 123 ("Statement 123") which encourages, but does not require companies
to record compensation expense for stock-based employee compensation plans at
fair value. The Company 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, in accounting for its
fixed plan stock options. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock exceeded
the exercise price. The Company elected to disclose the pro forma net earnings
and pro forma earnings per share for stock option grants made
23
beginning in fiscal 1995 as if such method had been used to account for
stock-based compensation costs as described in Statement 123.
(o) TRANSLATION OF FOREIGN CURRENCIES
As of January 2, 2000, the Company operated three international locations,
one in Singapore (opened May 1998), one in Toronto (opened September 1998), and
one in Hong Kong (opened December 1999). The financial position and results of
operations of the Company's foreign businesses are measured using local currency
as the functional currency. Assets and liabilities are translated into U.S.
dollars at year-end rates of exchange, and revenues and expenses are translated
at the average rates of exchange for the year. Gains or losses resulting from
the translation of foreign currency financial statements are accumulated as a
separate component of stockholders' equity.
(p) COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" ("Statement 130"). Statement 130 establishes standards for
the reporting and presentation of comprehensive income and its components in a
full set of financial statements. Comprehensive income consists of net income
and equity adjustments from foreign currency translation and is presented in the
consolidated statements of stockholders' equity. The Statement requires only
additional disclosures in the consolidated financial statements; it does not
affect the Company's financial position or results of operations.
(q) RECLASSIFICATION
Certain items previously reported in specific financial statement captions
have been reclassed to conform to the fiscal 1999 presentation.
(3) NONRECURRING (BENEFIT) CHARGES
(a) BERTOLINI'S
Based on a strategic assessment of trends and a downturn in comparable
revenues of Bertolini's Authentic Trattorias, during the fourth quarter of
fiscal 1998, pursuant to the approval of the Board of Directors, the Company
recorded a nonrecurring, pre-tax charge of $19,925,000 representing the
write-down of impaired Bertolini's restaurant assets, the write-down and accrual
of lease exit costs associated with the closure of specified Bertolini's
restaurants as well as the write-off of the residual interests in Mick's and
Peasant restaurants.
The Company performed an in-depth analysis of historical and projected
operating results and, as a result of significant operating losses, identified
several nonperforming restaurants which have all been closed in fiscal 1999. The
Company ascribed no value to the leasehold improvements for closed locations as
such assets inure to the benefit of the landlord and estimated the net
realizable value of furniture and equipment based upon the Company's past
history of restaurant closures, as well as industry standards. The net
realizable value incorporated a factor for depreciation in the fiscal 1999
period in which the restaurants operated until closure. The accrual for lease
exit costs was recorded based upon the remaining guarantee values specified in
the underlying lease agreements. Additionally,
24
the analysis identified several underperforming restaurants, which reflected a
pattern of historical operating losses and negative cash flow, as well as
continued projected negative cash flow and operating results for 1999 and 2000.
Accordingly, the Company recorded an impairment charge in the fourth quarter of
fiscal 1998 to write-down these impaired assets and will contemplate their
potential closure upon future operating results. During September 1999, one such
underperforming restaurant was closed.
The components of the charge were as follows (amounts in thousands):
Write-down of property and equipment $10,833
Write-down of other assets 1,039
Accrual of lease exit and related costs 4,165
--------
Bertolini's subtotal 16,037
Write-down for Mick's and Peasant (detailed below) 3,888
--------
1998 nonrecurring charge $19,925
========
At January 2, 2000 and January 3, 1999, included in "Accrued expenses" in
the accompanying consolidated balance sheets is approximately $2,582,000 and
$4,165,000, respectively, representing the lease disposition liabilities related
to the closing of these restaurants. At January 2, 2000 and January 3, 1999,
remaining in furniture, fixtures and equipment is approximately $97,000 and
$263,000, respectively, representing management's estimate of the net realizable
value of the related Bertolini's property and equipment.
(b) LITIGATION AND RELATED EXPENSES
An employee (Plaintiff) of a subsidiary of the Company initiated legal
action against Morton's of Chicago, Quantum Corporation and unnamed "Doe"
defendants on February 8, 1996 in California Superior Court in San Francisco.
Plaintiff's, Ms. Wendy Kirkland, complaint alleged under California law, among
other things, wrongful constructive termination, sex discrimination and sexual
harassment. Plaintiff sought general, special and punitive damages in
unspecified amounts, as well as attorney's fees and costs. The case was
subsequently removed to the US District Court for the Northern District of
California. By order dated October 14, 1997, the Court granted Plaintiff's
motion for partial summary judgment, finding that an employer is strictly liable
under California law for the sexually harassing conduct of the employer's
supervisory employees. On November 25, 1997, a jury in the US District Court for
the Northern District of California awarded a judgment to the Plaintiff. In
conjunction with the judgment, the Company recorded a 1997 fourth quarter
nonrecurring, pre-tax charge of $2,300,000, representing compensatory damages of
$250,000 (reduced in 1998 by the Court to $150,000), punitive damages of
$850,000, and an estimate of the Plaintiff's and the Company's legal fees and
expenses. The Company filed an appeal and on July 12, 1999, settled all claims
relating to the lawsuit. The final amount of the settlement, including all
related legal and other costs, resulted in the Company recording a nonrecurring,
pre-tax benefit of approximately $159,000 in the third quarter of fiscal 1999.
(c) MICK'S AND PEASANT RESTAURANTS
The following represents the combined results of operations for Mick's and
Peasant for the year ended December 28, 1997. There were no operations in fiscal
1999 and fiscal 1998. Interest expense was not allocated to Mick's and Peasant.
25
1997
----
(amounts in thousands)
Revenues $ 8,453
Food and beverage costs 2,561
Restaurant operating expenses 5,120
Depreciation, amortization and other non-cash charges 6
General and administrative expenses 556
Marketing and promotional expenses 157
-----------
Income before income taxes $ 53
===========
During fiscal 1995, the Company approved a plan for the sale of Mick's
and Peasant and therefore, pursuant to Statement 121, the Company discontinued
depreciating fixed assets and amortizing goodwill related to Mick's and Peasant.
Management had been actively seeking potential buyers for the sale of all Mick's
and Peasant restaurants, however, most of the interest received related to the
majority of the restaurants located mainly in the Atlanta area. No meaningful
offers were received for the remaining restaurants (the "Remaining
Restaurants"). Cash flow analyses prepared by management for the Remaining
Restaurants indicated that it would be less costly to close such restaurants in
an orderly fashion, rather than continue to operate them through the end of
their respective lease terms. Accordingly, assets of $8,300,000 related to the
Remaining Restaurants were written off and expenses of $7,200,000, representing
management's estimate of the expected costs to terminate related leases, were
accrued at December 31, 1995. During fiscal 1999 and fiscal 1998, restaurant
occupancy expenses of approximately $340,000 and $720,400, respectively, for the
Remaining Restaurants were charged to the accrual for lease exit costs. During
fiscal 1997, seven Mick's, and during fiscal 1996, seven Mick's restaurants and
two Peasant restaurants were sold, closed or otherwise disposed of. At January
2, 2000 and January 3, 1999, included in "Accrued expenses" in the accompanying
consolidated balance sheet, is approximately $289,000 and $1,128,000,
respectively, representing the remaining lease disposition liabilities related
to these restaurants.
On February 6, 1997, the Company completed the sale of its
Atlanta-based Mick's and Peasant restaurants. In connection with the sale, the
Remaining Restaurants were transferred to another subsidiary of the Company.
Pursuant to these agreements, MRI Acquisition Corporation acquired an 80.1%
interest in Mick's and PRI Acquisition Corporation acquired an 80.1% interest in
Peasant for an aggregate of $6,800,000, consisting of $4,300,000 in cash and
$2,500,000 in the form of two unsecured promissory notes. The Company retained a
19.9% interest in Mick's and Peasant which, on April 6, 1998 was exchanged for a
19.9% interest in Atlanta Dining Group, Inc., parent of Mick's and Peasant. The
unsecured promissory notes and the 19.9% interest in Mick's and Peasant were
recorded at their estimated fair values on the date of the sale of approximately
$2,200,000. In conjunction with the sale, the Company recorded a fiscal 1996
fourth quarter charge of $11,500,000 to write-down the Atlanta-based restaurants
to their net realizable values based on the fair value of the consideration
received, to accrue for the various expenses related to the closing of such sale
and to write-off two restaurants which were not part of the sale, both of which
were disposed of in 1997.
In the fourth quarter of fiscal 1998, the Company evaluated the
recoverability of its 19.9% ownership interest in Mick's and Peasant and the
related promissory notes received in connection with the 1997 sale. The analysis
was based upon a review of Atlanta Dining Group's 1998 operating
26
performance, including anticipated future cash flows, and concluded that
pursuant to the provisions of Statement's 114 and 115, the notes receivable and
investment carrying values were impaired and therefore recorded an impairment
charge of $2,200,000. Additionally, during fiscal 1998, the Company recorded
additional lease termination liabilities of $1,688,000, based upon additional
defaults of sublease agreements previously guaranteed by the Company, as well as
additional litigation charges.
(4) PROPERTY AND EQUIPMENT
The costs and related accumulated depreciation and amortization of major
classes of assets as of January 2, 2000 and January 3, 1999 are set forth below:
January 2, 2000 January 3, 1999
--------------- ---------------
(amounts in thousands)
Furniture, fixtures and equipment $ 30,696 $ 20,658
Leasehold improvements 38,002 25,422
Land 6,236 4,287
Construction in progress 2,281 3,248
--------- ----------
77,215 53,615
Less accumulated depreciation and amortization 10,500 7,804
--------- ----------
Net property and equipment $ 66,715 $ 45,811
========= ===========
(5) ACCRUED EXPENSES
January 2, 2000 January 3, 1999
--------------- ---------------
Accrued expenses consist of the following: (amounts in thousands)
Accrued construction costs $ 3,886 $ 2,749
Restaurant operating expenses 2,781 1,797
Bertolini's accrued lease exit costs 2,582 4,165
Accrued gift certificates 2,175 1,410
Payroll and related taxes 1,857 1,623
Deferred gain on sale of assets 1,813 --
Sales and use tax 1,722 1,695
Rent and property taxes 1,243 1,360
Litigation and related expenses 1,000 1,841
Mick's and Peasant lease exit costs 289 1,128
Other 2,688 1,698
--------- ----------
Total accrued expenses $ 22,036 $ 19,466
========== ==========
(6) OBLIGATIONS TO FINANCIAL INSTITUTIONS
The Company and Fleet National Bank ("Fleet") (formerly BankBoston, NA)
entered into the Second Amended and Restated Revolving Credit and Term Loan
Agreement, dated June 19, 1995, as amended, from time to time (the "Credit
Agreement"), pursuant to which the Company's credit facility (the "Credit
Facility") is $75,000,000, which reflects an increase of $30,000,000 in fiscal
1999. The
27
Credit Facility consists of a $25,000,000 term loan (the "Term Loan") and a
$50,000,000 revolving credit facility (the "Revolving Credit"). Loans made
pursuant to the Credit Agreement bear interest at a rate equal to the lender's
base rate (plus applicable margin) or, at the Company's option, the Eurodollar
Rate (plus applicable margin). At January 2, 2000, calculated pursuant to the
Credit Agreement, the Company's applicable margin on the Revolving Credit was
0.00% on base rate loans and 2.00% on Eurodollar Rate loans and the Company's
applicable margin on the Term Loan was 0.25% on base rate loans and 2.25% on
Eurodollar Rate loans. In addition, the Company is obligated to pay fees of
0.25% on unused loan commitments less than $10,000,000, 0.375% on unused loan
commitments greater than $10,000,000 and a per annum letter of credit fee (based
on the face amount thereof) equal to the applicable margin on the Eurodollar
Rate loans. Fleet has syndicated portions of the Credit Facility to First Union
Corporation, Imperial Bank and Chase Manhattan Bank.
At the end of fiscal 1999 and fiscal 1998, the Company had outstanding
borrowings of $41,625,000 and $29,475,000, respectively, under the Credit
Agreement. At January 2, 2000, $185,000 was restricted for letters of credit
issued by the lender on behalf of the Company. Unrestricted and undrawn funds
available to the Company under the Credit Agreement were $33,190,000 and the
weighted average interest rate on all borrowings under the Credit Facility was
8.2% on January 2, 2000.
Management believes that the carrying amount of long-term debt
approximates fair value since the interest rate is variable and the margins are
consistent with those available to the Company under similar terms.
Quarterly principal installments on the Term Loan of $250,000 will be
due at the end of each calendar quarter from March 31, 2000 through December 31,
2002; $2,500,000 from March 31, 2003 through December 31, 2003 and $3,000,000
from March 31, 2004 through December 31, 2004. The Revolving Credit will be
payable in full on December 31, 2004. Total amounts of principal payable by the
Company under the Credit Agreement during the five years subsequent to January
2, 2000 amount to $1,000,000 in 2000, $1,000,000 in 2001, $1,000,000 in 2002,
$10,000,000 in 2003 and $28,625,000 in 2004. The borrowings under the Credit
Agreement have been classified as noncurrent on the Company's consolidated
balance sheet since the Company may borrow amounts due under the Term Loan from
the Revolving Credit, including the Term Loan principal payments commencing in
March 2000.
Borrowings under the Credit Agreement are secured by all tangible and
intangible assets of the Company. The Credit Agreement contains certain
restrictive covenants with respect to the Company that, among other things,
create limitations (subject to certain exceptions) on: (i) the incurrence or
existence of additional indebtedness or the granting of liens on assets or
contingent obligations; (ii) the making of certain investments; (iii) mergers,
dispositions of assets or consolidations; (iv) prepayment of certain other
indebtedness; (v) making capital expenditures above specified amounts; (vi) the
repurchase of the Company's outstanding common stock; and (vii) the ability to
make certain fundamental changes or to change materially the present method of
conducting the Company's business. The Credit Agreement also requires the
Company to satisfy certain financial ratios and tests. As of January 2, 2000,
the Company believes it was in compliance with such covenants.
The Credit Agreement permits the Company to pay dividends or repurchase
stock in an amount not to exceed 5% of consolidated net income calculated for
the fiscal year immediately preceding the fiscal years in which any such
dividends or repurchases take place, provided that no event of default is
28
then existing or would result from such payment. In addition, the Company is
permitted to pay dividends and repurchase stock in an additional amount not to
exceed 25% of net proceeds from equity offerings, including the Company's 1992
equity offering. The Company is also permitted under the provisions of the
Credit Agreement to repurchase up to an additional $40 million of its stock. See
Note 8(d).
On April 7, 1998 and May 29, 1998, the Company entered into interest rate
swap agreements with Fleet on notional amounts of $10,000,000 each. The terms of
the agreements are for three years and may be extended for an additional two
years at the option of Fleet. Interest rate swap agreements are used to reduce
the potential impact of interest rate fluctuations relating to $20,000,000 of
variable rate debt. The swap agreements entitle the Company to receive from
Fleet, on a quarterly basis, any amounts by which the prevailing variable rate
exceeds a predetermined fixed rate. Conversely, the Company is required to pay
Fleet amounts by which the predetermined fixed rate exceeds the prevailing
variable rate. At January 2, 2000, the Company estimates the fair value of the
agreements to be approximately $212,000.
In March 1997, a subsidiary of the Company and CNL Financial I, Inc.
("CNL") entered into a $2,500,000 loan agreement (the "CNL Loan") which matures
on April 1, 2007 and has a 10.002% per annum interest rate. Principal and
interest payments will be made over the term of the loan. At January 2, 2000 and
January 3, 1999, the outstanding principal balance of the CNL Loan was
approximately $2,039,000 and $2,221,000, respectively, of which approximately
$202,000 and $167,000, respectively, has been included in "Current portion of
obligations to financial institutions and capital leases" in the accompanying
consolidated balance sheets.
During 1999 and 1998, various subsidiaries of the Company and FFCA
Acquisition Corporation ("FFCA") entered into loan commitments, aggregating
$27,000,000, to fund the purchases of land and construction of restaurants.
During 1999 and 1998, $4,757,000 and $5,315,000, respectively, was funded, with
the interest rates ranging from 7.68% to 8.06% per annum. Monthly principal and
interest payments have been scheduled over twenty-year periods. At January 2,
2000 and January 3, 1999, the aggregate outstanding principal balance due to
FFCA was approximately $9,943,000 and $5,305,000, respectively, of which
approximately $206,000 and $67,000, respectively, of principal has been included
in "Current portion of obligations to financial institutions and capital leases"
in the accompanying consolidated balance sheets.
(7) INCOME TAXES
Income tax expense (benefit) is comprised of the following:
1999 1998 1997
---- ---- ----
(amounts in thousands)
Federal: Current $ -- $ 903 $ 725
Deferred 2,798 (4,851) 578
----- ------ ---
2,798 (3,948) 1,303
State and Local: Current 509 200 743
Deferred 270 (510) 249
----- ------ ---
779 (310) 992
----- ------ ---
Income tax expense (benefit) $ 3,577 $(4,258) $ 2,295
======= ======= =======
29
Income tax expense (benefit) differed from the amounts computed by applying
the U.S. Federal income tax rates to income (loss) before income taxes as a
result of the following:
1999 1998 1997
---- ---- ----
(amounts in thousands)
Computed "expected" tax expense (benefit) $4,505 $ (2,084) $ 3,121
Increase (reduction) in income taxes resulting from:
State and local income taxes, net of federal income tax benefit 514 (202) 655
FICA tax credits (1,555) (956) (1,313)
Change in valuation allowance -- (1,157) --
Other, net 113 141 (168)
------ -------- -------
$ 3,577 $ (4,258) $ 2,295
======= ======== =======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at the end of fiscal 1999
and 1998 are presented below:
January 2, January 3,
2000 1999
---- ----
(amounts in thousands)
Deferred tax assets:
Federal and state net operating loss carryforwards $ 4,774 $ 3,330
Capital loss carryforwards 3,428 3,706
Nonrecurring charge for write-down and related
charges for assets held for sale 106 421
Nonrecurring charge for write-down and related
charges for impaired assets 2,244 5,982
Nonrecurring charge for litigation accrual 365 698
Compensatory stock options -- 604
Deferred rent and start-up amortization 3,500 3,588
FICA and other tax credits 7,286 4,930
-------- --------
Total gross deferred tax assets 21,703 23,259
Less valuation allowance (5,775) (5,775)
-------- --------
Net deferred tax assets 15,928 17,484
Deferred tax liabilities:
Property and equipment depreciation 2,718 3,013
-------- --------
Net deferred tax assets and liabilities $ 13,210 $ 14,471
======== ========
At January 2, 2000, the Company had various state income tax net operating
loss carryforwards, capital loss carryforwards, and FICA and other tax credits
expiring in various periods through 2017, 2002 and 2014, respectively. The
valuation allowance for deferred tax assets as of January 2, 2000 and January 3,
1999 was $5,775,000 which remained constant for the year ended January 2, 2000
and decreased $1,157,000 for the year ended January 3, 1999.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the
30
periods in which temporary differences become deductible and net operating
losses can be carried forward. Management considers the scheduled reversal of
deferred tax assets, projected future taxable income and tax planning strategies
in making this assessment. In order to fully realize the deferred tax asset, the
Company will need to generate future taxable income of approximately
$36,200,000. Taxable income (loss), before the application of net operating loss
carryforwards and FICA and other tax credits, for the years ended January 3,
1999 and December 28, 1997 was approximately $8,480,000 and $1,657,000,
respectively, and for the year ended January 2, 2000 is estimated to be
$(3,700,000). The Company assesses the recoverability of its net deferred tax
asset based upon the level of historical income and projections of future
taxable income over the next two to three years. Deferred tax assets arising
from capital losses have been fully reserved. The sale-leaseback transactions,
described in Note 11, do not meet the definition of a tax strategy pursuant to
the provisions of SFAS 109 and, accordingly, a tax benefit has not been recorded
in fiscal 1999. The amount of the deferred tax asset considered realizable,
however, could be reduced in the near term if estimates of future taxable income
during the carryforward periods are reduced.
(8) CAPITAL STOCK
(a) On December 15, 1994, the Company adopted a Stockholder Protection
Rights Plan ("Rights Plan"). Pursuant to the Rights Plan, a dividend of one
Right for each outstanding share of the Company's Common Stock was issued to
shareholders of record on January 3, 1995. Under certain conditions, each Right
may be exercised to purchase 1/100 of a share of Series A Junior Participating
Preferred Stock (the "Preferred Stock") of the Company at a price of $42. The
Rights will become exercisable following the tenth day after a person or group
acquires 15% or more of the Company's Common Stock or announces a tender or
exchange offer, the consummation of which would result in ownership by such
person or group of 15% or more of the Company's Common Stock. If a person or
group acquires 15% or more of the Company's outstanding Common Stock, each Right
will entitle its holder (other than such person or members of such group) to
purchase, at the Right's then-current purchase price, in lieu of 1/100 of a
share of Preferred Stock, a number of shares of the Company's Common Stock
having a market value of twice the Right's purchase price. In addition, if the
Company is acquired in a merger or other business combination, 50% or more of
its assets or earning power is sold or transferred, or a reclassification or
recapitalization of the Company occurs that has the effect of increasing by more
than 1% the proportionate ownership of the Company's Common Stock by the
acquiring person, then, each Right will entitle its holder to purchase, at the
Right's then-current purchase price, a number of the acquiring company's shares
of common stock having a market value at that time of twice the Right's purchase
price.
The Rights may be redeemed prior to becoming exercisable by the Company,
subject to approval of the Board of Directors for $.01 per Right, in accordance
with the provision of the Rights Plan. The Rights expire on January 3, 2005. The
Company has reserved 200,000 shares of Preferred Stock for issuance upon
exercise of the Rights.
(b) The Company's Stock Option Plan (the "Stock Option Plan"), as amended,
provides for the issuance, to employees, of incentive stock options ("ISOs") and
non-qualified stock options ("NQSOs") having a maximum term of ten years and may
be granted to purchase up to 900,000 shares of Common Stock.
31
The exercise price of ISOs will be equal to the fair market value of the
shares subject to option on the date of grant, while the exercise price of NQSOs
will be determined by a committee of the Board of Directors. Options vest and
become exercisable commencing at the second anniversary date of the grant at the
rate of 25% per year. During fiscal 1999 and 1998, the Company issued 189,600
and 108,500 NQSOs, respectively.
Activity in stock options is summarized as follows:
1999 1998 1997
--------------------------- -------------------------- ---------------------------
Weighted Shares Weighted Shares Weighted Shares
Average Subject to Average Subject to Average Subject to
Exercise Price Option Exercise Price Option Exercise Price Option
-------------- ---------- -------------- ---------- -------------- ----------
Beginning of year $13.73 835,955 $11.17 627,385 $8.48 790,765
Options granted 15.31 208,700 18.28 379,900 17.12 205,100
Options exercised 1.26 96,830 8.88 56,805 3.62 160,892
Options canceled 20.01 36,425 17.24 114,525 12.65 207,588
----- ------ ----- ------- ----- -------
End of year $15.16 911,400 $13.73 835,955 $11.17 627,385
====== ======= ====== ======= ====== =======
As of January 2, 2000, there were 229,939 options exercisable with a weighted
average exercise price of $11.55.
(c) In October of 1995, the Financial Accounting Standards Board issued
Statement No. 123, "Accounting for Stock-Based Compensation" ("Statement 123"),
which was adopted by the Company in 1996. The Company has elected to disclose
the pro forma net income and earnings per share as if such method had been used
to account for stock-based compensation cost as described in Statement 123.
The per share weighted average fair value of stock options granted
during fiscal 1999, 1998 and 1997 was $6.93, $8.43 and $7.81 on the date of
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions: 1999 - expected dividend yield 0.0%, risk-free interest
rate of 5.8%, volatility of 35% and an expected life of 6.3 years; 1998 -
expected dividend yield 0.0%, risk-free interest rate of 5.0%, volatility of 37%
and an expected life of 6.6 years; 1997 expected dividend yield 0.0%, risk-free
interest rate of 6.0%, volatility of 33% and an expected life of 6.4 years.
The Company applies APB Opinion No. 25 in accounting for its Stock
Option Plan and, accordingly, no compensation cost has been recognized for its
stock options in the consolidated financial statements. Had the Company
determined compensation cost based on the fair value at the grant date for its
stock options under Statement 123, the Company's net income (loss) and net
income (loss) per share would have been reduced to the pro forma amounts
indicated below:
1999 1998 1997
---- ---- ----
(amounts in thousands, except per share data)
Net income (loss) as reported $ 8,451 $ (1,872) $ 6,884
Pro forma $ 7,647 $ (2,402) $ 6,553
Net income (loss) per diluted share as reported $ 1.39 $ (0.28) $ 1.00
Pro forma $ 1.27 $ (0.36) $ 0.96
32
Pro forma net income (loss) only reflects options granted from 1995 on.
Therefore, the full impact of calculating compensation cost for stock options
under Statement 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options' vesting
period of five years and compensation cost for options granted prior to January
1, 1995 is not considered.
(d) In October 1998, the Company announced that its board of directors
authorized a repurchase of up to 20%, or approximately 1,330,600 shares, of the
Company's outstanding common stock. In November 1999, the board of directors
increased the Company's authorization by an additional 600,000 shares. The
timing and amount of the purchases are at the full discretion of the Company's
senior management and subject to market conditions and applicable securities and
tax regulations. Repurchases are accomplished through periodic purchases at
prevailing prices on the open market, by block purchases or in privately
negotiated transactions. The repurchased shares have been retained as treasury
stock to use for corporate purposes. The Company expects to finance purchases
from existing cash flow, through its current credit facility, from additional
borrowings, or a combination thereof. At January 2, 2000 and January 3, 1999,
the Company had repurchased 1,381,190 and 234,400 shares of its common stock at
an average purchase price of $17.10 and $17.90, respectively.
(e) In October 1999, the Company commenced an Employee Stock Purchase
Plan under which 600,000 shares of the Company's common stock have been reserved
for future employee purchases. Pursuant to this plan, and as approved by
stockholders, all employees with a minimum of one year of service may purchase,
at a 15% discount, shares of common stock of the Company on a quarterly basis.
In January 2000, there were 1,164 shares issued from treasury shares at a price
of $13.175 per share.
(9) EARNINGS PER SHARE
As discussed in Note 2(k), the Company adopted Statement 128 which
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. The following table sets forth the
computation of basic and diluted earnings per share. Prior periods have been
restated to conform to the Statement 128 requirements:
1999 1998 1997
---- ---- ----
(amounts in thousands, except per share data)
Net income (loss) $ 8,451 $(1,872) $ 6,884
======= ======= ========
Weighted average common shares (denominator for basic
earnings per share) 5,938 6,617 6,498
Effect of dilutive securities:
Employee stock options 140 -- * 388
------- ------- --------
Weighted average common and potential common shares
outstanding (denominator for diluted earnings per share) 6,078 6,617 6,886
======= ======= ========
Basic earnings (loss) per share $ 1.42 $ (0.28) $ 1.06
======= ======= ========
Diluted earnings (loss) per share $ 1.39 $ (0.28) $ 1.00
======= ======= ========
* Assumed exercise of stock options was antidilutive due to net loss and
therefore excluded in fiscal 1998. For additional disclosures regarding employee
stock options see Note 8.
33
(10) OPERATING LEASES
The Company's operations are generally conducted in leased premises.
Including renewal options, remaining lease terms range from 1 to 40 years.
In connection with entering into leases, the Company is frequently provided
with development allowances from the lessors. These allowances for leasehold
improvements, furniture, fixtures and equipment are offset against the related
fixed asset accounts and the net amount is amortized on a straight-line basis
over the shorter of the lease term, including planned extensions, or estimated
useful lives of the assets. At the end of fiscal 1999 and fiscal 1998, $943,000
and $134,000, respectively, of development allowances were due from lessors and
are included in "Landlord construction receivables, prepaid expenses and other
current assets" in the accompanying consolidated balance sheets.
The Company leases certain office and restaurant facilities and related
equipment under noncancelable operating lease agreements with third parties.
Certain leases contain contingent rental provisions based upon a percent of
gross revenues and or provide for rent deferral during the initial term of such
leases. Included in "Other liabilities" in the accompanying consolidated balance
sheets at the end of fiscal 1999 and fiscal 1998 are accruals related to such
rent deferrals of approximately $3,768,000 and $3,701,000, respectively. For
financial reporting purposes, such leases are accounted for on a straight-line
rental basis. Future minimum annual rental commitments under these leases are
approximately as follows:
(amounts in thousands)
Fiscal 2000 $ 12,849
Fiscal 2001 13,118
Fiscal 2002 13,379
Fiscal 2003 12,744
Fiscal 2004 10,963
Fiscal 2005 and thereafter 62,856
---------
Total minimum lease payments $ 125,909
=========
Contingent rental payments on building leases are typically made based upon
the percentage of gross revenues on the individual restaurants that exceed
predetermined levels. The percentages of gross revenues to be paid, and the
related gross revenues, vary by restaurant. Contingent rental expense was
approximately $2,727,000, $2,794,000 and $2,376,000 for fiscal 1999, 1998 and
1997, respectively.
Rental expense for all such leases was approximately $13,419,000,
$13,463,000 and $11,936,000, for fiscal 1999, 1998 and 1997, respectively.
(11) CAPITAL LEASES
The Company typically finances the purchase of certain restaurant equipment
through capital leases. At January 2, 2000, the Company had approximately
$5,100,000 commitments available for future fundings. During the third quarter
of fiscal 1999, the Company entered into sale-leaseback transactions whereby the
Company sold, and leased back, existing restaurant equipment at 15 of its
34
restaurant locations. Aggregate proceeds of $6,000,000 were used to reduce the
Company's revolving credit facility. These transactions are being accounted for
as financing arrangements. Recorded in the accompanying consolidated balance
sheet as of January 2, 2000 are such capital lease obligations, related
equipment of $5,547,000, and a deferred gain of approximately $5,020,000, each
of which are being recognized over the three year lives of such transactions. At
January 2, 2000 and January 3, 1999, furniture, fixtures and equipment include
approximately $14,993,000 and $7,290,000, respectively, of net assets recorded
under capital leases. These assets are amortized over the life of the respective
leases. At January 2, 2000 and January 3, 1999, capital lease obligations of
approximately $7,771,000 and $3,452,000, respectively, are included in
"Obligations to financial institutions and capital leases, less current
maturities" in the accompanying consolidated balance sheets.
The Company's minimum future obligations under capital leases as of
January 2, 2000 are as follows:
(amounts in thousands)
Fiscal 2000 $ 4,543
Fiscal 2001 4,044
Fiscal 2002 2,954
Fiscal 2003 956
Fiscal 2004 403
-------
Total minimum lease payments 12,900
Less amount representing interest 1,114
-----
Present value of net minimum lease payments
(including current portion of $4,015) $11,786
=======
(12) EMPLOYMENT AGREEMENTS
The Company and its Chief Executive Officer entered into an employment
agreement on January 1, 1992. The agreement, as amended, is terminable by the
Company upon 60 months prior notice. The Company is a party to change of control
agreements with its Chief Executive Officer and another officer which grant
these employees the right to receive up to approximately three times their total
compensation (as computed under the Internal Revenue Code) if there is a change
in control of the Company and termination of their employment during a specified
period by the Company without cause or by such officer with good reason.
(13) EMPLOYEE BENEFIT PLANS
Employees of the Company and its subsidiaries who are over the age of 21
and who have completed a year of service are eligible for voluntary
participation in a profit sharing plan. Employer contributions to the plan are
made at the discretion of the Board of Directors. Employer contributions for
fiscal 1999, 1998 and 1997 were approximately $523,000, $603,000 and $516,000,
respectively.
(14) LEGAL MATTERS AND CONTINGENCIES
During fiscal 1998, the Company identified several under performing
Bertolini's restaurants and authorized a plan for the closure or abandonment of
specified restaurants which have all been closed. The Company is involved in
legal action relating to such closures, however, the Company does not
35
believe that the ultimate resolution of these actions will have a material
effect beyond that recorded during fiscal 1998.
The Company is also involved in other various legal actions incidental
to the normal conduct of its business. Management does not believe that the
ultimate resolution of these actions will have a material adverse effect on the
Company's consolidated financial position, equity, results of operations,
liquidity and capital resources.
36
PRICE RANGE OF COMMON STOCK AND RELATED MATTERS
- --------------------------------------------------------------------------------
The Company's Common Stock is traded on the New York Stock Exchange ("NYSE")
under the symbol "MRG".
The following table sets forth, for the periods indicated, the highest and
lowest sale prices for the Common Stock, as reported by the NYSE.
Fiscal Year Ended January 2, 2000 High Low
- ------------------------------------------------------------------------------------------------------
First Quarter............................................................. $19 $15 1/2
Second Quarter............................................................ 19 1/8 13 7/8
Third Quarter............................................................. 20 5/8 17 3/8
Fourth Quarter............................................................ 18 1/16 13
Fiscal Year Ended January 3, 1999 High Low
- ------------------------------------------------------------------------------------------------------
First Quarter............................................................. $22 1/8 $18 3/4
Second Quarter............................................................ 25 1/8 22 1/8
Third Quarter............................................................. 24 5/16 19 15/16
Fourth Quarter............................................................ 21 5/8 12 5/8
On January 2, 2000, the last reported sale price of the Common Stock on the NYSE
was $15.50. On March 1, 2000, the last reported sale price of the Common Stock
on the NYSE was $17.00.
As of March 1, 2000, there were approximately 60 holders of record of the
Company's Common Stock. The Company believes that as of such date there were
approximately 1,000 beneficial owners of its Common Stock.
The Company has not paid any dividends on its common stock since its inception.
The Company currently intends to retain all of its earnings to support the
continued development of its business and has no present intention of paying any
dividends on its Common Stock. Any future determination as to the payment of
dividends will be at the discretion of the Board of Directors and will depend on
the Company's financial condition, results of operations, capital requirements,
compliance with charter and contractual restrictions and such other factors as
the Board of Directors deems relevant. In addition, the Company's Credit
Agreement restricts the payment of dividends. See Note 6 of Notes to
Consolidated Financial Statements.
37