FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-12692
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MORTON'S RESTAURANT GROUP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-3490149
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(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
3333 New Hyde Park Road, Suite 210, New Hyde Park, New York 11042
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(Address of principal executive offices) (zip code)
516-627-1515
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
As of August 5, 1998, the registrant had 6,652,090 shares of its Common Stock,
$.01 par value, issued and outstanding.
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
INDEX
Part I - Financial Information Page
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Item 1. Financial Statements
Consolidated Balance Sheets as of June 28, 1998 and December 28, 1997 3-4
Consolidated Statements of Income for the three and six month periods ended
June 28, 1998 and June 29, 1997 5
Consolidated Statements of Cash Flows for the six month periods ended June 28, 1998
and June 29, 1997 6
Notes to Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10-15
Part II - Other Information
Item 1. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Stockholders 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
2
Item 1. Financial Statements
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(amounts in thousands)
June 28, December 28,
1998 1997
---- ----
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 1,419 $ 3,437
Accounts receivable 1,375 1,669
Inventories 5,544 5,420
Landlord construction receivables, prepaid expenses and other
current assets 2,740 3,226
Deferred income taxes 5,232 4,890
------- -----
Total current assets 16,310 18,642
Property and equipment, at cost:
Furniture, fixtures and equipment 20,694 19,169
Leasehold improvements 23,068 21,876
Land 1,540 -
Construction in progress 2,724 46
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48,026 41,091
Less accumulated depreciation and amortization 7,837 6,449
------- -------
Net property and equipment 40,189 34,642
------ ------
Intangible assets, net of accumulated amortization of $3,659 at
June 28, 1998 and $3,458 at December 28, 1997 12,336 12,537
Other assets and deferred expenses, net of accumulated
amortization of $3,520 at June 28, 1998 and $3,901 at
December 28, 1997 10,667 11,902
Deferred income taxes 2,482 4,220
------ -------
$81,984 $ 81,943
------ -------
------ -------
(Continued)
3
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
(amounts in thousands, except share data)
June 28, December 28,
1998 1997
----- ----
(unaudited)
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 5,160 $ 6,159
Accrued expenses 9,034 13,210
Current portion of bank debt and capital lease obligations 1,640 1,419
Accrued income taxes 511 656
--------- --------
Total current liabilities 16,345 21,444
Bank debt 25,320 24,931
Capital lease obligations 3,050 3,739
Other liabilities 3,472 3,274
-------- -------
Total liabilities 48,187 53,388
------- -------
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 6,651,840 shares at
June 28, 1998 and 6,604,565 shares at December 28, 1997 67 66
Nonvoting common stock, $.01 par value per share. Authorized
3,000,000 shares, no shares issued or outstanding - -
Additional paid-in capital 62,697 62,214
Cumulative foreign currency translation adjustment (73) -
Accumulated deficit (28,894) (33,725)
-------- --------
Total stockholders' equity 33,797 28,555
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$ 81,984 $ 81,943
--------- --------
--------- --------
See accompanying notes to consolidated financial statements.
4
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(amounts in thousands, except per share data)
Three Months Ended Six Months Ended
June 28, June 29, June 28, June 29,
1998 1997 1998 1997
---- ---- ---- ----
(unaudited) (unaudited)
Revenues $ 45,604 $ 41,061 $ 93,315 $ 87,595
Food and beverage costs 15,530 14,226 31,927 30,171
Restaurant operating expenses 19,840 17,896 39,882 38,180
Depreciation, amortization and other non-cash charges 2,128 1,826 4,614 3,913
General and administrative expenses 3,407 3,202 6,816 6,892
Marketing and promotional expenses 1,226 975 2,453 2,082
Interest expense, net 602 589 1,182 1,209
------- -------- ------- --------
Income before income taxes 2,871 2,347 6,441 5,148
Income tax expense 718 587 1,610 1,287
------- -------- ------- --------
Net income $ 2,153 $ 1,760 $ 4,831 $ 3,861
------- -------- ------- --------
------- -------- ------- --------
Net income per share:
Basic $ 0.32 $ 0.27 $ 0.73 $ 0.60
------- -------- ------- --------
------- -------- ------- --------
Diluted $ 0.31 $ 0.26 $ 0.70 $ 0.56
------- -------- ------- --------
------- -------- ------- --------
Weighted average shares outstanding:
Basic 6,644 6,476 6,625 6,464
------- -------- ------- --------
------- -------- ------- --------
Diluted 6,956 6,844 6,925 6,838
------- -------- ------- --------
------- -------- ------- --------
See accompanying notes to consolidated financial statements.
5
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(amounts in thousands)
Six Months Ended
June 28, June 29,
1998 1997
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(unaudited)
Cash flows from operating activities:
Net income $ 4,831 $ 3,861
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, amortization and other non-cash charges 4,614 3,913
Deferred income taxes 1,396 1,024
Change in assets and liabilities:
Accounts receivable 296 2
Inventories (123) (388)
Prepaid expenses and other assets 42 (2,255)
Accounts payable, accrued expenses and other liabilities (6,222) (2,008)
Accrued income taxes (145) (274)
------- -------
Net cash provided by operating activities 4,689 3,875
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Cash flows from investing activities:
Purchases of property and equipment, net (4,939) (3,438)
Payments for start-up costs, licenses and other deferred expenses (1,050) (1,966)
Proceeds from sale of Mick's and Peasant restaurants - 4,308
------- -------
Net cash used by investing activities (5,989) (1,096)
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Cash flows from financing activities:
Principal reduction on bank debt (2,635) (7,624)
Proceeds from bank debt 1,500 4,850
Net proceeds from issuance of stock 484 253
-------- --------
Net cash used by financing activities (651) (2,521)
-------- --------
Effect of exchange rate changes on cash (67) -
--------- ------
Net increase (decrease) in cash and cash equivalents (2,018) 258
Cash and cash equivalents at beginning of period 3,437 2,276
------- -------
Cash and cash equivalents at end of period $ 1,419 $ 2,534
------- -------
------- -------
See accompanying notes to consolidated financial statements.
6
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 28, 1998 and June 29, 1997
1) The accompanying unaudited, consolidated financial statements have been
prepared in accordance with instructions to Form 10-Q and, therefore, do not
include all information and footnotes normally included in financial
statements prepared in conformity with generally accepted accounting
principles. They should be read in conjunction with the consolidated
financial statements of Morton's Restaurant Group, Inc., (the "Company") for
the fiscal year ended December 28, 1997, filed by the Company on Form 10-K
with the Securities and Exchange Commission on March 26, 1998.
The accompanying financial statements are unaudited and include all
adjustments (consisting of normal recurring adjustments and accruals) that
management considers necessary for a fair presentation of its financial position
and results of operations for the interim periods presented. The results of
operations for the interim periods are not necessarily indicative of the results
that may be expected for the entire year.
The Company uses a fiscal year which consists of 52 weeks.
Approximately every six or seven years, a 53rd week will be added.
2) 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 $1,155,000 and $965,000, and income
taxes of approximately $351,000 and $835,000, for the six months ended June 28,
1998 and June 29, 1997, respectively. During the first six months of fiscal 1998
and 1997, the Company entered into capital lease arrangements of approximately
$571,000 and $777,000, respectively, for restaurant equipment. Also during the
second quarter of fiscal 1998, the Company entered into mortgage financing of
$1,500,000 for the purchase of land.
3) As described below, on February 6, 1997, the Company completed the sale of
its Atlanta-based Mick's Restaurants, Inc. ("Mick's") and The Peasant
Restaurants, Inc. ("Peasant"). 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 had
approved a plan for the sale of Mick's and The Peasant.
7
The following represents the combined results of operations for Mick's
and Peasant for the periods ended June 28, 1998 and June 29, 1997. Interest
expense was not allocated.
Six Months Ended
June 28, 1998 June 29, 1997 *
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(amounts in thousands, unaudited)
Revenues $ - $ 7,181
Food and beverage costs - 2,151
Restaurant operating expense - 4,320
Depreciation, amortization and other non-cash charges - 6
General and administrative expenses - 477
Marketing and promotional expenses - 123
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Income before income taxes $ - $ 104
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*Includes the Atlanta-based Mick's and Peasant restaurants through
February 6, 1997, the date of sale, as discussed below, and the five remaining
non-Atlanta Mick's restaurants which the Company sold, closed or otherwise
disposed of during fiscal 1997.
Management had been actively seeking potential buyers for the sale of
all Mick's and Peasant restaurants, however, most of the interest received
related to the majority of the restaurants located mainly in the Atlanta area.
No meaningful offers were received for the remaining restaurants (the "Remaining
Restaurants"). Cash flow analyses prepared by management for the Remaining
Restaurants indicated that it would be less costly to close such restaurants in
an orderly fashion, rather than continue to operate them through the end of
their respective lease terms. Accordingly, assets of $8,300,000 related to the
Remaining Restaurants were written off and expenses of $7,200,000, representing
management's estimate of the expected costs to terminate related leases, were
accrued at December 31, 1995. During the first six months of fiscal 1998 and
1997, restaurant occupancy expense of approximately $390,000 and $647,000 for
the Remaining Restaurants has been charged against the accrual for lease exit
costs, respectively. During fiscal 1997, the remaining seven Mick's restaurants
were sold, closed or otherwise disposed of. At June 28, 1998 and December 28,
1997, included in "Accrued expenses" in the accompanying consolidated balance
sheet is approximately $503,000 and $788,000 representing the remaining lease
disposition liabilities related to the closing of these restaurants.
On February 6, 1997, the Company completed the sale of its
Atlanta-based Mick's and Peasant restaurants. In connection with the sale, the
Remaining Restaurants were transferred to another subsidiary of the Company.
Pursuant to these agreements, MRI Acquisition Corporation acquired an 80.1%
interest in Mick's and PRI Acquisition Corporation acquired an 80.1% interest in
Peasant for an aggregate of $6,800,000, consisting of $4,300,000 in cash and
$2,500,000 in the form of two unsecured promissory notes. The Company retained a
19.9% interest in Mick's and Peasant which, on April 6, 1998 was exchanged for a
19.9% interest in Atlanta Dining Group, Inc., parent of Mick's and Peasant. The
unsecured promissory notes and the 19.9% interest in Mick's and Peasant were
recorded at their estimated fair values on the date of the sale of approximately
$2,200,000 and are included in "Other assets and deferred expenses" in the
accompanying consolidated balance sheets at June 28, 1998 and December 28, 1997.
In conjunction with the sale, the Company had 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, both of which
were disposed of in fiscal 1997.
8
4) In May 1998, the Company opened its first international location in
Singapore. Foreign revenues and expenses are translated at average exchange
rates and foreign assets and liabilities are translated at period-end exchange
rates. Net foreign exchange gains and losses on translation are reported in
stockholders' equity.
5) During fiscal 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income". For the three and six
months ended June 28, 1998, the change in the cumulative foreign currency
translation adjustment was $73,000, which is a component of comprehensive
income.
6) The Company is involved in various legal actions. See "Part II - Other
Information, Item 1. Legal Proceedings" on page 16 of this Form 10-Q for a
discussion of these legal actions.
9
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
The following table represents the unaudited combined results of
operations for Morton's Restaurant Group, Morton's of Chicago Steakhouses
(Morton's) and Bertolini's Authentic Trattorias (Bertolini's), excluding Mick's
Restaurants, Inc. (Mick's) and The Peasant Restaurants, Inc. (Peasant). As
discussed in Note 3 to the accompanying consolidated financial statements, the
Company completed the sale of its Atlanta-based Mick's and Peasant restaurants
on February 6, 1997 and closed, sold, or otherwise disposed of all other
remaining Mick's and Peasant restaurants during fiscal 1997.
Morton's Restaurant Group, Inc., Morton's and Bertolini's (excluding Mick's
and Peasant):
Three Months Ended Six Months Ended
June 28, 1998 June 29, 1997 June 28, 1998 June 29, 1997
------------- -------------- ------------- -------------
(amounts in thousands)
Revenues $45,604 $39,604 $93,315 $80,414
Food and beverage costs 15,530 13,778 31,927 28,020
Restaurant operating expenses 19,840 17,025 39,882 33,860
Depreciation, amortization and other
non-cash charges 2,128 1,826 4,614 3,907
General and administrative expenses 3,407 3,157 6,816 6,415
Marketing and promotional expenses 1,226 953 2,453 1,959
Interest expense, net 602 589 1,182 1,209
----------- ------------ ----------- -------------
Income before income taxes $ 2,871 $ 2,276 $ 6,441 $ 5,044
----------- ------------ ----------- -------------
----------- ------------ ----------- -------------
The following represents the unaudited combined results of operations for
Mick's and Peasant. Interest expense was not allocated to Mick's and Peasant.
Mick's and Peasant Restaurants:
Three Months Ended Six Months Ended
June 28, 1998 June 29, 1997 June 28, 1998 June 29, 1997
------------- ------------- ------------- -------------
(amounts in thousands)
Revenues $ - $ 1,457 $ - $ 7,181
Food and beverage costs - 448 - 2,151
Restaurant operating expenses - 871 - 4,320
Depreciation, amortization and other
non-cash charges - - - 6
General and administrative expenses - 45 - 477
Marketing and promotional expenses - 22 - 123
------------- --------- ------------- ----------
Income before income taxes $ - $ 71 $ - $ 104
------------- --------- ------------- ----------
------------- --------- ------------- ----------
Revenues increased $4.5 million, or 11.1%, to $45.6 million for the
three month period ended June 28, 1998, from $41.1 million for the comparable
1997 period. Revenues from Morton's and Bertolini's
10
increased $6.0 million, or 15.1%, to $45.6 million for the three month period
ended June 28, 1998, from $39.6 million during the comparable 1997 period. Of
the increase in Morton's and Bertolini's revenues, $4.9 million was attributable
to incremental restaurant revenues from nine new restaurants opened after
December 30, 1996 and $1.1 million, or 3.1%, was attributable to additional
comparable revenues from restaurants open all of both periods. Average Morton's
and Bertolini's revenues per restaurant open for a full period increased 0.6%.
Revenues for the Mick's and Peasant restaurants were approximately $1.5 million
in the second quarter of fiscal 1997.
Revenues increased $5.7 million, or 6.5%, to $93.3 million for the six
month period ended June 28, 1998, from $87.6 million for the comparable 1997
period. Revenues from Morton's and Bertolini's increased $12.9 million, or
16.0%, to $93.3 million for the six month period ended June 28, 1998, from $80.4
million for the comparable 1997 period. Of the increase in Morton's and
Bertolini's revenues, $10.4 million was attributable to incremental restaurant
revenues from nine new restaurants opened after December 30, 1996 and $3.0
million, or 3.9%, was attributable to additional comparable revenues from
restaurants open all of both periods. Average Morton's and Bertolini's revenues
per restaurant open for a full period increased 1.5%. Included in 1997 six month
revenues is approximately $0.5 million of investment income. As stated in Note
3, the Company completed the sale of its Atlanta-based Mick's and Peasant
restaurants on February 6, 1997 and all remaining Mick's and Peasants were
disposed of during fiscal 1996 and 1997. Revenues for the Mick's and Peasant
restaurants were approximately $7.2 million for the six month period ended June
29, 1997.
Percentage changes in comparable restaurant revenues for the three and
six month periods ended June 28, 1998 versus June 29, 1997 for restaurants open
all of both periods are as follows:
Three Months Six Months
Ended June 28, 1998 Ended June 28, 1998
Percentage Change Percentage Change
-------------------- -------------------
Morton's 3.9% 4.4%
Bertolini's -1.2% 1.7%
Total 3.1% 3.9%
Food and beverage costs increased from $14.2 million for the three month
period ended June 29, 1997 to $15.5 million for the three month period ended
June 28, 1998 and increased from $30.2 million for the six month period ended
June 29, 1997 to $31.9 million for the six month period ended June 28, 1998.
Food and beverage costs, excluding all Mick's and Peasant restaurants, increased
by $1.7 million to $15.5 million for the three month period ended June 28, 1998
from $13.8 million recorded for the three month period ended June 29, 1997 and
increased by $3.9 million to $31.9 million for the six month period ended June
28, 1998, from $28.0 million for the comparable 1997 period. These costs as a
percentage of related revenues decreased 0.7% and 0.6% for the three and six
month periods, respectively. As a result of the disposition of Mick's and
Peasant as discussed in Note 3, there was a reduction in food and beverage costs
of approximately $0.4 million and $2.2 million in the three and six month
periods ended June 28, 1998 from the corresponding 1997 periods, respectively.
Restaurant operating expenses which include labor, occupancy and other
operating expenses increased from $17.9 million for the three month period ended
June 29, 1997 to $19.8 million for the three month period ended June 28, 1998,
an increase of $1.9 million. For the six months ended June 28, 1998, these costs
increased from $38.2 million during the 1997 period, to $39.9 million for the
comparable 1998 period. Restaurant operating expenses, excluding all Mick's and
Peasant restaurants, increased from $17.0 million for the three month period
ended June 29, 1997 to $19.8 million for the comparable 1998 period and
increased from $33.9 million for the six month period ended June 29, 1997 to
$39.9 million for the
11
comparable 1998 period. Those costs, excluding Mick's and
Peasant, as a percentage of revenues increased 0.5% from 43.0% for the three
month period ended June 29, 1997 to 43.5% for the three month period ended June
28, 1998 and increased 0.6% from 42.1% for the six month period ended June 29,
1997 to 42.7% for the comparable 1998 period. Offsetting the increase in total
restaurant operating expenses was a reduction of approximately $0.9 million and
$4.3 million during the three and six month periods ended June 28, 1998 versus
the comparable 1997 periods, respectively, due to the disposition of Mick's and
Peasant restaurants as discussed in Note 3.
Depreciation, amortization and other non-cash charges increased from
$1.8 million for the three month period ended June 29, 1997 to $2.1 million for
the three month period ended June 28, 1998 and increased from 4.4% of revenues
to 4.7%, respectively. For the six months ended June 28, 1998, such costs were
$4.6 million versus $3.9 million for the comparable 1997 period. Pre-opening
costs associated with the opening of new restaurants are amortized over the 12
months following opening. The timing of restaurant openings affects the amount
of such costs amortized.
General and administrative expenses for the three month period ended
June 28, 1998 were $3.4 million, an increase of $0.2 million, from $3.2 million
for the three month period ended June 29, 1997. For the six months ended June
28, 1998, such costs were $6.8 million versus $6.9 million for the comparable
1997 period. General and administrative expenses, excluding all Mick's and
Peasant restaurants, increased $0.3 million from $3.1 million for the three
month period ended June 29, 1997 to $3.4 million for the comparable 1998 period
and increased $0.4 million from $6.4 million for the six month period ended June
29, 1997, to $6.8 million for the comparable 1998 period. Such costs, excluding
Mick's and Peasant, as a percentage of revenues were 7.5% for the three month
period ended June 28, 1998, a decrease of 0.5% from the three month period ended
June 29, 1997 and 7.3% for the six months ended June 28, 1998, a decrease of
0.7% from the six months ended June 29, 1997. The increase in such expense is
driven by incremental costs associated with restaurant development. General and
administrative expenses relating to Mick's and Peasant restaurants decreased
$0.1 million and $0.5 million during the three and six month periods ended June
28, 1998, respectively, versus the comparable 1997 period as a result of the
disposition of Mick's and Peasant restaurants as discussed in Note 3.
Marketing and promotional expenses were $1.2 million, an increase of
$0.2 million, and $2.5 million, an increase of $0.5 million, for the three and
six month periods ended June 28, 1998, respectively. Marketing and promotional
expenses, excluding Mick's and Peasant restaurants, were $1.2 million, or 2.7%
of revenues for the three months ended June 28, 1998, as compared to $1.0
million, or 2.4% of revenues, for the comparable 1997 period and were $2.5
million, or 2.6% of revenues for the six months ended June 28, 1998, as compared
to $2.0 million, or 2.4% of revenues, for the comparable 1997 period. The
increase is driven by incremental costs associated with increased restaurant
development. Mick's and Peasant marketing and promotional expenses were $0.02
million and $0.1 million during the three and six month periods ended June 29,
1997.
Interest expense, net of interest income, remained constant at $0.6
million for the three month periods ended June 28, 1998 and June 29, 1997. For
the six month periods ended June 28, 1998 and June 29, 1997, interest expense
remained constant at $1.2 million.
Income tax expense of $1.6 million for the six month period ended June
28, 1998 represents Federal income taxes, which were partially offset by the
establishment of additional deferred tax assets relating to FICA and other tax
credits that were generated during fiscal 1998, as well as state income taxes.
12
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 are used for
noncurrent capital expenditures and/or payments of long-term debt balances under
revolving credit agreements.
The Company and BankBoston, N.A. (formerly The First National Bank of
Boston) ("BBNA") entered into the Second Amended and Restated Revolving Credit
and Term Loan Agreement dated as of June 19, 1995, as amended from time to time
(collectively, the "Credit Agreement"), pursuant to which the Company's credit
facility is $32,500,000, consisting of a $15,000,000 term loan (the "Term Loan")
and a $17,500,000 revolving credit facility (the "Revolving Credit"). The final
maturity date is December 31, 2002. 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
June 28, 1998, the Company's applicable margin, calculated pursuant to the
Credit Agreement, was 0.00% on base rate loans and 1.75% on Eurodollar Rate
loans. BBNA has syndicated portions of the Term Loan and Revolving Credit of the
Credit Agreement.
As of June 28, 1998 and December 28, 1997, the Company had outstanding
borrowings of $21,650,000 and $22,700,000, respectively, under the Credit
Agreement. At June 28, 1998, $230,000 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 $8,720,000. The
weighted average interest rate on all bank borrowings on June 28, 1998 was
7.45%. 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 reduce by
$1,000,000 on June 30, 1999 and thereafter principal installments on the Term
Loan of $1,000,000 will be due at the end of each calendar quarter through
December 31, 2002. The Revolving Credit will be payable in full on December 31,
2002. 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 June 28,
1998 amount to $0 in 1998, $3,000,000 in 1999, $4,000,000 in 2000, $4,000,000 in
2001 and $10,650,000 in 2002. The borrowings under the Company's Credit
Agreement have been classified as long-term bank debt on the Company's
consolidated balance sheet since the Company may borrow amounts due under the
Term Loan from the Revolving Credit, including the Term Loan principal payments
due in June 1999. As stated in Note 3 to the accompanying consolidated financial
statements, the Company completed the sale of its Atlanta-based Mick's and
Peasant restaurants in fiscal 1997. Net cash proceeds from the sale were used to
reduce the Company's Revolving Credit.
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 June 28, 1998, the
Company believes it was in compliance with such covenants.
13
On April 7, 1998 and May 29, 1998, the Company entered into interest
rate swap agreements with BBNA on notional amounts of $10,000,000 each. The term
of the agreements are for three years and may be extended for an additional two
years at the option of BBNA.
In March 1997, a subsidiary of the Company and CNL Financial I, Inc.
("CNL") entered into a $2,500,000 loan agreement (the "CNL Loan") which matures
on April 1, 2007 and has a 10.02% per annum interest rate. Principal and
interest payments will be made over the term of the loan. Proceeds from the CNL
loan were used to reduce the Company's Revolving Credit. At June 28, 1998 the
outstanding principal balance of the CNL Loan was approximately $2,305,000 of
which approximately $174,000 is payable within the next fiscal year and
therefore has been included in "Current portion of bank debt and capital lease
obligations" in the accompanying consolidated balance sheet for the period ended
June 28, 1998.
In May 1998, a subsidiary of the Company and FFCA Acquisition
Corporation ("FFCA") entered into a loan agreement to fund the purchase of land
and the construction of a Morton's of Chicago restaurant for an amount not
exceeding $3,000,000. In May 1998, $1,500,000 was funded for the land purchase
and the remainder will be funded upon completion of construction. Interest is
accrued on the initial funding at an adjustable rate equal to the London
interbank offered rate, adjusted monthly, plus an applicable margin of 2.75%. At
June 28, 1998, approximately $16,000 of interest had accrued. Upon the final
disbursement, the interest rate will be fixed at a rate of interest equal to the
ten year U.S. Treasury Rate then in effect plus 2.75%. Principal and interest
payments will be made on a monthly basis over a twenty-year period.
During the first six months of fiscal 1998, the Company's net investment
in fixed assets and related investment costs, net of capitalized leases
approximated $6.0 million. The Company estimates that it will expend up to an
aggregate of $15.0 million in 1998 to finance ordinary refurbishment of existing
restaurants and pre-opening costs and capital expenditures, net of landlord
development and rent allowances and net of equipment lease and mortgage
financing, for new restaurants. The Company has entered into various equipment
lease and mortgage financing agreements with several financial institutions of
which approximately $18.6 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.
The Company has entered the international market. A Morton's of Chicago
restaurant opened in Singapore in May 1998 and a lease has been signed to open a
Morton's of Chicago restaurant in Toronto. Other international opportunities are
being investigated.
New Accounting Pronouncements
In April 1998, Statement of Position (SOP) 98-5, "Reporting on the Costs
of Start-up Activities", was issued. The SOP requires that costs incurred during
start-up activities (including pre-opening costs) be expensed as incurred. The
Company will adopt the SOP in the first quarter of 1999. Since the Company
currently amortizes pre-opening costs over the twelve months following the
underlying restaurant's opening, the impact of adopting this pronouncement will
be dependent upon the amount of unamortized start-up costs at the date of
adoption.
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("Statement
133"), was issued. Statement 133 standardizes the accounting for derivative
instruments and requires that all derivative instruments be carried at fair
value in the statement of financial position. The Company has not determined
the impact that Statement 133 will have on its financial statements and
believes that such determination will not be meaningful until closer to the
date of initial adoption in January 2000.
14
Forward-Looking Statements
Except for the historical information contained in this Form 10-Q,
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.
15
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Part II - Other Information
Item 1. Legal Proceedings
An employee (Plaintiff) of a subsidiary of the Company, initiated
legal action against Morton's of Chicago, Quantum Corporation and unnamed
"Doe" defendants on February 8, 1996 in California Superior Court in San
Francisco. Plaintiff's, Ms. Wendy Kirkland, complaint alleged under
California law, among other things, wrongful constructive termination, sex
discrimination and sexual harassment. Plaintiff sought general, special, and
punitive damages in unspecified amounts, as well as attorney's fees and
costs. The case was subsequently removed to the US District Court for the
Northern District of California. By order dated October 14, 1997, the Court
granted Plaintiff's motion for partial summary judgment, finding that an
employer is strictly liable under California law for the sexually harassing
conduct of the employer's supervisory employees. On November 25, 1997, a jury
in the US District Court for the Northern District of California awarded a
judgment to the Plaintiff. In conjunction with the judgment, the Company
recorded a 1997 fourth quarter nonrecurring, pre-tax charge of $2,300,000,
representing compensatory damages of $250,000, punitive damages of $850,000,
and an estimate of the Plaintiff's and the Company's legal fees and expenses.
On July 29, 1998, the Court entered judgment in accordance with the jury's
verdict. The Company will vigorously contest and appeal the judgment.
The Company is also involved in other various legal actions incidental
to the normal conduct of its business. Management does not believe that the
ultimate resolution of these actions will have a material adverse effect on the
Company's consolidated financial position, equity, results of operations,
liquidity and capital resources.
Item 4. Submission of Matters to a Vote of Stockholders
No matters were submitted to a vote of stockholders during the quarter
for which this report was filed.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
4.04 (l) Letter Agreement, dated May 29, 1998, among BankBoston, N.A.
and the Registrant regarding an Extendible Swap Transaction.
4.04 (m) Promissory Note, dated May 14, 1998, among FFCA Acquisition
Corporation and Morton's of Chicago/North Miami Beach, Inc., a
subsidiary of the Registrant.
27.00 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter for which this
report was filed.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MORTON'S RESTAURANT GROUP, INC.
---------------------------------
(Registrant)
Date August 11, 1998
----------------------
By: /s/ ALLEN J. BERNSTEIN
---------------------------
Allen J. Bernstein
Chairman of the Board, President
and Chief Executive Officer
Date August 11, 1998 By: /s/ THOMAS J. BALDWIN
----------------------- ---------------------------
Thomas J. Baldwin
Executive Vice President
and Chief Financial Officer
17
INDEX TO EXHIBITS
The following is a list of all exhibits filed as part of this report.
Exhibit
Number Page Document
------- ---- --------
4.04 (l) Letter Agreement, dated May 29, 1998, among BankBoston, N.A. and the
Registrant regarding an Extendible Swap Transaction.
4.04 (m) Promissory Note, dated May 14, 1998, among FFCA Acquisition Corporation and Morton's of
Chicago/North Miami Beach, Inc., a subsidiary of the Registrant.
27.00 Financial Data Schedule
18