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 September 27, 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 November 3, 1998, the registrant had 6,547,720 shares of its Common Stock,
$.01 par value, issued and outstanding.
1
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 September 27, 1998 and December 28, 1997 ..................... 3-4
Consolidated Statements of Income for the three and nine month periods ended
September 27, 1998 and September 28, 1997 .................................................... 5
Consolidated Statements of Cash Flows for the nine month periods ended September 27, 1998
and September 28, 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)
September 27, December 28,
1998 1997
------- -------
(unaudited)
Assets
Current assets:
Cash and cash equivalents ................................... $ 2,015 $ 3,437
Accounts receivable ......................................... 2,153 1,669
Inventories ................................................. 5,479 5,420
Landlord construction receivables, prepaid expenses and other
current assets ............................................ 2,701 3,226
Deferred income taxes ....................................... 5,420 4,890
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Total current assets .................................. 17,768 18,642
Property and equipment, at cost:
Furniture, fixtures and equipment ........................... 21,929 19,169
Leasehold improvements ...................................... 26,782 21,876
Land ........................................................ 3,869 --
Construction in progress .................................... 1,499 46
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54,079 41,091
Less accumulated depreciation and amortization .............. 8,815 6,449
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Net property and equipment ............................ 45,264 34,642
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Intangible assets, net of accumulated amortization of $3,760 at
September 27, 1998 and $3,458 at December 28, 1997 .......... 12,235 12,537
Other assets and deferred expenses, net of accumulated
amortization of $2,933 at September 27, 1998 and $3,901 at
December 28, 1997 ........................................... 10,859 11,902
Deferred income taxes ............................................ 2,040 4,220
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$88,166 $81,943
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------- -------
(Continued)
3
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
(amounts in thousands, except share data)
September 27, December 28,
1998 1997
------- -------
(unaudited)
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ............................................ $ 6,916 $ 6,159
Accrued expenses ............................................ 7,820 13,210
Current portion of bank debt and capital lease obligations .. 1,704 1,419
Accrued income taxes ........................................ 387 656
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Total current liabilities ........................... 16,827 21,444
Bank debt ........................................................ 30,022 24,931
Capital lease obligations ........................................ 3,073 3,739
Other liabilities ................................................ 3,417 3,274
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Total liabilities ................................... 53,339 53,388
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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 6,652,915
shares at September 27, 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 .................................. 62,708 62,214
Cumulative foreign currency translation adjustment .......... (72) --
Accumulated deficit ......................................... (27,876) (33,725)
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Total stockholders' equity ............................ 34,827 28,555
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$88,166 $81,943
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------- -------
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 Nine Months Ended
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
1998 1997 1998 1997
-------- -------- -------- --------
(unaudited) (unaudited)
Revenues ............................................ $ 40,886 $ 37,461 $134,201 $125,056
Food and beverage costs ............................. 14,005 12,787 45,932 42,958
Restaurant operating expenses ....................... 19,021 17,680 58,904 55,860
Depreciation, amortization and other non-cash charges 1,801 1,410 6,415 5,324
General and administrative expenses ................. 3,105 2,993 9,921 9,885
Marketing and promotional expenses .................. 1,063 846 3,516 2,928
Interest expense, net ............................... 532 564 1,714 1,772
-------- -------- -------- --------
Income before income taxes ................ 1,359 1,181 7,799 6,329
Income tax expense .................................. 340 295 1,950 1,582
-------- -------- -------- --------
Net income ................................. $ 1,019 $ 886 $ 5,849 $ 4,747
-------- -------- -------- --------
-------- -------- -------- --------
Net income per share:
Basic ...................................... $ 0.15 $ 0.14 $ 0.88 $ 0.73
-------- -------- -------- --------
-------- -------- -------- --------
Diluted .................................... $ 0.15 $ 0.13 $ 0.84 $ 0.69
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-------- -------- -------- --------
Weighted average shares outstanding:
Basic ...................................... 6,652 6,515 6,634 6,481
-------- -------- -------- --------
-------- -------- -------- --------
Diluted .................................... 6,930 6,949 6,927 6,873
-------- -------- -------- --------
-------- -------- -------- --------
See accompanying notes to consolidated financial statements.
5
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(amounts in thousands)
Nine Months Ended
Sept. 27, Sept. 28,
1998 1997
-------- --------
(unaudited)
Cash flows from operating activities:
Net income ...................................................... $ 5,849 $ 4,747
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, amortization and other non-cash charges ........... 6,415 5,324
Deferred income taxes ........................................... 1,650 1,283
Change in assets and liabilities:
Accounts receivable ......................................... (483) (650)
Inventories ................................................. (58) (370)
Prepaid expenses and other assets ........................... 113 (3,090)
Accounts payable, accrued expenses and other liabilities .... (6,188) (3,157)
Accrued income taxes ........................................ (269) (385)
-------- --------
Net cash provided by operating activities .............. 7,029 3,702
-------- --------
Cash flows from investing activities:
Purchases of property and equipment, net ........................ (8,923) (6,144)
Payments for start-up costs, licenses and other deferred expenses (2,072) (4,896)
Proceeds from sale of Mick's and Peasant restaurants ............ -- 4,308
-------- --------
Net cash used by investing activities .................. (10,995) (6,732)
-------- --------
Cash flows from financing activities:
Principal reduction on bank debt ................................ (4,296) (7,665)
Proceeds from bank debt ......................................... 6,400 10,200
Net proceeds from issuance of stock ............................. 495 471
-------- --------
Net cash provided by financing activities .............. 2,599 3,006
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Effect of exchange rate changes on cash .............................. (55) --
-------- --------
Net decrease in cash and cash equivalents ............................ (1,422) (24)
Cash and cash equivalents at beginning of period ..................... 3,437 2,276
-------- --------
Cash and cash equivalents at end of period ........................... $ 2,015 $ 2,252
-------- --------
-------- --------
See accompanying notes to consolidated financial statements.
6
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 27, 1998 and September 28, 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 $1,616,000 and $1,398,000 and
income taxes of approximately $797,000 and $954,000, for the nine months ended
September 27, 1998 and September 28, 1997, respectively. During the first nine
months of fiscal 1998 and 1997, the Company entered into capital lease
arrangements of approximately $953,000 and $1,569,000, respectively, for
restaurant equipment. Also during the first nine months of fiscal 1998, the
Company entered into mortgage financing of $3,000,000 for the purchase of land
and construction of a restaurant.
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 Peasant.
7
The following represents the combined results of operations for Mick's
and Peasant for the periods ended September 27, 1998 and September 28, 1997.
Interest expense was not allocated.
Nine Months Ended
Sept. 27, 1998 Sept. 28, 1997*
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(amounts in thousands, unaudited)
Revenues ............................................ $ -- $7,981
Food and beverage costs ............................. -- 2,407
Restaurant operating expense ........................ -- 4,841
Depreciation, amortization and other non-cash charges -- 6
General and administrative expenses ................. -- 529
Marketing and promotional expenses .................. -- 138
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Income before income taxes ................. $ -- $ 60
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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 nine months of fiscal 1998 and
1997, restaurant occupancy expense of approximately $546,000 and $1,201,000 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 September 27, 1998 and December
28, 1997, included in "Accrued expenses" in the accompanying consolidated
balance sheet is approximately $231,000 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 September 27, 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
8
received, to 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.
4) During 1998, the Company opened two international locations, one in
Singapore (May 1998) and one in Toronto (September 1998). 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 nine
months ended September 27, 1998, the change in the cumulative foreign currency
translation adjustment was $72,000, which is a component of comprehensive
income.
6) In October 1998, the Company announced that its board of directors
has authorized a repurchase of up to 20%, or approximately 1.3 million shares,
of the Company's outstanding common stock. The timing and amount of the
purchases will be at the full discretion of the Company's senior management and
subject to market conditions and applicable securities and tax regulations. The
repurchase will be accomplished through periodic purchases at prevailing prices
on the open market, by block purchases or in privately negotiated transactions.
The repurchased shares will be retained as treasury stock for use for corporate
purposes. The Company expects to finance the purchases from existing cash flow,
through its current credit facility, from additional borrowings, or a
combination thereof.
7) 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 Nine Months Ended
Sept. 27, 1998 Sept. 28, 1997 Sept. 27, 1998 Sept. 28, 1997
-------------- -------------- -------------- --------------
(amounts in thousands)
Revenues ........................... $ 40,886 $ 36,661 $134,201 $117,075
Food and beverage costs ............ 14,005 12,531 45,932 40,551
Restaurant operating expenses ...... 19,021 17,160 58,904 51,019
Depreciation, amortization and other
non-cash charges ............... 1,801 1,410 6,415 5,317
General and administrative expenses 3,105 2,941 9,921 9,357
Marketing and promotional expenses . 1,063 831 3,516 2,790
Interest expense, net .............. 532 564 1,714 1,772
-------- -------- -------- --------
Income before income taxes $ 1,359 $ 1,224 $ 7,799 $ 6,269
-------- -------- -------- --------
-------- -------- -------- --------
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 Nine Months Ended
Sept. 27, 1998 Sept. 28, 1997 Sept. 27, 1998 Sept. 28, 1997
-------------- -------------- -------------- --------------
(amounts in thousands)
Revenues ........................... $ -- $ 800 $ -- $ 7,981
Food and beverage costs ............ -- 255 -- 2,407
Restaurant operating expenses ...... -- 521 -- 4,841
Depreciation, amortization and other
non-cash charges .............. -- -- -- 6
General and administrative expenses -- 52 -- 529
Marketing and promotional expenses . -- 15 -- 138
-------- -------- -------- --------
Income (loss) before
income taxes ............ $ -- $ (43) $ -- $ 60
-------- -------- -------- --------
-------- -------- -------- --------
10
Revenues increased $3.4 million, or 9.1%, to $40.9 million for the
three month period ended September 27, 1998, from $37.5 million for the
comparable 1997 period. Revenues from Morton's and Bertolini's increased $4.2
million, or 11.5%, to $40.9 million for the three month period ended September
27, 1998, from $36.7 million during the comparable 1997 period. Of the increase
in Morton's and Bertolini's revenues, $3.6 million was attributable to
incremental restaurant revenues from ten new restaurants opened after December
30, 1996 and $0.8 million, or 2.3%, 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 decreased 0.5%.
Included in 1997 three-month revenues is approximately $0.2 million of
consulting fee income. Revenues for the Mick's and Peasant restaurants were
approximately $0.8 million in the third quarter of fiscal 1997.
Revenues increased $9.1 million, or 7.3%, to $134.2 million for the
nine month period ended September 27, 1998, from $125.1 million for the
comparable 1997 period. Revenues from Morton's and Bertolini's increased $17.1
million, or 14.6%, to $134.2 million for the nine month period ended September
27, 1998, from $117.1 million for the comparable 1997 period. Of the increase in
Morton's and Bertolini's revenues, $14.0 million was attributable to incremental
restaurant revenues from ten new restaurants opened after December 30, 1996 and
$3.8 million, or 3.4%, 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 0.9%. Included in 1997
nine-month revenues is approximately $0.5 million of investment income and $0.2
million of consulting fee 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 $8.0 million
for the nine-month period ended September 28, 1997. Certain Bertolini's
restaurants have generated lower than anticipated revenues which have adversely
impacted average restaurant revenues, earnings and earnings trends.
Additionally, as reflected in the table below, 1998 was impacted by declines in
Bertolini's comparable restaurant revenues offset by increases in Morton's.
Percentage changes in comparable restaurant revenues for the three and
nine-month periods ended September 27, 1998 versus September 28, 1997 for
restaurants open all of both periods are as follows:
Three Months Nine Months
Ended Sept. 27, 1998 Ended Sept. 27, 1998
Percentage Change Percentage Change
----------------- -----------------
Morton's .. 4.2% 4.3%
Bertolini's -5.9% -0.9%
Total ..... 2.3% 3.4%
Food and beverage costs increased from $12.8 million for the three month
period ended September 28, 1997 to $14.0 million for the three month period
ended September 27, 1998 and increased from $43.0 million for the nine month
period ended September 28, 1997 to $45.9 million for the nine month period ended
September 27, 1998. Food and beverage costs, excluding all Mick's and Peasant
restaurants, increased by $1.5 million to $14.0 million for the three month
period ended September 27, 1998 from $12.5 million recorded for the three month
period ended September 28, 1997 and increased by $5.3 million to $45.9 million
for the nine month period ended September 27, 1998, from $40.6 million for the
comparable 1997 period. These costs as a percentage of related revenues
increased 0.1% and decreased 0.4% for the three and nine 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
$0.3 million and $2.4 million in the three and nine month periods ended
September 27, 1998 from the corresponding 1997 periods, respectively.
11
Restaurant operating expenses which include labor, occupancy and other
operating expenses increased from $17.7 million for the three month period ended
September 28, 1997 to $19.0 million for the three month period ended September
27, 1998, an increase of $1.3 million. For the nine months ended September 27,
1998, these costs increased from $55.9 million during the 1997 period, to $58.9
million for the comparable 1998 period. Restaurant operating expenses, excluding
all Mick's and Peasant restaurants, increased from $17.2 million for the three
month period ended September 28, 1997 to $19.0 million for the comparable 1998
period and increased from $51.0 million for the nine month period ended
September 28, 1997 to $58.9 million for the comparable 1998 period. Those costs,
excluding Mick's and Peasant, as a percentage of revenues decreased 0.3% from
46.8% for the three month period ended September 28, 1997 to 46.5% for the three
month period ended September 27, 1998 and increased 0.3% from 43.6% for the nine
month period ended September 28, 1997 to 43.9% for the comparable 1998 period.
Offsetting the increase in total restaurant operating expenses was a reduction
of approximately $0.5 million and $4.8 million during the three and nine month
periods ended September 27, 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
$1.4 million for the three month period ended September 28, 1997 to $1.8 million
for the three month period ended September 27, 1998 and increased from 3.8% of
revenues to 4.4%, respectively. For the nine months ended September 27, 1998,
such costs were $6.4 million versus $5.3 million for the comparable 1997 period.
Pre-opening costs associated with the opening of new restaurants are amortized
over the 12 months following opening. Timing of restaurant openings affects the
amount of amortization of such costs.
General and administrative expenses for the three month period ended
September 27, 1998 were $3.1 million, an increase of $0.1 million, from $3.0
million for the three month period ended September 28, 1997. For the nine months
ended September 27, 1998, such costs were $9.9 million versus $9.9 million for
the comparable 1997 period. General and administrative expenses, excluding all
Mick's and Peasant restaurants, increased $0.2 million from $2.9 million for the
three month period ended September 28, 1997 to $3.1 million for the comparable
1998 period and increased $0.5 million from $9.4 million for the nine month
period ended September 28, 1997, to $9.9 million for the comparable 1998 period.
Such costs, excluding Mick's and Peasant, as a percentage of revenues were 7.6%
for the three month period ended September 27, 1998, a decrease of 0.4% from the
three month period ended September 28, 1997 and 7.4% for the nine months ended
September 27, 1998, a decrease of 0.6% from the nine months ended September 28,
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 nine month periods ended September 27, 1998, respectively, versus
the comparable 1997 period as a result of the disposition of Mick's and Peasant
restaurants discussed in Note 3.
Marketing and promotional expenses were $1.1 million, an increase of
$0.3 million, and $3.5 million, an increase of $0.6 million, for the three and
nine month periods ended September 27, 1998, respectively. Marketing and
promotional expenses, excluding Mick's and Peasant restaurants, were $1.0
million, or 2.6% of revenues for the three months ended September 27, 1998, as
compared to $0.8 million, or 2.3% of revenues, for the comparable 1997 period
and were $3.5 million, or 2.6% of revenues for the nine months ended September
27, 1998, as compared to $2.8 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 $0.01 million and $0.1 million during the three and nine-month
periods ended September 28, 1997.
Interest expense, net of interest income, decreased $0.1 million to $0.5
million for the three month period ended September 27, 1998. For the nine month
period ended September 27, 1998, interest expense decreased $0.1 million to $1.7
million.
12
Income tax expense of $2.0 million for the nine month period ended
September 27, 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.
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 $32,500,000 revolving credit facility
(the "Revolving Credit"). The Revolving Credit will be payable in full on the
final maturity date of December 31, 2004. 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 September 27, 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 Revolving
Credit.
As of September 27, 1998 and December 28, 1997, the Company had
outstanding borrowings of $25,000,000 and $22,700,000, respectively, under the
Credit Agreement. At September 27, 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 $7,270,000. The
weighted average interest rate on all bank borrowings on September 27, 1998 was
7.5%. 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.
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 September
27, 1998 amount to $0 for each of 1998 through 2003 and $32,500,000 in 2004. The
borrowings under the Company's Credit Agreement have been classified as
long-term bank debt on the Company's consolidated balance sheet. 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 September 27, 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 September 27, 1998
the outstanding principal balance of the CNL Loan was approximately $2,271,000
of which approximately $177,000 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
September 27, 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 in September 1998, an additional $1,500,000 was funded upon completion of
construction. Upon the final disbursement, the interest rate was fixed at a per
annum interest rate of 7.68%. Principal and interest payments on the loan, which
matures on October 1, 2018, are made on a monthly basis. At September 27, 1998
the outstanding principal balance was approximately $2,994,000 of which
approximately $66,000 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 September 27,
1998.
During the first nine months of fiscal 1998, the Company's net
investment in fixed assets and related investment costs, net of capitalized
leases approximated $11.0 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 $16.7 million in the aggregate is available for future
fundings. The Company anticipates that funds generated through operations and
funds available through equipment lease and mortgage financing commitments as
well as those available under the Credit Agreement will be sufficient to fund
planned expansion.
The Company has entered international markets with the openings of
Morton's of Chicago restaurants in Singapore in May 1998 and in Toronto in
September 1998. 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
14
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.
Year 2000
The Company has instituted a company wide initiative to examine the
implications of the Year 2000 on the Company's computer systems and
applications to ensure that the Company's computer systems will function
properly in the Year 2000 and thereafter. The Company anticipates completing
its Year 2000 project in early calendar 1999 and belives that the Year 2000
issue will not pose significant operational problems for its computer
systems. The Company has also initiated procedures to communicate with
suppliers regarding compliance with Year 2000 requirements. The Corporation
has not determined the impact, if any, on its operations if outside third
parties with which it has a business relationship fail to comply with Year
2000 requirements. Management currently believes that the costs related to
the Company's compliance with the Year 2000 issue should not have a material
adverse effect on its consolidated financial position, results of operations
or cash flows. While the Company has developed plans to test its business
critical computer systems prior to the Year 2000, there can be no assurance
that the systems of other parties upon which the Company's business also
relies will be Year 2000 compliant on a timely basis.
Forward-Looking Statements
This quarterly report on Form 10Q contains various "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1993, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements, written, oral or otherwise made, represent the
Company's expectation or belief concerning future events. Without limiting the
foregoing, the words "believes," "anticipates," "plans," expects," and similar
expressions are intended to identify forward-looking statements. The Company
cautions that these statements are further qualified by important economic and
competitive factors that could cause actual results to differ materially, or
otherwise, from those in the forward-looking statements, including, without
limitation, risks of the restaurant industry, the competitive environment,
including a highly competitive industry with many well-established competitors
with greater financial and other resources than the Company, and the impact of
changes in consumer tastes, local, regional and national economic and market
conditions, restaurant profitability levels, expansion plans, demographic
trends, traffic patterns, employee availability and benefits and cost increases,
and other risks detailed from time to time in the Company's periodic earnings
releases and reports filed with the Securities and Exchange Commission. In
addition, the Company's ability to expand is dependent upon various factors,
such as the availability of attractive sites for new restaurants, the ability to
negotiate suitable lease terms, the ability to generate or borrow funds to
develop new restaurants and obtain various government permits and licenses and
the recruitment and training of skilled management and restaurant employees.
Accordingly, such forward-looking statements do not purport to be predictions of
future events or circumstances and therefore there can be no assurance that any
forward-looking statement contained herein will prove to be accurate.
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 intends to 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 (n) Amended and Restated Promissory Note, dated September
18, 1998, among FFCA Acquisition Corporation and Morton's of Chicago, a
subsidiary of the Registrant.
4.04 (o) Ninth Amendment to the Second Amended and Restated
Revolving Credit and Term Loan Agreement, dated September 25, 1998,
between BankBoston, N.A., individually and as agent, and the
Registrant.
10.16 First Amendment to the Second Amended and Restated
Employment Agreement, dated October 1, 1998, between Registrant and
Allen J. Bernstein.
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 November 10, 1998 By: /s/ ALLEN J. BERNSTEIN
------------------------- -----------------------------
Allen J. Bernstein
Chairman of the Board, President
and Chief Executive Officer
Date November 10, 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 (n) Amended and Restated Promissory Note, dated
September 18, 1998, among FFCA Acquisition
Corporation and Morton's of Chicago, a
subsidiary of the Registrant.
4.04 (o) Ninth Amendment to the Second Amended and
Restated Revolving Credit and Term Loan
Agreement, dated September 25, 1998, between
BankBoston, N.A., individually and as agent,
and the Registrant.
10.16 First Amendment to the Second Amended and
Restated Employment Agreement, dated October 1,
1998, between Registrant and Allen J. Bernstein.
27.00 Financial Data Schedule