Morton's Restaurant Group, Inc.
1996 Annual Report
"ABOUT OUR COMPANY"
"A great steak exists. It's a matter of breeding, then proper aging. You verify
these truths at Morton's."
The quote is from the 1997 Washington Post Dining Guide, but it could have been
said by any of our Morton's of Chicago guests who have enjoyed our elegant and
memorable dining experience.
A dining experience in a fun, colorful and festive setting is the order of the
day at Bertolini's Authentic Trattoria. Our trattorias feature genuine Italian
ingredients imported and prepared daily in our kitchens.
Morton's Restaurant Group maintains locations from coast to coast, principally
in major metropolitan areas such as Beverly Hills, Chicago, Washington D.C. and
New York. The growth of our flagship Morton's of Chicago steakhouses reflects
one of the American restaurant industry's great success stories. Beginning in
1978 on State Street in the heart of Chicago, Morton's grew to nine restaurants
in its first decade. In its second decade, Morton's Restaurant Group has grown
the concept to 35 Morton's of Chicago steakhouses. Bertolini's has also rapidly
grown -- from our one Las Vegas restaurant that opened four years ago to the
seven we have today.
Great food, a fabulous atmosphere and warm and friendly hospitality -- it's the
trademark of Morton's Restaurant Group. As we continue to follow our plans for
expansion domestically and internationally, we will always remember that what
brought us this far has been the outstanding
response from our guests, who frequent our restaurants. This wonderful
word-of-mouth, of course, reflects on our people---the finest in the industry.
As we approach the 21st Century, we look forward to maximizing the opportunities
to increase our brand identity and name recognition for Morton's of Chicago and
Bertolini's Authentic Trattoria, and enhancing our reputation as the premier
fine-dining restaurant company.
SELECTED FINANCIAL INFORMATION
(dollars in millions, except per share data)
================================================================================
Statement of Operations Information Fiscal Years
----------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Restaurant Revenues (All) $ 193.4 $ 173.4 $ 156.3 $ 119.4 $ 93.1
Restaurant Revenues (Combined Morton's
of Chicago and Bertolini's) 139.0 109.0 90.8 64.2 47.5
EBITDA (1) 17.5 11.2 12.7 11.0 9.2
Income Before Income Taxes and
Nonrecurring Charges 8.8 3.1 3.1 5.3 4.4
Income (Loss) Before Income Taxes (2.7)(2) (14.7)(3) (3.0)(4) 5.3 4.4
Income (Loss) Before Extraordinary Item 1.8(2) (13.9)(3) (0.3)(4) 4.9 2.8
Net Income (Loss) 1.8(2) (13.9)(3) (0.3)(4) 4.9 (1.0)(5)
Income (Loss) Per Share:
Before Extraordinary Item 0.26(2) (2.18)(3) (0.05)(4) 0.74 0.58
Net Income (Loss) $ 0.26(2) $ (2.18)(3) $ (0.05)(4) $ 0.74 $ (0.20)(5)
- --------------------------------------------------------------------------------
Balance Sheet Information
Fiscal Years
----------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Current Assets $27.3(6) $35.4(6) $15.4 $13.0 $ 6.7
Net Property and Equipment 24.7 19.4 25.3 19.8 10.8
Total Assets 77.0 73.2 73.5 65.3 41.4
Current Liabilities 25.3(7) 26.4(7) 15.4 16.1 9.8
Long-Term Debt 24.9 23.7 20.0 12.7 1.5
Stockholders' Equity $21.1 $19.0 $32.9 $33.3 $28.4
================================================================================
(1) Represents earnings before interest, taxes, depreciation and amortization,
and nonrecurring charges.
(2) Includes a nonrecurring 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 .
(3) Includes nonrecurring 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.
(4) Includes one-time charges aggregating $6.1 million, of which $5.5 million
relates to the write-off of a preferred stock minority investment in an
affiliate.
(5) Includes an extraordinary charge, net of income taxes, of $3.8 million
relating to the early extinguishment of debt.
(6) Includes assets held for sale of $12.5 million and $22.6 million for fiscal
1996 and 1995, respectively.
(7) Includes liabilities related to assets held for sale of $12.1 million and
$14.0 million for fiscal 1996 and 1995, respectively.
CHAIRMAN AND PRESIDENT'S LETTER
TO OUR STOCKHOLDERS
For Morton's Restaurant Group, 1996 marked a year of progress, key decisions and
strategic growth.
This is our first report to you as Morton's Restaurant Group (NYSE:MRG). Our
name now clearly recognizes the fine-dining leadership position, extraordinary
brand identity and enviable reputation for excellence that Morton's of Chicago
steakhouses have earned over the past eighteen years. Additionally, it
underscores our commitment to increasing stockholder value by focusing our
efforts on Morton's and Bertolini's.
In February, we announced the completion of the sale of our Atlanta-based Mick's
and Peasant restaurants. It was a major step forward for us as we continue to
grow our company on the solid foundation of our two core fine-dining concepts,
Morton's and Bertolini's. A subsidiary of Morton's Restaurant Group has retained
a minority interest in Mick's and Peasant.
Of all our accomplishments throughout the year, we are most proud of the
progress we've made in continuing to develop our people, both at Morton's and
Bertolini's. Morton's of Chicago has established standards for excellence and
consistency that enable us to recruit and hire the highest quality professionals
in every city and in every restaurant we open.
What has also helped us become a niche leader in our industry is the emphasis we
place on our sophisticated staff and management training programs, in addition
to a premier employee compensation and benefits package. Even more important is
the "culture" that exists at Morton's of Chicago. This results in our people
maintaining a loyalty to us, often choosing a career path with Morton's. Taken a
step further, this translates to a guest loyalty which is truly remarkable. In a
time when the public has so many choices regarding dining possibilities, the
fact that our guests return to Morton's regularly is a tribute not only to our
excellent cuisine and ambiance, but also to our superb service and outstanding
people who provide our guests with the ultimate in hospitality.
The fact that Morton's of Chicago has been so successful is due in large measure
to those who have been with us for ten, fifteen, and soon, twenty years.
Programs such as our Employee Stock Purchase Plan, our Profit Sharing Plan and
the Service Recognition Programs allow us to reward, in a tangible way, our most
valuable asset, our people.
Morton's of Chicago has been able to achieve its nationwide growth and success
by maintaining the highest quality and consistency and by refusing to compromise
our standards. The conventional wisdom had been that Morton's could not be fully
replicated in so many locations without some compromises.
We have defied conventional wisdom.
For the year ended December 29, 1996, Morton's Restaurant Group, Inc. reported
revenues of $193,378,000, up 11.5% over revenues of $173,373,000 reported for
the year ended December 31, 1995. Combined 1996 Morton's of Chicago steakhouses
and Bertolini's Authentic Trattoria revenues of $138,968,000 were up 27.5% over
their combined 1995 revenues of $108,986,000. 1996 earnings before income taxes
and nonrecurring charges were $8,758,000. Including a nonrecurring charge
related to the sale of Mick's and Peasant restaurants of $11,500,000 and income
tax benefits, net income of $1,765,000, or $.26 per share, was reported for the
year ended December 29, 1996. This compares to a net loss of $13,908,000, or
$2.18 per share, reported for the year ended December 31, 1995. Included in the
year ended December 31, 1995 results is a pre-tax charge of $2,240,000, which
related to the settlement of a lawsuit, and a pre-tax charge of $15,500,000,
which related to a reduction of asset-carrying values and lease exit costs
associated with certain Mick's and Peasant restaurants.
As Morton's of Chicago continues to focus on its outstanding growth
opportunities, Bertolini's has begun to show its strong potential. While
Bertolini's is an authentic trattoria featuring the finest in Northern Italian
cuisine, its emphasis, in a sense, is similar to that of Morton's of Chicago.
Only fresh, high-quality ingredients are used at Bertolini's, either imported
from Italy or made "in-house" in our "made from scratch" kitchens. Like Morton's
of Chicago, Bertolini's prides itself on its niche position as an adult-oriented
restaurant, yet it is still appealing to families and children.
The Bertolini's menu is one of simplicity, with an atmosphere that is clearly
unique: colorful, fun and festive, a place where you experience casual fine
dining. The simplicity of the Bertolini's concept enhances its potential for
adaptability to a wide variety of diverse geographical areas. Currently,
Bertolini's Authentic Trattorias are achieving success in areas such as Irvine,
CA, Indianapolis, IN and King of Prussia, PA. Like Morton's of Chicago, we
believe Bertolini's has significant long-range potential for growth and
expansion throughout America.
Along with plans to expand Bertolini's potentially throughout the country, we
continue to add to the appeal of our current restaurants by expanding
"internally." A major renovation was recently completed at our Las Vegas
restaurant, which increased our patio seating capacity; our Pennsylvania
Avenue/Market Square restaurant in Washington D.C. has been updated with new
stone columns and colorful murals to provide more of our Bertolini's signature
look; and the patio at our White Flint/North Bethesda, MD restaurant has been
enclosed to increase restaurant seating.
To assist us in reaching our goals, we named Geoffrey Stiles vice president of
operations for Bertolini's in November of 1996. Geoff has an impressive
background in the Italian food segment, and we believe that his experience and
team-building skills will have a significant impact on our continuing growth and
success. We strongly believe that not only is Bertolini's a viable growth
vehicle, but it is now positioned to meet the needs for future expansion.
For the year ahead, we believe the growth of Morton's of Chicago and Bertolini's
Authentic Trattoria will continue as we focus on enhancing our training
programs, further sharpening our strong marketing and hospitality programs, and,
for Morton's of Chicago, increasing opportunities to showcase our boardroom
business. Because of the strength of our commitment, we believe we will be able
to develop Bertolini's into a niche-leading upscale Italian restaurant -- just
as Morton's of Chicago has become America's premier fine dining steakhouse.
Additionally, we are
now looking at some very exciting possibilities regarding future international
development for Morton's of Chicago steakhouses.
But our ultimate commitment is to you, the stockholders. You will be pleased to
know that Morton's Restaurant Group, today, is stronger than ever, and poised to
meet the challenges of the future.
We take great pleasure in exceeding the expectations of our guests. We wish to
assure you that our mission and philosophy is the same regarding our
stockholders' expectations.
Allen J. Bernstein
Chairman of the Board and Chief Executive Officer
William L. Hyde, Jr.
President and Chief Operating Officer
MORTON'S OF CHICAGO AND BERTOLINI'S AUTHENTIC TRATTORIA
Maybe it happened to you at the Morton's in downtown Chicago -- or was it the
one in the Wall Street district? It could be that you were in Beverly Hills,
barely a porterhouse and cabernet away from one of many international
celebrities. Princess Caroline of Monaco, baseball's Ken Griffey, Jr., President
George Bush, Mel Gibson and Lyle Lovett have all recently graced our
restaurants. Or perhaps you were in Phoenix, or Boston, Minneapolis or Orlando,
or any of our 35 prime locations. But wherever it was, the experience was
remarkably consistent. You don't merely enter into a Morton's -- instead, you're
transported, quickly surrounded and ultimately seduced by mahogany and brass, by
soft lighting and warm hospitality, by the vague sense that you've slipped into
another time, another era.
"GUESTS APPRECIATE OUR COMMITMENT TO EXCELLENCE. THEY DEMAND, AND DESERVE THE
VERY BEST, AND THAT IS EXACTLY WHAT THEY GET, CONSISTENTLY AT MORTON'S."
Thomas J. Walters, President
Morton's of Chicago
The deep aroma of prime aged beef edges against dark mahogany paneled walls that
hold the dynamic work of LeRoy Neiman. You pass by patrons enjoying the finest
of premium wines, while waiters glide through the room clutching the most
delicious of desserts. It is clubby, but not clique-ish; impeccably appointed,
but not stuffy. Your waiter, utterly professional, knows how to tread the fine
line -- knowledgeable but not overbearing, classy but not overly formal,
attentive but not hovering.
If you order a steak -- indeed, most of Morton's clientele order a beef entree
- -- you might try the three-pound double porterhouse. New York magazine says ours
"is the champ, singing with flavor and rare as can be." Meantime, the Los
Angeles Times has claimed the other coast for us: "There's not a better steak in
Southern California." And the Orlando Sentinel adds: "If you're a connoisseur of
top-of-the-line steaks, you probably know Morton's of Chicago -- the uptown,
Midwestern-based restaurant where steak is serious business."
It's fair to say there are those who feel that going to Morton's and not
ordering a steak is like facing East during a picturesque sunset -- you're
missing the point. Then again, it wasn't long ago when members of the St. Louis
Rams' offensive line visited the St. Louis (Clayton) restaurant -- and before it
was all over, consumed, not steak, but 40 pounds of lobster, an equal amount of
lamb chops, 30 orders of scallops, 30 orders of crabmeat cocktail along with 10
dozen jumbo shrimp -- all topped off with 15 classic cigars. The fact is, thanks
to the supreme quality of all the items on the Morton's menu, our guests choose
to sample almost everything. After all, we've seen them come back -- again and
again.
Why so many happy returns? At Morton's, we do stake our reputation on our
steaks. "They're the best steaks money can buy, period," says Mike Donlon, a
Morton's regional general manager. All of our beef is shipped fresh from our
long-time Chicago suppliers. Last year, we served more than one-and-one-half
million pounds of USDA prime aged beef -- certified as the absolute highest
grade of beef and properly aged to make it tender and full of flavor.
The standards for our seafood are as precise as those for our beef. The New York
Law Journal says "I wish everyone else in town had such superb seafood." Our
Atlantic salmon is farm raised, our scallops originate seventy miles east of
Cape Cod and our swordfish steak comes to us from the coast of Rhode Island. The
whole, baked Maine Lobsters are flown in fresh daily and, on average, weigh
three pounds or more. Crain's New York Business calls them "awesome."
All Morton's potatoes must meet strict specifications: they must weigh between
18 and 22 ounces, Idaho-grown, free of blemishes, with specific water and sugar
content levels -- and the two million plus we serve each year are hand-selected.
In terms of supply, if the Columbus restaurant runs out, the Morton's in
Cleveland will arrange for a rush shipment from door to door. Every product gets
the same serious attention. When the Detroit (Southfield) restaurant ran out of
an ingredient for its salad dressing, a Morton's employee in Chicago picked up a
supply and sent it out overnight express. "We will never compromise our
product," says Elaine Fosse, a regional general manager.
Morton's jumbo asparagus is purchased from below the equator during winter
months and purchased from above the equator the rest of the year. The products
are constantly monitored -- especially during the critical season changes. "If
the asparagus that we serve in the Palm Desert restaurant meets our high
standards, we've been known to contact that grower, and if necessary, transport
it to an East Coast Morton's," says Peggy DeNapoli, manager of restaurant
services. "This level of commitment makes us unique." The premium wine list at
Morton's has received praise from, most recently, Wine Spectator, who rated us
number one among national steakhouse companies in 1996. There is a core list of
at least 150 wines at most Morton's, and in wine centers such as New York and
San Francisco, the restaurants carry nearly 500 selections.
Consistency is everything: a New York strip sirloin, whether you're dining in
Dallas or Denver or Detroit, should be, and is, the same (and so tender that, as
Gourmet magazine says, "it barely needs a knife.") Mike Donlon says it's why
people keep coming back. "No matter what city you're in, you know you're going
to have a consistently positive experience," he says. "And when you're
entertaining your boss, your friends and family or your client, you want to make
sure everything's just right." Since Morton's first opened in 1978, the menu has
been continually developed and maintained by Klaus W. Fritsch, Morton's of
Chicago vice chairman and co-founder. All Morton's items must pass Fritsch's
approval before becoming part of the menu. He most recently unveiled an expanded
lunch menu at our newest Morton's in downtown Washington D.C.
"ONE OF OUR CORE VALUES IS TO EXCEED GUESTS' EXPECTATIONS. IT STARTS WITH
PURCHASING THE FINEST PRODUCTS AVAILABLE."
Peggy DeNapoli, Manager of Restaurant Services
Morton's of Chicago
But there's something else at work -- hospitality. "Our prime beef is certainly
outstanding," says Tom Walters, Morton's of Chicago president. "But serving our
guests is the real differentiating point." Morton's adopts an approach that
ensures lots of people at your table, and lots of hospitality, but not so much
that you feel smothered. "It's a key part of our success," says Elaine Fosse.
"We encourage our employees to acknowledge guests by name and to get to know
their
dining preferences, so we can fully accomodate them each time they come in. The
guests respond wonderfully."
Stories abound about the company's obsession with guest hospitality. A few days
before Christmas, a major investment bank executive walked into the Morton's at
90 West Street and told general manager Pat Felitti that his company wanted to
purchase 175 sets of our signature steak knives as holiday gifts. He needed them
in two days. Pat scrambled like mad, but he came through. 130 of the sets were
sent overseas.
There's more. A guest spills a beverage, and a Morton's general manager takes
the soiled jacket out and has it cleaned before dessert is over. Two guests have
a critical choice to make: eat a leisurely dinner at Morton's or rush out the
door to grab theater tickets for an evening show. A Morton's server voluntarily
runs out, stands in line, and promptly brings back the tickets during the
guest's main course.
General managers have been known to visit guests in the hospital and bring them
dinner. Recently, a manager gave a couple an anniversary celebration they'll
never forget. He brought a prime rib dinner to their home -- set up a
tablecloth, poured the wine, the works. Food and beverage manager Charlie
Johnson recalls one regular who wanted his own personalized steak. "It was in
Westchester. He wanted whole peppercorn smashed into a New York strip steak,
wrapped in plastic to age it and put in the cooler, with his name on it. When he
came in on a Saturday night, his steak was ready for him."
Speaking of anniversaries, some of these same employees will celebrate
double-digit ones with Morton's sometime this year. Astonishing, considering the
fact that Morton's has been around only since 1978; more astonishing,
considering the high turnover rate in the restaurant business, 95% for staff
employees, according to the National Restaurant Association, compared to
Morton's of Chicago's turnover rate, which is approximately 40% lower. The
difference -- employee recognition programs, continual rigorous training coupled
with genuine advancement opportunities, profit sharing, health benefits and
flexible work schedules. "We have a premier compensation package," says Tom
Walters. It pays off for the company: employees who stay develop relationships
with guests, who cherish the personal contact and become regulars.
"GARLIC IS THE CORNERSTONE OF ITALIAN CUISINE. IT IS SAID TO BE THE KETCHUP
OF INTELLECTUALS."
Bryan Dillon, Corporate Executive Chef
Bertolini's Authentic Trattoria
It also allows Morton's the opportunity to become an integral part of the
community. Morton's employees work with dozens of charitable groups, including
the American Cancer Society, "Big Brothers" and more. Most restaurants will
close once or twice a year to host a charity event, whether it benefits a local
zoo or a children's organization. "Kim Owens, our catering manager in Charlotte
(now at Morton's in Atlanta) did an enormous amount of work with the Leukemia
Foundation," says Deborah Hinson, Morton's national catering and sales director.
"It was hundreds of hours of dedicated work, and Kim was named Charlotte's Woman
of the Year. It's a testimony to the caliber of people that are with this
company."
Other special events are simply fun, and profitable. Three thousand people who
attended the 1997 Grammy Awards in New York partied afterwards with delectables
from Morton's. We were chosen for the festivities because Grammy representatives
said Morton's has "some of the best cuisine in the world." Our groundbreaking,
first-ever Women's Cigar Dinner received tremendous media coverage last year and
was such an overwhelming success that Morton's hosted it again this year. A
portion of the proceeds went to the National Coalition Against Domestic
Violence. "It was an excellent networking opportunity for professional women to
get together," says Hinson. "It was just wild. They let their hair down and had
a wonderful evening. Many of them have become regular guests."
The winemaker dinners, cigar smokes and single malt scotch tastings are all huge
draws for Morton's; in most cases, our restaurants sell out. The private
Boardrooms, used for business meetings, conventions and social celebrations
(including corporate events, wedding receptions, rehearsal dinners and
birthdays), introduce thousands of brand-new guests every year, all exposed to
Morton's for the first time.
To give the Chicago Tribune the last word: "Morton's is the Rolls Royce of
steak houses."
If Morton's is the Rolls Royce of steak houses, Bertolini's might be considered
the Corvette of Italian restaurants. Fun and festive with a colorful finish,
it's an authentic trattoria with a zesty Northern Italian street festival
atmosphere.
It's definitely different from Morton's, but its favorable reviews are similar.
The readers of the Las Vegas Review-Journal say it's "the best Italian
restaurant in town." Peachtree magazine in Atlanta claims the decor is "as much
a feast for the eye as the food is for the palate." And as for the Los Angeles
Times, well, "you're bound to be impressed."
The philosophy is also the same as Morton's. "The guest always comes first,"
says John Maloney, a Bertolini's area director. "We started in Las Vegas, and
from the beginning we've had a great guest response. But what tore up the town
was the service and the great food. That's what stole Vegas' heart." On an
average day, the Las Vegas restaurant serves 1,500 meals; the extra virgin olive
oil is imported from Italy, the pizzas are pulled from wood-burning ovens, the
gelato is made in house and the espressos and cappuccinos are brewed fresh. But
the key element is the training. Servers are literally a walking encyclopedia
replete with detailed information about our Italian food and wines. Not only do
they know what Fazzoletto con Funghi is -- a handkerchief sheet of fresh pasta
inundated with spinach, ricotta cheese and a wild mushroom sauce -- they can
even offer details about the dish. Ditto for the Tagliolini al Frutti di Mare --
that's tagliolini and lobster, shrimp and scallops with tomatoes, parmesan and a
cream sauce. "When our servers get out on the floor, they absolutely must know
the entire menu," says Maloney. "We want them to be able to answer any questions
from our guests."
The above-and-beyond approach truly applies to the menu and to our hospitality.
"We tell our people to do whatever is necessary to satisfy the dining
preferences of our guests," says Bryan Dillon, Bertolini's corporate executive
chef. "If there's something that's not on the menu, and if the guest wants it,
and if it's humanly possible to do it, we'll do it." Every ingredient used in
the Bertolini's menu is made from scratch right at the restaurant: the sauces,
pastas, pizzas, and gelato. "We have a system where everything is made fresh,"
says Dillon. Bertolini's is very "old
world," more rustic, and with large portions, a key element of all Morton's
Restaurant Group restaurants. "That's what makes it personal," says Dillon. "And
the guest immediately knows it." Adding to the authenticity is the Bertolini's
philosophy of importing its ingredients directly from Italy. "The recipe for our
pomodoro sauce is from Italy," says Geoffrey Stiles, Bertolini's vice president
of operations. "So is the olive oil and the ingredients for the mascarpone
cheese. We have to do it to achieve the authenticity we're looking for. The
flavor profile is different from its American counterpart."
"OUR CALAMARI IS SERVED WITH A TOMATO CAPER SAUCE, AND EVERYBODY TRIES TO
DUPLICATE IT. BUT NO ONE HAS."
John Maloney, Area Director
Bertolini's Authentic Trattoria
Then there's the very special "look and feel" of Bertolini's. Whether in Irvine
or Indianapolis, it's informal; the restaurants are awash in bright vests,
richly-colored murals, and festive Italian music. The food is prepared
exhibition-style, and served on bright white tablecloths covered in butcher
paper and crayons on the side -- something for the servers to scribble their
names on. "There aren't many Italian restaurants that fit the niche that
Bertolini's fills," says Geoffrey Stiles. "We don't try to be `sophisticated'.
But we are high-energy and exciting. It's a place where I'd feel comfortable
taking my wife out for a nice dinner. It's an adult-oriented restaurant that
also appeals to families."
Dessert is another focal point in the traditional authentic Italian meal. The
same holds true at Bertolini's, where we showcase our gelato, featuring multiple
flavors made in house daily. Forty percent of our guests order dessert, with the
favorites being gelato and our tiramisu, a mousse made with a mascarpone cream
cheese and drenched in espresso and marsala. Guests love the gelato dessert
display; it's another visually appealing component of the Bertolini's
experience.
When it comes to our people, Bertolini's adopts the Morton's strategy. The
interview and orientation process is lengthy, not perfunctory. "We're very
particular about who we bring on board," says John Maloney. "We attract a unique
individual, someone who truly believes in what we're doing, both with food and
guest hospitality." Bertolini's has a strong "promote from within" policy. Every
quarter, top employees undergo extensive training in every conceivable area,
from dining room work to dishwashing. Managers take all sorts of
self-improvement seminars, including time management, employee relations, and
stress management. There's also a major emphasis on community service. "We're
involved with many local organizations, including the Valley Forge Youth Academy
and Swarthmore College," says Bruce Myers, general manager of Bertolini's at
King of Prussia. "Make-a-Wish Foundation used the proceeds from our opening
charity event to set up a shopping spree at the mall for some terminally ill
children. Seeing the children benefit from this event made it all worthwhile."
Great food, superb service, a devotion to the highest quality ingredients, a
commitment to our people and a generous corporate spirit constantly giving back
to the community: these are just a few of the reasons why Morton's Restaurant
Group continues its strong and steady growth. We are a company that has
consistently kept its commitment to providing guests with an exceptional
experience -- and clearly one that is equally committed to carefully growing its
business.
SIDEBAR FEATURES
Boardroom Benefits
The Morton's of Chicago private Boardrooms -- used for business meetings,
corporate dinners and social celebrations, such as anniversaries, birthday
parties, graduations and rehearsal dinners -- are now taking the next step. Like
the new downtown Washington D.C. Morton's, which may be the Boardroom "Capitol"
of the country. It opened earlier this year with five Boardrooms, the most of
any Morton's restaurant. Almost any kind of celebration or dinner can be held
there; the Boardrooms work for groups ranging from six to 160. They're fully
equipped with state-of-the-art audio-visual equipment, should you need to make a
presentation before, during or after dinner. (All A-V equipment is bipartisan
and works equally well for Democrats, Republicans or Independents.) Whatever
your party, our Boardrooms are the perfect place to have a party, whether it be
a business luncheon or a dynamic dinner event.
- --------------------------------------------------------------------------------
Destination Bertolini's
True, Bertolini's is changing the concept of dining at the nation's top retail
centers. At the moment, most Bertolini's are located inside upscale malls and
entertainment centers, whether it's The Forum Shops at Caesars Palace, The
Spectrum in Irvine, California, The Mall at King of Prussia, or Circle Centre in
Indianapolis. While Bertolini's is the place to be even if you don't have any
shopping to do, the plan is to eventually take its initial design and adapt it
to other types of locations - to make it a destination in itself. We believe
that the Bertolini's concept is so flexible it can work in practically any major
metropolitan area in the United States, including high-traffic downtown centers,
business areas and free-standing sites. Stay tuned.
- --------------------------------------------------------------------------------
www.mortons.com
So your eyes are feasting on the Morton's double porterhouse? Or is it a
mouthwatering plate of Bertolini's Tagliolini al Frutti di Mare? Or are you just
taking a long look at our fabulous menu? Whatever, all that doesn't necessarily
mean you're actually at a Morton's of Chicago or Bertolini's Authentic
Trattoria. Now you can check us out on-line. Welcome to Morton's Restaurant
Group on the world wide web, the most desired dining destination on the
Internet. Between actual visits to Morton's and Bertolini's, feel free to look
at the latest on our menus, visit our nationwide locations and catch up on our
latest company news, restaurant reviews, financial information, company history
and upcoming special events and restaurant openings. The Morton's Restaurant
Group web site..... it's the next best thing to being there. Please E-Mail us at
mrg@mortons.com
- --------------------------------------------------------------------------------
The Bull...
The Bear...
The Beef.
MRG Specialists at NYSE. What's it like on the trading floor of the New York
Stock Exchange? Well, grab a minute (if you can) with Jimmy Enrich, a Specialist
with Equitrade. He'll tell you that working the trading floor is like performing
on Broadway -- a constant adrenaline buzz, but in this case, there's no script
and the cast of characters changes every day. His partner, Joe McCarthy, has
been a top NYSE floor specialist for 15 years. He is responsible for trading
Morton's Restaurant Group common stock (NYSE: MRG). The added bonus of working
on Wall Street... the fact that our Morton's of Chicago steakhouse is nearby at
90 West Street... steps away from the hectic pace of the trading floor.
Equitrade is one of three dozen specialist firms on the NYSE. It specializes in
over 100 issues.
- --------------------------------------------------------------------------------
Prime Aged Beef in its Prime
Tender and flavorful USDA prime aged beef -- it's what our guests crave.
Proof positive is Morton's of Chicago's growth; in the last eight years, we've
grown from nine restaurants to thirty-five restaurants, and our sales are five
times what they were in 1988. True, we believe much of that's due to our
great food and hospitality. But there's another reason why a fine dining
steakhouse like Morton's is becoming an American icon -- because it's such a
treat. "Steak takes center stage when people eat out," says Tom Walters,
president of Morton's of Chicago. "It's the nation's top pick." Trends
clearly show that diners want red meat when they're having a "meal
celebration" -- whether it's business related or a social celebration. What's
more, beef consumption is on a two-year rise after more than a decade of
decline. And many industry experts say Morton's is one of the best-positioned
companies to benefit from this new demand.
- --------------------------------------------------------------------------------
The Real Deal
At Bertolini's, when we say our trattorias provide authentic Italian cuisine, we
mean it. Here's a sampling of some of the ingredients we import directly from
Italy: the ingredients for the pomodoro and cream sauces, the gelato ingredients
we use to prepare all of our 130 flavors, the mascarpone and mozzarella cheese
ingredients, and the extra virgin olive oil that's served at the table so guests
can enjoy it with the Pizzetta Bertolini. True, there's an easier way to do it:
we could simply buy cheaper ingredients. But if we did that, we would lose the
authenticity of our true Italian dishes. By importing directly from Italy, you
can be assured that Bertolini's goes not only the extra mile -- but thousands of
miles to bring its guests the very best.
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
1996 Compared to 1995
Revenues increased $20.0 million, or 11.5%, to $193.4 million for fiscal
1996 from $173.4 million during fiscal 1995. Of the increase, $21.4 million was
attributable to incremental revenues from nine new restaurants opened after
January 1, 1995 and $4.1 million, or 2.6%, of additional comparable revenues
from restaurants open all of both periods. Offsetting these increases was a
reduction of $5.5 million from Mick's and Peasant restaurants closed during
fiscal 1996. Average sales per restaurant open for the full year increased
11.3%. In addition, higher revenues for fiscal 1996 reflect the impact of price
increases of approximately 1% in November 1996 for Morton's of Chicago and
approximately 2% in April 1995 for Mick's and Peasant. The Company operated 67
restaurants as of December 29, 1996 (including 34 Morton's of Chicago
steakhouses, 7 Bertolini's, 18 Mick's, and 8 Peasants) and 71 restaurants as of
December 31, 1995 (including 30 Morton's of Chicago steakhouses, 6 Bertolini's,
25 Mick's, and 10 Peasants).
Mick's and Peasant restaurants have generated lower than anticipated
revenues which are adversely impacting average restaurant revenues and earnings
trends. Additionally, as reflected in the table below, the fiscal 1996 period
was adversely impacted by declines in the comparable restaurant revenues in the
Mick's and Peasant restaurant groups, offset by increases in the Morton's and
Bertolini's restaurant groups. The Atlanta market, where 22 of the Company's
restaurants are located, has become increasingly competitive. As discussed in
Note 3 to the Company's consolidated financial statements, the Company completed
the sale of an 80.1% interest in its Atlanta-based Mick's and Peasant restaurant
groups.
Percentage changes in comparable revenues for fiscal 1996 versus fiscal
1995 for restaurants open all of both years are as follows:
Percentage Change
-----------------
Morton's 9.2%
Bertolini's 3.7%
Mick's (7.8)%
Peasant (8.3)%
Total 2.6%
The Company believes that revenues for the first quarter of fiscal 1996
were adversely affected by severe winter storms in January 1996. The Company
believes that the Olympic Games which were held in Atlanta in July 1996 had a
favorable impact on Atlanta-based restaurant revenues for that period.
Food and beverage costs increased from $57.7 million for fiscal 1995, to
$64.7 million for fiscal 1996. Offsetting these increases was a reduction of
approximately $1.8 million due to the Mick's and Peasant restaurants closed
during fiscal 1996. These costs as a percentage of revenues increased 0.2% for
the period.
Restaurant operating expenses, which include labor, occupancy and other
operating expenses, increased from $85.9 million for fiscal 1995 to $92.4
million for fiscal 1996, an increase of $6.5 million. Those costs as a
percentage of revenues decreased 1.7% from 49.5% for fiscal 1995 to 47.8% for
fiscal 1996. Offsetting these increases was a reduction of approximately $4.8
million for fiscal 1996 due to the nine Mick's and Peasant restaurants closed
during the period. In addition, restaurant occupancy expense does not include
approximately $1.5 million for the Remaining Restaurants (see Note 3 to the
Company's consolidated financial statements) which has been charged against the
accrual for lease exit costs. The 1996 period increase in costs related to the
added costs of operating nine additional restaurants opened after January 1,
1995.
Depreciation, amortization and other non-cash charges were $6.5 million
for fiscal 1996 versus $6.3 million in fiscal 1995. The fiscal 1996 period
increase is due to increased start-up cost amortization resulting from increased
development in fiscal 1996 from fiscal 1995, offset by the exclusion of
depreciation and amortization related to Mick's and Peasant of approximately
$0.4 million recorded in the first quarter of fiscal 1995. Such depreciation and
amortization was discontinued in the second quarter of 1995 pursuant to
Statement 121 (see Note 3 to the Company's consolidated financial statements).
General and administrative expenses for fiscal 1996 were $14.3 million
versus $14.1 million for fiscal 1995. Such costs as a percentage of revenues
were 7.4% for fiscal 1996 as compared to 8.1% in fiscal 1995, representing a
decrease of 0.7%.
Marketing and promotional expenses were $4.4 million, or 2.3% of revenues,
for fiscal 1996 compared to $4.4 million, or 2.5% of revenues, for fiscal 1995.
These expenses reflect an increase driven by incremental costs associated with
restaurant development offset by a reduction of approximately $0.2 million due
to the closure of certain Mick's and Peasant restaurants during the period.
Interest expense, net of interest income, increased to $2.3 million for
fiscal 1996 from $1.8 million for fiscal 1995. This increase is a result of
higher outstanding debt balances.
During fiscal 1995, the Company recorded a charge of approximately $2.2
million related to the settlement of a lawsuit, and associated legal and related
costs, which had been pending in the United States District Court for the
District of Nevada (see Note 15 to the Company's consolidated financial
statements).
In connection with the Company's plan to sell or otherwise dispose of the
Mick's and Peasant restaurant groups, the Company recorded a charge of $15.5
million in fiscal 1995 to write-down certain assets held for sale and to accrue
related lease exit costs. During fiscal 1996, the Company recorded an additional
charge of $11.5 million in connection with the sale of an 80.1% interest in its
Atlanta-based Mick's and Peasant restaurants (see Note 3 to the Company's
consolidated financial statements).
An income tax benefit of $4.5 million and $0.8 million for fiscal 1996 and
fiscal 1995, respectively, is the result of utilization of the Company's net
operating loss carryforwards, additional deferred tax assets relating to FICA
and other tax credits generated during fiscal 1996, and a reassessment of the
valuation allowance against deferred tax assets (see Note 8 to the Company's
consolidated financial statements).
1995 Compared to 1994
Revenues increased $17.1 million, or 10.9%, to $173.4 million for fiscal
1995 from $156.3 million during fiscal 1994. Of the increase, $12.9 million was
attributable to incremental revenues from seventeen new restaurants opened after
January 1, 1994 and $4.5 million, or 3.2%, of additional comparable revenues
from restaurants open all of both periods. Average sales per restaurant open for
the full year decreased 3.1%. Included in fiscal 1994 was consulting fee income
of $0.25 million. In addition, higher revenues for fiscal 1995 reflect the
impact of price increases of approximately 2% in November 1994 for Morton's of
Chicago and approximately 2% in April 1995 for Mick's and Peasant. The Company
operated 71 and 67 restaurants as of December 31, 1995 and January 1, 1995,
respectively.
Mick's and Peasant restaurants have generated lower than anticipated
revenues which are adversely impacting average restaurant revenues and earnings
trends. Additionally, as reflected in the table below, the fiscal 1995 period
was adversely impacted by declines in the comparable restaurant revenues in the
Mick's and Peasant restaurant groups, offset by increases in the Morton's and
Bertolini's restaurant groups. The Atlanta market, where 22 of the Company's
restaurants are located, has become increasingly competitive and may continue to
adversely impact comparable restaurant revenues and operating results. As
discussed in Note 3 to the Company's consolidated financial statements, the
Company approved a plan for the sale of the Mick's and Peasant restaurant
groups. Operating results for Mick's and Peasant restaurant groups during the
period they are being held for sale may continue to be adversely impacted.
Percentage changes in comparable revenues for fiscal 1995 versus fiscal
1994 for restaurants open all of both years are as follows:
Percentage Change
-----------------
Morton's 9.6%
Bertolini's 9.1%
Mick's (8.2)%
Peasant (1.3)%
Total 3.2%
The Company believes that revenues for the first quarter of fiscal 1994
were adversely affected by numerous and exceptionally severe winter storms,
particularly in Mick's and Peasant restaurant groups.
Food and beverage costs increased from $52.3 million for fiscal 1994, to
$57.7 million for fiscal 1995. These costs as a percentage of revenues decreased
0.2% for the period.
Restaurant operating expenses which include labor, occupancy and other
operating expenses, increased from $76.5 million for fiscal 1994 to $85.9
million for fiscal 1995, an increase of $9.4 million. Those costs as a
percentage of revenues increased 0.6% from 48.9% for fiscal 1994 to 49.5% for
fiscal 1995. The increase in costs relates to the added costs of operating
seventeen additional restaurants opened after
January 1, 1994. Contributing to the increase of 0.6% as a percentage of
revenues are restaurant operating expenses for several Mick's restaurants which
opened in new markets during fiscal 1994 and generated lower than anticipated
revenues and are adversely impacting earnings trends.
Depreciation, amortization and other non-cash charges were $6.3 million
for fiscal 1995 versus $8.9 million in fiscal 1994. The fiscal 1995 period
decrease is due to decreased start-up cost amortization resulting from reduced
development in the latter part of fiscal 1994 and during fiscal 1995, as well as
the exclusion of 1995 second, third and fourth quarter depreciation and
amortization related to Mick's and Peasant restaurant groups. The amount of such
depreciation and amortization was approximately $1.2 million in fiscal 1994 (see
Note 3 to the Company's consolidated financial statements).
General and administrative expenses for fiscal 1995 were $14.1 million
versus $12.3 million for fiscal 1994. Such costs as a percentage of revenues
were 8.1% for fiscal 1995 as compared to 7.8% in fiscal 1994, representing an
increase of 0.3%. The increase in such expense is driven by incremental costs
associated with operating seventeen additional restaurants since January 1,
1994.
Marketing and promotional expenses were $4.4 million, or 2.5% of revenues,
for fiscal 1995 compared to $2.6 million, or 1.6% of revenues, for fiscal 1994.
The increase is driven by incremental costs associated with restaurant
development and increased advertising expenditures in the Atlanta region for
Mick's restaurants.
Interest expense, net of interest income, increased to $1.8 million for
fiscal 1995 from $0.7 million for fiscal 1994. This increase is a result of
higher outstanding debt balances and higher interest rates.
During the fourth quarter of fiscal 1994, the Company decided to suspend
development of future Mick's and Peasant restaurants and wrote off approximately
$0.6 million of related development costs incurred through the architectural and
pre-construction stages for locations which the Company decided not to further
pursue. No such charges were recorded during fiscal 1995.
Included in fiscal 1994 is a charge of $5.5 million related to the
write-off of the Company's preferred stock minority investment in Santa Fe USA,
Inc. ("Santa Fe") (See Note 4 to the Company's consolidated financial
statements).
An income tax benefit of $0.8 million and $2.7 million for fiscal 1995 and
fiscal 1994, respectively, is the result of utilization of the Company's net
operating loss carryforwards, additional deferred tax assets
relating to FICA and other tax credits generated during fiscal 1995, and a
reassessment of the valuation allowance against deferred tax assets (see Note 8
to the Company's consolidated financial statements).
Liquidity and Capital Resources
In the past, the Company has had, and may have in the future, negative
working capital balances. 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 needed immediately to pay
for food and supplies or to finance receivables or inventories were used for
noncurrent capital expenditures and or payments of long-term debt balances under
revolving credit agreements.
The Company and The First National Bank of Boston ("FNBB") entered into
the Second Amended and Restated Revolving Credit and Term Loan Agreement, dated
June 19, 1995 as amended from time to time (collectively the "Credit
Agreement"), pursuant to which the Company's then existing credit facility was
restructured and amended to, among other things, increase the credit facility
from $25,000,000 to $30,000,000, consisting of a $15,000,000 term loan (the
"Term Loan") and a $15,000,000 revolving credit facility (the "Revolving Credit
Facility") and to extend the final maturity date one year to December 31, 2001.
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 December 29, 1996, the Company's
applicable margin, calculated pursuant to the Credit Agreement, was 0.25% on
base rate loans and 2.25% on Eurodollar Rate loans. The Company has no
outstanding futures contracts or interest rate hedge agreements.
During fiscal 1996, FNBB syndicated portions of the Term Loan and the
Revolving Credit Facility of the Credit Agreement to two additional lenders,
Imperial Bank and Heller Financial. FNBB, as agent for the Lenders, receives an
annual fee of $10,000 paid by the Company.
As of the end of fiscal 1996 and fiscal 1995, the Company had outstanding
borrowings of $24,900,000 and $23,650,000, respectively, under the Credit
Agreement. At December 29, 1996, $399,000 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 $4,701,000 as of
December 29, 1996. The weighted average interest rate on all bank borrowings on
December 29, 1996 was 7.77%. 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.
The availability under the Credit Agreement is scheduled to be reduced by
$800,000 on September 30, 1997 and thereafter principal installments on the Term
Loan of $800,000 each will be due at the end of each calendar quarter through
December 31, 2001. The Revolving Credit Facility will be payable in full on
December 31, 2001. Borrowings under the Credit Agreement are secured by all
tangible and intangible assets of the Company. Total amounts of principal
payable by the Company under the Credit Agreement during the five years
subsequent to December 29, 1996 amount to $1,600,000 in 1997, $3,200,000 in
1998, $3,200,000 in 1999, $3,200,000 in 2000, and $13,700,000 in 2001. As
discussed in Note 3 to the Company's consolidated financial statements, the
Company has completed the sale of an 80.1% interest in its Mick's and Peasant
Atlanta-based restaurants. Net cash proceeds from the sale were used to reduce
the Company's Revolving Credit Facility.
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
investments in any person; (iii) mergers, dispositions of assets or
consolidations; (iv) prepayment of certain other indebtedness; (v) making
capital expenditures above specified amounts; and (vi) 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 December 29, 1996,
the Company believes it was in compliance with such covenants.
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"). Monthly
principal and interest payments will be made over the ten-year term of the loan.
Proceeds from the CNL Loan were used to reduce the Company's Revolving Credit
Facility.
In July 1994, the Company entered into an agreement to purchase 9% of the
outstanding 11% of common stock of Peasant Holding Corp. ("Peasant Holding")
from one of the two remaining minority holders of Peasant Holding common stock.
The purchase price of the shares was approximately $1,985,000 plus interest
calculated at 5%, which was paid in installments through March 1996.
During fiscal 1996, the Company's net investment in fixed assets and
related investment costs, net of capitalized leases, approximated $9.8 million.
The Company estimates that it will expend up to an aggregate of $12.0 million in
1997 to finance ordinary refurbishment of existing restaurants and preopening
costs and capital expenditures, net of landlord development and rent allowances
and net of equipment lease financing, for new restaurants. The Company has
entered into various equipment lease financing agreements with several financial
institutions of which approximately $8.4 million in the aggregate has been
funded from February 1994 through March 1997 and $5.7 million in the aggregate
is available for future fundings. The Company anticipates that funds generated
through operations and funds available through equipment lease commitments as
well as those available under the Credit Agreement will be sufficient to fund
planned expansion.
At December 29, 1996, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $4.7 million expiring by 2007 and
various state income tax net operating loss carryforwards. Approximately $1.4
million of the Company's deferred tax asset related to the write-off of Santa Fe
represents a capital loss. Additionally, as of December 29, 1996, the Company
had approximately $2.6 million in FICA and other tax credits available to reduce
income taxes payable in future years expiring by 2011. As a result of the
Company's equity offerings in 1992, certain limitations apply on the maximum
annual amount of the net operating loss carryforward and credit carryforwards
which may be utilized by the Company to offset taxable income in future periods.
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
periods in which temporary differences become deductible and net operating
losses can be carried forward. Management considers projected future taxable
income and tax planning strategies in making this assessment. Based upon the
level of historical income of the Morton's of Chicago and Bertolini's
restaurants and projections of future taxable income over the next two to three
years, management believes it is more likely than not that the Company will
realize its net deferred tax asset. Deferred tax assets arising from capital
losses have been fully reserved for since the Company has no capital gains to
offset such losses.
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 prices.
Building costs, taxes, maintenance and insurance costs all have an impact on the
Company's occupancy costs, which continued to increase during the period.
Management believes the current practice of maintaining operating margins
through a combination of menu price increases and cost controls, careful
evaluation of property and equipment needs, and efficient purchasing practices
is its most effective tool for coping with inflation.
Seasonality
The Company's business is somewhat seasonal in nature, with revenues being
less in the third quarter than in other quarters primarily due to Morton's
reduced summer volume. It is possible, given the sale of Mick's and Peasant, as
discussed in Note 3 to the Company's consolidated financial statements, that the
Company's revenues will become more seasonal in nature. The following table sets
forth historical unaudited quarterly revenues for the Company's restaurants
which were open for the entire period from January 1, 1994 to December 31, 1995
(52 restaurants), and for the entire period from January 1, 1995 to December 29,
1996 (57 restaurants):
Comparable Restaurant Revenues
(in thousands)
1994 1995 1995 1996
---- ---- ---- ----
52 restaurants 57 restaurants
-------------- --------------
$ % $ % $ % $ %
- - - - - - - -
First Quarter 35,123 25.6 36,873 26.0 42,879 26.9 43,526 26.6
Second Quarter 33,008 24.0 33,952 23.9 38,300 24.1 39,388 24.1
Third Quarter 31,732 23.1 32,190 22.7 35,498 22.3 37,508 23.0
Fourth Quarter 37,552 27.3 38,851 27.4 42,562 26.7 42,912 26.3
------- ----- ------- ----- ------- ----- ------- -----
137,415 100.0 141,866 100.0 159,239 100.0 163,334 100.0
======= ===== ======= ===== ======= ===== ======= =====
The Company believes that revenues for the first quarter of fiscal 1994
were adversely affected by numerous and exceptionally severe winter storms,
particularly in Mick's and Peasant restaurant groups and that the severe winter
storms in January 1996 also impacted fiscal 1996 first quarter revenues. The
Company believes that the Olympic Games which were held in Atlanta in July 1996
had a favorable impact on Atlanta-based restaurant revenues for that period.
Forward-Looking Statements
Except for the historical information contained in this annual report,
certain statements made herein are forward-looking statements that involve risks
and uncertainties and are subject to important factors that could cause actual
results to differ materially from these forward-looking statements, including
without limitation, the effect of economic and market conditions, the impact of
competitive activities, the Company's expansion plans, restaurant profitability
levels and other risks detailed in the Company's public reports and SEC filings.
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 December 29, 1996 and December 31,
1995 and the related consolidated statements of operations, stockholders' equity
and cash flows for each of the years in the three-year period ended December 29,
1996. 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 December 29, 1996 and December 31, 1995 and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 29, 1996, in conformity with generally
accepted accounting principles.
As discussed in Notes 2(k) and 3 of the notes to consolidated financial
statements, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," in 1995.
KPMG PEAT MARWICK LLP
Jericho, New York
February 7, 1997
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 29, 1996 and December 31, 1995
(amounts in thousands, except share data)
December 29, December 31,
Assets 1996 1995
- ------ ---- ----
Current assets:
Cash and cash equivalents $ 2,276 $ 2,351
Accounts receivable 2,116 2,575
Inventories 4,254 3,465
Landlord construction receivables,
prepaid expenses and other current assets 2,408 2,157
Deferred income taxes 3,808 2,280
Assets held for sale 12,474 22,583
------- -------
Total current assets 27,336 35,411
------- -------
Property and equipment, at cost:
Furniture, fixtures and equipment 13,552 8,304
Leasehold improvements 14,188 7,050
Construction in progress 1,284 6,618
------- -------
29,024 21,972
Less accumulated depreciation and amortization 4,353 2,593
------- -------
Net property and equipment 24,671 19,379
------- -------
Intangible assets, net of accumulated amortization of $3,054 at
December 29, 1996 and $2,654 at December 31, 1995 12,941 13,341
Other assets and deferred expenses, net of accumulated amortization of
$3,963 at December 29, 1996 and $1,306 at December 31, 1995 5,909 5,057
Deferred income taxes 6,129 --
------- -------
$76,986 $73,188
======= =======
(Continued)
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
December 29, 1996 and December 31, 1995
(amounts in thousands, except share data)
December 29, December 31,
Liabilities and Stockholders' Equity 1996 1995
- ------------------------------------ ---- ----
Current liabilities:
Accounts payable $ 4,694 $ 6,904
Accrued expenses 7,795 4,499
Accrued income taxes 700 538
Current portion of note payable to related party -- 483
Liabilities related to assets held for sale 12,134 13,995
-------- --------
Total current liabilities 25,323 26,419
-------- --------
Bank debt 24,900 23,650
Other liabilities 5,676 4,079
-------- --------
Total liabilities 55,899 54,148
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value per share
Authorized 3,000,000 shares, no shares issued or outstanding -- --
Common stock, $.01 par value per share. Authorized 25,000,000
shares, issued and outstanding 6,443,673 at December 29, 1996
and 6,367,093 at December 31, 1995 64 64
Nonvoting common stock, $.01 par value per share. Authorized
3,000,000 shares, no shares issued or outstanding -- --
Additional paid-in capital 61,632 61,350
Accumulated deficit (40,609) (42,374)
-------- --------
Total stockholders' equity 21,087 19,040
-------- --------
$ 76,986 $ 73,188
======== ========
See accompanying notes to consolidated financial statements.
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 29, 1996, December 31, 1995, and January 1, 1995
(amounts in thousands, except per share data)
December 29, December 31, January 1,
1996 1995 1995
---- ---- ----
Revenues $ 193,378 $ 173,373 $ 156,319
Food and beverage costs 64,723 57,734 52,338
Restaurant operating expenses 92,382 85,891 76,494
Depreciation, amortization and other non-cash charges 6,454 6,321 8,907
General and administrative expenses 14,333 14,115 12,264
Marketing and promotional expenses 4,431 4,407 2,557
Interest expense, net 2,297 1,829 696
Litigation settlement and related expenses -- 2,240 --
Write-down and related charges for net assets held
for sale 11,500 15,500 --
Write-off of restaurant development costs -- -- 597
Write-off of preferred stock investment in affiliate -- -- 5,506
--------- --------- ---------
Loss before income taxes (2,742) (14,664) (3,040)
Income tax benefit (4,507) (756) (2,704)
--------- --------- ---------
Net income (loss) $ 1,765 $ (13,908) $ (336)
========= ========= =========
Net income (loss) per share $ 0.26 $ (2.18) $ (0.05)
========= ========= =========
Weighted average shares and equivalents outstanding 6,792 6,367 6,367
========= ========= =========
See accompanying notes to consolidated financial statements.
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 29, 1996, December 31, 1995 and January 1, 1995
(amounts in thousands)
Additional Total
Common Paid-In Accumulated Stockholders'
Stock Capital Deficit Equity
----- ------- ------- ------
Balance at December 31, 1993 $ 64 $ 61,330 $(28,130) $ 33,264
Issuance of restricted stock -- 20 -- 20
Net loss -- -- (336) (336)
------- -------- -------- --------
Balance at January 1, 1995 64 61,350 (28,466) 32,948
Net loss -- -- (13,908) (13,908)
------- -------- -------- --------
Balance at December 31, 1995 64 61,350 (42,374) 19,040
Exercise of stock options -- 282 -- 282
Net income -- -- 1,765 1,765
------- -------- -------- --------
Balance at December 29, 1996 $ 64 $ 61,632 $(40,609) $ 21,087
======= ======== ======== ========
See accompanying notes to consolidated financial statements.
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 29, 1996, December 31, 1995, and January 1, 1995
(amounts in thousands)
December 29, December 31, January 1,
1996 1995 1995
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ 1,765 $(13,908) $ (336)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation of property and equipment 1,534 1,112 1,678
Amortization of intangible assets 400 461 636
Amortization of other deferred expenses 3,722 3,337 5,346
Deferred occupancy costs 798 1,411 1,269
Deferred income taxes (5,477) (1,006) (2,837)
Write-down and related charges for net assets held for sale 11,500 15,500 --
Write-off of preferred stock investment in
affiliate -- -- 5,506
Write-off of restaurant development costs -- -- 597
Change in assets and liabilities:
Accounts receivable 351 (899) (546)
Inventories (456) (398) (1,261)
Prepaid expenses and other assets 122 212 (1,489)
Accounts payable, accrued expenses and other liabilities (6,050) 751 (251)
Accrued income taxes 450 (605) (13)
-------- -------- --------
Net cash provided by operating activities 8,659 5,968 8,299
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment (5,297) (6,628) (6,783)
Payments for start-up costs, licenses and other deferred expenses (4,486) (3,236) (4,164)
Payments for investment in preferred stock of and loans to
affiliate -- -- (2,465)
Cash paid to minority holder for common stock of subsidiary (483) (535) (967)
-------- -------- --------
Net cash used by investing activities (10,266) (10,399) (14,379)
-------- -------- --------
(Continued)
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
(amounts in thousands)
December 29, December 31, January 1,
1996 1995 1995
---- ---- ----
Cash flows from financing activities:
Decrease in bank overdraft $ -- $ (574) $ (461)
Principal reduction on bank debt (4,750) (4,150) (2,650)
Proceeds from bank debt 6,000 7,475 10,275
Net proceeds from issuance of stock 282 -- 20
------- ------- --------
Net cash provided by financing activities 1,532 2,751 7,184
------- ------- --------
Net increase (decrease) in cash and cash equivalents (75) (1,680) 1,104
Cash and cash equivalents at beginning of year 2,351 4,031 2,927
------- ------- --------
Cash and cash equivalents at end of year $ 2,276 $ 2,351 $ 4,031
======= ======= ========
See accompanying notes to consolidated financial statements.
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 29, 1996, December 31, 1995 and January 1, 1995
(1) Organization and Other Matters
Morton's Restaurant Group, Inc., formerly known as Quantum Restaurant
Group, Inc., ("Company"), was incorporated in the State of Delaware in October
1988 and is engaged in the business of owning and operating restaurants.
In 1988, the Company acquired 89% of the outstanding common stock of a
predecessor company of Peasant Holding Corp. ("Peasant Holding"), the holding
company for The Peasant Restaurants, Inc. ("Peasant") and Mick's Restaurants,
Inc. ("Mick's"). The acquisition was accounted for using the purchase method of
accounting. During 1994, the Company purchased 9% of the outstanding 11% of
common stock of Peasant Holding from one of the two remaining minority holders
for approximately $1,985,000 (see Note 12). During 1995, the Company approved a
plan to sell its Mick's and Peasant Restaurants, and on February 6, 1997, the
Company completed the sale of its Atlanta-based Mick's and Peasant restaurants
(see Note 3).
In 1989, the Company acquired 100% of the outstanding common stock,
preferred stock, stock options and common stock warrants of Porterhouse, Inc.
and subsidiaries, which do business as Morton's of Chicago ("Morton's"), a
national restaurant group. The acquisition was accounted for using the purchase
method of accounting.
During fiscal 1994, the Company changed its fiscal reporting period from a
calendar basis, with a December 31 year end, to a fiscal year basis ending on
the closest Sunday to December 31. The fiscal year consists of 52 weeks and
approximately every six or seven years, a 53rd week will be added. The Company
believes the effect of the change was not material to the Company's financial
statements.
(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. The minority
interest in Peasant Holding's losses were allocated to the minority interest in
the equity capital of Peasant Holding. To the extent such losses exceed the
minority interest in the equity capital of Peasant Holding, they have been
charged to the Company.
(b) 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.
(c) 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
1996, 1995, and 1994, interest costs during the construction period for
leasehold improvements of $202,500, $235,000, and $496,400, respectively, were
capitalized.
(d) Other Assets and Deferred Expenses
The Company defers certain organizational and start-up costs associated
with the opening of each new restaurant. Such costs are amortized over the 12
months following the restaurant's opening. Unamortized start-up costs of
$3,472,000 and $2,849,000 at the end of fiscal 1996 and 1995, respectively, 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 $1,775,000 at the end of fiscal 1996 and $1,515,000
at the end of fiscal 1995. In addition, included in "Assets held for sale" are
$760,000 and $1,400,000 of smallwares at the end of fiscal 1996 and 1995,
respectively.
(e) Income Taxes
The Company adopted Statement of Financial Accounting Standards 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.
(f) Intangible Assets
Intangible assets arose from the acquisitions of Peasant Holding and
Morton's (see Note 1). Amortization is being recognized on a straight-line basis
over forty years for goodwill. During fiscal 1994, additional goodwill of
approximately $1,985,000 was recorded in connection with the purchase of Peasant
Holding common stock from a minority holder (see Note 12). Coincident with the
adoption of Statement 121 (see Note 3), Mick's and Peasant unamortized goodwill
of $8,077,000 was reclassified to "Assets held for sale".
(g) Marketing and Promotional Expenses
Marketing and promotional expenses in the accompanying consolidated
statements of operations include advertising expenses of $2,875,000, $3,026,000,
and $920,000 for fiscal 1996, 1995 and 1994, respectively.
(h) 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 $2,141,000, $1,798,000, and
$720,000 and income taxes of approximately $977,000, $894,000 and $360,000, for
fiscal 1996, 1995 and 1994, respectively. During fiscal 1996, 1995 and 1994, the
Company entered into capital lease finance agreements of approximately
$2,346,000, $2,069,000 and $522,000, respectively, for restaurant equipment. In
1994, the Company purchased a minority interest from a Peasant Holding
stockholder for cash and a note payable (see Note 12).
(i) Earnings Per Share
For fiscal 1996, 1995 and 1994, weighted average common shares and
equivalents outstanding were 6,792,169, 6,367,093 and 6,366,509, respectively.
Fiscal 1996 includes incremental shares relating to common stock equivalents
(stock options) which are dilutive.
(j) 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.
(k) 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. As
discussed in Note 3, the Company adopted the provisions of Statement 121
effective January 2, 1995. 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. Statement 121 did not have an impact on the Company at
adoption.
(l) Stock-Based Compensation
The Company records compensation expense for stock options only if the
current market price of the underlying stock exceeds the exercise price on the
date the options are granted. On January 1, 1996, the Company adopted Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("Statement 123"). The Company has elected not to implement the
fair value based accounting method for stock options, but has elected to
disclose the proforma net earnings and proforma earnings per share for stock
option grants made beginning in fiscal 1995 as if such method had been used to
account for stock-based compensation costs as described in Statement 123.
(3) Assets Held For Sale and Related Liabilities
Effective January 2, 1995, the Company adopted 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").
During the second quarter of fiscal 1995, the Company approved a plan for
the sale of Mick's and Peasant. Pursuant to Statement 121, the Company
discontinued depreciating fixed assets and amortizing goodwill relating to
Mick's and Peasant for the second, third, and fourth quarters of fiscal 1995 and
all of fiscal 1996. The amount of such depreciation and amortization for the
corresponding fiscal 1994 period approximated $1,232,000.
Coincident with the Company's approval of the plan of sale, the assets
held for sale and related liabilities for Mick's and Peasant have been
reclassified as "Assets held for sale" and "Liabilities related to assets held
for sale" when the Company reports its financial position. The accompanying
December 29, 1996 and December 31, 1995 consolidated balance sheets include the
following components:
December 29, December 31,
1996 1995
---- ----
(amounts in thousands)
Current assets $ 2,166 $ 2,686
Net property and equipment 10,704 13,851
Unamortized goodwill 8,077 8,077
Other assets 2,143 4,089
Deferred tax assets -- 2,180
Write-down of carrying values (10,616) (8,300)
-------- --------
Assets held for sale 12,474 22,583
Current liabilities 3,495 3,470
Other liabilities 1,612 3,325
Lease exit and other transaction costs 7,027 7,200
-------- --------
Liabilities related to assets held for sale 12,134 13,995
-------- --------
Net assets held for sale $ 340 $ 8,588
======== ========
The following represents the combined results, before nonrecurring
charges, of Mick's and Peasant for the years ended December 29, 1996, December
31, 1995 and January 1, 1995. Interest expense was not allocated.
1996 1995 1994
---- ---- ----
(amounts in thousands)
Revenues $54,410 $ 64,387 $ 65,550
Food and beverage costs 15,956 18,839 19,321
Restaurant operating expenses 33,042 38,776 36,821
Depreciation, amortization and other
non-cash charges 172 2,679 5,859
General and administrative expenses 3,741 4,190 3,998
Marketing and promotional expenses 975 1,643 1,001
------- -------- --------
Income (loss) before income taxes $ 524 $ (1,740) $ (1,450)
======= ======== ========
Management had been actively seeking potential buyers for the sale of all
Mick's and Peasant restaurants and in the fourth quarter of fiscal 1995 engaged
an investment banking firm to assist with the sale. Although marketing efforts
concentrated on selling all of the Mick's and Peasant restaurants, sales
materials indicated that a partial sale would be considered. 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 in the near term, 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, had been accrued at December 31,
1995. During fiscal 1996, restaurant occupancy expenses of approximately
$1,498,000 for the Remaining Restaurants were charged against the accrual for
lease exit costs. During fiscal 1996, seven Mick's restaurants and two Peasant
restaurants were closed. During January 1997, two more Mick's restaurants were
closed.
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. In conjunction with the sale, the Company has
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, accrue for the various expenses related to the
closing of such sale and to write-off two restaurants which are not part of the
sale, one of which was closed in January 1997. Net assets held for sale at
December 29, 1996 consisted of net assets of $3,700,000 related to the
Atlanta-based restaurants and net liabilities of $3,400,000 related to the
Remaining Restaurants.
The write-down and related charges for net assets held for sale reflect
management's best estimate of the costs expected to be incurred in connection
with the disposition of Mick's and Peasant. As a result of the numerous
uncertainties which may impact the actual costs to be incurred by the Company,
such costs may differ from the current estimates used by management.
(4) Investments
On August 13, 1993, a subsidiary of the Company purchased 30,000 shares of
Series A Cumulative Convertible Preferred Stock of Santa Fe ("Santa Fe Preferred
Stock") for a purchase price of $4,000,000. Santa Fe was a moderately-priced
full service steakhouse group based in Columbus, Ohio.
Dividends on the Santa Fe Preferred Stock accrued at an annual rate of 6.5%
through August 1994 and at 8% thereafter. The Company recorded this investment
under the cost method of accounting for long term investments. In connection
with the purchase of Santa Fe Preferred Stock, the Company paid $1,000,000 in
cash at closing and entered into three $1,000,000 notes payable to Santa Fe. The
Company paid one of the notes in November 1993 and the remaining notes during
fiscal 1994. In addition, a subsidiary of the Company loaned additional amounts
totaling $465,000 during fiscal 1994 and the Company entered into a guaranty of
up to $200,000 for Santa Fe lease obligations. During the second quarter of
fiscal 1994, the Company entered into a management agreement with Santa Fe.
Pursuant to the management agreement, the Company was entitled to receive an
annual management fee of 3% of the gross revenues of Santa Fe.
As a result of Santa Fe's continuing operating losses and failure to meet
its development objectives, the Company recorded a nonrecurring charge of
$5,506,000 related to the write-off of the Company's loans and preferred stock
investment in Santa Fe during fiscal 1994. As of December 31, 1995, the Company
had utilized the entire amount accrued during fiscal 1994 and there have been no
further cash outlays.
(5) Development Costs
During the fourth quarter of fiscal 1994, the Company decided to suspend
development of future Mick's and Peasant restaurants and wrote off approximately
$597,000 of related development costs incurred through the architectural and
pre-construction stages for locations which the Company decided not to further
pursue.
(6) Accrued Expenses
Accrued expenses consist of the following:
December 29, December 31,
1996 1995
---- ----
(amounts in thousands)
Restaurant operating expenses $ 1,509 $ 592
Payroll and related taxes 1,004 775
Accrued construction costs 929 22
Current portion of capital lease
liabilities 913 534
Sales and use tax 882 787
Rent and property taxes 797 653
Accrued gift certificates 695 635
Other 1,066 501
------- -------
Total accrued expenses $ 7,795 $ 4,499
======= =======
(7) Bank Debt
The Company and The First National Bank of Boston ("FNBB") entered into the
Second Amended and Restated Revolving Credit and Term Loan Agreement, dated June
19, 1995 as amended from time to time (collectively the "Credit Agreement"),
pursuant to which the Company's then existing credit facility was restructured
and amended to, among other things, increase the credit facility from
$25,000,000 to $30,000,000, consisting of a $15,000,000 term loan (the "Term
Loan") and a $15,000,000 revolving credit facility (the "Revolving Credit
Facility") and to extend the final maturity date one year to December 31, 2001.
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 December 29, 1996, the Company's
applicable margin, calculated pursuant to the Credit Agreement, was 0.25% on
base rate loans and 2.25% on Eurodollar Rate loans. The Company has no
outstanding futures contracts or interest rate hedge agreements.
During fiscal 1996, FNBB syndicated portions of the Term Loan and Revolving
Credit Facility of the Credit Agreement to two additional lenders, Imperial Bank
and Heller Financial. FNBB, as agent for the Lenders, receives an annual fee of
$10,000 paid by the Company.
As of the end of fiscal 1996 and fiscal 1995, the Company had outstanding
borrowings of $24,900,000 and $23,650,000, respectively, under the Credit
Agreement. At December 29, 1996, $399,000 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 $4,701,000 as of
December 29, 1996. The weighted average interest rate on all bank borrowings on
December 29, 1996 was 7.77%. 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.
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.
The availability under the Credit Agreement is scheduled to reduce by
$800,000 on September 30, 1997 and thereafter principal installments on the Term
Loan of $800,000 each will be due at the end of each calendar quarter through
December 31, 2001. The Revolving Credit Facility will be payable in full on
December 31, 2001. Borrowings under the Credit Agreement are secured by all
tangible and intangible assets of the Company. Total amounts of principal
payable by the Company under the Credit Agreement during the five years
subsequent to December 29, 1996 amount to $1,600,000 in 1997, $3,200,000 in
1998, $3,200,000 in 1999, $3,200,000 in 2000 and $13,700,000 in 2001. As
discussed in Note 3, the Company has completed the sale of its Atlanta-based
Mick's and Peasant restaurants. Net cash proceeds from the sale were used to
reduce the Company's Revolving Credit Facility.
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
investments in any person; (iii) mergers, dispositions of assets or
consolidations; (iv) prepayment of certain other indebtedness; (v) making
capital expenditures above specified amounts; and (vi) 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 December 29, 1996,
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 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.
(8) Income Taxes
Income tax expense (benefit) for fiscal 1996, 1995 and 1994 includes state
and local current taxes in the amounts of $970,000, $250,000 and $580,000,
respectively. Included in income tax benefit for fiscal 1996, 1995 and 1994 are
approximately $5,477,000, $1,006,000 and $3,284,000, respectively, of benefits
relating to the utilization of the Company's net operating loss carryforward and
a reassessment of the valuation allowance against deferred tax assets.
Income tax benefit for fiscal 1996, 1995 and 1994 differed from the amounts
computed by applying the U.S. Federal income tax rate of 34% to loss before
income taxes as a result of the following:
1996 1995 1994
---- ---- ----
(amounts in thousands)
Computed "expected" tax benefit $ (932) $(4,986) $(1,034)
Increase (reduction) in income taxes resulting from:
State and local income taxes, net of federal income tax
benefit 644 165 383
Amortization of intangible assets 139 159 209
Change in valuation allowance and increase in
deferred tax assets (4,523) 3,880 (2,044)
Other, net 165 26 (218)
------- ------- -------
$(4,507) $ (756) $(2,704)
======= ======= =======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at the end of fiscal 1996
and 1995 are presented below:
December 29, December 31,
1996 1995
---- ----
(amounts in thousands)
Deferred tax assets:
Federal and state net operating loss carryforwards $ 4,181 $ 2,158
Write-off of preferred stock investment 1,400 1,400
Write-down and related charges for
assets held for sale 6,109 5,270
Compensatory stock options 1,124 983
Deferred rent and start-up amortization 2,793 4,376
FICA and other tax credits 2,645 2,188
-------- --------
Total gross deferred tax assets 18,252 16,375
Less valuation allowance (7,114) (9,400)
-------- --------
Net deferred tax assets 11,138 6,975
Deferred tax liabilities:
Property and equipment depreciation 1,201 2,515
-------- --------
Net deferred tax assets and liabilities $ 9,937 $ 4,460
======== ========
At December 29, 1996, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $4,747,000 expiring by 2007 and
various state income tax net operating loss carryforwards. Approximately
$1,400,000 of the Company's deferred tax asset related to the write-off of Santa
Fe represents a capital loss. Additionally, as of December 29, 1996, the Company
had approximately $2,645,000 in FICA and other tax credits available to reduce
income taxes payable in future years expiring by 2011. As a result of the
Company's equity offerings in 1992, certain limitations apply on the maximum
annual amount of the net operating loss carryforward and credit carryforwards
which may be utilized by the Company to offset taxable income in future periods.
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 periods in
which
temporary differences become deductible and net operating losses can be carried
forward. Management considers projected future taxable income and tax planning
strategies in making this assessment. Based upon the level of historical income
of the Morton's of Chicago and Bertolini's restaurants and projections of future
taxable income over the next two to three years, management believes it is more
likely than not that the Company will realize its net deferred tax asset.
Deferred tax assets arising from capital losses have been fully reserved for
since the Company has no capital gains to offset such losses.
(9) 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) In May 1995, the Company amended its 1991 Stock Option Plan (the
"Stock Option Plan") which provides for the issuance of incentive stock options
("ISO's") and non-qualified stock options ("NQSO's") to employees. The Stock
Option Plan, as amended, provides that options, having a maximum term of ten
years, may be granted to purchase up to 900,000 shares of Common Stock.
The exercise price of ISO's will be equal to the fair market value of the
shares subject to option on the date of grant, while the exercise price of
NQSO's 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.
Activity in stock options is summarized as follows:
1996 1995 1994
-------------------- -------------------- --------------------
Weighted Shares Weighted Shares Weighted Shares
Average Subject Average Subject Average Subject
Exercise to Exercise to Exercise to
Price Option Price Option Price Option
------ ------- ------ ------- ------ -------
Beginning of year $ 6.63 693,295 $ 6.27 648,745 $ 4.97 465,245
Options granted 12.97 233,650 10.88 97,000 9.94 233,600
Options exercised 3.67 76,580 -- -- 0.07 5,000
Options canceled 10.72 59,600 10.08 52,450 12.59 45,100
------ ------- ------ ------- ------ -------
End of year $ 8.48 790,765 $ 6.63 693,295 $ 6.27 648,745
------ ------- ------ ------- ------ -------
As of December 29, 1996, there were 326,040 options exercisable with a weighted
average exercise price of $4.01.
(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
1996 and 1995 was $7.01 and $5.35 on the date of grant using the Black Scholes
option-pricing model with the following weighted average assumptions: 1996 -
expected dividend yield 0.0%, risk-free interest rate of 6.0%, and an expected
life of 7 years; 1995 - expected dividend yield 0.0%, risk-free interest rate of
6.0%, and an expected life of 6.8 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 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:
1996 1995
---- ----
(amounts in thousands,
except per share data)
Net income (loss) as reported $1,765 $(13,908)
Pro forma $1,516 $(13,955)
Net income (loss) per share as reported $ 0.26 $ (2.18)
Pro forma $ 0.22 $ (2.19)
Pro forma net income (loss) reflects only options granted in 1996 and 1995.
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.
(10) Operating Leases
All of the Company's operations are conducted in leased premises. Including
renewal options, remaining lease terms range from one to 25 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 1996 and fiscal 1995, $578,000
and $679,000, 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 an affiliate and
third parties. Certain leases contain contingent rental provisions based upon a
percent of gross sales 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 1996 and fiscal 1995 are accruals related to
such rent deferrals of approximately $2,656,000 and $2,273,000, respectively. In
addition, included in "Liabilities related to assets held for sale" are
approximately $1,592,000 and $3,281,000, respectively, of such accruals at the
end of fiscal 1996 and 1995. 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:
Affiliate Third Party
--------- -----------
(amounts in thousands)
Fiscal 1997 $ 414 $ 12,533
Fiscal 1998 409 12,727
Fiscal 1999 397 12,050
Fiscal 2000 408 11,896
Fiscal 2001 418 11,472
Fiscal 2002 and thereafter 2,111 81,097
------ --------
Total minimum lease payments $4,157 $141,775
====== ========
Contingent rental payments on building leases are typically made based upon
the percentage of gross sales on the individual restaurants that exceed
predetermined levels. The percentage of gross sales to be paid and related gross
sales level vary by unit. Contingent rental expense was approximately
$2,391,000, $1,904,000 and $1,809,000, for fiscal 1996, 1995 and 1994,
respectively.
Rental expense for all leases was approximately $14,175,000, $13,375,000
and $11,378,000, for fiscal 1996, 1995 and 1994, respectively, of which
approximately, $564,000, $553,000 and $552,000, respectively, was paid to the
affiliate.
(11) Capital Leases
The Company finances the purchase of certain restaurant equipment through
capital leases. At December 29, 1996 and December 31, 1995, furniture, fixtures
and equipment include approximately
$4,628,000 and $2,655,000 of net assets recorded under capital leases. These
assets are amortized over the life of the respective leases. At December 29,
1996 and December 31, 1995, capitalized lease obligations of approximately
$3,020,000 and $1,846,000 are included in "Other liabilities" in the
accompanying consolidated balance sheets. In addition, included in "Liabilities
related to assets held for sale" are approximately $17,000 and $43,000,
respectively, of such capital lease obligations at the end of fiscal 1996 and
1995.
The Company's minimum future obligations under capital leases as of
December 29, 1996 are as follows:
(amounts in thousands)
Fiscal 1997 $1,329
Fiscal 1998 1,267
Fiscal 1999 1,044
Fiscal 2000 713
Fiscal 2001 241
Fiscal 2002 and thereafter 5
------
Total minimum lease payments 4,599
Less amount representing interest 649
------
Present value of net minimum lease
payments
(including current portion of $913) $3,950
======
(12) Acquisition Related Agreements
In connection with the Peasant Holding acquisition (see Note 1), two of the
selling shareholders, who retained a minority interest in Peasant Holding,
signed employment agreements with Peasant Holding. One of these agreements was
for a period of five years and terminated in December 1993. The other had been
amended and restated effective December 1, 1992, and further amended and
supplemented September 13, 1995, and terminated on December 31, 1996.
In July 1994, the Company entered into an agreement to purchase 9% of the
outstanding 11% of common stock of Peasant Holding from one of the two minority
holders of Peasant Holding common stock. The purchase price of the shares was
approximately $1,985,000 plus interest calculated at 5%, which was paid in
installments through March 1996.
The Company has a right of first refusal should the remaining minority
shareholder desire to sell his Peasant Holding shares at any time after December
1996, and can require the shareholder to sell such shares to the Company or
Peasant Holding should the shareholder leave the employ of Peasant Holding.
Additionally, the shareholder has the right to require the Company or Peasant
Holding to purchase such shares during a three-year period which commenced in
December 1993. The price of the shares under all the aforementioned agreements
is based upon an agreed to formula of seven times earnings before interest and
taxes on a per share basis, adjusted for amortization of intangible assets
resulting from the acquisition of Peasant Holding and certain other effects of
the acquisition, as defined.
(13) 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. On
January 31, 1994, the Company entered into an employment agreement with its
President. The agreement, as amended, expires on January 31, 2000.
During fiscal 1994, the Company entered into change of control agreements
with the two officers noted above and another officer which grant these
employees the right to receive up to approximately three times their base
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.
(14) Employee Benefit Plans
Employees of Morton's Restaurant Group, Morton's of Chicago, and
Bertolini's 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 1996, 1995 and 1994 were $364,612, $145,203
and $128,758, respectively.
Effective January 1, 1991, Peasant Holding adopted a 401(K) Plan benefiting
certain employees. No employer contributions have been made.
(15) Legal Matters and Contingencies
In October 1995, the Company announced that the lawsuit among the Company, a
subsidiary of the Company and Mr. Alberto Lombardi and a company controlled by
Mr. Lombardi had been settled on mutually satisfactory terms and agreed to the
dismissal of all claims pending against each other. In connection with the
settlement, the Company recorded a pre-tax charge of approximately $2,240,000 in
1995, which amount includes legal and related costs associated with the lawsuit.
The settlement provides that it is not to be construed or considered to be an
admission of guilt or noncompliance with any federal, state or local statute,
public policy, tort law, common law or of any other wrongdoing whatsoever.
The Company is involved in 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.
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". From January 21, 1994 until May 9, 1996, it was traded
under the symbol "KRG."
The following table sets forth, for the periods indicated, the highest and
lowest sale prices for the Common Stock, as reported by NYSE.
Fiscal Year Ended December 29, 1996 High Low
================================================================================
First Quarter........................................... $17 1/4 $10 7/8
Second Quarter.......................................... 19 13 5/8
Third Quarter........................................... 18 1/2 15 1/8
Fourth Quarter.......................................... 17 5/8 14
Fiscal Year Ended December 31, 1995 High Low
================================================================================
First Quarter........................................... $11 5/8 $ 9 5/8
Second Quarter.......................................... 11 5/8 9 7/8
Third Quarter........................................... 14 7/8 9 7/8
Fourth Quarter.......................................... 13 7/8 10 1/8
On December 29, 1996, the last reported sale price of the Common Stock on the
NYSE was $16.00.
As of March 3, 1997, there were approximately 58 holders of record of the
Company's Common Stock. The Company believes that as of such date there were
approximately 1,300 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 7 of Notes to
Consolidated Financial Statements.
Corporate Information
Morton's Restaurant Group, Inc. and Subsidiaries
The Board of Directors
Allen J. Bernstein (1)
Chairman of the Board
and Chief Executive Officer,
Morton's Restaurant Group, Inc.
Robert L. Barney (3)
Retired Chairman,
Wendy's International, Inc.
John K. Castle (1,3)
Chairman and Chief Executive Officer,
Castle Harlan, Inc.,
a private merchant bank.
Dr. John J. Connolly (3)
President and Chief Executive Officer,
Castle Connolly Medical Ltd.
William L. Hyde, Jr.
President, Chief Operating Officer
and Director,
Morton's Restaurant Group, Inc.
David B. Pittaway (1,2)
Managing Director,
Castle Harlan, Inc.
Dianne H. Russell (2)
Senior Vice President, Manager
Imperial Bank
Alan A. Teran (2)
Private Investor
Committees of the Board
1. Executive 2. Audit 3. Compensation and Stock Option
Senior Corporate Officers
Allen J. Bernstein
Chairman of the Board
and Chief Executive Officer
William L. Hyde, Jr.
President, Chief Operating Officer
and Director
Thomas J. Baldwin
Executive Vice President,
Chief Financial Officer,
Assistant Secretary and Treasurer
Agnes Longarzo
Vice President -
Administration and Secretary
Allan C. Schreiber
Vice President - Real Estate
Klaus W. Fritsch
Vice Chairman and Co-Founder
Morton's of Chicago
Thomas J. Walters
President
Morton's of Chicago
Geoffrey D. Stiles
Vice President - Operations
Bertolini's Restaurants
Investor Data
Common Stock
The common stock of Morton's
Restaurant Group, Inc. is traded on
the New York Stock Exchange under
the symbol "MRG" (NYSE:MRG).
Stock Transfer Agent and
Registrar of Stock
The First National Bank of Boston
c/o Boston Equiserve, L.P.
P.0. Box 644
Boston, Massachusetts 02102
Counsel
Schulte Roth & Zabel LLP
900 Third Avenue
New York, NY 10022
Independent Auditors
KPMG Peat Marwick LLP
One Jericho Plaza
Jericho, New York 11753
Executive Offices
3333 New Hyde Park Road
New Hyde Park, New York 11042
Form 10-K Information
A copy of the Company's annual
report on Form 10-K, together with
financial statements and schedules,
as filed with the Securities and
Exchange Commission, will be fur-
nished to any stockholder without
charge upon written request to the
Company.
Investor Relations
Thomas J. Baldwin
Executive Vice President,
Chief Financial Officer
Morton's Restaurant Group, Inc.
3333 New Hyde Park Road
New Hyde Park, New York 11042
Annual Meeting
The annual meeting of stockholders
will be held at 9:00 A.M. on
Thursday May 1,1997 at
The Garden City Hotel,
45 seventh Street, Garden City,
New York 11530.