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 March 31, 2002
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to ________________
Commission file number 1-12692
MORTON'S RESTAURANT GROUP, INC.
------------------------------
(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
incorporation or organization) identification no.)
3333 New Hyde Park Road, Suite 210, New Hyde Park, New York 11042
----------------------------------------------------------- -----
(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 May 10, 2002, the registrant had 4,189,711 Shares of its Common Stock,
$.01 par value, outstanding.
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
INDEX
Page
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2002 and December 30, 2001 3-4
Consolidated Statements of Income for the three month periods ended March 31, 2002 and
April 1, 2001 5
Consolidated Statements of Cash Flows for the three month periods ended March 31, 2002
and April 1, 2001 6
Notes to Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11-15
Item 3. Quantitative and Qualitative Disclosure about Market Risk 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Stockholders 17
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
2
Item 1. Financial Statements
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(amounts in thousands)
March 31, December 30,
ASSETS 2002 2001
------ --------------- ---------------
(unaudited)
Current assets:
Cash and cash equivalents $ 5,798 $ 4,827
Accounts receivable 2,699 3,988
Income taxes receivable 560 560
Inventories 7,616 8,061
Landlord construction receivables,
prepaid expenses and other current assets 2,365 2,632
Deferred income taxes 4,854 4,616
--------------- ---------------
Total current assets 23,892 24,684
--------------- ---------------
Property and equipment, at cost:
Furniture, fixtures and equipment 41,394 41,100
Leasehold improvements 61,090 60,692
Land 6,241 6,241
Construction in progress 1,502 669
--------------- ---------------
110,227 108,702
Less accumulated depreciation and amortization 28,075 25,766
--------------- ---------------
Net property and equipment 82,152 82,936
--------------- ---------------
Intangible assets, net of accumulated amortization of $5,072 at
March 31, 2002 and December 30, 2001 10,923 10,923
Other assets and deferred expenses, net of accumulated amortization
of $678 at March 31, 2002 and $649 at December 30, 2001 7,675 7,582
Insurance receivable -- 1,682
Deferred income taxes 5,985 6,907
--------------- ---------------
$ 130,627 $ 134,714
=============== ===============
See accompanying notes to consolidated financial statements.
3
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
(amounts in thousands, except share and per share data)
March 31, December 30,
2002 2001
--------------- ---------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,059 $ 6,566
Accrued expenses 17,905 19,531
Current portion of obligations to financial institutions and
capital leases 3,907 4,477
Accrued income taxes 305 --
--------------- ---------------
Total current liabilities 27,176 30,574
--------------- ---------------
Obligations to financial institutions and capital leases, less current
maturities 96,993 100,232
Other liabilities 4,289 4,118
--------------- ---------------
Total liabilities 128,458 134,924
--------------- ---------------
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $0.01 par value per share. Authorized 3,000,000
shares, no shares issued or outstanding -- --
Common stock, $0.01 par value per share. Authorized
25,000,000 shares, issued 6,803,801 at March 31, 2002
and December 30, 2001 68 68
Nonvoting common stock, $0.01 par value per share. Authorized
3,000,000 shares, no shares issued or outstanding -- --
Additional paid-in capital 63,478 63,478
Accumulated other comprehensive loss (814) (907)
Accumulated deficit (13,830) (16,095)
Less treasury stock, at cost, 2,621,326 shares at March 31, 2002
and 2,624,154 shares at December 30, 2001 (46,733) (46,754)
--------------- ---------------
Total stockholders' equity (deficit) 2,169 (210)
--------------- ---------------
$ 130,627 $ 134,714
=============== ===============
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
March 31, April 1,
2002 2001
--------------- ---------------
(unaudited)
Revenues $ 61,106 $ 66,342
Food and beverage costs 21,204 22,670
Restaurant operating expenses 27,365 27,833
Pre-opening costs, depreciation, amortization and
non-cash charges 2,437 2,756
General and administrative expenses 3,758 4,932
Marketing and promotional expenses 1,188 2,199
Gain on insurance proceeds 1,318 --
Costs associated with strategic alternatives and proxy contest 1,239 --
Interest expense, net 1,997 2,032
--------------- ---------------
Income before income taxes 3,236 3,920
Income tax expense 971 1,176
--------------- ---------------
Net income $ 2,265 $ 2,744
=============== ===============
Net income per share:
Basic $ 0.54 $ 0.66
=============== ===============
Diluted $ 0.54 $ 0.62
=============== ===============
Weighted average shares outstanding:
Basic 4,182 4,158
=============== ===============
Diluted 4,182 4,425
=============== ===============
See accompanying notes to consolidated financial statements.
5
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(amounts in thousands)
Three Months Ended
March 31, April 1,
2002 2001
--------------- ---------------
(unaudited)
Cash flows from operating activities:
Net income $ 2,265 $ 2,744
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, amortization and other non-cash charges 2,150 2,142
Deferred income taxes 684 997
Change in assets and liabilities:
Accounts receivable 1,288 3,537
Inventories 448 141
Prepaid expenses and other assets 44 (380)
Insurance receivable 1,682 --
Accounts payable, accrued expenses and other liabilities (2,598) (7,079)
Accrued income taxes 305 (878)
--------------- ---------------
Net cash provided by operating activities 6,268 1,224
--------------- ---------------
Cash flows from investing activities:
Purchases of property and equipment (1,516) (3,137)
--------------- ---------------
Net cash used by investing activities (1,516) (3,137)
--------------- ---------------
Cash flows from financing activities:
Principal reduction on obligations to financial institutions and capital
leases (4,807) (6,901)
Proceeds from obligations to financial institutions and capital leases 1,000 8,000
Issuance of treasury stock 21 --
Net proceeds from issuance of stock -- 254
--------------- ---------------
Net cash provided (used) by financing activities (3,786) 1,353
--------------- ---------------
Effect of exchange rate changes on cash 5 (15)
--------------- ---------------
Net increase (decrease) in cash and cash equivalents 971 (575)
Cash and cash equivalents at beginning of period 4,827 2,296
--------------- ---------------
Cash and cash equivalents at end of period $ 5,798 $ 1,721
=============== ===============
See accompanying notes to consolidated financial statements.
6
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2002 and April 1, 2001
(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 30, 2001 filed by the Company on Form 10-K with the Securities and
Exchange Commission on March 29, 2002.
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.
Recent Developments
On March 26, 2002, the Company entered into a definitive merger agreement
providing for the acquisition of the Company by an affiliate of Castle Harlan
Partners III, L.P., a New York based private equity investor. Under the terms of
the merger agreement, the Company's stockholders will receive $12.60 in cash for
each share of common stock. The merger agreement and the merger are subject to
approval by the holders of a majority of the outstanding shares of the Company's
common stock, as well as other conditions, including that the parties obtain
required governmental consents and approvals (including liquor licenses
necessary to maintain continuity of service of alcoholic beverages post-merger),
that no court or governmental entity has imposed an order or injunction
prohibiting the merger, that the Company has achieved a minimum level of
earnings, that the Company has received identified third party consents and
approvals (including with respect to certain mortgage financing and equipment
leasing contracts) and that no event has occurred that has resulted in or would
reasonably be likely to result in a material adverse effect on the Company.
There can be no assurance that these or other conditions to the merger will be
satisfied or waived or that the merger will be completed. If the merger is not
completed for any reason, it is expected that the current management of the
Company, under the direction of the Board of Directors, will continue to manage
the Company as an ongoing business. The Company has also entered into an
amendment to its Credit Agreement which allows for the merger to take place;
however, this amendment will only become effective upon the completion of the
merger. The merger is currently expected to be completed in the summer of 2002.
(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 $1,792,000 and $2,007,000, and
income taxes of approximately $47,000 and $1,020,000, for the three months ended
March 31, 2002 and April 1, 2001, respectively.
(3) Based on a strategic assessment of trends and a downturn in comparable
revenues of Bertolini's Authentic Trattorias, during the fourth quarter of
fiscal 1998, pursuant to the approval of the Board of Directors, the Company
recorded a nonrecurring, pre-tax charge of $19,925,000 representing the
write-
7
down of impaired Bertolini's restaurant assets, the write-down and accrual
of lease exit costs associated with the closure of specified Bertolini's
restaurants as well as the write-off of the residual interests in Mick's and
Peasant restaurants. The Company performed an in-depth analysis of historical
and projected operating results and, as a result of significant operating
losses, identified several nonperforming restaurants which were all closed in
fiscal 1999. At March 31, 2002 and December 30, 2001, included in "Accrued
expenses" in the accompanying consolidated balance sheets is approximately
$1,678,000 and $1,714,000, respectively, representing the costs to exit
contractual lease obligations and costs for current litigation that was
initiated by a landlord as a result of closing one restaurant. This landlord has
alleged multiple claims, including breach of contract and breach of guarantee
and is seeking to recover substantial financial damages. Such litigation is
currently in the discovery stage and the trial date has been set for November
2002. Additionally, the analysis identified several underperforming restaurants,
which reflected a pattern of historical operating losses and negative cash flow,
as well as continued projected negative cash flow and operating results.
Accordingly, the Company recorded an impairment charge in the fourth quarter of
fiscal 1998 to write-down these impaired assets. During 2001, one such
underperforming restaurant was closed and during 2000 and 1999 three such
underperforming restaurants were closed. (See "Part II - Other Information, Item
1. Legal Proceedings".)
(4) The components of comprehensive income for the three months ended March 31,
2002 and April 1, 2001 are as follows:
Three Months Ended
------------------
March 31, 2002 April 1, 2001
--------------- ---------------
(in thousands)
Net income $ 2,265 $ 2,744
Other comprehensive income (loss):
Foreign currency translation (49) (163)
Fair value of interest rate swap agreements 142 --
--------------- ---------------
Total comprehensive income $ 2,358 $ 2,581
=============== ===============
(5) The Company adopted Statement of Financial Accounting Standards ("SFAS")
133, "Accounting for Derivative Instruments and Hedging Activities", as amended
by SFAS 137 and SFAS 138, as of January 1, 2001. SFAS 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measures those instruments at fair value.
The Company's derivative financial instruments consist of two interest rate swap
agreements with notional amounts of $10,000,000 each. The interest rate swap
agreements are designated as cash flow hedges for purposes of SFAS 133. Based on
regression analysis, the Company has determined that its interest rate swap
agreements are highly effective. As of December 30, 2001, in accordance with
SFAS 133, assets were increased by approximately $320,000 and liabilities by
approximately $875,000, and the Company recognized a loss of approximately
$555,000 in accumulated other comprehensive income (loss). As of March 31, 2002,
in accordance with SFAS 133, assets were increased by approximately $255,000 and
liabilities by approximately $668,000, and the Company recognized a loss of
approximately $413,000 in accumulated other comprehensive income (loss).
(6) The Company adopted SFAS 142, "Goodwill and Intangible Assets" as of
December 31, 2001. SFAS 142 eliminated the requirement to amortize goodwill and
indefinite-lived intangible assets, addressed the amortization of intangible
assets with a defined life and addressed the impairment testing and recognition
for goodwill and intangible assets. SFAS 142 applies to goodwill and intangible
assets arising from transactions completed before and after the Statement's
effective date.
8
In connection with the transitional goodwill impairment evaluation, SFAS
142 requires the Company to perform an assessment of whether there is an
indication that goodwill is impaired as of the date of adoption. To accomplish
this the Company must identify its reporting units and determine the carrying
value of each reporting unit by assigning the assets and liabilities, including
the existing goodwill and intangible assets, to those reporting units as of the
date of adoption. The Company has up to six months from the date of adoption to
determine the fair value of each reporting unit and compare it to the reporting
unit's carrying amount. To the extent a reporting unit's carrying amount exceeds
its fair value, an indication exists that the reporting unit's goodwill may be
impaired and the Company must perform the second step of the transitional
impairment test. In the second step, the Company must compare the implied fair
value of the reporting unit's goodwill, determined by allocating the reporting
unit's fair value to all of its assets (recognized and unrecognized) and
liabilities in a manner similar to a purchase price allocation in accordance
with SFAS 141, to its carrying amount, both of which would be measured as of the
date of adoption. This second step is required to be completed as soon as
possible, but no later than the end of the year of adoption. A transitional
impairment loss, if any, would be recognized as the cumulative effect of a
change in accounting principle in the Company's consolidated statement of
income.
The Company is in the process of completing this assessment, however due to
the extensive effort needed to comply with adopting SFAS No. 142, it is not
practicable to reasonably estimate whether the Company will be required to
recognize any transitional impairment losses as a cumulative effect of a change
in accounting principle.
Goodwill amortization for the three months ended April 1, 2001 was
approximately $101,000. The following table shows the results of operations as
if the pronouncement was applied to prior periods:
Three Months Ended
------------------
March 31, 2002 April 1, 2001
-------------- -------------
(in thousands, except per share amounts)
Net income, as reported $ 2,265 $ 2,744
Add back: Goodwill amortization -- 101
--------------- ---------------
Adjusted net income $ 2,265 $ 2,845
=============== ===============
Net income per share: - Basic:
Net income, as reported $ 0.54 $ 0.66
Goodwill amortization -- 0.02
--------------- ---------------
Adjusted net income $ 0.54 $ 0.68
=============== ===============
Net income per share: - Diluted:
Net income, as reported $ 0.54 $ 0.62
Goodwill amortization -- 0.02
--------------- ---------------
Adjusted net income $ 0.54 $ 0.64
=============== ===============
In October 2001, the Financial Accounting Standards Board issued SFAS 144,
"Accounting for the Impairment of Long-Lived Assets", which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supercedes SFAS 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of", while retaining the
fundamental recognition and measurement provisions of that statement. SFAS 144
requires that a long-lived asset to be abandoned, exchanged for a similar
productive asset or distributed to owners in a spinoff, be considered held and
used until it is disposed of. However, SFAS 144 requires that management
consider revising the depreciable life of such long-lived asset. With respect to
long-lived assets to be disposed of by sale, SFAS 144 retains the provisions of
SFAS 121 and, therefore, requires that discontinued operations no longer be
9
measured on a net realizable value basis and that future operating losses
associated with such discontinued operations no longer be recognized before they
occur. SFAS 144 was adopted by the Company on December 31, 2001 and did not have
a material effect on the Company's consolidated financial statements.
(7) As a result of the World Trade Center terrorist attacks on September 11,
2001, the Morton's of Chicago steakhouse restaurant located at 90 West Street,
New York, NY, two blocks from the World Trade Center, was closed permanently due
to structural damage. During the first quarter of fiscal 2002 and the third and
fourth quarters of fiscal 2001, the Company recorded benefits in "Restaurant
operating expenses" in the consolidated statements of income of approximately
$511,000 and $860,000, respectively, representing expected business interruption
insurance recoveries. During fiscal 2002 and fiscal 2001, the Company has
received $250,000 and $500,000, respectively, for such insurance. The Company
believes that additional benefits will be recorded in fiscal 2002 and possibly
future periods relating to future insurance recoveries. In addition, as of
December 30, 2001, the Company had written off the net book value of the assets
of the restaurant and recorded a receivable in "Insurance receivable" in the
accompanying consolidated balance sheet of approximately $1,682,000,
representing expected minimum insurance proceeds relating to such assets. During
the first quarter of fiscal 2002, the Company received $3,000,000 relating to
such insurance and therefore recorded a gain of approximately $1,318,000 in the
accompanying consolidated statements of income.
(8) In December 2001, based on a strategic assessment of revenue trends, the
Company decided to close the Morton's of Chicago steakhouse restaurant in
Sydney, Australia in January 2002. Newly imposed restrictions on importing
certain cuts of USDA prime beef from the United States, an essential ingredient
of the Morton's dining experience, contributed to the decision to close the
restaurant. The Company recorded a 2001 fourth quarter, pre-tax charge of
approximately $1,625,000, representing the write-down and exit costs associated
with the closing of the restaurant. At March 31, 2002, included in "Accrued
expenses" in the accompanying consolidated balance sheets is approximately
$340,000, respectively, representing the costs to exit contractual lease
obligations.
(9) The Company is involved in various legal actions. See "Part II - Other
Information, Item 1. Legal Proceedings" on page 17 of this Form 10-Q for a
discussion of these legal actions.
10
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Revenues decreased $5.2 million, or 7.9%, to $61.1 million for the three
month period ended March 31, 2002, from $66.3 million during the comparable 2001
period. Incremental revenues of $4.1 million were attributable to five new
restaurants opened after January 1, 2001, which were offset by $6.8 million, or
10.8%, attributable to a reduction in comparable revenues from restaurants open
all of both periods. Revenues decreased $1.9 million for the Morton's of Chicago
Steakhouse restaurant formerly located in the Wall Street area of downtown
Manhattan (closed since September 11, 2001). Revenues for the one Bertolini's
restaurant closed during 2001 decreased by $0.6 million compared to fiscal 2001.
Average revenue per restaurant open for a full period decreased 11.9%.
Percentage changes in comparable restaurant revenues for the three month
period ended March 31, 2002 versus April 1, 2001 for restaurants open all of
both periods are as follows:
Three Months
Ended March 31, 2002
Percentage Changes
--------------------
Morton's -11.1%
Bertolini's - 6.8%
Total -10.8%
The Company believes that due to the severe nationwide impact of the World
Trade Center terrorist attacks, the continuing impact of the troubled economy,
unfavorable business conditions, corporate spending cutbacks and reduced
business travel, it has experienced, and may continue to experience, weak
revenue trends and negative comparable restaurant revenues. These adverse
operating conditions, unfavorable revenue trends, increased operating costs and
investment banking, legal and other costs associated with the Company's
evaluation of strategic alternatives, including costs associated with entering
into the merger agreement discussed below, are expected to negatively impact
results. The Company believes that if such unfavorable conditions continue or
worsen, future results will also be adversely affected, the full extent of which
cannot be determined or forecasted at this time.
The building in which the Morton's of Chicago Steakhouse restaurant was
formerly located in the Wall Street area of downtown Manhattan (located at 90
West Street, two blocks from the World Trade Center) was damaged and has been
closed permanently. Accordingly, the restaurant has been excluded from
comparable restaurant revenues.
On March 26, 2002, the Company entered into a definitive merger agreement,
which is further discussed in Note 1 to the Company's Notes to Consolidated
Financial Statements. There can be no assurance that the conditions to the
merger will be satisfied or waived or that the merger will be completed. The
Company has also entered into an amendment to its Credit Agreement which allows
for the merger to take place; however, this amendment will only become effective
upon the completion of the merger.
Food and beverage costs decreased from $22.7 million for the three month
period ended April 1, 2001 to $21.2 million for the three month period ended
March 31, 2002. Due in part to higher meat costs,
11
these costs as a percentage of revenues increased from 34.2% for the 2001 period
to 34.7% for the 2002 period.
Restaurant operating expenses, which include labor, occupancy and other
operating expenses, decreased from $27.8 million for the three month period
ended April 1, 2001 to $27.4 million for the three month period ended March 31,
2002, a decrease of $0.5 million. Those costs as a percentage of revenues
increased 2.8% from 42.0% for the 2001 period to 44.8% for 2002 period. Included
in fiscal 2002 is a recovery of approximately $0.5 million for business
interruption insurance related to costs incurred from the closing of the
Morton's of Chicago Steakhouse restaurant located in the Wall Street area of
downtown Manhattan as a result of the September 11, 2001 terrorist attacks. The
Company believes that additional benefits will be recorded in fiscal 2002
relating to future insurance recoveries.
Pre-opening costs, depreciation, amortization and non-cash charges
decreased from $2.8 million for the three month period ended April 1, 2001 to
$2.4 million for the three month period ended March 31, 2002 and decreased as a
percentage of revenues by 0.2%. Included in the 2001 period is approximately
$0.1 million representing amortization of goodwill. In fiscal 2002, in
accordance with the adoption of SFAS 142, "Goodwill and Intangible Assets", the
Company ceased amortizing goodwill. The Company expenses all costs incurred
during start-up activities, including pre-opening costs, as incurred.
Pre-opening costs incurred and recorded as expense for the three month period
ended March 31, 2002 and April 1, 2001 were $0.3 million and $0.6 million,
respectively. The timing of restaurant openings, as well as costs per
restaurant, affected the amount of such costs.
General and administrative expenses for the three month period ended March
31, 2002 were $3.8 million, which decreased from $4.9 million for the three
month period ended April 1, 2001. Decreases in such costs were due in part to
the Company's reduction in certain staff, travel and other overhead
expenditures. Such costs as a percentage of revenues decreased from 7.4% for the
2001 period to 6.1% for the 2002 period.
Marketing and promotional expenses were $1.2 million for the three month
period ended March 31, 2002 and $2.2 million for the three month period ended
April 1, 2001. Due in part to reduced spending for marketing and promotional
programs, such costs decreased as a percentage of revenues by 1.4% from the 2001
period to 1.9% for the 2002 period.
Gain on insurance proceeds of $1.3 million represents the amount of
insurance proceeds received in excess of the insurance receivable of
approximately $1.7 million which was recorded as of December 30, 2001 in the
accompanying consolidated balance sheet. The insurance receivable was recorded
to write off the net book value of the assets of the Morton's of Chicago
Steakhouse restaurant formerly located at 90 West Street, two blocks from the
World Trade Center, which was closed permanently due to structural damage
sustained in the September 11, 2001 terrorist attacks. During the first quarter
of fiscal 2002, the Company received $3.0 million relating to such insurance and
therefore recorded a gain of approximately $1.3 million in the accompanying
consolidated statement of income.
Costs associated with strategic alternatives and proxy contest were $1.2
million for the three month period ended March 31, 2002. Such costs are
associated with the Company's evaluation of strategic alternatives, including
costs associated with entering into the merger agreement described earlier.
Interest expense, net of interest income, remained consistent at $2.0
million for the three month period ended March 31, 2002 with the three month
period ended April 1, 2001. This was due to increased borrowings offset by a
decrease in interest rates.
12
The Company's provision for income taxes consisted of income tax expense of
$1.0 million and $1.2 million for the three month periods ended March 31, 2002
and April 1, 2001, respectively, or an effective tax rate of 30%. The effective
tax rate represents the establishment of additional deferred tax assets relating
to FICA and other tax credits that were generated during fiscal 2002 and fiscal
2001.
LIQUIDITY AND CAPITAL RESOURCES
At present and in the past, the Company has had, and may have in the
future, negative working capital balances. The working capital deficit is
principally the result of the Company's investment in long-term restaurant
operating assets and real estate. The Company does not have significant
receivables or inventories and receives trade credit based upon negotiated terms
in purchasing food and supplies. Funds available from cash sales not 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.
Obligations to financial institutions and capital leases consists of the
following:
March 31, Dec. 30,
2002 2001
--------------- ---------------
(in thousands)
Credit Facility (a) $ 73,475 $ 75,960
Loan Agreement with CNL Financial I, Inc., due in monthly principal and
interest payments at 10.002% per annum, matures on April 1, 2007 1,555 1,614
Mortgage loans with GE Capital Franchise Finance, due in monthly principal
and interest payments scheduled over twenty-year periods at interest
rates ranging from 7.68% to 9.26% per annum. (b) 17,984 18,093
Capital leases 7,886 9,042
--------------- ---------------
Total obligations to financial institutions and capital leases 100,900 104,709
Less current portion of obligations to financial institutions and
capital leases 3,907 4,477
--------------- ---------------
Obligations to financial institutions and capital leases, less current
maturities $ 96,993 $ 100,232
=============== ===============
(a) Credit Facility obligations relate to borrowings under the Company's
Second Amended and Restated Revolving Credit and Term Loan Agreement, dated June
19, 1995, between the Company and Fleet National Bank ("Fleet"), as amended from
time to time (the "Credit Agreement"), pursuant to which the Company's credit
facility (the "Credit Facility"), at March 31, 2002, was $89,250,000. At March
31, 2002, the Credit Facility consisted of a $23,750,000 term loan (the "Term
Loan") and a $65,500,000 revolving credit facility (the "Revolving Credit").
Loans made pursuant to the Credit Agreement bear interest at a rate equal to the
lender's base rate plus applicable margin or, at the Company's option, the
Eurodollar Rate plus applicable margin. Pursuant to an amendment of the Credit
Agreement dated March 13, 2002, the Company's applicable margin on the Revolving
Credit and on the Term Loan, calculated pursuant to the Credit Agreement, is
3.00% on base rate loans and 4.50% on Eurodollar Rate loans. Additionally, if
the borrowings under the Revolving Credit exceed $55,000,000, an additional
0.50% will be added to the applicable margin on base rate loans and Eurodollar
Rate loans under the Revolving Credit facility. In addition, the Company is
obligated to pay fees of 0.75% on unused loan commitments 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 Credit Agreement also provides for annual
additional mandatory prepayments as calculated based on the Company's net cash
flows, as defined. The amendment reduces the Revolving Credit facility to
$60,000,000 through June 30, 2003 unless a specified leverage ratio is achieved,
in which case the facility will return to $65,500,000, and also reduces the
Revolving Credit facility by $5 million every 6 months from June 30, 2003
through June 30, 2005.
13
At March 31, 2002, $267,000 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 $15,508,000 and the weighted average
interest rate on all borrowings under the Credit Facility was 7.49% on March 31,
2002. Fleet has syndicated portions of the Credit Facility to First Union
National Bank, Comerica Bank, JPMorgan Chase Bank and LaSalle Bank National
Association.
Borrowings under the Credit Agreement have been classified as noncurrent on
the Company's consolidated balance sheet since the Company may borrow amounts
due under the Term Loan from the Revolving Credit, including the Term Loan
principal payments which commenced in September 2001.
Borrowings under the Credit Agreement are secured by all tangible and
intangible assets of the Company. The Credit Agreement contains, among other
things, certain restrictive covenants with respect to the Company that create
limitations (subject to certain exceptions) on: (i) the incurrence or existence
of additional indebtedness or the granting of liens on assets or contingent
obligations; (ii) the making of certain investments; (iii) mergers, dispositions
of assets or consolidations; (iv) prepayment of certain other indebtedness; (v)
making capital expenditures above specified amounts; 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 prohibits the Company
from entering into any new capital expenditure commitments or lease commitments
for new restaurants until a specified cash flow leverage ratio test is achieved
and prohibits the payment of dividends and the repurchase of the Company's
outstanding common stock. The Company's Credit Agreement also requires the
Company to satisfy certain financial ratios and tests. On March 31, 2002, the
Company believes it was in compliance with such covenants.
On April 7, 1998 and May 29, 1998, the Company entered into interest rate
swap agreements with Fleet on notional amounts of $10,000,000 each. Interest
rate swap agreements are used to reduce the potential impact of interest rate
fluctuations relating to $20,000,000 of variable rate debt. Such agreements
terminate on April 7, 2003 and May 29, 2003, respectively. As of December 30,
2001, in accordance with SFAS 133, assets were increased by approximately
$320,000 and liabilities by approximately $875,000 and the Company recognized a
loss of approximately $555,000 in accumulated other comprehensive income (loss).
As of March 31, 2002, in accordance with SFAS 133, assets were increased by
approximately $255,000 and liabilities by approximately $668,000 and the Company
recognized a loss of approximately $413,000 in accumulated other comprehensive
income (loss).
(b) Mortgage loans relate to loan commitments entered into during 1999 and
1998 by various subsidiaries of the Company and GE Capital Franchise Finance to
fund the purchases of land and construction of restaurants. During 2001, 2000
and 1999, $6,900,000, $1,927,000 and $4,757,000, respectively, were funded.
During the third quarter of fiscal 1999, the Company entered into
sale-leaseback transactions whereby the Company sold, and leased back, existing
restaurant equipment at 15 of its restaurant locations. Aggregate proceeds of
$6,000,000 were used to reduce the Company's revolving credit facility. These
transactions are being accounted for as financing arrangements. Recorded in the
accompanying consolidated balance sheet as of March 31, 2002 and December 30,
2001 are such capital lease obligations, related equipment of $800,000 and
$1,218,000, respectively, and a deferred gain of approximately $863,000 and
$1,279,000, respectively, each of which are being recognized over the three year
lives of such transactions.
During the first quarter of fiscal 2002, the Company's net investment in
fixed assets and related investment costs, including pre-opening costs,
approximated $1.8 million. The Company estimates that it will expend up to an
aggregate of $13.0 million in 2002 to finance ordinary refurbishment of existing
restaurants and capital expenditures, net of landlord development and or rent
allowances and net of equipment lease financing, for new restaurants. As a
result of the March 13, 2002 amendment to the
14
Company's Credit Agreement, capital expenditures have been limited to $13.0
million in 2002, and further restricted in future years. As a result, the
Company is limited to five new Morton's of Chicago Steakhouse restaurants in
2002 and no new development in 2003. The Company may not enter into new
restaurant leases until a specified cash flow leverage ratio is achieved.
Subject to the Company's performance, which if adversely affected, could
adversely affect the availability of funds, the Company anticipates that funds
generated through operations and funds available under the Credit Agreement will
be sufficient to fund planned expansion during 2002.
From fiscal October 1998 through fiscal July 2000, the Company's Board of
Directors authorized repurchases of the Company's outstanding common stock of up
to 2,930,600 shares. The Company had repurchased 2,635,090 shares at an average
stock price of $17.80. The Company suspended the stock repurchase program on May
8, 2001 and, as a result of the March 13, 2002 amendment to the Company's Credit
Agreement, may not repurchase shares of its common stock.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains various "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Forward-looking
statements, written, oral or otherwise made, represent the Company's expectation
or belief concerning future events. Without limiting the foregoing, the words
"believes," "thinks," "anticipates," "plans," "expects," and similar expressions
are intended to identify forward-looking statements. The Company cautions that
these statements are further qualified by important economic and competitive
factors that could cause actual results to differ materially, or otherwise, from
those in the forward-looking statements, including, without limitation, risks of
the restaurant industry, including a highly competitive 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, regulatory developments, 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 restrictions under the
Company's Credit Agreement, 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.
Additionally, this Form 10-Q contains forward-looking statements that
involve risks and uncertainties relating to the proposed merger and other future
events, including whether and when the proposed merger will be consummated. A
variety of factors could cause actual events or results to differ materially
from those expressed or implied by the forward-looking statements. These factors
include, but are not limited to, risks that stockholder approval and regulatory
and third party clearances may not be obtained in a timely manner or at all,
that the required minimum earnings level may not be achieved by the Company,
that an order or injunction may be imposed prohibiting or delaying the merger
and that any other conditions to the merger may not be satisfied or waived. The
Company assumes no obligation to update the forward-looking information.
15
Item 3. Quantitative and Qualitative Disclosure about Market Risk
The inherent risk in market risk sensitive instruments and positions
primarily relates to potential losses arising from adverse changes in foreign
currency exchange rates and interest rates.
As of March 31, 2002, the Company operated five international locations,
two in Hong Kong, one in Singapore, one in Toronto, Canada and one in Vancouver,
Canada. As a result, the Company is subject to risk from changes in foreign
exchange rates. These changes result in cumulative translation adjustments which
are included in other comprehensive income (loss). The potential loss resulting
from a hypothetical 10% adverse change in quoted foreign currency exchange
rates, as of March 31, 2002, is not considered material.
The Company is subject to market risk from exposure to changes in interest
rates based on its financing activities. This exposure relates to borrowings
under the Company's Credit Facility which are payable at floating rates of
interest. The Company has entered into interest rate swap agreements to manage
some of its exposure to interest rate fluctuations. The change in fair value of
our long-term debt resulting from a hypothetical 10% fluctuation in interest
rates as of March 31, 2002 is not considered material.
16
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
During fiscal 1998, the Company identified several underperforming
Bertolini's restaurants and authorized a plan for the closure or abandonment of
specified restaurants which have all been closed. The Company is involved in
legal action relating to such closures, however, the Company does not believe
that the ultimate resolution of these actions will have a material effect beyond
that recorded during fiscal 1998.
Between March 27, 2002 and April 3, 2002, five substantially similar civil
actions were commenced, four in the Court of Chancery in the State of Delaware
in New Castle County and one of which was commenced in the Supreme Court of the
State of New York in Nassau County. The plaintiff in each action seeks to
represent a putative class consisting of the public stockholders of the Company
(excluding officers and directors of the Company). Named as defendants in each
of the complaints are the Company, the members of the Company's Board of
Directors and Castle Harlan, Inc. The plaintiffs allege, among other things,
that the proposed merger is unfair; the Company's directors breached their
fiduciary duties by failing to disclose material non-public information related
to the value of the Company and by engaging in self-dealing; Castle Harlan, Inc.
aided and abetted the Company's directors' breach of fiduciary duty; the price
contemplated in the merger agreement is inadequate; the merger agreement is a
product of a conflict of interest between the directors of the Company and the
Company's public stockholders; and information regarding the value and prospects
of the Company has not been publicly disclosed although that information is
known to the defendants. The complaints seek an injunction, damages and other
relief. The Company believes that these lawsuits are without merit and intends
to defend against them vigorously. The Company expects future results to be
adversely affected by legal and other costs associated with such litigation.
On April 18, 2002, a civil action was commenced in the Court of Chancery in
the State of Delaware in New Castle County. The plaintiff in this action seeks
to represent a putative class consisting of the public stockholders of the
Company (excluding those named as defendants in the suit). Named as defendants
are the Company and the members of the Company's Board of Directors. The
plaintiff alleges, among other things, that the proposed merger is unfair; the
Company's directors breached their fiduciary duties by engaging in self-dealing
and unfairly excluding BFMA Holding Corporation from participating in the
bidding process for the Company; the price contemplated in the merger agreement
is inadequate; and the merger agreement is a product of a conflict of interest
between the directors of the Company and the Company's public stockholders. The
complaint seeks an injunction, damages and other relief. The Company believes
that this lawsuit is without merit and intends to defend against it vigorously.
The Company expects future results to be adversely affected by legal and other
costs associated with such litigation.
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 or 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.
17
Item 5. Other Information
On March 26, 2002, the Company entered into a definitive merger agreement,
which is further discussed in Note 1 to the Company's Notes to Consolidated
Financial Statements. There can be no assurance that the conditions to the
merger will be satisfied or waived or that the merger will be completed. The
Company has also entered into an amendment to its Credit Agreement which allows
for the merger to take place; however, this amendment will only become effective
upon the completion of the merger.
The Company has received notice from a stockholder that it intends to
solicit proxies in support of three nominees for election to the Company's Board
of Directors at the Company's 2002 annual meeting of stockholders. If such a
proxy contest occurs, the Company expects future results to be adversely
affected by the solicitation, legal and other costs associated with the proxy
contest.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
None
(b) Reports on Form 8-K.
A report on Form 8-K was filed on March 27, 2002 relating to the
Company entering into a definitive merger agreement providing for the
acquisition of the Company by an affiliate of Castle Harlan Partners
III, L.P., a New York based private equity investor.
18
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 May 14, 2002 By: /s/ ALLEN J. BERNSTEIN
-------------------------------------
Allen J. Bernstein
Chairman of the Board, President
and Chief Executive Officer
Date May 14, 2002 By: /s/ THOMAS J. BALDWIN
-------------------------------------
Thomas J. Baldwin
Executive Vice President,
Chief Financial Officer and Director
19
INDEX TO EXHIBITS
The following is a list of all exhibits filed as part of this report.
Exhibit
Number Page Document
------ ---- --------
20