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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (Fee Required)
For the fiscal year ended December 28, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
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)
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<S> <C>
Delaware 13-3490149
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(State or other jurisdiction of (I.R.S.
incorporation or organization) employer identification no.)
3333 New Hyde Park Road, New Hyde Park, NY 11042
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(Address of principal executive offices) (zip code)
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516-627-1515
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(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
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Title of each class Name of exchange
Common Stock, $.01 par value New York Stock Exchange
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Securities Registered Pursuant to Section 12(g) of the Act:
None
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(Title of Class)
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 5, 1998, the aggregate market value of voting stock held by
non-affiliates of the registrant was $140,869,410.
As of March 23, 1998, the registrant had 6,607,665 shares of its common stock,
$.01 par value, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
(1) portions of the registrant's annual report to stockholders for the fiscal
year ended December 28, 1997 (the "Annual Report") are incorporated by
reference into Part II hereof; and
(2) portions of the registrant's definitive proxy statement (to be filed
pursuant to Regulation 14A) for the 1998 Annual Meeting of Stockholders (the
"Proxy Statement") are incorporated by reference into Part III hereof.
<PAGE>
Part I
Item 1. Business
General
Morton's Restaurant Group, Inc., formerly known as Quantum Restaurant
Group, Inc., was incorporated as a Delaware corporation on October 3, 1988. As
used in this Report, the terms "MRG" or "Company" refer to Morton's Restaurant
Group, Inc. and its consolidated subsidiaries.
In December 1988, the Company acquired 89% of the outstanding common stock
of a predecessor company of Peasant Holding Corp. ("Peasant Holding"), the
holding company for The Peasant Restaurants, Inc. ("Peasant") and Mick's
Restaurants, Inc. ("Mick's"). On February 6, 1997, the Company completed the
sale of an 80.1% interest in its Atlanta-based Mick's and Peasant restaurants
(see Note 3 to the Company's consolidated financial statements).
In 1989, the Company acquired 100% of the outstanding common stock,
preferred stock, stock options and common stock warrants of Porterhouse, Inc.
and subsidiaries, which do business as Morton's of Chicago ("Morton's").
At December 28, 1997, the Company owned and operated 48 restaurants
utilizing two distinct restaurant concepts: Morton's and Bertolini's Authentic
Trattorias ("Bertolini's"). These concepts appeal to a broad spectrum of
consumer tastes and target separate price points and dining experiences. During
the first quarter of fiscal 1998, one new Morton's restaurant was opened.
The Company provides strategic support and direction to its subsidiary
companies, and evaluates and analyzes potential locations for new restaurants.
Management consists of Allen J. Bernstein, Chairman of the Board, President and
Chief Executive Officer and vice presidents responsible for site selection and
development, finance, and administration.
The Company plans to expand by adding new Morton's and Bertolini's
restaurants. The Company has no agreements or letters of intent with respect to
any potential acquisition. However, the Company has investigated, and may
possibly continue to investigate, the acquisition of other restaurant concepts.
The Company does not currently intend to develop a franchise program for any of
its restaurant concepts.
During 1998, the Company plans to enter international markets. Leases have
been signed to open Morton's of Chicago Steakhouse restaurants in Singapore and
Toronto. The Company will continue to monitor events in major Asian markets.
There can be no assurance that the Company's expansion plans will be
successfully achieved or that new restaurants will meet with consumer acceptance
or can be operated profitably.
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Morton's of Chicago Steak House Restaurants
At December 28, 1997, Morton's operated 38 premium quality steak houses
located in 35 cities. During the first quarter of 1998, a new Morton's
restaurant was opened in Stamford, CT. Morton's offers its clientele a
combination of excellent service and large quantities of the highest quality
menu items. Morton's has received awards in many locations for the quality of
its food and hospitality. Morton's serves USDA prime aged beef, including a
24 oz. porterhouse, a 20 oz. NY strip sirloin and a 14 oz. filet mignon.
Morton's also offers fresh fish, lobster, veal and chicken. All Morton's have
identical dinner menu items. While the emphasis is on beef, the menu
selection is broad enough to appeal to many taste preferences. The Morton's
dinner menu consists of a tableside presentation by the server of many of the
dinner items, including a 48 oz. porterhouse steak and a live Maine lobster,
and all Morton's restaurants feature an open display kitchen where steaks are
prepared. Each restaurant has a fully stocked bar with a complete list of
name brands and an extensive premium wine list that offers approximately 175
selections.
Morton's caters primarily to high-end, business-oriented clientele. During
the year ended December 28, 1997, the average per-person check, including dinner
and lunch, was approximately $65.00. Management believes that, on a nationwide
basis, a vast majority of Morton's weekday sales and a substantial portion of
its weekend sales are derived from business people using expense accounts. Sales
of alcoholic beverages accounted for approximately 32% of Morton's revenues
during fiscal 1997. In the nine Morton's serving both lunch and dinner during
fiscal 1997, dinner service accounted for approximately 89% of revenues and
lunch service accounted for approximately 11%. All Morton's are open seven days
a week. Those 29 Morton's serving only dinner are typically open from 5:30 p.m.
to 11:30 p.m., while those Morton's serving both lunch and dinner are also
typically open from 11:30 a.m. to 2:30 p.m. for the lunch period.
All Morton's are very similar in terms of style, concept and decor and are
located in retail, hotel, commercial and office building complexes in major
metropolitan areas and urban centers. In 1997, 37 Morton's (including all
restaurants opened since the 1989 acquisition) had on-premises private dining
and meeting facilities referred to as "Boardrooms". During fiscal 1997,
Boardroom sales were approximately 17% of sales in those locations offering
Boardrooms. Boardrooms offer a valuable amenity to customers and fully
complement Morton's operations. It is anticipated that all future Morton's will
contain Boardrooms.
Morton's operations and cost systems, developed over 20 years, enable
Morton's to maintain tight controls over operating expenses. The cooking staff
is highly trained and experienced. The uniform staffing patterns throughout
Morton's restaurants enhance operating efficiencies. Morton's management
believes that its centralized sourcing from its primary suppliers of its USDA
prime aged beef gives it significant cost and availability advantages over many
independent restaurants. Morton's purchases Midwest-bred, grain-fed, USDA prime
aged beef (approximately the finest two to three percent of a 1,100 pound
steer).
Bertolini's Authentic Trattoria Restaurants
At December 28, 1997, there were ten Bertolini's, located in ten cities.
Bertolini's is a white tablecloth, authentic Italian trattoria, which
provides table service in a casual dining atmosphere. For the year ended
December 28, 1997, Bertolini's average per-person check, including dinner and
lunch, was approximately $19.25. Bertolini's restaurants are open seven days
a week, for lunch and dinner, with typical hours of 11:00 a.m. to 12:00
midnight. During fiscal 1997, dinner service accounted for approximately 67%
of revenues and
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lunch service accounted for approximately 33%. Sales of alcoholic beverages
accounted for approximately 20% of Bertolini's revenues during fiscal 1997.
Sale of Mick's and Peasant Restaurants
On February 6, 1997, the Company completed the sale of its Atlanta-based
Mick's and Peasant restaurants. 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. As of December 28, 1997, all
remaining non-Atlanta Mick's and Peasant restaurants were closed, sold or
otherwise disposed of.
Site Development and Expansion
General. To date, the Company has attempted to maximize its capital resources
by receiving substantial development or rent allowances from its landlords.
The Company's leases typically provide for substantial landlord development
or rent allowances and an annual percentage rent based on gross sales,
subject to market-based minimum annual rents. This leasing strategy enables
the Company to reduce its net investments in newly developed restaurants.
The costs of opening a Morton's or Bertolini's varies by restaurant
depending upon, among other things, the location of the site and the extent of
any renovation required. The Company leases all of its restaurant sites and
operates both free-standing and in-line restaurants. In recent years, the
Company has received substantial landlord development or rent allowances for
leasehold improvements and furniture, fixtures and equipment and, in certain
instances, pre-opening expenses. The Company's average net cash investments for
the eight restaurants opened between January 1, 1997 and March 1998, was
approximately $1.7 million, in each case, net of landlord development and or
rent allowances and restaurant equipment lease financings. The Company currently
targets its average net cash investment in new restaurants to be less than $2.0
million per restaurant, although the Company may expend greater amounts for
particular restaurants.
The Company believes that the locations of its restaurants are critical to
its long-term success, and management devotes significant time and resources to
analyzing each prospective site. As it has expanded, the Company has developed
specific criteria by which each prospective site is evaluated. Potential sites
are generally sought in major metropolitan areas. In addition to carefully
analyzing demographic information, such as average household size and income,
for each prospective site, management considers factors such as traffic
patterns, proximity of shopping areas and office buildings, area restaurant
competition, accessibility and visibility. The Company's ability to open new
restaurants depends upon locating satisfactory sites, negotiating favorable
lease terms, securing appropriate government permits and approvals, obtaining
liquor licenses and recruiting or transferring additional qualified management
personnel. For these and other reasons, there can be no assurance that the
Company's expansion plans will be successfully achieved or that new restaurants
will meet with consumer acceptance or can be operated profitably.
The standard decor and interior design of each of the Company's restaurant
concepts can be readily adapted to accommodate different types of locations.
Morton's. The first Morton's was opened in 1978 in downtown Chicago, where
Morton's headquarters are still located. From 1978 to 1989, Morton's expanded to
a group of nine restaurants in nine cities. Under
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the Company, Morton's has grown from nine to 39 restaurants through March 1998.
During 1997, new Morton's opened in Washington, DC, San Diego, CA, Baltimore,
MD, and Miami, FL. During the first quarter of 1998 a new Morton's opened in
Stamford, CT. During 1998, the Company plans to enter international markets.
Leases have been signed to open Morton's of Chicago Steakhouse restaurants in
Singapore and Toronto.
Morton's are located in retail, hotel, commercial and office building
complexes in major metropolitan areas and urban centers. Management believes
that fixed investment costs and occupancy costs have been relatively low, as
appropriate space for new Morton's restaurants has been readily available. The
approximate gross costs to the Company for the five Morton's opened between
January 1, 1997 and March 1998, ranged from $2.4 million to $2.9 million,
including the costs of leasehold improvements, capital expenditures for
furniture, fixtures and equipment, and other pre-opening expenses. These
aggregate per-restaurant costs were substantially offset by landlord development
and or rent allowances ranging from $0.9 million to $1.3 million.
The Company plans to continue the development of Morton's and has selected
several possible domestic and international sites for expansion.
Bertolini's Authentic Trattoria Restaurants. The first Bertolini's opened in
Las Vegas in May 1992 (located in the Forum Shops Mall, adjacent to Caesar's
Palace Casino). During 1997, new Bertolini's opened in Charlotte, NC, Costa
Mesa, CA, and Westbury, NY.
The approximate gross costs to the Company for the three restaurants opened
during 1997, ranged from $2.5 million to $3.7 million, including the costs of
leasehold improvements, capital expenditures for furniture, fixtures and
equipment, and other pre-opening expenses. These aggregate costs were partially
offset by landlord development and or rent allowances ranging from $0.5 million
to $0.8 million.
The Company plans to continue the development of Bertolini's and has
selected several possible sites for expansion.
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Restaurant Locations
The Company operated 49 restaurants as of March 1998. The following table
provides information with respect to those restaurants which are open:
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Month and
Year Opened
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Morton's of Chicago Steakhouse Restaurants
Chicago, IL (1) December 1978
Washington (Georgetown), DC November 1982
Philadelphia, PA May 1985
Westchester/Oakbrook, IL June 1986
Dallas, TX May 1987
Boston, MA December 1987
O'Hare/Rosemont, IL June 1989
Cleveland, OH September 1990
Tyson's Corner, VA November 1990
Columbus, OH April 1991
Cincinnati, OH August 1991
San Antonio, TX September 1991
Palm Beach, FL November 1991
Minneapolis, MN December 1991
Nashville, TN September 1992
Beverly Hills, CA (2) October 1992
Detroit/Southfield, MI November 1992
Las Vegas, NV January 1993
Sacramento, CA May 1993
Pittsburgh, PA August 1993
New York (Midtown Manhattan), NY October 1993
St. Louis/Clayton, MO December 1993
Palm Desert, CA January 1994
Atlanta/Buckhead, GA March 1994
Charlotte, NC July 1994
San Francisco, CA November 1994
Dallas/Addison, TX November 1994
Costa Mesa/Orange, CA March 1995
Denver, CO (3) March 1995
Atlanta/Downtown, GA (4) November 1995
Houston, TX January 1996
Phoenix, AZ March 1996
Orlando, FL March 1996
New York (Downtown Manhattan), NY June 1996
Washington (Connecticut Ave.), DC January 1997
San Diego, CA April 1997
Baltimore, MD August 1997
Miami, FL December 1997
Stamford, CT February 1998
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Month and
Year Opened
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Bertolini's Authentic Trattorias
Las Vegas, NV May 1992
Atlanta, GA September 1993
Washington, DC (5) September 1995
Rockville, MD October 1995
King of Prussia, PA November 1995
Irvine, CA November 1995
Indianapolis, IN October 1996
Charlotte, NC July 1997
Westbury, NY September 1997
Costa Mesa, CA October 1997
</TABLE>
Additional sites are under active review for potential leases representing
new Morton's and Bertolini's restaurants to open. Including the restaurant that
opened during the first quarter of 1998, the Company currently intends to open
approximately seven to eight new restaurants during 1998, comprised of both
Morton's and Bertolini's restaurants. There can be no assurance, however, that
the Company's expansion plans will be successfully achieved or that new
restaurants will meet with consumer acceptance or can be operated profitably.
(1) Excludes Morton's Boardroom Banquet facilities.
(2) Operates under the name "Arnie Morton's of Chicago."
(3) The Morton's Denver, CO location was relocated in March 1995 to a new site.
The original location had been open since September 1985.
(4) The Morton's Atlanta/Downtown, GA location was relocated in November 1995 to
a new site. The original location had been opened since March 1986.
(5) The Bertolini's in Washington, DC opened in September 1995. It was converted
from a Peasant Restaurant which had been open since September 1990.
Restaurant Operations and Management
Morton's and Bertolini's restaurants have a well developed management
infrastructure and are set up as distinct operations within the Company. Each
group has a senior officer responsible for overall restaurant operations.
Operations for the Company's restaurants are supervised by area, or regional
directors, each of whom is responsible for the operations of several
restaurants and reports to the appropriate division senior officer. Area
directors meet frequently with senior management to review operations and to
resolve any issues. Working in concert with area or regional directors and
restaurant general managers, senior management defines operations and
performance objectives for each restaurant. An incentive plan has been
established in which area directors and certain restaurant managers
participate. Awards under incentive plans are tied to achievement of
specified revenue, profitability and operating targets and related quality
objectives.
The Company strives to maintain quality and consistency in its restaurants
through the careful training and supervision of personnel and the establishment
of standards relating to food and beverage preparation, maintenance of
facilities and conduct of personnel. Restaurant managers, many of whom are drawn
from the Company's restaurant personnel, must complete a training program of at
least twelve weeks during which they are instructed in areas of restaurant
management, including food quality and preparation, customer service, alcoholic
beverage service, liquor liability avoidance and employee relations. Restaurant
managers are also provided with operations manuals relating to food and beverage
preparation and
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operation of restaurants. These manuals are designed to ensure uniform
operations, consistently high quality products and service and proper
accounting for restaurant operations. The Company holds regular meetings of
its restaurant general managers to discuss menu items, continuing training
and other aspects of business management.
The staff for a typical Morton's consists of one general manager, up to four
assistant managers and approximately 40 to 60 hourly employees. The staff for a
typical Bertolini's consists of one general manager and up to five other
managers, and approximately 100 hourly employees. Each new restaurant
employee of the Company participates in a training program during which the
employee works under the close supervision of restaurant managers. Management
strives to instill enthusiasm and dedication in its employees. Restaurant
management regularly solicits employee suggestions concerning restaurant
operations, strives to be responsive to the employees' concerns and meets
regularly with employees at each of the restaurants.
The Company devotes considerable attention to controlling food costs. The
Company makes extensive use of computers providing management with pertinent
information on daily sales and inventory requirements, thus minimizing the need
to carry excessive quantities of food inventories. This cost management system
is complemented by the Company's ability to obtain volume-based discounts. In
addition, each restaurant, within the Company's divisions, has similar menu
items and common operating methods, allowing for more simplified management
operating controls.
The Company maintains financial and accounting controls for each of its
restaurants through the use of centralized accounting and management information
systems and reporting requirements. Revenue, cost and related information is
collected daily from each restaurant. Restaurant managers are provided with
operating statements for their respective locations. Cash and credit card
receipts are controlled through daily deposits to local operating accounts, the
balances of which are wire transferred or deposited to cash concentration
accounts.
Purchasing
The Company's ability to maintain consistent quality throughout its
restaurants depends in part upon the ability to acquire food products and
related items from reliable sources in accordance with Company specifications.
The Company has no long-term contracts for any food items used in its
restaurants. The Company currently does not engage in any futures contracts and
all purchases are made at prevailing market prices. While management believes
adequate alternative sources of supply are readily available, these alternative
sources might not provide as favorable terms to the Company as its current
suppliers when viewed on a long-term basis. All of Morton's USDA prime aged beef
is shipped to Morton's restaurants by refrigerated common carrier from its
primary Chicago-based suppliers. All other products used by Morton's are
procured locally based on strict group-wide specifications. Bertolini's
restaurants also adhere to strict product specifications and use both national
and regional suppliers. Food and supplies are shipped directly to the
restaurants and invoices for purchases are sent by vendors to the headquarters
office.
Marketing
Management believes that the Company's commitment to quality food,
hospitality and value/price is the most effective approach to attracting guests.
Accordingly, the Company has historically focused its resources on providing its
customers with superior service and value, and has relied primarily on word of
mouth to attract new customers. The Company employs public relations consultants
and limited print, billboard and direct mail advertising, and typically conducts
some local restaurant promotions. The
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Company's expenditure for advertising, marketing and promotional expenses as
a percentage of its revenues was 2.4% during fiscal 1997.
Competition
The restaurant business is highly competitive and fragmented, and the
number, size and strength of competitors varies widely by region. The Company
believes that restaurant competition is based on, among other things, quality of
food products, customer service, reputation, restaurant location, name
recognition and price points. The Company's restaurants compete with a number of
restaurants within their markets, both locally owned restaurants and other
restaurants which are members of regional or national chains. Some of the
Company's competitors are significantly larger and have greater financial and
other resources and greater name recognition than the Company and its
restaurants. Many of such competitors have been in existence longer than the
Company and are better established in areas where the Company's restaurants
are, or are planned to be, located. The restaurant business is often affected by
changes in consumer taste and spending habits, national, regional or local
economic conditions, population and traffic patterns and bad weather. In
addition, factors such as inflation, increased costs, food, labor and benefits
and the lack of experienced management and hourly staff employees may adversely
affect the restaurant industry in general and, in particular, the Company's
restaurants.
Service Marks and Trademarks
The Company has registered the names Morton's, Morton's of Chicago,
Bertolini's and certain other names used by its restaurants as trademarks or
service marks with the United States Patent and Trademark Office. The Company is
aware of names similar to that of the Company's restaurants used by third
parties in certain limited geographical areas, although the Company does not
anticipate that such use will prevent the Company from using its marks in such
areas. The Company is not aware of any infringing uses that could materially
affect its business. The Company believes that its trademarks and service marks
are valuable to the operation of its restaurants and are important to its
marketing strategy.
Government Regulation
The Company's business is subject to extensive Federal, state and local
government regulation, including regulations relating to alcoholic beverage
control, public health and safety, zoning and fire codes. The failure to obtain
or retain food, liquor or other licenses would adversely affect the operations
of the Company's restaurants. While the Company has not experienced and does not
anticipate any problems in obtaining required licenses, permits or approvals,
any difficulties, delays or failures in obtaining such licenses, permits or
approvals could delay or prevent the opening of a restaurant in a particular
area. Approximately 32% and 20% of the revenues of Morton's and Bertolini's,
respectively, for fiscal 1997 were attributable to the sale of alcoholic
beverages. Each restaurant has appropriate licenses from regulatory authorities
allowing it to sell liquor and or beer and wine, and each restaurant has food
service licenses from local health authorities. The Company's licenses to sell
alcoholic beverages must be renewed annually and may be suspended or revoked at
any time for cause, including violation by the Company or its employees of any
law or regulation pertaining to alcoholic beverage control, such as those
regulating the minimum age of patrons or employees, advertising, wholesale
purchasing, and inventory control, handling and storage. However, each
restaurant is operated in accordance with standardized procedures designed to
assure compliance with all applicable codes and regulations.
The Company is subject in certain states to "dram-shop" statutes, which
generally provide a person injured by an intoxicated person the right to recover
damages from an establishment which wrongfully
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served alcoholic beverages to such person. While the Company carries liquor
liability coverage as part of its existing comprehensive general liability
insurance, a judgment against the Company under a dram-shop statute in excess
of the Company's liability coverage, or inability to continue to obtain such
insurance coverage at reasonable costs, could have a material adverse effect
on the Company.
The development and construction of additional restaurants will be subject
to compliance with applicable zoning, land use and environmental regulations.
Management believes that Federal and state environmental regulations have not
had a material effect on the Company's operations, but more stringent and varied
requirements of local government bodies with respect to zoning, land use and
environmental factors could delay construction of new restaurants and add to
their cost.
The Company is also subject to the Fair Labor Standards Act, the Immigration
Reform and Control Act of 1986 and various federal and state laws governing such
matters as minimum wages, overtime, tips, tip credits and other working
conditions. A significant number of the Company's hourly staff are paid at rates
related to the Federal minimum wage and, accordingly, increases in the minimum
wage or decreases in allowable tip credits will increase the Company's labor
cost.
Employees
As of December 28, 1997, the Company had approximately 3,312 employees, of
whom 2,901 were hourly restaurant employees, 334 were salaried restaurant
employees engaged in administrative and supervisory capacities and 77 were
corporate and office personnel. Many of the hourly employees are employed on a
part-time basis to provide services necessary during peak periods of restaurant
operations. None of the Company's employees are covered by a collective
bargaining agreement. The Company believes that its relations with its employees
are good.
Forward-Looking Statements
Except for the historical information contained in this document, certain
statements made herein are forward-looking statements that involve risks and
uncertainties and are subject to important factors that could cause actual
results to differ materially from these forward-looking statements, including
without limitation, the effect of economic and market conditions, the impact of
competitive activities, the Company's expansion plans, restaurant profitability
levels and other risks detailed in the Company's public reports and SEC filings.
Item 2. Properties
All of the Company's restaurants are located in space leased by subsidiaries
of the Company. Restaurant lease expirations, including renewal options, range
from two to 29 years. The majority of the Company's leases provide for an option
to renew for terms ranging from five years to ten years. All of the restaurant
leases provide for a specified annual rent, and most leases call for additional
or contingent rent based on sales volumes over specified levels. Generally, the
leases are "net leases" which require the Company's subsidiary to pay its pro
rata share of all taxes, insurance and maintenance costs. In some cases, the
Company or another subsidiary guarantees the performance of new leases of the
tenant subsidiary for a portion of the lease term, typically not exceeding the
first five years.
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The Company maintains its executive offices of approximately 9,800 square
feet in New Hyde Park, New York. The executive offices for Morton's and
Bertolini's consist of approximately 11,300 square feet in Chicago. All such
executive offices are leased.
The Company believes its current office and operating space is suitable and
adequate for intended purposes.
Item 3. 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 attorneys' fees and costs. The case was
subsequently removed to the U.S. 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 U.S.
District Court for the Northern District of California awarded a judgment to
the Plaintiff. In conjunction with the judgment, the Company recorded a
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. The
Company intends to vigorously contest and appeal the judgment when entered.
In October 1995, the Company announced that the lawsuit among the
Company, a subsidiary of the Company and Mr. Alberto Lombardi and a company
controlled by Mr. Lombardi had been settled on mutually satisfactory terms
and agreed to the dismissal of all claims pending against each other. In
connection with the settlement, the Company recorded a pre-tax charge of
approximately $2,240,000 in 1995, which amount includes legal and related
costs associated with the lawsuit. The settlement provides that it is not to
be construed or considered to be an admission of guilt or noncompliance with
any federal, state or local statute, public policy, tort law, common law or
of any other wrongdoing whatsoever.
The Company is involved in various legal actions incidental to the normal
conduct of its business. Management does not believe that the ultimate
resolution of these actions will have a material adverse effect on the Company's
consolidated financial position, equity, results of operations, liquidity and
capital resources.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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Item 4A. Executive Officers of the Registrant
The following sets forth certain information regarding the Company's
executive officers:
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<CAPTION>
NAME AGE POSITION
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<S> <C> <C>
Allen J. Bernstein (1) 52 Chairman of the Board, President and Chief Executive
Officer
Thomas J. Baldwin 42 Executive Vice President, Chief Financial Officer,
Assistant Secretary and Treasurer
Agnes Longarzo 59 Vice President-Administration and Secretary
Allan C. Schreiber 57 Vice President-Real Estate
Klaus W. Fritsch 54 Vice Chairman and Co-Founder-Morton's of Chicago
Mark D. Running 45 Vice President -- Operations -- Bertolini's
Restaurants
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(1) Member of Executive Committee of the Board of Directors.
Allen J. Bernstein has been Chairman of the Board of the Company since
October 1994 and Chief Executive Officer and a Director of the Company since
December 1988. He has been President of the Company since September 1997 and was
previously President of the Company from December 1988 through October 1994.
Prior to co-founding the Company, Mr. Bernstein served as Chairman and Chief
Executive Officer of Le Peep Restaurants, Inc. from July 1983 to December 1988
and its predecessors from July 1981. From 1975 to 1981, Mr. Bernstein was
President and Chief Operating Officer of Wenco Food Systems, Inc., a New York
City area franchisee for Wendy's Restaurants, Inc. Mr. Bernstein has been a
director of Dave and Busters, Inc. since February 1996.
Thomas J. Baldwin was elected Executive Vice President in January 1997. He
previously served as Senior Vice President--Finance of the Company since June
1992, and was Vice President--Finance from December 1988 until June 1992. In
addition, Mr. Baldwin has been Chief Financial Officer, Assistant Secretary and
Treasurer of the Company since December 1988. Mr. Baldwin was the Chief
Financial Officer, Vice President of Finance and Treasurer of Le Peep
Restaurants, Inc. from October 1986 until December 1988. After seven years at
General Foods Corp., now a subsidiary of Philip Morris Companies, Inc., Mr.
Baldwin joined Citicorp in April 1985 and became Vice President responsible for
strategic planning and financial analysis at a major corporate banking division.
Mr. Baldwin has an M.B.A. and is also a licensed certified public accountant in
the State of New York.
Agnes Longarzo has been Vice President of Administration and Secretary of
the Company since December 1988. Ms. Longarzo had been Vice President of
Administration and Corporate Secretary for Le Peep Restaurants, Inc. from March
1983 to December 1988. Prior to joining Le Peep Restaurants, Inc., Ms. Longarzo
served as the Director of Administration of Wenco Food Systems, Inc.
Allan C. Schreiber has been Vice President of Real Estate since January 1996
and prior to that was Director of Real Estate since November 1995. Mr. Schreiber
had been a Senior Managing Director at The Galbreath Company since 1991. Prior
to joining Galbreath, he served as an Executive Vice President of
12
<PAGE>
National Westminster Bank USA from 1982 to 1991. Previously, Mr. Schreiber
had been a Vice President and Division Executive of the Chase Manhattan Bank.
Klaus W. Fritsch has been the Vice Chairman of Morton's of Chicago, Inc.
since May 1992. Mr. Fritsch has been with Morton's of Chicago, Inc. since its
inception in 1978, when he co-founded Morton's. After Mr. Arnold Morton ceased
active involvement in 1987, Mr. Fritsch assumed all operating responsibilities
as President in which capacity he served until May 1992.
Mark D. Running has been Vice President of Operations for Bertolini's
Restaurants since December 1997. He had previously served as Director of
Operations for Morton's of Chicago from April 1996 to December 1997. Before
joining the Company, Mr. Running was the Executive Vice President and Chief
Operating Officer of Capital Grille and Bugaboo Creek Steak House since December
1993. Prior to that he served as the Chief Operating Officer of the American
Cafe Division of W. R. Grace, as the Vice President of Operations for the
Marriott Family Restaurants and was the Division Vice President for TGI Fridays
for nine years.
Officers are elected by and serve at the discretion of the Board of
Directors.
13
<PAGE>
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
"Price Range of Common Stock and Related Matters" contained on page 36 of
the Company's Annual Report is hereby incorporated by reference.
Item 6. Selected Consolidated Financial and Operating Data
"Selected Financial Information" contained on page one of the Company's
Annual Report is hereby incorporated by reference.
The graphs labeled "Morton's and Bertolini's Revenues", "Morton's and
Bertolini's Restaurants at Year End", "Consolidated EBITDA" and "Morton's and
Bertolini's % Change in Comparable Revenues" on page one of the Company's
Annual Report shall not be deemed incorporated by reference into this Annual
Report on Form 10-K.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained on pages 18 to 23 of the Company's Annual Report is hereby
incorporated by reference.
Item 8. Financial Statements and Supplementary Data
The following items are hereby incorporated by reference to the Company's
Annual Report on the pages indicated:
<TABLE>
<CAPTION>
Page
-------
<S> <C> <C>
(i) Independent Auditors' Report 23
(ii) Consolidated Balance Sheets as of December 28, 1997
and December 29, 1996 24
(iii) Consolidated Statements of Operations For the years
ended December 28, 1997, December 29, 1996, and
December 31, 1995. 25
(iv) Consolidated Statements of Stockholders' Equity For
the years ended December 28, 1997, December 29,
1996, and December 31, 1995. 25
(v) Consolidated Statements of Cash Flows For the years
ended December 28, 1997, December 29, 1996, and
December 31, 1995 26
(vi) Notes to Consolidated Financial Statements 27-36
</TABLE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
14
<PAGE>
Part III
Item 10. Directors and Executive Officers of the Registrant
"Election of Directors" and "Reporting under 16(A) of the Securities
Exchange Act of 1934" contained in the Proxy Statement is hereby incorporated by
reference. See also Item 4A, "Executive Officers of the Registrant" in Part I of
this Annual Report on Form 10-K.
Item 11. Executive Compensation
"Executive Compensation" contained in the Proxy Statement is hereby
incorporated by reference. The matters labeled "Compensation Committee Report"
and "Performance Graph" contained in the Proxy Statement shall not be deemed
incorporated by reference into this Annual Report on Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management
"Security Ownership of Certain Beneficial Owners and Management" contained
in the Proxy Statement is hereby incorporated by reference.
Item 13. Certain Relationships and Related Transactions
None.
15
<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this Annual Report on Form
10-K:
(1) The response to this portion of Item 14 is set forth in Item 8 of
Part II hereof.
(2) Financial Statement Schedules
Schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and
therefore have been omitted.
(3) Exhibits
See accompanying Index to Exhibits. The Company will furnish to any
stockholder, upon written request, any exhibit listed in the
accompanying Index to Exhibits upon payment by such stockholder of
the Company's reasonable expenses in furnishing any such exhibit.
(b) Reports on Form 8-K:
Form 8-K filed on January 6, 1997 regarding the signing of definitive
agreements to sell Mick's Restaurants, Inc. and The Peasant Restaurants,
Inc.
Form 8-K filed on February 7, 1997 regarding the completion of the sale
of Mick's Restaurants, Inc. and The Peasant Restaurants, Inc.
Form 8-K filed on November 26, 1997 regarding the award of a judgment
against a subsidiary of the Registrant by the United States District
Court for the Northern District of California.
(c) Reference is made to Item 14(a)(3) above.
(d) Reference is made to Item 14 (a)(2) above.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 March 26, 1998 By: /s/ ALLEN J. BERNSTEIN
- --------------------- --------------------------------------
Allen J. Bernstein
Chairman of the Board of Directors,
President, and Chief Executive Officer
(Principal Executive Officer)
Date March 26, 1998 By: /s/ THOMAS J. BALDWIN
- --------------------- --------------------------------------
Thomas J. Baldwin
Executive Vice President, Chief
Financial Officer, Assistant Secretary
and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date March 26, 1998 By: /s/ ALLEN J. BERNSTEIN
- --------------------- --------------------------------------
Allen J. Bernstein
Chairman of the Board of Directors,
President, and Chief Executive Officer
(Principal Executive Officer)
Date March 26, 1998 By: /s/ THOMAS J. BALDWIN
- --------------------- --------------------------------------
Thomas J. Baldwin
Executive Vice President, Chief
Financial Officer, Assistant Secretary
and Treasurer (Principal Financial and
Accounting Officer)
17
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated. (Continued)
Date March 26, 1998 By: /s/ LEE M. COHN
- --------------------- --------------------------------------
Lee M. Cohn
Director
Date March 26, 1998 By: /s/ DIANNE H. RUSSELL
- --------------------- --------------------------------------
Dianne H. Russell
Director
Date March 26, 1998 By: /s/ ALAN A. TERAN
- --------------------- --------------------------------------
Alan A. Teran
Director
18
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated. (Continued)
Date March 26, 1998 By: /s/ JOHN K. CASTLE
- --------------------- --------------------------------------
John K. Castle
Director
Date: March 26, 1998 By: /s/ DR. JOHN J. CONNOLLY
- --------------------- --------------------------------------
Dr. John J. Connolly
Director
Date March 26, 1998 By: /s/ DAVID B. PITTAWAY
- --------------------- --------------------------------------
David B. Pittaway
Director
19
<PAGE>
INDEX TO EXHIBITS
The following is a list of all exhibits filed as part of this report:
<TABLE>
<CAPTION>
Exhibit
Number Page Document
- ----------- ----- ----------
<S> <C> <C>
3.01 (a) Amended and Restated Certificate of Incorporation of the
Registrant. (7)
(b) Certificate of Designation for the Preferred Stock issuable
pursuant to the Rights Plan. (4)
(c) Amendment to the Amended and Restated Certificate of
Incorporation of the Registrant. (7)
(d) Second Amendment to the Amended and Restated Certificate of
Incorporation of the Registrant. (11)
3.02 Amended and Restated By-Laws of the Registrant, dated
January 17, 1995. (4)
4.01 (a) Specimen Certificate representing the Common Stock, par
value $.01 per share including Rights Legend. (4)
(b) Specimen Certificate representing the Common Stock, par
value $.01 per share including Rights Legend and name
change to Morton's Restaurant Group, Inc. (11)
4.02 (a) Registration Rights Agreement for Common Stock, dated as of
July 27, 1989, among the Registrant, BancBoston Capital
Inc., Legend Capital Group, L.P., Legend Capital
International, Ltd. and Allen J. Bernstein. (1)
(b) Amendment to Registration Rights Agreement for Common
Stock, dated as of April 1, 1992, among the Registrant,
BancBoston Capital Inc., Legend Capital Group, L.P., Legend
Capital International, Ltd., Allen J. Bernstein, Castle
Harlan, Inc. and certain executive officers of the
Registrant. (2)
4.03 (a) + Stock Option Agreement, dated as of March 30, 1992, between
Thomas J. Baldwin and the Registrant. (2)
(b) + Stock Option Agreement, dated as of March 30, 1992, between
Agnes Longarzo and the Registrant. (2)
(c) + Stock Option Agreement, dated as of March 30, 1992, between
Allen J. Bernstein and the Registrant. (1)
4.04 (a) Second Amended and Restated Revolving Credit and Term Loan
Agreement, dated June 19, 1995 among the Registrant, The
Peasant Restaurants, Inc., Morton's of Chicago, Inc. and
The First National Bank of Boston, individually and as
agent. (7)
(b) First Amendment to the Second Amended and Restated
Revolving Credit and Term Loan Agreement, dated
February 14, 1996 among the Registrant, The Peasant
Restaurants, Inc., Morton's of Chicago, Inc. and The First
National Bank of Boston, individually and as agent. (9)
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Page Document
- ----------- ----- ----------
<S> <C> <C>
(c) Second Amendment to the Second Amended and Restated
Revolving Credit and Term Loan Agreement, dated March 5,
1996 among the Registrant, The Peasant Restaurants, Inc.,
Morton's of Chicago, Inc. and The First National Bank of
Boston, individually and as agent. (9)
(d) Letter Agreement, dated May 2, 1996, among the Registrant,
The Peasant Restaurants, Inc., Morton's of Chicago, Inc.
and The First National Bank of Boston, individually and as
agent. (10)
(e) Third Amendment to the Second Amended and Restated
Revolving Credit and Term Loan Agreement, dated June 28,
1996 among the Registrant, The Peasant Restaurants, Inc.,
Morton's of Chicago, Inc. and The First National Bank of
Boston, individually and as agent. (11)
(f) Fourth Amendment to the Second Amended and Restated
Revolving Credit and Term Loan Agreement, dated
December 26, 1996 among the Registrant, The Peasant
Restaurants, Inc., Morton's of Chicago, Inc. and The First
National Bank of Boston, individually and as agent. (13)
(g) Fifth Amendment to the Second Amended and Restated
Revolving Credit and Term Loan Agreement, dated
December 31, 1996 among the Registrant, The Peasant
Restaurants, Inc., Morton's of Chicago, Inc. and The First
National Bank of Boston, individually and as agent. (13)
(h) Sixth Amendment to the Second Amended and Restated
Revolving Credit and Term Loan Agreement, dated
February 6, 1997 among the Registrant, The Peasant
Restaurants, Inc., Morton's of Chicago, Inc. and The First
National Bank of Boston, individually and as agent. (13)
(i) Seventh Amendment to the Second Amended and Restated
Revolving Credit and Term Loan Agreement, dated
June 27, 1997 among the Registrant, Peasant Holding Corp.,
Morton's of Chicago, Inc. and BankBoston, N.A.,
individually and as agent. (14)
(j) Eighth Amendment to the Second Amended and Restated
Revolving Credit and Term Loan Agreement, dated
February 12, 1998 among the Registrant, Peasant Holding
Corp., Morton's of Chicago, Inc. and BankBoston, N.A.,
individually and as agent.
4.05 Rights Agreement, dated as of December 15, 1994, between
the Registrant and The First National Bank of Boston as
Rights Agent, which includes as Exhibit A thereto the form
of Certificate of Designation of Series A Junior
Participating Preferred Stock of the Registrant, as
Exhibit B thereto the form of Rights Certificate and as
Exhibit C thereto the Summary of Rights to Purchase
Preferred Stock. (5)
10.01 + Morton's of Chicago, Inc. Profit Sharing and Cash
Accumulation Plan as Amended Effective January 1,
1989. (4)
10.02 Commercial Lease, between American National Investor
Services, Inc. and Morton's of Chicago, Inc., dated
October 15, 1992, relating to the executive offices of
Morton's located at 350 West Hubbard Street, Chicago,
Illinois. (2)
10.03 Shareholders Agreement, dated January 1, 1990, among
Stephan D. Nygren, Robert A. Amick, the Registrant and
Peasant Holding Corp. (1)
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Page Document
- ----------- ----- ----------
<S> <C> <C>
10.04 Commercial Lease, between X-Cell Realty Associates and the
Registrant, dated January 18, 1994 relating to the
executive offices of the Registrant located at 3333 New
Hyde Park Road, Suite 210, New Hyde Park, New York
11042. (3)
10.05 + Amended and Restated Employment Agreement, dated as of
February 1,1997, between the Registrant and William L.
Hyde, Jr. (13)
10.06 (a) Commercial Lease Commitment, dated February 7, 1994,
between BancBoston Leasing Inc. and the Registrant relating
to restaurant equipment. (3)
(b) Commercial Lease Commitment, dated August 30, 1994, between
General Electric Capital Corporation and the Registrant
relative to restaurant equipment. (4)
(c) Commercial Lease Commitment, dated February 14, 1995,
between BancBoston Leasing Inc. and the Registrant relating
to restaurant equipment. (4)
(d) Commercial Lease Commitment, dated May 26, 1995, between
ATEL Leasing Corporation and the Registrant relating to
restaurant equipment. (8)
10.07 + Employment Agreement, dated as of January 31, 1994, between
the Registrant and Allen J. Bernstein. (6)
10.08 (a)+ Change of Control Agreement, dated December 15, 1994,
between the Registrant and Allen J. Bernstein. (4)
(b) + Change of Control Agreement, dated December 15, 1994,
between the Registrant and William L. Hyde, Jr. (4)
(c) + Change of Control Agreement, dated December 15, 1994,
between the Registrant and Thomas J. Baldwin. (4)
10.09 + Second Amended and Restated Employment Agreement, dated as
of February 28, 1995, between the Registrant and Allen J.
Bernstein. (4)
10.10 + Quantum Restaurant Group, Inc. Stock Option Plan. (9)
10.11 Stock Purchase Agreement, dated as of December 31, 1996, by
and among Peasant Holding Corp., Morton's Restaurant Group,
Inc., and MRI Acquisition Corporation. (12)
10.12 Stock Purchase Agreement, dated as of December 31, 1996, by
and among Peasant Holding Corp., Morton's Restaurant Group,
Inc., and PRI Acquisition Corporation. (12)
10.13 Promissory Note, dated March 4, 1997, between CNL Financial
I, Inc., as Lender, and Morton's of Chicago, Inc. (13)
10.14 + Termination and Release Agreement, dated September 18, 1997
between the Registrant and William L. Hyde, Jr. (15)
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Page Document
- ----------- ----- ----------
<S> <C> <C>
10.15 Commercial Mortgage Commitment, dated August 4, 1997,
between Franchise Finance Corporation of America and the
Registrant relating to mortgage financing.
13.01 Registrant's Annual Report to Stockholders for the year
ended December 28, 1997. Except for the portions thereof
which are expressly incorporated by reference into this
report, such Annual Report is furnished solely for the
information of the Commission and is not to be deemed
"filed" as part of this report.
21.01 Subsidiaries of the Registrant.
23.01 Independent Auditors' consent to the incorporation by
reference in the Company's Registration Statement on
Form S-8 of the independent auditors' report included in
the Company's Annual Report to Stockholders.
27.00 Financial Data Schedule
(1) Included as an exhibit to the Registrant's Registration
Statement on Form S-1 (No. 33-45738) and incorporated by
reference.
(2) Included as an exhibit to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1992 and
incorporated by reference.
(3) Included as an exhibit to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1993 and
incorporated by reference.
(4) Included as an exhibit to the Registrant's Annual Report on
Form 10-K for the year ended January 1, 1995 and
incorporated by reference.
(5) Included as an exhibit to the Registrant's Form 8-K dated
on December 15, 1994 and incorporated by reference.
(6) Included as an exhibit to the Registrant's Quarterly Report
on Form 10-Q, dated October 2, 1994.
(7) Included as an exhibit to the Registrant's Quarterly Report
on Form 10-Q, dated July 2, 1995.
(8) Included as an exhibit to the Registrant's Quarterly Report
on Form 10-Q, dated October 1, 1995.
(9) Included as an exhibit to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1995 and
incorporated by reference.
(10) Included as an exhibit to the Registrant's Quarterly Report
on Form 10-Q, dated March 31, 1996.
(11) Included as an exhibit to the Registrant's Quarterly Report
on Form 10-Q, dated June 30, 1996.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Page Document
- ----------- ----- ----------
<S> <C> <C>
(12) Included as an exhibit to the Registrant's Form 8-K, dated
January 6, 1996.
(13) Included as an exhibit to the Registrant's Annual Report
on Form 10-K for the year ended December 29, 1996 and
incorporated by reference.
(14) Included as an exhibit to the Registrant's Quarterly Report
on Form 10-Q, dated June 29, 1997.
(15) Included as an exhibit to the Registrant's Quarterly Report
on Form 10-Q, dated September 28, 1997.
+ Management contracts or compensatory plans or arrangements
required to be filed as an exhibit to the Registrant's
Annual Report on Form 10-K pursuant to Item 14 (a)(3) of
this Form 10-K.
</TABLE>
24
<PAGE>
Exhibit 4.04(j)
EIGHTH AMENDMENT TO SECOND AMENDED AND RESTATED
REVOLVING CREDIT AND TERM LOAN AGREEMENT
This EIGHTH AMENDMENT (this "Amendment"), executed, delivered, and dated
as of February 12, 1998 (but effective as of the specified Effective Date
referred to below), by and among MORTON'S RESTAURANT GROUP, INC., a Delaware
corporation (formerly known as Quantum Restaurant Group, Inc.) having its
principal place of business at Suite 210, 3333 New Hyde Park Road, New Hyde
Park, New York 11042 (referred to below and in the Credit Agreement, as
defined below, as "Quantum"), PEASANT HOLDING CORP., a Delaware corporation
having its principal place of business at Suite 210, 3333 New Hyde Park Road,
New Hyde Park, New York 11042 ("Peasant Holding"), MORTON'S OF CHICAGO, INC.,
an Illinois corporation with its principal place of business at 350 West
Hubbard Street, Chicago, Illinois 60610 ("Morton's") (Quantum, Peasant
Holding and Morton's are referred to herein collectively as the "Borrowers",
and each, individually, as a "Borrower"), BANKBOSTON, N.A. (formerly known as
The First National Bank of Boston), as Agent (the "Agent") for the Lenders
(as defined in the Credit Agreement referred to below), BANKBOSTON, N.A.
(formerly known as The First National Bank of Boston and referred to below
and in the Credit Agreement, as defined below, as "FNBB") in its individual
capacity as a Lender, and IMPERIAL BANK, as a Lender, amends the Second
Amended and Restated Revolving Credit and Term Loan Agreement dated as of
June 19, 1995, as amended by the First Amendment dated as of February 14,
1996, the Second Amendment dated as of March 5, 1996, a letter agreement
dated as of May 2, 1996, the Third Amendment dated as of June 28, 1996 (the
"Third Amendment"), a letter agreement dated as of November 7, 1996, the
Fourth Amendment dated as of December 26, 1996, the Fifth Amendment dated as
of December 31, 1996, the Sixth Amendment dated as of February 6, 1997, the
Seventh Amendment dated as of June 27, 1997, and as the same may be further
amended, modified, or supplemented from time to time (the "Credit
Agreement"), by and among the Borrowers, the Agent, and the Lenders.
Capitalized terms used but not defined herein shall have the meanings set
forth in the Credit Agreement.
WHEREAS, the Borrowers have requested the Lenders agree to amend certain
provisions of the Credit Agreement relating to the rates of interest
applicable to the Loans, and certain other provisions of the Credit
Agreement; and
WHEREAS, the Agent and the Lenders, subject to the terms and provisions
hereof, have agreed to so amend the Credit Agreement;
NOW THEREFORE, the parties hereto hereby agree as follows:
Section 1. Amendments to Credit Agreement. Subject to the satisfaction
of the conditions precedent set forth in Section 3 hereof, upon the
effectiveness of this Amendment the Credit Agreement is hereby amended as
follows:
Section 1.1. Certain New Definitions. The following new definitions
are hereby added to Section 1 of the Credit Agreement, in the appropriate
location in the alphabetical sequence (upon the effectiveness of this
Amendment, the previously existing definition of Ratio
<PAGE>
Calculation Date being hereby deleted in its entirety, and the previously
existing definition of Adjustment Date being hereby deleted and replaced by
the new definition of such term set forth below):
"Adjustment Date. Except as otherwise provided elsewhere
in this Agreement, each Adjustment Date shall be that date which is
the first Business Day which occurs at least forty-five (45) days
after the end of each Fiscal Quarter of the Companies."
"Cash Flow Leverage Ratio. As of any date of
determination, the ratio of (a) Funded Indebtedness outstanding as
of such date, to (b) Consolidated EBITDA for the immediately
preceding four consecutive Fiscal Quarters (treated as a single
accounting period) ended on such date."
"Consolidated EBITDA. For any period, Consolidated
EBITDA shall be equal to Consolidated Net Income for such period
plus (i) Interest Charges, plus (ii) depreciation, amortization,
and other non-cash charges (reduced by any non-cash gains), plus
(iii) federal, state, and local income tax expense for such period."
"Funded Indebtedness. As of any date of determination,
an amount equal to the sum (without duplication) of the
Indebtedness of the Companies (determined on a consolidated basis
in accordance with generally accepted accounting principles) in
respect of the borrowing of money or the obtaining of credit,
including, without limitation, Indebtedness consisting of the
Obligations hereunder in respect of Loans and Letters of Credit
(whether or not contingent), other Indebtedness of the types
referred to in clauses (iii) and (iv) of the definition of
Indebtedness, purchase money Indebtedness, and Indebtedness in
respect of Capitalized Leases, but excluding, in any event, for the
avoidance of doubt, accounts payable and accrued expense
liabilities (in each case) incurred in the ordinary course of
business, any Indebtedness referred to in clause (b) of Section
10.1 hereof, and Operating Leases."
Section 1.2. Certain Accounting Matters. The following new sentence is
hereby added to the definition of Generally Accepted Accounting Principles,
at the end of such definition:
"Without limitation of the generality of the foregoing, for
purposes of calculations of compliance with Sections 10.2, 10.6 and
10.7 hereof, generally accepted accounting principles shall exclude
any future changes thereunder in the accounting treatment of
capitalized start-up expenses and capitalized pre-opening expenses."
Section 1.3. Certain Adjustments to Financial Calculations. The
following new paragraph (j) is hereby added to Section 1.2 of the Credit
Agreement, immediately after paragraph (i) thereof:
"(j) For purposes only of Sections 10.2, 10.6, and 10.7
hereof, the computation of Consolidated EBITDA, and the
determination of the Applicable Margin under Section 2.4 hereof,
the parties agree that any applicable federal tax credits,
associated with excess federal social security taxes previously
paid, earned in any fiscal period, shall (if and to the extent such
taxes were expensed as labor costs when paid) be treated as
reductions in labor cost expense (or reductions in
2
<PAGE>
other applicable operating expenses), without duplication in each
case, for the period in which such federal tax credits are earned
(rather than as reductions in federal tax expense for such period),
notwithstanding any other provisions of this Agreement to the
contrary."
Section 1.4. Interest on Revolving Credit Loans. Effective as of the
Effective Date referred to below, Sections 2.4(b) and 2.4(c) of the Credit
Agreement are hereby amended in their entirety to read as follows:
"(b) On each Adjustment Date following the end of each
Fiscal Quarter, the Applicable Margin shall be determined on the
basis of the financial statements and Compliance Certificates
required to be delivered under Section 9.4 hereof with respect to
such Fiscal Quarter. The Applicable Margin shall be the applicable
rate per annum set forth in the table below opposite the level of
the Cash Flow Leverage Ratio determined for the applicable fiscal
period of four consecutive Fiscal Quarters, treated as a single
accounting period (as referred to in the definition of Cash Flow
Leverage Ratio), ending on the last day of the Fiscal Quarter that
ended immediately prior to such Adjustment Date (the "Quarter End
Date"). The Applicable Margin that is so determined on each such
Adjustment Date shall be effective with respect to the Loans as
follows: (i) with respect to all Base Rate Loans, such Applicable
Margin shall be deemed to have become effective as of the date
immediately following the preceding Quarter End Date (i.e., as of
the first day of the Fiscal Quarter immediately following such
Quarter End Date) and shall continue to be effective through the
next Quarter End Date; and (ii) with respect to Eurodollar Rate
Loans, such Applicable Margin shall be deemed to have become
effective with respect to all Interest Periods (or the applicable
portions thereof) of Eurodollar Rate Loans for which the Interest
Payment Date occurs on or after such Adjustment Date (but prior to
the next Adjustment Date).
<TABLE>
<CAPTION>
Applicable
Applicable Eurodollar
Pricing Cash Flow Base Rate Rate
Tier Leverage Ratio Margin (p.a.) Margin (p.a.)
------- -------------- ------------- -------------
<S> <C> <C> <C>
1 Less than 1:1 0% 0.875%
2 Greater than or equal 0% 1.25%
to 1:1 but less than 1.25:1
3 Greater than or equal 0% 1.50%
to 1:25:1 but less
than 1.50:1
4 Greater than or equal to 0% 1.75%
1.50:1 but less
than 2.00 to 1
3
<PAGE>
5 Greater than or equal 0% 2.00%
to 2:00:1 but less
than 2.50 to 1
6 Greater than or equal 0.25% 2.25%
to 2.50 to 1 but less
than 3.00 to 1
7 Greater than or equal 0.75% 2.75%
to 3:00 to 1
</TABLE>
(c) Notwithstanding the foregoing provisions,
(i) the initial Adjustment Date shall be deemed to occur
on February 15, 1998 (notwithstanding the definition of Adjustment
Date in Section 1 hereof) with the Applicable Margin to be
determined on such date on the basis of the calculation of the Cash
Flow Leverage Ratio for the fiscal period of four consecutive
Fiscal Quarters ended in December 1997 (treated as a single
accounting period); thereafter, each Adjustment Date subsequent to
each applicable Quarter End Date shall be such date as is provided
in the definition of Adjustment Date in Section 1 hereof;
(ii) if the Companies fail to deliver any financial
statements or Compliance Certificates (as the case may be) required
under Section 9.4 hereof with respect to any Fiscal Quarter on or
prior to the scheduled Adjustment Date immediately following such
Fiscal Quarter, then (notwithstanding such failure) the Applicable
Margin shall be deemed provisionally set on such Adjustment Date at
that "Tier" which was determined on the prior Adjustment Date;
provided, however, in the event such failure to deliver such
financial statements or Compliance Certificates (as the case may
be) is subsequently cured, the Applicable Margin shall be
appropriately re-adjusted and shall be deemed to have been
initially set on such scheduled Adjustment Date at that correct
"Tier" which should have been set on such Adjustment Date had such
failure not occurred; in any event, the Applicable Margin so
determined under this paragraph (c)(ii) shall be effective with
respect to the Loans as provided in paragraph (b) above; and
(iii) if, as a result of any such delay in delivery
of financial statements or Compliance Certificates (as the case may
be) as described above, or as a result of any such delay as
described above in correctly determining the Applicable Margin that
should have been determined on the relevant Adjustment Date, or for
any other reason, an incorrect interest rate shall have been
applied hereunder to the Loans, then such interest rate
determination shall be appropriately corrected retroactively, and
within three (3) Business Days after written notice thereof in
reasonable detail requesting a retroactive correction of interest
previously paid given by either the Borrowers, the Agent or any
Lender, the Borrowers shall pay to the Lenders, or (as the case may
be) the Lenders on a several and ratable basis shall credit the
Borrowers with, the amount of the appropriate retroactive
correction in the amount of interest paid with respect to the
Loans."
4
<PAGE>
Section 1.5. Reporting Provisions. Section 9.4(d) of the Credit
Agreement is hereby amended by deleting the phrase "at the delivery of each
fiscal monthly statement under Section 9.4(c), a calculation of the Leverage
Ratio as of the end of such fiscal monthly period, in reasonable detail," and
inserting in its place the phrase "including in such Compliance Certificate
to be prepared for each such fiscal quarter, a calculation of the Cash Flow
Leverage Ratio as of the end of such fiscal quarter, to be provided in
reasonable detail," immediately before the word "sufficient" in the
next-to-last line of Section 9.4(d).
Section 1.6. Change In Financial Covenants. Section 10.7 of the Credit
Agreement is hereby amended in its entirety to read as follows:
"Section 10.7. Cash Flow Leverage Ratio. The Cash Flow
Leverage Ratio, determined as of the end of any Fiscal Quarter,
shall not exceed 4.00 to 1."
Section 1.7. Deletion of Net Worth Covenant. Section 10.8 of the
Credit Agreement is hereby deleted.
Section 2. Representations and Warranties. The Borrowers hereby
represent and warrant to the Agent and the Lenders as follows:
(a) Representations and Warranties in Credit Agreement.
Except as specified in writing by the Borrowers to the Agent with
respect to the subject matter of this Amendment prior to the
execution and delivery hereof by the Agent and the Lenders, the
representations and warranties of the Borrowers contained in the
Credit Agreement were true and correct in all material respects
when made and continue to be true and correct in all material
respects on and as of the date hereof, and as of the Effective
Date, except, in each case to the extent of changes resulting from
transactions contemplated or permitted by the Loan Documents and
this Amendment and changes occurring in the ordinary course of
business which singly or in the aggregate are not materially
adverse, and to the extent that such representations and warranties
relate expressly to an earlier date.
(b) Authority, No Conflicts, Enforceability of Obligations,
Etc. Each of the Borrowers hereby confirms that the
representations and warranties of the Borrowers contained in
Sections 6.1, 6.3 and 6.4 of the Credit Agreement are true and
correct on and as of the date hereof, and as of the Effective Date,
as if made on each such date, treating this Amendment, the Credit
Agreement as amended hereby, and the other Loan Documents as
amended hereby, as "Loan Documents" for the purposes of making said
representations and warranties.
Section 3. Conditions to Effectiveness. This Amendment shall be deemed
to be effective as of February 15, 1998 (the "Effective Date"), subject to
the delivery to the Agent and the Lenders by (or on behalf of) each of the
Borrowers or the Guarantors, as the case may be, of each of the following,
each in form and substance satisfactory to the Agent and the Lenders:
(a) this Amendment signed by each of the Borrowers, each of
the Guarantors, the Agent, and each of the Lenders;
5
<PAGE>
(b) such evidence as the Agent may reasonably request such
that the Agent shall be satisfied that the representations and
warranties contained in Section 2 hereof are true and correct on
and as of date hereof and as of the Effective Date; and
(c) such other certificates, documents, or instruments with
respect to this Amendment, the Borrowers, and the Guarantors as the
Agent or the Lenders may reasonably request.
Section 4. No Other Amendments or Waivers; Execution in Counterparts.
Except as otherwise expressly provided by this Amendment, all of the terms,
conditions and provisions of the Credit Agreement and the other Loan
Documents shall remain in full force and effect. Each of the Borrowers and
the Guarantors confirms and agrees that the Obligations of the Borrowers to
the Lenders under the Loan Documents, as amended and supplemented hereby, are
secured by, guarantied under, and entitled to the benefits, of the Security
Documents. The Borrowers, the Guarantors, the Agent and the Lenders hereby
acknowledge and agree that all references to the Credit Agreement and the
Obligations thereunder contained in any of the Loan Documents shall be
references to the Credit Agreement and the Obligations, as amended hereby and
as the same may be amended, modified, supplemented, or restated from time to
time. The Security Documents and the perfected first priority security
interests of the Lenders thereunder as collateral security for the
Obligations shall continue in full force and effect, and the collateral
security and guaranties provided for in the Security Documents shall not be
impaired by this Amendment. This Amendment may be executed in any number of
counterparts, but all such counterparts shall together constitute but one
instrument. In making proof of this Amendment it shall not be necessary to
produce or account for more than one counterpart signed by each party hereto
by and against which enforcement hereof is sought.
Section 5. Governing Law. This Amendment shall be construed according
to and governed by the internal laws of the Commonwealth of Massachusetts
without reference to principles of conflicts of law.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized.
The Borrowers:
MORTON'S RESTAURANT GROUP, INC.
PEASANT HOLDING CORP.
MORTON'S OF CHICAGO, INC.
By: /s/ Thomas J. Baldwin
----------------------------------------------
Name: Thomas J. Baldwin
Title: Executive Vice President and Chief
Financial Officer
BANKBOSTON, N.A. (formerly known as The First
National Bank of Boston), for itself and as Agent
By: /s/ CM Holtz
----------------------------------------------
Name: CM Holtz
Title: V.P.
IMPERIAL BANK
By: /s/ Dianne H. Russell
----------------------------------------------
Name: Dianne H. Russell
Title: Senior Vice President
Consented and agreed to, by each of
THE GUARANTORS (as defined in the Credit
Agreement)
By: /s/ Thomas J. Baldwin
Name: Thomas J. Baldwin
Title: Executive Vice President and
Chief Financial Officer for each of the
Guarantors
7
<PAGE>
EXHIBIT 10.15
FRANCHISE FINANCE [LOGO]
CORPORATION OF AMERICA
August 4, 1997
VIA AIRBORNE EXPRESS
Mr. Thomas Baldwin
Chief Financial Officer
Morton's Restaurant Group, Inc.
3333 New Hyde Park Road
New Hyde Park, New York 11042
Dear Tom:
Morton's Restaurant Group, Inc. ("MRG") has advised FFCA Acquisition
Corporation ("FFCA") that MRG or one or more wholly-owned subsidiaries of MRG
(individually or collectively, as appropriate, "Borrower") desires to obtain
mortgage financing for up to three (3) new Morton's of Chicago restaurants
during the next twenty-four (24) months. For each Property, Borrower desires to
obtain a construction/long term mortgage loan secured by a first lien mortgage
or deed of trust, as determined by FFCA (individually, the "Mortgage Loan" and
collectively the "Mortgage Loans"). Each of the Mortgage Loans shall be secured
by a first lien mortgage or deed of trust on the land, building and other
improvements (individually, a "Property" and collectively, the "Properties"). At
the time of the final construction draw of each Mortgage Loan, Borrower may also
elect to obtain an equipment loan from FFCA (individually an "Equipment Loan"
and collectively, the "Equipment Loans") secured by a first lien security
interest in the new furniture, equipment and other trade fixtures at the
Property (collectively, the "Equipment").
Upon the acceptance of this commitment letter (the "Commitment") by
Borrower, FFCA commits to make to borrower (i) up to three (3) Mortgage Loans,
and (ii) up to three (3) Equipment Loans, all on the terms set forth in this
Commitment (individually, a "Transaction" and collectively, the "Transactions").
<PAGE>
A. Basic Commitment Terms.
Background: This Commitment outlines certain basic terms and
conditions of the Transactions; however, it is not
meant to define all of the terms and conditions of
the Transactions, which will be set forth more
fully in a separate term sheet (the "Term Sheet")
and the final documentation for each Transaction.
Each Transaction is subject to, among other things,
the approval by FFCA's in-house site review and
valuation department of the Property and the Loan
Amount (as defined below), Borrower's compliance
with all of the requirements set forth in this
Commitment and the receipt by FFCA of all documents
and other information requested by FFCA and its
counsel.
Acceptance: Borrower may accept this Commitment by signing and
returning a copy of this Commitment, together with
a check for the Fee (as defined below) to FFCA
within 10 days of the date hereof.
Fee: Borrower shall pay FFCA a $9,000.00 fee for this
Commitment.
Refundability of Fee: Although the Fee shall be nonrefundable and fully
earned when received by FFCA, all or part of the
Fee may be applied to the Property Commitment Fees
as described in the Property Commitment Fee Section
below. In the event FFCA does not approve any sites
prior to expiration of this Commitment, the Fee,
less FFCA's reasonable out-of-pocket expenses, will
be returned to Borrower.
Transaction
Processing: Borrower will notify FFCA as soon as Borrower has
identified a Property. Such notice shall include a
copy of the proposed purchase agreement, a
description of the Property, including the proposed
lmprovements, budget for the proposed Improvements,
a description and cost estimate for the Equipment
and any other documents and information available
regarding the Property (the "Property Notice").
Upon receipt of the Property Notice, FFCA's
in-house site review and insection department will
inspect the Property identified by Borrower. If the
identified Property is approved by FFCA, FFCA will
prepare a Term Sheet in the form attached hereto as
Exhibit A outlining the specific terms
2
<PAGE>
and conditions upon which FFCA would be willing to
enter into the Transaction. FFCA will not order a
title insurance commitment and phase I
environmental report or instruct its counsel to
begin preparing any of the documentation, until
Borrower has accepted the Term Sheet and returned
it to FFCA.
Commitment Term: The term of this Commitment shall commence on the
date this Commitment is accepted and automatically
expire and be of no further force or effect after
July 31 1999. Any Property Notice received by FFCA
after such date shall be ineffective.
Loan Amount Cap: Notwithstanding anything herein to the contrary, in
no event shall FFCA be obligated to fund a
Transaction where the sum of the Mortgage Loan
Amount and the Equipment Loan Amount for a Property
exceeds $3,500,000.00.
Property Locations: Each of the Properties shall be located in the
United States of America.
B. Basic Mortgage Loan Terms
Property Commitment
Fee: For each Transaction Borrower shall pay FFCA an
underwriting and processing fee equal to the sum of
one percent (1%) of the sum of the Loan Amount and
the Equipment Loan Amount. Borrower shall be
entitled to a $3,000.00 credit towards the Property
Commitment Fee owing under each Term Sheet.
One-half of the balance of the Property Commitment
Fee shall be due upon Borrower's acceptance of a
Term Sheet; the balance of the Property Commitment
Fee shall be due at the Closing. If any Loan fails
to close as a result of Borrower's default, FFCA's
damages shall be limited to the Property Commitment
Fee and any actual out-of-pocket expenses incurred
by FFCA in excess of the Property Commitment Fee.
Documentation FFCA shall provide Borrower with FFCA's proposed
form of promissory note ("Note"), loan agreement
("Loan Agreement"), disbursement agreement
("Disbursement Agreement") mortgage or deed of
trust, as determined by FFCA, and security
agreement ("Deed of Trust"),
3
<PAGE>
assignment of leases and rents and UCC-1 financing
statements.
Loan Amount: The sum of (i) the fair market value of the land as
determined by FFCA's in-house site inspection and
valuation department, (ii) the actual and
reasonable cost to construct the Improvements, as
determined by FFCA's in-house site inspection and
review department (iii) the Property Commitment
Fee, and (iv) such soft costs and closing costs as
FFCA may approve in its sole discretion.
Loan Amount: Up to $3,000,000 for any property (inclusive of the
cost of the Land, the Development Price (as defined
below), and all financed soft costs and closing
costs).
Development Price: After Borrower purchases the Land, FFCA will fund
the sum of (i) the actual and reasonable hard costs
incurred to construct the improvements at the
Property, and (ii) such soft costs relating to the
construction of the Improvements as may be approved
as to category and amount by FFCA, in its sole
discretion.
Basic Construction
Funding Terms: The Disbursement Agreement shall provide that FFCA
will agree to fund the Development Price in
progress payments through Lawyer's Title Insurance
Company, and Borrower will agree to complete the
lmprovements as provided therein.
Note Terms: During the construction period, interest shall
accrue at a variable rate equal to the 30-day LIBO
Rate then in effect plus 2.75%; thereafter,
interest shall accrue at an annual rate equal to
the 10-year U.S. Treasury Note Rate in effect 10
days prior to final disbursement of the Development
Price plus 2.75%. Principal and interest shall be
paid in equal monthly installments due on the first
day of each month based on a twenty (20) year
amortization schedule.
Prepayment: Subject to the terms of the Fixed Charge Coverage
paragraph below, the Note may not be prepaid in
whole or in part during the first five years of the
term of the Note. Thereafter, Borrower may prepay
the Note, in whole but not in part, on any
regularly scheduled payment date; provided,
however, any prepayment during the sixth year of
the term of the Mortgage Loan shall include a
prepayment premium equal to 5% of the
4
<PAGE>
then outstanding amount of the loan; any prepayment
during the seventh year of the term of the Mortgage
Loan shall include a prepayment premium equal to 4%
of the then outstanding amount of the loan; any
prepayment during the eighth year of the term of
the Mortgage Loan shall include a prepayment
premium equal to 3% of the then outstanding amount
of the loan; any prepayment during the ninth year
of the term of the Mortgage Loan shall include a
prepayment premium equal to 2% of the then
outstanding amount of the loan; and any prepayment
during the tenth year of the term of the Mortgage
Loan shall include a prepayment premium equal to 1%
of the then outstanding amount of the loan.
Fixed Charge
Coverage: Borrower shall be required to achieve and maintain
an annual Fixed Charge Coverage Ratio (as defined
below) at each Property equal to or greater than
1.25:1. If Borrower does not achieve such annual
the fixed Charge Coverage Ratio for such Properties
within 30 days following notice from FFCA, Borrower
shall be required to perform one of the following
at its sole option: (i) substitute a similar
property in the place of the non-complying Property
provided such property has a fair market value (as
determined by FFCA) of not less than the original
principal amount of the related Mortgage Loan terms
as are reasonably required by FFCA, (ii) partially
prepay the Note by an amount sufficient to raise
the Fixed Charge Coverage Ratio at such Property to
1.25:1, and Borrower and FFCA shall amend such Note
to reamortize the payment schedule thereunder, or
(iii) prepay the Note in full or provide that such
Note is prepayable and any applicable prepayment
penalty is made thereon. For purposes hereof, the
term "Fixed Charge Coverage Ratio" shall mean the
ratio of (a) the sum of net income before
non-recurring items and after corporate overhead
allocation (equal to 2% of gross sales), interest
charges (in accordance with generally accepted
accounting principles), depreciation, amortization,
non cash charges and non cash inter-company
charges, income taxes, FICA income tax credits and
operating lease payments, to (b) the sum of any
cash principal and interest mortgage payments and
equipment loan payments which are associated with
the Property.
5
<PAGE>
Closing Costs: Borrower shall pay its attorneys' fees, FFCA's
reasonable attorneys' fees, the cost of the phase I
environmental report, FFCA's in-house site
inspection expenses and all other reasonable and
customary Mortgage Loan closing costs, including,
without limitation, all mortgage and stamp taxes,
construction consultant fees, soil report expenses,
disbursement agent costs, survey expenses, and
title insurance premiums, and escrow, filing and
recording fees.
Guaranty: To the extent Borrower is an entity other than MRG,
all of Borrower's obligations under the Loan
Documents shall be unconditionally guaranteed by
MRG.
Basic Construction
Funding Terms: The Loan Agreement shall provide that FFCA will
agree to fund the Loan Amount in progress payments
through the title company and Borrower will agree
to complete the Improvements as provided therein.
C. Basic Equipment Loan Terms:
Documentation: In the event Borrower elects to obtain financing
for its equipment package from FFCA, FFCA's counsel
will prepare and submit to Borrower the form of
equipment note (the "Equipment Note"), equipment
loan agreement (the "Equipment Loan Agreement"),
security agreement (the "Security Agreement") and
UCC-1 Financing Statements previously agreed upon
by FFCA and Borrower. The Security Agreement shall
grant FFCA a first priority purchase money security
interest in the Equipment, and the Equipment Loan
Agreement shall (i) contain such representations,
warranties, covenants and agreements as are
customary in loan transactions of this type, and
(ii) provide that Borrower will indemnify FFCA
against all claims, suits and costs whatsoever
relating to any breach of Borrower's
representations and warranties. At the Equipment
Loan closing, Borrower shall (i) provide FFCA with
proof of insurance and copies of all bills of sale,
invoices and purchase agreements relating to the
Equipment, and (ii) execute the Equipment Note, the
Equipment Loan Agreement, the Security Agreement,
the UCC-1 financing statements and such other
documents as may be reasonably required by FFCA or
the title company (collectively, the "Equipment
Loan Documents"). In the event Borrower seeks
purchase-
6
<PAGE>
money equipment financing from a third party
lender, the Loan Documents shall provide the FFCA
will subordinate its lien in such equipment to the
lien of the third-party lender.
Equipment
Loan Amount: The actual and reasonable cost of the Equipment at
each Property, but in no event shall the cost
exceed the sum of $500,000.00 per Property.
Note Terms: Interest shall accrue at the rate per annum equal
to the 10-year U.S. Treasury Note Rate in effect 10
days prior to closing plus 2.75%. Principal and
interest shall be paid in equal monthly
installments due on the first day of each month
based on a seven (7) year amortization schedule.
Prepayment: Borrower may not prepay any Note in whole or in
part during the first four (4) years thereof;
thereafter Borrower may prepay the Note in whole
only on any regularly scheduled payment date;
provided, however any prepayment during the fifth
year of the term of the Equipment Loan shall
include a prepayment premium equal to 3% of the
then outstanding amount of the Equipment Loan;
any prepayment during the sixth year of the term
of the Equipment Loan shall include a prepayment
premium equal to 2% of the then outstanding amount
of the Equipment Loan; and any prepayment during
the seventh year of the term of the Equipment Loan
shall include a prepayment premium equal to 1% of
the then outstanding amount of the Equipment Loan.
Equipment Loan
Closing Date: The date of the final funding of the Loan Amount.
Guaranty: To the extent Borrower is an entity other than MRG,
all of Borrower's obligations under the Loan
Documents shall be unconditionally guaranteed by
MRG.
D. Other Material Transaction Terms.
Financial Statements: Within forty-five days following the end of each
quarter during the Commitment Term, Borrower shall
provide FFCA with Borrower's financial statements
for the preceding quarter.
7
<PAGE>
Securitization: The Loan Documents shall provide that FFCA may, at
any time, sell, transfer or assign any Note, Deed
of Trust and any of the other Loan Documents and
Equipment Loan Documents, and any or all servicing
rights with respect thereto (each, a "Transfer"),
or grant participations therein (each, a
"Participation"), or complete an asset
securitization vehicle selected by FFCA, in
accordance with all requirements which may be
imposed by the investors or the rating agencies
involved in such securitized financing transaction,
as selected by FFCA, or which may be imposed by
applicable securities, tax or other laws or
regulations, including, without limitation, laws
relating to FFCA's status as a real estate
investment trust (each, a "Securitization").
Borrower agrees to cooperate in good faith with
FFCA in connection with any Transfer Participation
and/or Securitization, including, without
limitation, (i) providing such documents, financial
and other data, and other information and materials
(the "Disclosures") which would typically be
required with respect to Borrower by a purchaser,
transferee, assignee, servicer, participant,
investor or rating agency involved with respect to
such Transfer, Participation and/or the
Securitization, as applicable; provided, however,
Borrower shall not be required to make Disclosures
of any confidential information or any information
which has not previously been made public unless
required by applicable federal or state securities
laws; and (ii) amending the terms of the
transactions evidenced by the Loan Documents to the
extent necessary so as to satisfy the requirements
of purchasers, transferees, assignees, servicers,
participants, investors or selected rating agencies
involved in any such Transfers, Participations or
Securitization, so long as such amendments would
not have a material adverse effect upon Borrower or
the transactions contemplated by this Commitment.
Borrower consents to FFCA providing the
Disclosures, as well as any other information which
FFCA may now have or hereafter acquire with respect
to the Property or the financial condition of
Borrower, to each purchaser, transferee, assignee,
servicer, participant, investor or rating agency
involved with respect to each Transfer,
Participation and/or Securitization, as applicable.
FFCA shall pay its own attorneys' fees and other
out-of-pocket expenses incurred in connection with
any Transfer, Participation, and/or Securitization;
and FFCA shall pay reasonable attorneys' fees
incurred by Borrower in
8
<PAGE>
reviewing, negotiating and/or preparing any
documentation requested of Borrower in connection
therewith.
Contingencies: Prior to the first Closing, FFCA shall have
received and approved the financial statements of
Bertolini's and Mick's for the most recent fiscal
year. The structure and legal documentation of
these Transactions are subject to the approval of
FFCA's legal department.
E. Other Matters.
THE FOREGOING SUMMARY OF BASIC TERMS AND CONDITIONS IS NOT MEANT TO BE:
NOR SHOULD IT BE CONSTRUED AS AN ATTEMPT TO DEFINE ALL OF THE TERMS AND
CONDITIONS REGARDING THE TRANSACTIONS AND THE EQUIPMENT LOANS. INSTEAD, IT IS
INTENDED ONLY TO OUTLINE CERTAIN BASIC POINTS OF THE BUSINESS UNDERSTANDING
AROUND WHICH LEGAL DOCUMENTATION WILL BE STRUCTURED. THE OUTLINED TERMS AND
CONDITIONS ARE SUBJECT TO FINAL DOCUMENTATION SATISFACTORY TO ALL PARTIES AND
COMPLETE LEGAL REVIEW AND APPROVAL OF ALL PERTINENT MATTERS.
This Commitment and the Transactions and the Equipment Loans contemplated
hereby (i) shall be subject to, in FFCA's judgment, there being no adverse
materiel change in Borrower's financial condition, (ii) shall not be assignable
by Borrower or relied upon by any third party without the prior written consent
of FFCA, and (iii) shall be governed by the internal laws of the State of
Arizona, without giving effect to conflict of law principles. This Commitment
may be assigned by FFCA without the consent of Borrower. This Commitment (i)
supersedes any previous discussions, agreements and/or proposal/commitment
letters relating to the Transactions, and the Equipment Loans, (including, but
not limited to, those certain Commitment Letters dated April 29, 1997 and July
23, 1997) and (ii) may only be amended by a written agreement executed by FFCA
and Borrower. FFCA reserves the right to cancel this Commitment in the event
Borrower has made any misrepresentations or has withheld any information with
regard to the Transactions.
ANY ACTION ARISING OUT OF THIS COMMITMENT SHALL BE PROSECUTED ONLY IN THE
STATE OR FEDERAL COURTS LOCATED IN THE STATE OF ARIZONA. FFCA AND BORROWER
WAIVES ANY RIGHT MAY HAVE TO A TRIAL BY JURY IN RESPECT TO ANY ACTION ARISING
OUT OF THIS COMMITMENT. BORROWER WAIVES ANY RIGHT BORROWER HAS OR MAY HAVE TO
SEEK OR RECOVER FROM FFCA OR ANY OF ITS AFFILIATES, OFFICERS, DIRECTORS AND
EMPLOYEES ANY AWARD OF SPECIAL, INDIRECT, CONSEQUENTIAL OR PUNITIVE DAMAGES IN
CONNECTION WITH ANY DEFAULT BY FFCA UNDER THIS COMMITMENT.
9
<PAGE>
Please indicate your acceptance of this Commitment by having a copy of
this Commitment signed and returned to FFCA to the attention of Ms. Michelle D.
Stewart, FFCA Acquisition Corporation, 17207 North Perimeter Drive, Scottsdale,
Arizona 85255, together with a check in the sum of $9,000.00 payable to "FFCA
Acquisition Corporation", within ten (10) days from the date hereof or this
Commitment will automatically expire.
FFCA Acquisition Corporation,
a Delaware corporation
/s/ Mark E. Wood
---------------------------------
Mark E. Wood
Vice President, Corporate Finance
ACCEPTED AND AGREED TO on this 11th day of August, 1997.
Morton's Restaurant Group, Inc.
By: /s/ Thomas J. Baldwin
------------------------------------
Thomas J. Baldwin
Executive Vice President and Chief Financial Officer
10
<PAGE>
Exhibit 13.01
SELECTED FINANCIAL INFORMATION
(dollars in millions, except per share data)
<TABLE>
<CAPTION>
FISCAL YEARS
------------------------------------------------------------------
STATEMENT OF OPERATIONS INFORMATION 1997 1996 1995 1994 1993
- --------------------------------------------------------- --------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Restaurant Revenues (All)................................ $ 172.7 $ 193.4 $ 173.4 $ 156.3 $ 119.4
Restaurant Revenues (Combined Morton's and
Bertolini's)........................................... 164.3 139.0 109.0 90.8 64.2
EBITDA (1)............................................... 20.7 17.5 11.2 12.7 11.0
Income Before Income Taxes and Nonrecurring Charges...... 11.5 8.8 3.1 3.1 5.3
Income (Loss) Before Income Taxes........................ 9.2(2) (2.7) (3) (14.7) (4) (3.0) (5) 5.3
Net Income (Loss)........................................ 6.9(2) 1.8 (3) (13.9) (4) (0.30) (5) 4.9
Net Income (Loss) Per Share:
Basic.................................................. 1.06(2) 0.28 (3) (2.18) (4) (0.05) (5) 0.77
Diluted................................................ $ 1.00(2) $ 0.26 (3) $ (2.18) (4) $ (0.05) (5) $ 0.74
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Information FISCAL YEARS
- ----------------------------------------------------------- ---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
Current Assets..................................................... $ 18.6 $ 27.3(6) $ 35.4(6) $ 15.4 $ 13.0
Net Property and Equipment......................................... 34.6 24.7 19.4 25.3 19.8
Total Assets....................................................... 81.9 77.0 73.2 73.5 65.3
Current Liabilities................................................ 21.4 25.3(7) 26.4(7) 15.4 16.1
Long-Term Debt..................................................... 24.9 24.9 23.7 20.0 12.7
Stockholders' Equity............................................... $ 28.6 $ 21.1 $ 19.0 $ 32.9 $ 33.3
</TABLE>
- ------------------------
(1) Represents earnings before interest, taxes, depreciation and amortization,
and nonrecurring charges.
(2) Includes nonrecurring litigation charge of $2.3 million.
(3) Includes nonrecurring charge of $11.5 million to write-down the
Atlanta-based Mick's and Peasant restaurants recorded in conjunction with
the sale of such restaurants .
(4) Includes nonrecurring charges of $15.5 million representing a write-down and
related charges for net assets held for sale and $2.2 million related to the
settlement of a lawsuit.
(5) Includes one-time charges aggregating $6.1 million, of which $5.5 million
related to the write-off of a preferred stock minority investment in an
affiliate.
(6) Includes assets held for sale of $12.5 million and $22.6 million for fiscal
1996 and 1995, respectively.
(7) Includes liabilities related to assets held for sale of $12.1 million and
$14.0 million for fiscal 1996 and 1995, respectively.
<PAGE>
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
1997 Compared to 1996
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 Company's consolidated financial
statements, the Company completed the sale of its Atlanta-based Mick's and
Peasant restaurants on February 6, 1997 and closed, sold, or otherwise
disposed of all other remaining Mick's and Peasant restaurants during fiscal
1997.
Morton's Restaurant Group, Inc., Morton's and Bertolini's (excluding Mick's
and Peasant):
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 29,
1997 1996
------------ ------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Revenues............................................................................. $ 164,272 $ 138,968
Food and beverage costs.............................................................. 56,628 48,767
Restaurant operating expenses........................................................ 70,659 59,340
Depreciation, amortization and other non-cash charges................................ 6,823 6,282
General and administrative expenses.................................................. 12,329 10,592
Marketing and promotional expenses................................................... 4,011 3,456
Interest expense, net................................................................ 2,396 2,297
Litigation and related expenses...................................................... 2,300 --
------------ ------------
Income before income taxes....................................................... $ 9,126 $ 8,234
------------ ------------
------------ ------------
</TABLE>
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
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 29,
1997 1996
------------- -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Revenues............................................................................. $ 8,453 $ 54,410
Food and beverage costs.............................................................. 2,561 15,956
Restaurant operating expenses........................................................ 5,120 33,042
Depreciation, amortization and other non-cash charges................................ 6 172
General and administrative expenses.................................................. 556 3,741
Marketing and promotional expenses................................................... 157 975
<PAGE>
Write-down and related charges for net assets held for sale.......................... -- 11,500
------ ------
Income (loss) before income taxes.................................................... $ 53 $ (10,976)
------ ------
------ ------
</TABLE>
Revenues decreased $20.7 million, or 10.7%, to $172.7 million for fiscal
1997, from $193.4 million for fiscal 1996. Revenues from Morton's and
Bertolini's increased $25.3 million, or 18.2%, to $164.3 million for fiscal
1997, from $139.0 million during the comparable 1996 period. Of the increase
in Morton's and Bertolini's revenues, $17.6 million was attributable to
incremental restaurant revenues from twelve new restaurants opened after
January 1, 1996 and $7.0 million, or 5.6%, was attributable to additional
comparable revenues from restaurants open all of both periods. Included in
1997 revenues is approximately $0.7 million of investment and consulting fee
income. Average Morton's and Bertolini's revenues per restaurant open for a
full period increased 6.3%. As discussed in Note 3 to the Company's
consolidated financial statements, the Company completed the sale of its
Atlanta-based Mick's and Peasant restaurants on February 6, 1997. Nine other
non-Atlanta Mick's and Peasant restaurants were closed, sold or otherwise
disposed of during fiscal 1996 and the remaining seven Mick's were closed,
sold or otherwise disposed of during fiscal 1997. As a result, revenues for
the Mick's and Peasant restaurants decreased approximately $46.0 million in
the fiscal 1997 period versus the comparable period of fiscal 1996. As of
December 28, 1997, the Company operated 48 restaurants (including 38 Morton's
and 10 Bertolini's) and as of December 29, 1996, 67 restaurants (including 34
Morton's, 7 Bertolini's, 18 Mick's and 8 Peasants).
Percentage changes in comparable restaurant revenues for fiscal 1997 versus
fiscal 1996 for restaurants open all of both periods are as follows:
<TABLE>
<CAPTION>
PERCENTAGE
CHANGE
-------------
<S> <C>
Morton's...................................................... 6.2%
Bertolini's................................................... 2.6%
Total......................................................... 5.6%
</TABLE>
The Company believes that revenues for the first quarter of 1996 were
adversely affected by severe winter storms in January 1996. The Company believes
that the Olympic Games, which were held in Atlanta in July 1996, had a favorable
impact on Atlanta-based restaurant revenues for that period.
Food and beverage costs decreased from $64.7 million for fiscal 1996 to
$59.2 million for fiscal 1997. Food and beverage costs, excluding all Mick's and
Peasant restaurants, increased $7.9 million to $56.6 million for fiscal 1997
from $48.8 million recorded for fiscal 1996. These costs as a percentage of
<PAGE>
related revenues decreased 0.6% for the period. As a result of the sale and
closings of the Mick's and Peasant restaurants, as discussed in Note 3 to the
Company's consolidated financial statements, there was a reduction in food and
beverage costs of approximately $13.4 million for fiscal 1997.
Restaurant operating expenses which include labor, occupancy and other
operating expenses decreased from $92.4 million for fiscal 1996 to $75.8 million
for fiscal 1997, a decrease of $16.6 million. Restaurant operating expenses,
excluding all Mick's and Peasant restaurants, increased from $59.3 million for
fiscal 1996 to $70.7 million for fiscal 1997. Those costs, excluding Mick's and
Peasant, as a percentage of revenues increased 0.3% from 42.7% for fiscal 1996
to 43.0% for fiscal 1997. Offsetting the increase in total restaurant operating
expenses was a reduction of approximately $28.0 million during fiscal 1997
versus the comparable 1996 period, due to the sale and closings of Mick's and
Peasant restaurants as discussed in Note 3 to the Company's consolidated
financial statements.
Depreciation, amortization and other non-cash charges increased from $6.5
million for fiscal 1996 to $6.8 million for the fiscal 1997 and increased from
3.3% of revenues to 4.0%, respectively. Pre-opening costs associated with the
opening of new restaurants are amortized over the 12 months following opening.
The timing of restaurant openings affects the amount of such costs amortized.
General and administrative expenses for fiscal 1997 were $12.9 million, a
decrease of $1.4 million, from $14.3 million for fiscal 1996. General and
administrative expenses, excluding all Mick's and Peasant restaurants, increased
$1.7 million from $10.6 million for fiscal 1996 to $12.3 million for fiscal
1997. Such costs, excluding Mick's and Peasant, as a percentage of revenues were
7.5% for fiscal 1997, a decrease of 0.1% from fiscal 1996. The increase in such
expense is driven by incremental costs associated with increased restaurant
development. General and administrative expenses relating to the Mick's and
Peasant restaurant groups decreased $3.1 million during fiscal 1997 versus the
comparable 1996 period as a result of the sale and closings of Mick's and
Peasant restaurants as discussed in Note 3.
Marketing and promotional expenses were $4.2 million, or 2.4% of revenues,
for fiscal 1997 versus $4.4 million, or 2.3% of revenues, for fiscal 1996.
Marketing and promotional expenses, excluding Mick's and Peasant, were $4.0
million, or 2.4% of revenues, for fiscal 1997, as compared to $3.4 million, or
2.5% of revenues, for fiscal 1996. The increase is driven by incremental costs
associated with increased restaurant development. Mick's and Peasant marketing
and promotional expenses decreased $0.8 million during fiscal 1997 versus fiscal
1996.
<PAGE>
Interest expense, net of interest income, increased $0.1 million, from $2.3
million for fiscal 1996 to $2.4 million for fiscal 1997.
During fiscal 1997, the Company recorded a charge of approximately $2.3
million related to a judgment against the Company in the United States District
Court for the Northern District of California (see Note 14 to the Company's
consolidated financial statements).
Income tax expense of $2.3 million for fiscal 1997 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 1997, as well as state income taxes.
1996 Compared to 1995
Revenues increased $20.0 million, or 11.5%, to $193.4 million for fiscal
1996 from $173.4 million during fiscal 1995. Of the increase, $21.4 million was
attributable to incremental revenues from nine new restaurants opened after
January 1, 1995 and $4.1 million, or 2.6%, of additional comparable revenues
from restaurants open all of both periods. Offsetting these increases was a
reduction of $5.5 million from Mick's and Peasant restaurants closed during
fiscal 1996. Average sales per restaurant open for the full year increased
11.3%. In addition, higher revenues for fiscal 1996 reflect the impact of price
increases of approximately 1% in November 1996 for Morton's of Chicago and
approximately 2% in April 1995 for Mick's and Peasant. The Company operated 67
restaurants as of December 29, 1996 (including 34 Morton's, 7 Bertolini's, 18
Mick's, and 8 Peasants) and 71 restaurants as of December 31, 1995 (including 30
Morton's, 6 Bertolini's, 25 Mick's, and 10 Peasants).
Mick's and Peasant restaurants had generated lower than anticipated revenues
which were adversely impacting average restaurant revenues and earnings trends.
Additionally, as reflected in the table below, the fiscal 1996 period was
adversely impacted by declines in the comparable restaurant revenues in the
Mick's and Peasant restaurant groups, offset by increases in the Morton's and
Bertolini's restaurant groups. The Atlanta market, where 22 of the Company's
restaurants were located, had become increasingly competitive. As discussed in
Note 3 to the Company's consolidated financial statements, the Company completed
the sale of its Atlanta-based Mick's and Peasant restaurant groups.
<PAGE>
Percentage changes in comparable revenues for fiscal 1996 versus fiscal 1995
for restaurants open all of both years are as follows:
<TABLE>
<CAPTION>
PERCENTAGE CHANGE
---------------------
<S> <C>
MORTON'S............................................... 9.2%
BERTOLINI'S............................................ 3.7%
MICK'S................................................. (7.8)%
PEASANT................................................ (8.3)%
TOTAL.................................................. 2.6%
</TABLE>
The Company believes that revenues for the first quarter of fiscal 1996 were
adversely affected by severe winter storms in January 1996. The Company believes
that the Olympic Games, which were held in Atlanta in July 1996, had a favorable
impact on Atlanta-based restaurant revenues for that period.
Food and beverage costs increased from $57.7 million for fiscal 1995, to
$64.7 million for fiscal 1996. Offsetting these increases was a reduction of
approximately $1.8 million due to the Mick's and Peasant restaurants closed
during fiscal 1996. These costs as a percentage of revenues increased 0.2% for
the period.
Restaurant operating expenses, which include labor, occupancy and other
operating expenses, increased from $85.9 million for fiscal 1995 to $92.4
million for fiscal 1996, an increase of $6.5 million. Those costs as a
percentage of revenues decreased 1.7% from 49.5% for fiscal 1995 to 47.8% for
fiscal 1996. Offsetting these increases was a reduction of approximately $4.8
million for fiscal 1996 due to the nine Mick's and Peasant restaurants closed
during the period. In addition, restaurant occupancy expense does not include
approximately $1.5 million for the Remaining Restaurants (see Note 3 to the
Company's consolidated financial statements) which has been charged against the
accrual for lease exit costs. The 1996 period increase in costs related to the
added costs of operating nine additional restaurants opened after January 1,
1995.
Depreciation, amortization and other non-cash charges were $6.5 million
for fiscal 1996 versus $6.3 million in fiscal 1995. The fiscal 1996 period
increase is due to increased start-up cost amortization resulting from
increased development in fiscal 1996 from fiscal 1995, offset by the
exclusion of depreciation and amortization related to Mick's and Peasant of
approximately $0.4 million recorded in the first quarter of fiscal 1995. Such
depreciation and amortization was discontinued in the second quarter of 1995
pursuant to Statement 121 (see Note 3 to the Company's consolidated financial
statements).
<PAGE>
General and administrative expenses for fiscal 1996 were $14.3 million
versus $14.1 million for fiscal 1995. Such costs as a percentage of revenues
were 7.4% for fiscal 1996 as compared to 8.1% in fiscal 1995, representing a
decrease of 0.7%.
Marketing and promotional expenses were $4.4 million, or 2.3% of revenues,
for fiscal 1996 compared to $4.4 million, or 2.5% of revenues, for fiscal 1995.
These expenses reflect an increase driven by incremental costs associated with
restaurant development offset by a reduction of approximately $0.2 million due
to the closure of certain Mick's and Peasant restaurants during the period.
Interest expense, net of interest income, increased to $2.3 million for
fiscal 1996 from $1.8 million for fiscal 1995. This increase is a result of
higher outstanding debt balances.
During fiscal 1995, the Company recorded a charge of approximately $2.2
million related to the settlement of a lawsuit, and associated legal and related
costs, which had been pending in the United States District Court for the
District of Nevada (see Note 14 to the Company's consolidated financial
statements).
In connection with the Company's plan to sell or otherwise dispose of the
Mick's and Peasant restaurant groups, the Company recorded a charge of $15.5
million in fiscal 1995 to write-down certain assets held for sale and to accrue
related lease exit costs. During fiscal 1996, the Company recorded an additional
charge of $11.5 million in connection with the sale of an 80.1% interest in its
Atlanta-based Mick's and Peasant restaurants (see Note 3 to the Company's
consolidated financial statements).
An income tax benefit of $4.5 million and $0.8 million for fiscal 1996 and
fiscal 1995, respectively, is the result of utilization of the Company's net
operating loss carryforwards, additional deferred tax assets relating to FICA
and other tax credits generated during fiscal 1996, and a reassessment of the
valuation allowance against deferred tax assets (see Note 6 to the Company's
consolidated financial statements).
Liquidity and Capital Resources
In the past, the Company has had, and may have in the future, negative working
capital balances. The Company does not have significant receivables or
inventories and receives trade credit based upon negotiated terms in purchasing
food and supplies. Funds available from cash sales not needed immediately to pay
for food and supplies or to finance receivables or inventories are used for
noncurrent capital expenditures and or payments of long-term debt balances under
revolving credit agreements.
<PAGE>
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 June 19, 1995 as amended from time to time
(collectively the "Credit Agreement"), pursuant to which the Company's credit
facility is $32,500,000, consisting of a $15,000,000 term loan (the "Term Loan")
and a $17,500,000 revolving credit facility (the "Revolving Credit"). The final
maturity date is December 31, 2002. Loans made pursuant to the Credit Agreement
bear interest at a rate equal to the lender's base rate (plus applicable margin)
or, at the Company's option, the Eurodollar Rate (plus applicable margin). At
December 28, 1997, the Company's applicable margin, calculated pursuant to the
Credit Agreement, was 0.00% on base rate loans and 2.00% on Eurodollar Rate
loans. The Company has no outstanding futures contracts or interest rate hedge
agreements.
During fiscal 1996, BBNA syndicated portions of the Term Loan and the
Revolving Credit of the Credit Agreement to two other lenders; Imperial Bank and
Heller Financial. BBNA, as agent for the Lenders, receives an annual fee of
$10,000 which is paid by the Company.
As of the end of fiscal 1997 and fiscal 1996, the Company had outstanding
borrowings of $22,700,000 and $24,900,000, respectively, under the Credit
Agreement. At December 28, 1997, $221,000 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 $9,579,000 as of
December 28, 1997. The weighted average interest rate on all bank borrowings on
December 28, 1997 was 7.9%. In addition, the Company is obligated to pay fees of
0.25% on unused loan commitments less than $10,000,000, 0.375% on
unused loan commitments greater than $10,000,000 and a per annum letter of
credit fee (based on the face amount thereof) equal to the applicable margin on
the Eurodollar Rate loans.
The availability under the Credit Agreement is scheduled to be reduced by
$1,000,000 on June 30, 1999 and thereafter principal installments on the Term
Loan of $1,000,000 each will be due at the end of each calendar quarter through
December 31, 2002. The Revolving Credit will be payable in full on December 31,
2002. Borrowings under the Credit Agreement are secured by all tangible and
intangible assets of the Company. Total amounts of principal payable by the
Company under the Credit Agreement during the five years subsequent to December
28, 1997 amount to $0 in 1998, $3,000,000 in 1999, $4,000,000 in 2000,
$4,000,000 in 2001, and $11,700,000 in 2002. As discussed in Note 3 to the
Company's consolidated financial statements, the Company completed the sale of
its Mick's and Peasant
<PAGE>
Atlanta-based restaurants. 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 December 28, 1997,
the Company believes it was in compliance with such covenants.
In March 1997, a subsidiary of the Company and CNL Financial I, Inc. ("CNL")
entered into a $2,500,000 loan agreement (the "CNL Loan") 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 December 28, 1997, the
outstanding principal balance of the CNL loan was approximately $2.4 million, of
which approximately $0.2 million is payable within the next fiscal year and
therefore has been included in "Accrued expenses" in the accompanying
consolidated balance sheet as of December 28, 1997.
In July 1994, the Company entered into an agreement to purchase 9% of the
outstanding 11% of common stock of Peasant Holding Corp. ("Peasant Holding")
from one of the two remaining minority holders of Peasant Holding common stock.
The purchase price of the shares was approximately $1,985,000 plus interest
calculated at 5%, which were paid in installments through March 1996.
During fiscal 1997, the Company's net investment in fixed assets and related
investment costs, net of capitalized leases, approximated $16.2 million. The
Company estimates that it will expend up to an aggregate of $15 million in 1998
to finance ordinary refurbishment of existing restaurants and pre-opening costs
and capital expenditures, net of landlord development and rent allowances and
net of equipment lease and mortgage financing, for new restaurants. The Company
has entered into various equipment lease and mortgage financing agreements with
several financial institutions of which approximately $18.7 million in the
aggregate is available for future fundings. The Company anticipates that funds
generated through
<PAGE>
operations and funds available through equipment lease and mortgage financing
commitments as well as funds available under the Credit Agreement will be
sufficient to fund planned expansion.
At December 28, 1997, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $6.6 million expiring by 2008 and
various state income tax net operating loss carryforwards. Approximately $2.7
million of the Company's deferred tax asset represents capital losses.
Additionally, as of December 28, 1997, the Company had approximately $4.2
million in FICA and other tax credits expiring by 2012 available to reduce
income taxes payable in future years. As a result of the Company's equity
offerings in 1992, certain limitations apply to the maximum annual amount of the
net operating loss carryforward and credit carryforwards which may be utilized
by the Company to offset taxable income in future periods.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which temporary differences become deductible and net operating losses can be
carried forward. Management considers projected future taxable income and tax
planning strategies in making this assessment. The Company assesses the
recoverability of its net deferred tax asset based upon the level of historical
income of the Morton's and Bertolini's restaurants and projections of future
taxable income over the next two to three years. Deferred tax assets arising
from capital losses have been fully reserved for since the Company has no
capital gains to offset such losses. Substantially all of the Company's state
net operating loss carryforwards relating to Mick's and Peasant have been fully
reserved (see Note 6 to the Company's consolidated financial statements).
Inflation
The impact of inflation on labor, food and occupancy costs can significantly
affect the Company's operations. Many of the Company's employees are paid hourly
rates related to the Federal minimum wage. Food costs as a percentage of net
sales have been somewhat stable due to procurement efficiencies and menu price
adjustments. The Company currently does not engage in any futures contracts and
all purchases are made at prevailing market prices. Building costs, taxes,
maintenance and insurance costs all have an impact on the Company's occupancy
costs, which continued to increase during the period. Management believes the
current practice of maintaining operating margins through a combination of menu
price
<PAGE>
increases and cost controls, careful evaluation of property and equipment
needs, and efficient purchasing practices is its most effective tool for coping
with inflation.
Seasonality
The Company's business is somewhat seasonal in nature, with revenues being
less in the third quarter than in other quarters primarily due to Morton's
reduced summer volume. It is possible, given the disposition of Mick's and
Peasant, as discussed in Note 3 to the Company's consolidated financial
statements, that the Company's revenues will become more seasonal in nature.
The following table sets forth historical unaudited quarterly revenues for
the Company's Morton's and Bertolini's restaurants which were open for the
entire period from January 1, 1995 to December 29, 1996 (31 restaurants), and
for the entire period from December 30, 1996 to December 28, 1997 (36
restaurants):
Comparable Restaurant Revenues
(in thousands)
<TABLE>
<CAPTION>
1995 1996
31 RESTAURANTS
-------------------- -
$ % $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
First Quarter.................................. 25,797 25.5 28,338 25.8
Second Quarter................................. 24,247 24.0 26,610 24.2
Third Quarter.................................. 22,575 22.3 24,411 22.2
Fourth Quarter................................. 28,489 28.2 30,457 27.8
--------- --------- --------- ---------
101,108 100.0 109,816 100.0
</TABLE>
<TABLE>
<CAPTION>
1996 1997
36 RESTAURANTS
-------------------
$ % $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
First Quarter.................................. 31,918 25.7 33,702 25.7
Second Quarter................................. 30,274 24.4 32,281 24.6
Third Quarter.................................. 27,793 22.4 28,868 22.0
Fourth Quarter................................. 34,195 27.5 36,300 27.7
--------- --------- --------- ---------
124,180 100.0 131,151 100.0
</TABLE>
The Company believes that revenues for the first quarter of fiscal 1996 were
adversely affected by severe winter storms in January 1996. The Company believes
that the Olympic Games, which were held in Atlanta in July 1996, had a favorable
impact on Atlanta-based restaurant revenues for that period.
Year 2000
The Company is continuing the process of assessing the impact of the Year
2000 issue on its operations. Based on the current status of this assessment,
the estimated total costs to be incurred for all Year 2000 related projects
are not expected to be material to the Company's business, results of
operations or financial condition.
<PAGE>
Forward-Looking Statements
Except for the historical information contained in this annual report,
certain statements made herein are forward-looking statements that involve
certain risks and uncertainties and are subject to important factors that
could cause actual results to differ materially from these forward-looking
statements, including without limitation, the effect of economic and market
conditions, the impact of competitive activities, the Company's expansion
plans, restaurant profitability levels and other risks detailed in the
Company's public reports and SEC filings.
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Morton's Restaurant Group, Inc.:
We have audited the accompanying consolidated balance sheets of Morton's
Restaurant Group, Inc. and subsidiaries as of December 28, 1997 and December 29,
1996 and the related consolidated statements of operations, stockholders' equity
and cash flows for each of the years in the three-year period ended December 28,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Morton's Restaurant
Group, Inc. and subsidiaries as of December 28, 1997 and December 29, 1996 and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 28, 1997, in conformity with generally
accepted accounting principles.
As discussed in Notes 2(k) and 3 of the notes to consolidated financial
statements, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," in 1995.
KPMG PEAT MARWICK LLP
Jericho, New York
January 23, 1998
<PAGE>
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 28, 1997 and December 29, 1996
(amounts in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 29,
ASSETS 1997 1996
- ------------------------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................................ $ 3,437 $ 2,276
Accounts receivable.............................................................. 1,669 2,116
Inventories...................................................................... 5,420 4,254
Landlord construction receivables, prepaid expenses and other current assets..... 3,226 2,408
Deferred income taxes............................................................ 4,890 3,808
Assets held for sale............................................................. -- 12,474
------------ ------------
Total current assets......................................................... 18,642 27,336
------------ ------------
Property and equipment, at cost:
Furniture, fixtures and equipment................................................ 19,169 13,552
Leasehold improvements........................................................... 21,876 14,188
Construction in progress......................................................... 46 1,284
------------ ------------
41,091 29,024
Less accumulated depreciation and amortization................................... 6,449 4,353
------------ ------------
Net property and equipment................................................... 34,642 24,671
------------ ------------
Intangible assets, net of accumulated amortization of $3,458 at December 28, 1997 and
$3,054 at December 29, 1996........................................................ 12,537 12,941
Other assets and deferred expenses, net of accumulated amortization of $3,901 at
December 28, 1997 and $3,963 at December 29, 1996.................................. 11,902 5,909
Deferred income taxes................................................................ 4,220 6,129
------------ ------------
$ 81,943 $ 76,986
------------ ------------
------------ ------------
</TABLE>
(Continued)
<PAGE>
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
December 28, 1997 and December 29, 1996
(amounts in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 29,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
- ------------------------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
Current liabilities:
Accounts payable................................................................. $ 6,159 $ 4,694
Accrued expenses................................................................. 14,629 7,795
Accrued income taxes............................................................. 656 700
Liabilities related to assets held for sale...................................... -- 12,134
------------ ------------
Total current liabilities.................................................... 21,444 25,323
------------ ------------
Bank debt............................................................................ 24,931 24,900
Other liabilities.................................................................... 7,013 5,676
------------ ------------
Total liabilities............................................................ 53,388 55,899
------------ ------------
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 6,604,565 at December 28, 1997 and 6,443,673 at December 29,
1996........................................................................... 66 64
Nonvoting common stock, $.01 par value per share. Authorized 3,000,000 shares, no
shares issued or outstanding................................................... -- --
Additional paid-in capital....................................................... 62,214 61,632
Accumulated deficit.............................................................. (33,725) (40,609)
------------ ------------
28,555 21,087
------------ ------------
Total stockholders' equity................................................... $ 81,943 $ 76,986
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 28, 1997, December 29, 1996, and December 31, 1995
(amounts in thousands, except per share data)
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 29, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues.............................................................. $ 172,725 $ 193,378 $ 173,373
Food and beverage costs............................................... 59,189 64,723 57,734
Restaurant operating expenses......................................... 75,779 92,382 85,891
Depreciation, amortization and other non-cash charges................. 6,829 6,454 6,321
General and administrative expenses................................... 12,885 14,333 14,115
Marketing and promotional expenses.................................... 4,168 4,431 4,407
Interest expense, net................................................. 2,396 2,297 1,829
Litigation and related expenses....................................... 2,300 -- 2,240
Write-down and related charges for net assets held for sale........... -- 11,500 15,500
------------ ------------ ------------
Income (loss) before income taxes............................... 9,179 (2,742) (14,664)
Income tax expense (benefit).......................................... 2,295 (4,507) (756)
------------ ------------ ------------
Net income (loss)............................................... $ 6,884 $ 1,765 $ (13,908)
------------ ------------ ------------
------------ ------------ ------------
Net income (loss) per share:
Basic......................................................... $ 1.06 $ 0.28 $ (2.18)
------------ ------------ ------------
------------ ------------ ------------
Diluted....................................................... $ 1.00 $ 0.26 $ (2.18)
------------ ------------ ------------
------------ ------------ ------------
Weighted average common and potential common shares outstanding:
Basic......................................................... 6,498 6,404 6,367
------------ ------------ ------------
------------ ------------ ------------
Diluted....................................................... 6,886 6,795 6,367
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 28, 1997, December 29, 1996 and December 31, 1995
(amounts in thousands)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN ACCUMULATED STOCKHOLDERS'
STOCK CAPITAL DEFICIT EQUITY
------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at January 1, 1995................................ $ 64 $ 61,350 $ (28,466) $ 32,948
Net loss.................................................. -- -- (13,908) (13,908)
--------- ---------- ---------- ----------
Balance at December 31, 1995.............................. 64 61,350 (42,374) 19,040
Exercise of stock options................................. -- 282 -- 282
Net income................................................ -- -- 1,765 1,765
--------- ---------- ---------- ----------
Balance at December 29, 1996.............................. 64 61,632 (40,609) 21,087
Exercise of stock options................................. 2 582 -- 584
Net income................................................ -- -- 6,884 6,884
--------- ---------- ---------- ----------
Balance at December 28, 1997.............................. $ 66 $ 62,214 $ (33,725) $ 28,555
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 28, 1997, December 29, 1996, and December 31, 1995
(amounts in thousands)
<TABLE>
<CAPTION>
DEC. 28, DEC. 29, DEC. 31,
1997 1996 1995
--------- --------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).............................................................. $ 6,884 $ 1,765 $ (13,908)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation of property and equipment....................................... 2,127 1,534 1,112
Amortization of intangible assets............................................ 404 400 461
Amortization of other deferred expenses...................................... 3,682 3,722 3,337
Deferred occupancy costs..................................................... 616 798 1,411
Deferred income taxes........................................................ 827 (5,477) (1,006)
Write-down and related charges for net assets held for sale.................. -- 11,500 15,500
Litigation and related expenses.............................................. 2,300 -- --
Change in assets and liabilities:
Accounts receivable...................................................... 447 351 (899)
Inventories.............................................................. (1,166) (456) (398)
Prepaid expenses and other assets........................................ (4,219) 122 212
Accounts payable, accrued expenses and other liabilities................. 404 (6,050) 751
Accrued income taxes..................................................... (44) 450 (605)
--------- --------- ----------
Net cash provided by operating activities............................ 12,262 8,659 5,968
--------- --------- ----------
Cash flows from investing activities:
Purchases of property and equipment............................................ (9,914) (5,297) (6,628)
Payments for pre-opening costs, licenses and other deferred expenses........... (6,274) (4,486) (3,236)
Proceeds from sale of Mick's and Peasant restaurants........................... 4,308 -- --
Cash paid to minority holder for common stock of subsidiary.................... -- (483) (535)
--------- --------- ----------
Net cash used by investing activities................................ (11,880) (10,266) (10,399)
--------- --------- ----------
</TABLE>
(Continued)
<PAGE>
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
(amounts in thousands)
<TABLE>
<CAPTION>
DEC. 28, DEC. 29, DEC. 31,
1997 1996 1995
--------- ----------- -----------
<S> <C> <C> <C>
Cash flows from financing activities:
Decrease in bank overdraft........................................................ $ -- $ -- $ (574)
Principal reduction on bank debt.................................................. (10,005) (4,750) (4,150)
Proceeds from bank debt........................................................... 10,200 6,000 7,475
Net proceeds from issuance of stock............................................... 584 282 --
--------- ----------- -----------
Net cash provided by financing activities............................... 779 1,532 2,751
--------- ----------- -----------
Net increase (decrease) in cash and cash equivalents................................ 1,161 (75) (1,680)
Cash and cash equivalents at beginning of year...................................... 2,276 2,351 4,031
--------- ----------- -----------
Cash and cash equivalents at end of year............................................ $ 3,437 $ 2,276 $ 2,351
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 28, 1997, December 29, 1996 and December 31, 1995
(1) Organization and Other Matters
Morton's Restaurant Group, Inc., formerly known as Quantum Restaurant Group,
Inc., ("Company") was incorporated in the State of Delaware in October 1988 and
is engaged in the business of owning and operating restaurants under the names
Morton's of Chicago, Inc. ("Morton's") and Bertolini's Authentic Trattorias
("Bertolini's").
In 1988, the Company acquired 89% of the outstanding common stock of a
predecessor company of Peasant Holding Corp. ("Peasant Holding"), the holding
company for The Peasant Restaurants, Inc. ("Peasant") and Mick's Restaurants,
Inc. ("Mick's"). The acquisition was accounted for using the purchase method of
accounting. During 1994, the Company purchased 9% of the outstanding 11% of
common stock of Peasant Holding from one of the two remaining minority holders
for approximately $1,985,000 (see Note 11). During 1995, the Company approved a
plan to sell its Mick's and Peasant restaurants, and on February 6, 1997, the
Company completed the sale of its Atlanta-based Mick's and Peasant restaurants
(see Note 3).
In 1989, the Company acquired 100% of the outstanding common stock,
preferred stock, stock options and common stock warrants of Porterhouse, Inc.
and subsidiaries, which do business as Morton's of Chicago, a national
restaurant group. The acquisition was accounted for using the purchase method of
accounting.
The Company uses a fiscal year which consists of 52 weeks. Approximately
every six or seven years, a 53rd week will be added.
(2) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts and results of
operations of the Company and its subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
(b) Inventories
Inventories consist of food, beverages, and supplies and are recorded at the
lower of cost or market. Cost is determined using the first-in, first-out (FIFO)
method.
<PAGE>
(c) Property and Equipment
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the related assets.
Improvements to leased premises and property under capital leases are amortized
on the straight-line method over the shorter of the lease term, including
planned extensions, or estimated useful lives of the improvements. In fiscal
1997, 1996, and 1995, interest costs capitalized during the construction period
for leasehold improvements were $270,000, $202,500 and $235,000, respectively.
(d) Other Assets and Deferred Expenses
The Company defers certain organizational and pre-opening costs associated
with the opening of each new restaurant. Such costs are amortized over the 12
months following the restaurant's opening. Unamortized pre-opening costs of
$4,116,000 and $3,472,000 at the end of fiscal 1997 and 1996, respectively, are
included in "Other assets and deferred expenses" in the accompanying
consolidated balance sheets. Also included in "Other assets and deferred
expenses" are smallwares of $2,135,000 at the end of fiscal 1997 and $1,775,000
at the end of fiscal 1996. In addition, included in "Assets held for sale" are
$760,000 of smallwares at the end of fiscal 1996.
(e) Income Taxes
The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("Statement 109"). Statement 109 requires a change
from the deferred method of accounting for income taxes of APB Opinion 11 to the
asset and liability method of accounting for income taxes. Under the asset and
liability method of Statement 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.
(f) Intangible Assets
Intangible assets arose from the acquisitions of Peasant Holding and
Morton's (see Note 1). Amortization is being recognized on a straight-line basis
over forty years for goodwill. Goodwill relating to Peasant Holding was recorded
in "Assets held for sale" at the end of fiscal 1996.
(g) Marketing and Promotional Expenses
Marketing and promotional expenses in the accompanying consolidated
statements of operations include advertising expenses of $3,022,000, $2,875,000
and $3,026,000 for fiscal 1997, 1996 and 1995, respectively.
<PAGE>
(h) Statements of Cash Flows
For the purposes of the consolidated statements of cash flows, the Company
considers all highly liquid instruments purchased with a maturity of three
months or less to be cash equivalents. The Company paid cash interest and fees,
net of amounts capitalized, of approximately $2,062,000, $2,141,000, and
$1,798,000, and income taxes of approximately $1,133,000, $977,000 and $894,000,
for fiscal 1997, 1996 and 1995, respectively. During fiscal 1997, 1996 and 1995,
the Company entered into capital lease finance agreements of approximately
$2,184,000, $2,346,000 and $2,069,000, respectively, for restaurant equipment.
(i) Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share'("Statement 128"). Statement 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of stock options. Dilutive earnings per
share is calculated in a manner similar to the previously reported fully diluted
earnings per share. Earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to the Statement 128
requirements (see Note 8).
(j) Use of Estimates
Management of the Company has made certain estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(k) Long-Lived Assets
The Company's accounting policies relating to the recording of long-lived
assets including property and equipment and intangibles are discussed above. As
discussed in Note 3, the Company adopted the provisions of Statement 121
effective January 2, 1995. Statement 121 requires, among other things, that
long-lived assets held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceed the fair values of the assets. Assets to be
disposed of or sold are reported at the lower of the carrying amount or fair
value less costs to sell. Statement 121 did not have an impact on the Company at
adoption.
(l) Stock-Based Compensation
The Company records compensation expense for stock options only if the
current market price of the underlying stock exceeds the exercise price on the
date the options are granted. On January 1, 1996, the Company adopted Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("Statement 123"). The Company has elected not to implement the
fair value based accounting method for stock options, but has elected to
disclose the pro forma net earnings and pro forma earnings per share for stock
option grants
<PAGE>
made beginning in fiscal 1995 as if such method had been used to account for
stock-based compensation costs as described in Statement 123.
(3) Assets Held For Sale and Related Liabilities
Effective January 2, 1995, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" ("Statement 121").
During the second quarter of fiscal 1995, the Company approved a plan for
the sale of Mick's and Peasant. Pursuant to Statement 121, the Company
discontinued depreciating fixed assets and amortizing goodwill related to Mick's
and Peasant for the second, third, and fourth quarters of fiscal 1995, fiscal
1996 and fiscal 1997.
Coincident with the Company's approval of the plan of sale, the assets held
for sale and related liabilities for Mick's and Peasant were reclassified as
"Assets held for sale" and "Liabilities related to assets held for sale". The
accompanying December 29, 1996 consolidated balance sheet includes the following
components:
<TABLE>
<CAPTION>
DECEMBER 29, 1996
----------------------
<S> <C>
(AMOUNTS IN THOUSANDS)
Current assets............................................................................ $ 2,166
Net property and equipment................................................................ 10,704
Unamortized goodwill...................................................................... 8,077
Other assets.............................................................................. 2,143
Write-down of carrying values............................................................. (10,616)
-------
Assets held for sale.................................................................. 12,474
-------
Current liabilities....................................................................... 3,495
Other liabilities......................................................................... 1,612
Lease exit and other transaction costs.................................................... 7,027
-------
Liabilities related to assets held for sale........................................... 12,134
-------
Net assets held for sale.......................................................... $ 340
-------
-------
</TABLE>
The following represents the combined results of operations for Mick's and
Peasant for the years ended December 28, 1997, December 29, 1996, and December
31, 1995. Interest expense was not allocated to Mick's and Peasant.
<TABLE>
<CAPTION>
1997 1996 1995
--------- ---------- ----------
<S> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
Revenues........................................................................ $ 8,453 $ 54,410 $ 64,387
Food and beverage costs......................................................... 2,561 15,956 18,839
Restaurant operating expenses................................................... 5,120 33,042 38,776
Depreciation, amortization and other non-cash charges........................... 6 172 2,679
General and administrative expenses............................................. 556 3,741 4,190
Marketing and promotional expenses.............................................. 157 975 1,643
Write-down and related charges for net assets held for sale..................... -- 11,500 15,500
--------- ---------- ----------
Income (loss) before income taxes......................................... $ 53 $ (10,976) $ (17,240)
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
<PAGE>
Management had been actively seeking potential buyers for the sale of all
Mick's and Peasant restaurants and in the fourth quarter of fiscal 1995 engaged
an investment banking firm to assist with the sale. Although marketing efforts
concentrated on selling all of the Mick's and Peasant restaurants, sales
materials indicated that a partial sale would be considered. Most of the
interest received related to the majority of the restaurants located mainly in
the Atlanta area. No meaningful offers were received for the remaining
restaurants (the "Remaining Restaurants"). Cash flow analyses prepared by
management for the Remaining Restaurants indicated that it would be less costly
to close such restaurants in an orderly fashion, rather than continue to operate
them through the end of their respective lease terms. Accordingly, assets of
$8,300,000 related to the Remaining Restaurants were written off and expenses of
$7,200,000, representing management's estimate of the expected costs to
terminate related leases, were accrued at December 31, 1995. During fiscal 1996
and fiscal 1997, restaurant occupancy expenses of approximately $1,498,000, and
$1,271,000, respectively, for the Remaining Restaurants were charged to the
accrual for lease exit costs. During fiscal 1996, seven Mick's restaurants and
two Peasant restaurants were sold, closed or otherwise disposed of. During
fiscal 1997, the remaining seven Mick's restaurants were sold, closed or
otherwise disposed of. At December 28, 1997, included in "Accrued expenses" in
the accompanying consolidated balance sheet, is approximately $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. 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 sheet at
December 28, 1997. In conjunction with the sale, the Company recorded a fiscal
1996 fourth quarter charge of $11,500,000 to write-down the Atlanta-based
restaurants to their net realizable values based on the fair value of the
consideration received, accrue for the various expenses related to the closing
of such sale and to write-off two restaurants which were not part of the sale,
both of which were disposed of in 1997.
(4) Accrued Expenses
<TABLE>
<CAPTION>
ACCRUED EXPENSES CONSIST OF THE FOLLOWING: DECEMBER 28, 1997 DECEMBER 29, 1996
- --------------------------------------------------------------------------- ----------------- -----------------
<S> <C> <C>
(AMOUNTS IN THOUSANDS)
Litigation and related expenses...................................... $ 2,216 $ --
Accrued construction costs........................................... 2,081 929
Restaurant operating expenses........................................ 1,437 1,509
Sales and use tax.................................................... 1,403 882
Payroll and related taxes............................................ 1,375 1,004
Current portion of capital lease liabilities......................... 1,467 913
Accrued gift certificates............................................ 1,002 695
Rent and property taxes.............................................. 957 797
Mick's and Peasant lease disposition costs........................... 788 --
Other................................................................ 1,903 1,066
------- ------
Total accrued expenses........................................... $ 14,629 $ 7,795
------- ------
------- ------
</TABLE>
<PAGE>
(5) Bank Debt
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 June 19, 1995 as amended from time to time
(collectively the "Credit Agreement"), pursuant to which the Company's credit
facility is $32,500,000, consisting of a $15,000,000 term loan (the "Term Loan")
and a $17,500,000 revolving credit facility (the "Revolving Credit"). The final
maturity date is December 31, 2002. Loans made pursuant to the Credit Agreement
bear interest at a rate equal to the lender's base rate (plus applicable margin)
or, at the Company's option, the Eurodollar Rate (plus applicable margin). At
December 28, 1997, the Company's applicable margin, calculated pursuant to the
Credit Agreement, was 0.00% on base rate loans and 2.00% on Eurodollar Rate
loans. The Company has no outstanding futures contracts or interest rate hedge
agreements.
During fiscal 1996, BBNA syndicated portions of the Term Loan and Revolving
Credit of the Credit Agreement to two other lenders; Imperial Bank and Heller
Financial. BBNA, as agent for the Lenders, receives an annual fee of $10,000
which is paid by the Company.
As of the end of fiscal 1997 and fiscal 1996, the Company had outstanding
borrowings of $22,700,000 and $24,900,000, respectively, under the Credit
Agreement. At December 28, 1997, $221,000 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 $9,579,000 as of
December 28, 1997. The weighted average interest rate on all bank borrowings on
December 28, 1997 was 7.9%. In addition, the Company is obligated to pay fees of
0.25% on unused loan commitments less than $10,000,000, 0.375% on unused loan
commitments greater than $10,000,000 and a per annum letter of credit fee (based
on the face amount thereof) equal to the applicable margin on the Eurodollar
Rate loans.
Management believes that the carrying amount of long-term debt approximates
fair value since the interest rate is variable and the margins are consistent
with those available to the Company under similar terms.
The availability under the Credit Agreement is scheduled to reduce by
$1,000,000 on June 30, 1999 and thereafter principal installments on the Term
Loan of $1,000,000 each will be due at the end of each calendar quarter through
December 31, 2002. The Revolving Credit will be payable in full on December 31,
2002. Borrowings under the Credit Agreement are secured by all tangible and
intangible assets of the Company. Total amounts of principal payable by the
Company under the Credit Agreement during the five years subsequent to December
28, 1997 amount to $0 in 1998, $3,000,000 in 1999, $4,000,000 in 2000,
$4,000,000 in 2001 and $11,700,000 in 2002. As discussed in Note 3, the Company
completed the sale of its Atlanta-based Mick's and Peasant restaurants. Net cash
proceeds from the sale were used to reduce the Company's Revolving Credit.
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)
<PAGE>
prepayment of certain other indebtedness; (v) making capital expenditures above
specified amounts; and (vi) the ability to make certain fundamental changes or
to change materially the present method of conducting the Company's business.
The Credit Agreement also requires the Company to satisfy certain financial
ratios and tests. As of December 28, 1997, the Company believes it was in
compliance with such covenants.
The Credit Agreement permits the Company to pay dividends or repurchase
stock in an amount not to exceed 5% of consolidated net income calculated for
the fiscal year immediately preceding the fiscal years in which any such
dividends or repurchases take place, provided that no event of default is then
existing or would result from such payment. In addition, the Company is
permitted to pay dividends and repurchase stock in an additional amount not to
exceed 25% of net proceeds from equity offerings, including the Company's 1992
equity offering.
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 December 28, 1997, the
outstanding principal balance of the CNL loan was approximately $2,395,000, of
which approximately $164,000 is payable within the next fiscal year and
therefore has been included in "Accrued Expenses" in the accompanying
consolidated balance sheet as of December 28, 1997.
(6) Income Taxes
Income tax expense (benefit) is comprised of the following:
<TABLE>
<CAPTION>
(Amounts in thousands)
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Federal: Current.................................................... $ 725 $ -- $ --
Deferred................................................... 578 (5,477) (1,006)
--------- --------- ---------
1,303 (5,477) (1,006)
State and Local: Current.................................................... 743 898 250
Deferred................................................... 249 72 --
--------- --------- ---------
992 970 250
--------- --------- ---------
Income tax expense (benefit)........................................................ $ 2,295 $ (4,507) $ (756)
--------- --------- ---------
--------- --------- ---------
</TABLE>
Income tax expense (benefit) for fiscal 1997, 1996 and 1995 differed from
the amounts computed by applying the U.S. Federal income tax rate of 34% to
income (loss) before income taxes as a result of the following:
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
Computed "expected" tax expense (benefit).......................................... $ 3,121 $ (932) $ (4,986)
Increase (reduction) in income taxes resulting from:
State and local income taxes, net of federal income tax benefit.................. 655 644 165
FICA tax credits................................................................. (1,313) (1,208) (1,166)
Change in valuation allowance.................................................... -- (3,315) 5,046
Other, net....................................................................... (168) 304 185
--------- --------- ---------
$ 2,295 $ (4,507) $ (756)
--------- --------- ---------
--------- --------- ---------
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at the end of fiscal 1997
and 1996 are presented below:
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 29,
1997 1996
------------- -------------
<S> <C> <C>
(AMOUNTS IN THOUSANDS)
Deferred tax assets:
Federal and state net operating loss carryforwards................................. $ 5,632 $ 4,181
Capital loss carryforwards......................................................... 2,665 1,400
Write-down and related charges for assets held for sale............................ 704 6,109
Litigation accrual................................................................. 782 --
Compensatory stock options......................................................... 642 1,124
Deferred rent and start-up amortization............................................ 3,080 2,793
FICA and other tax credits......................................................... 4,154 2,645
------ ------
Total gross deferred tax assets.................................................. 17,659 18,252
Less valuation allowance......................................................... (6,932) (7,114)
------ ------
Net deferred tax assets.......................................................... 10,727 11,138
Deferred tax liabilities:
Property and equipment depreciation................................................ 1,617 1,201
------ ------
Net deferred tax assets and liabilities.............................................. $ 9,110 $ 9,937
------ ------
------ ------
</TABLE>
At December 28, 1997, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $6,614,000 expiring by 2008 and
various state income tax net operating loss carryforwards. Approximately
$2,665,000 of the Company's deferred tax asset represents capital losses.
Additionally, as of December 28, 1997, the Company had approximately $4,154,000
in FICA and other tax credits expiring by 2012 available to reduce income taxes
payable in future years. As a result of the Company's equity offerings in 1992,
certain limitations apply to the maximum annual amount of the net operating loss
carryforward and credit carryforwards which may be utilized by the Company to
offset taxable income in future periods.
<PAGE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which temporary differences become deductible and net operating losses can be
carried forward. Management considers projected future taxable income and tax
planning strategies in making this assessment. The Company assesses the
recoverability of its net deferred tax asset based upon the level of historical
income of the Morton's and Bertolini's restaurants and projections of future
taxable income over the next two to three years. Deferred tax assets arising
from capital losses have been fully reserved since the Company has no capital
gains to offset such losses. Substantially all of the Company's state net
operating loss carryforwards relating to Mick's and Peasant have been fully
reserved.
(7) Capital Stock
(a) On December 15, 1994, the Company adopted a Stockholder Protection
Rights Plan ("Rights Plan"). Pursuant to the Rights Plan, a dividend of one
Right for each outstanding share of the Company's Common Stock was issued to
shareholders of record on January 3, 1995. Under certain conditions, each Right
may be exercised to purchase 1/100 of a share of Series A Junior Participating
Preferred Stock (the "Preferred Stock") of the Company at a price of $42. The
Rights will become exercisable following the tenth day after a person or group
acquires 15% or more of the Company's Common Stock or announces a tender or
exchange offer, the consummation of which would result in ownership by such
person or group of 15% or more of the Company's Common Stock. If a person or
group acquires 15% or more of the Company's outstanding Common Stock, each Right
will entitle its holder (other than such person or members of such group) to
purchase, at the Right's then-current purchase price, in lieu of 1/100 of a
share of Preferred Stock, a number of shares of the Company's Common Stock
having a market value of twice the Right's purchase price. In addition, if the
Company is acquired in a merger or other business combination, 50% or more of
its assets or earning power is sold or transferred, or a reclassification or
recapitalization of the Company occurs that has the effect of increasing by more
than 1% the proportionate ownership of the Company's Common Stock by the
acquiring person, then, each Right will entitle its holder to purchase, at the
Right's then-current purchase price, a number of the acquiring company's shares
of common stock having a market value at that time of twice the Right's purchase
price.
The Rights may be redeemed prior to becoming exercisable by the Company,
subject to approval of the Board of Directors for $.01 per Right, in accordance
with the provision of the Rights Plan. The Rights expire on January 3, 2005. The
Company has reserved 200,000 shares of Preferred Stock for issuance upon
exercise of the Rights.
(b) In May 1995, the Company amended its 1991 Stock Option Plan (the "Stock
Option Plan") which provides for the issuance of incentive stock options
("ISO's") and non-qualified stock options ("NQSO's") to employees. The Stock
Option Plan, as amended, provides that options, having a maximum term of ten
years, may be granted to purchase up to 900,000 shares of Common Stock.
The exercise price of ISO's will be equal to the fair market value of the
shares subject to option on the date of grant, while the exercise price of
NQSO's will be determined by a
<PAGE>
committee of the Board of Directors. Options vest and become exercisable
commencing at the second anniversary date of the grant at the rate of 25% per
year.
Activity in stock options is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
WEIGHTED
AVERAGE SHARES WEIGHTED SHARES WEIGHTED SHARES
EXERCISE SUBJECT TO AVERAGE SUBJECT TO AVERAGE SUBJECT TO
PRICE OPTION EXERCISE PRICE OPTION EXERCISE PRICE OPTION
------------- ----------- --------------- ----------- --------------- -----------
Beginning of year......................... $ 8.48 790,765 $ 6.63 693,295 $ 6.27 648,745
Options granted........................... 17.12 205,100 12.97 233,650 10.88 97,000
Options exercised......................... 3.62 160,892 3.67 76,580 -- --
Options canceled.......................... 12.65 207,588 10.72 59,600 10.08 52,450
------ ----------- ----- ----------- ----- -----------
End of year............................... $ 11.17 627,385 $ 8.48 790,765 $ 6.63 693,295
------ ----------- ----- ----------- ----- -----------
------ ----------- ----- ----------- ----- -----------
</TABLE>
As of December 28, 1997, there were 232,985 options exercisable with a
weighted average exercise price of $6.16.
(c) In October of 1995, the Financial Accounting Standards Board issued
Statement No. 123, "Accounting for Stock-Based Compensation" ("Statement 123"),
which was adopted by the Company in 1996. The Company has elected to disclose
the pro forma net income and earnings per share as if such method had been used
to account for stock-based compensation cost as described in Statement 123.
The per share weighted average fair value of stock options granted during
fiscal 1997, 1996 and 1995 was $7.81, $7.01 and $5.35 on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions: 1997 -- expected dividend yield 0.0%, risk-free interest rate of
6.0%, volatility of 33% and an expected life of 6.4 years; 1996--expected
dividend yield 0.0%, risk-free interest rate of 6.0%, volatility of 36% and an
expected life of 7 years; 1995--expected dividend yield 0.0%, risk-free interest
rate of 6.0%, volatility of 36% and an expected life of 6.8 years.
The Company applies APB Opinion No. 25 in accounting for its Stock Option
Plan and, accordingly, no compensation cost has been recognized for its stock
options in the financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under
Statement 123, the Company's net income (loss) and net income (loss) per share
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ----------
<S> <C> <C> <C>
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA)
Net income (loss) as reported...................................................... $ 6,884 $ 1,765 $ (13,908)
Pro forma..................................................................... $ 6,553 $ 1,516 $ (13,955)
Net income (loss) per diluted share as reported.................................... $ 1.00 $ 0.26 $ (2.18)
Pro forma..................................................................... $ 0.96 $ 0.23 $ (2.19)
</TABLE>
<PAGE>
Pro forma net income (loss) reflects only options granted in 1997, 1996 and
1995. Therefore, the full impact of calculating compensation cost for stock
options under Statement 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options' vesting
period of five years and compensation cost for options granted prior to January
1, 1995 is not considered.
(8) Earnings Per Share
As discussed in Note 2(i), the Company adopted Statement 128 which replaced
the calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. The following table sets forth the computation of
basic and diluted earnings per share. Prior periods have been restated to
conform to the Statement 128 requirements:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ----------
<S> <C> <C> <C>
(AMOUNTS IN THOUSANDS, EXCEPT
PER SHARE DATA)
Net income (loss).................................................................. $ 6,884 $ 1,765 $ (13,908)
--------- --------- ----------
--------- --------- ----------
Weighted average common shares (denominator for basic earnings per share).......... 6,498 6,404 6,367
Effect of dilutive securities:
Employee stock options........................................................ 388 391 -*
--------- --------- ----------
Weighted average common and potential common shares outstanding (denominator for
diluted earnings per share)...................................................... 6,886 6,795 6,367
--------- --------- ----------
--------- --------- ----------
Basic earnings per share........................................................... $ 1.06 $ 0.28 $ (2.18)
--------- --------- ----------
--------- --------- ----------
Diluted earnings per share......................................................... $ 1.00 $ 0.26 $ (2.18)
--------- --------- ----------
--------- --------- ----------
</TABLE>
* Assumed exercise of stock options was antidilutive due to net loss and
therefore excluded.
For additional disclosures regarding employee stock options see Note 7.
(9) Operating Leases
All of the Company's operations are conducted in leased premises. Including
renewal options, remaining lease terms range from two to 29 years.
In connection with entering into leases, the Company is frequently provided
with development allowances from the lessors. These allowances for leasehold
improvements, furniture, fixtures and equipment are offset against the related
fixed asset accounts and the net amount is amortized on a straight-line basis
over the shorter of the lease term, including planned extensions, or estimated
useful lives of the assets. At the end of fiscal 1997 and fiscal 1996,
$1,281,000 and $578,000, respectively, of development allowances were due from
lessors and are included in "Landlord construction receivables, prepaid expenses
and other current assets" in the accompanying consolidated balance sheets.
<PAGE>
The Company leases certain office and restaurant facilities and related
equipment under noncancelable operating lease agreements with an affiliate and
third parties. Certain leases contain contingent rental provisions based upon a
percent of gross sales and or provide for rent deferral during the initial term
of such leases. Included in "Other liabilities" in the accompanying consolidated
balance sheets at the end of fiscal 1997 and fiscal 1996 are accruals related to
such rent deferrals of approximately $3,393,000 and $2,656,000, respectively. In
addition, included in "Liabilities related to assets held for sale" are
approximately $1,592,000 of such accruals at the end of fiscal 1996. For
financial reporting purposes, such leases are accounted for on a straight-line
rental basis. Future minimum annual rental commitments under these leases are
approximately as follows:
<TABLE>
<CAPTION>
(amounts in thousands)
<S> <C>
Fiscal 1998 $10,365
Fiscal 1999 9,673
Fiscal 2000 9,512
Fiscal 2001 9,423
Fiscal 2002 9,653
Fiscal 2003 and thereafter 70,009
-------
Total minimum lease payments $118,635
-------
-------
</TABLE>
Contingent rental payments on building leases are typically made based upon
the percentage of gross sales on the individual restaurants that exceed
predetermined levels. The percentage of gross sales to be paid and related gross
sales level vary by unit. Contingent rental expense was approximately
$2,376,000, $2,391,000 and $1,904,000, for fiscal 1997, 1996 and 1995,
respectively.
Rental expense for all leases was approximately $11,936,000, $14,175,000,
and $13,375,000, for fiscal 1997, 1996 and 1995, respectively, of which
approximately, $564,000, and $553,000, respectively, was paid to an affiliate in
fiscal 1996 and 1995.
As discussed in Note 3, the Company accrued for lease disposition expenses
related to certain Mick's and Peasant restaurants whose underlying leases have
been assigned to third parties. At December 28, 1997, the aggregate remaining
minimum lease obligation is approximately $1,700,000, of which the Company's
portion of $788,000 has been accrued for and is included in "Accrued expenses"
in the accompanying consolidated balance sheet.
(10) Capital Leases
The Company typically finances the purchase of certain restaurant equipment
through capital leases and at December 28, 1997 had approximately $8,200,000 in
lease commitments available for future fundings. At December 28, 1997 and
December 29, 1996, furniture, fixtures and equipment include approximately
$6,300,000 and $4,628,000 of net assets recorded under capital leases. These
assets are amortized over the life of the respective leases. At December 28,
1997 and December 29, 1996, capitalized lease obligations of approximately
$3,503,000 and $3,020,000 are included in "Other liabilities" in the
accompanying consolidated balance sheets.
The Company's minimum future obligations under capital leases as of December
28, 1997 are as follows:
<PAGE>
<TABLE>
<CAPTION>
(amounts in thousands)
<S> <C>
Fiscal 1998 $ 1,826
Fiscal 1999 1,601
Fiscal 2000 1,237
Fiscal 2001 743
Fiscal 2002 361
-------
Total minimum lease payments 5,768
Less amount representing interest 798
-------
Present value of net minimum lease
payments (including current portion
of $1,467) $ 4,970
-------
-------
</TABLE>
(11) Acquisition Related Agreements
In July 1994, the Company entered into an agreement to purchase 9% of the
outstanding 11% of common stock of Peasant Holding from one of the two minority
holders of Peasant Holding common stock. The purchase price of the shares was
approximately $1,985,000 plus interest calculated at 5%, which was paid in
installments through March 1996.
(12) Employment Agreements
The Company and its Chief Executive Officer entered into an employment
agreement on January 1, 1992. The agreement, as amended, is terminable by the
Company upon 60 months prior notice. On January 31, 1994, the Company entered
into an employment agreement with its now former President. This agreement was
terminated in September 1997.
The Company is a party to change of control agreements with its Chief
Executive Officer and another officer which grant these employees the right to
receive up to approximately three times their base compensation (as computed
under the Internal Revenue Code) if there is a change in control of the Company
and termination of their employment during a specified period by the Company
without cause or by such officer with good reason.
(13) Employee Benefit Plans
Employees of Morton's Restaurant Group, Morton's of Chicago, and Bertolini's
who are over the age of 21 and who have completed a year of service are eligible
for voluntary participation in a profit sharing plan. Employer contributions to
the plan are made at the discretion of the Board of Directors. Employer
contributions for fiscal 1997, 1996 and 1995 were $516,000, $365,000 and
$145,000, respectively.
(14) Legal Matters and Contingencies
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.
<PAGE>
Plaintiff sought general, special, and punitive damages in unspecified
amounts, as well as attorneys' fees and costs. The case was subsequently
removed to the U.S. 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 U.S. District
Court for the Northern District of California awarded a judgment to the
Plaintiff. In conjunction with the judgment, the Company recorded a 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. The Company intends to
vigorously contest and appeal the judgment when entered.
In October 1995, the Company announced that the lawsuit among the Company, a
subsidiary of the Company and Mr. Alberto Lombardi and a company controlled by
Mr. Lombardi had been settled on mutually satisfactory terms and agreed to the
dismissal of all claims pending against each other. In connection with the
settlement, the Company recorded a pre-tax charge of approximately $2,240,000 in
1995, which amount includes legal and related costs associated with the lawsuit.
The settlement provides that it is not to be construed or considered to be an
admission of guilt or noncompliance with any federal, state or local statute,
public policy, tort law, common law or of any other wrongdoing whatsoever.
The Company is involved in various legal actions incidental to the normal
conduct of its business. Management does not believe that the ultimate
resolution of these actions will have a material adverse effect on the Company's
consolidated financial position, equity, results of operations, liquidity and
capital resources.
<PAGE>
Price Range of Common Stock and Related Matters
- ------------------------------------------------------------------------------
The Company's Common Stock is traded on the New York Stock Exchange ("NYSE")
under the symbol "MRG". From January 21, 1994 until May 9, 1996, it was traded
under the symbol "KRG".
The following table sets forth, for the periods indicated, the highest and
lowest sale prices for the Common Stock, as reported by the NYSE.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 28, 1997 HIGH LOW
- --------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
First Quarter................................................................................ $ 17 1/2 $ 14 1/2
Second Quarter............................................................................... 20 1/4 15
Third Quarter................................................................................ 24 19 1/8
Fourth Quarter............................................................................... 25 1/16 19 3/4
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 29, 1996 HIGH LOW
- --------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
First Quarter................................................................................ $ 17 1/4 $ 10 7/8
Second Quarter............................................................................... 19 13 5/8
Third Quarter................................................................................ 18 1/2 15 1/8
Fourth Quarter............................................................................... 17 5/8 14
</TABLE>
On December 28, 1997, the last reported sale price of the Common Stock on the
NYSE was $19.75. On March 2, 1998, the last reported sale price of the Common
Stock on the NYSE was $21.75.
As of March 2, 1998, there were approximately 60 holders of record of the
Company's Common Stock. The Company believes that as of such date there were
approximately 1,000 beneficial owners of its Common Stock.
The Company has not paid any dividends on its common stock since its inception.
The Company currently intends to retain all of its earnings to support the
continued development of its business and has no present intention of paying any
dividends on its Common Stock. Any future determination as to the payment of
dividends will be at the discretion of the Board of Directors and will depend on
the Company's financial condition, results of operations, capital requirements,
compliance with charter and contractual restrictions and such other factors as
the Board of Directors deems relevant. In addition, the Company's Credit
Agreement restricts the payment of dividends. See Note 5 of Notes to
Consolidated Financial Statements.
<PAGE>
Exhibit 21.01
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME STATE OF INCORPORATION
---- ----------------------
<S> <C> <C>
1. Porterhouse, Inc. Delaware
2. Morton's of Chicago, Inc. Illinois
3. Morton's of Chicago/Addison, Inc. Delaware
4. Morton's of Chicago/Atlanta, Inc. Illinois
5. Morton's of Chicago/Baltimore, Inc. Delaware
6. Morton's of Chicago/Boston, Inc. Illinois
7. Morton's of Chicago/Buckhead, Inc. Delaware
8. Morton's of Chicago/Charlotte, Inc. Delaware
9. Morton's of Chicago/Chicago, Inc. Delaware
10. Morton's of Chicago/Cincinnati, Inc. Delaware
11. Morton's of Chicago/Clayton, Inc. Delaware
12. Morton's of Chicago/Cleveland, Inc. Illinois
13. Morton's of Chicago/Columbus, Inc. Delaware
14. Morton's of Chicago/Dallas, Inc. Illinois
15. Morton's of Chicago/Denver, Inc. Illinois
16. Morton's of Chicago/Detroit, Inc. Delaware
17. Morton's of Chicago/Fifth Avenue, Inc. Delaware
18. Morton's of Chicago/Houston, Inc. Delaware
19. Morton's of Chicago/Las Vegas, Inc. Delaware
20. Morton's of Chicago/Miami, Inc. Delaware
21. Morton's of Chicago/Minneapolis, Inc. Delaware
22. Morton's of Chicago/Nashville, Inc. Delaware
23. Morton's of Chicago/New Orleans, Inc. Illinois
24. Morton's of Chicago/North Miami Beach, Inc. Delaware
25. Morton's of Chicago/Orlando, Inc. Delaware
26. Morton's of Chicago/Palm Beach, Inc. Delaware
27. Morton's of Chicago/Palm Desert, Inc. Delaware
28. Morton's of Chicago/Philadelphia, Inc. Illinois
<PAGE>
29. Morton's of Chicago/Phoenix, Inc. Delaware
30. Morton's of Chicago/Pittsburgh, Inc. Delaware
31. Morton's of Chicago/Portland, Inc. Delaware
32. Morton's of Chicago/Rosemont, Inc. Illinois
33. Morton's of Chicago/Sacramento, Inc. Delaware
34. Morton's of Chicago/San Antonio, Inc. Delaware
35. Morton's of Chicago/San Diego, Inc. Delaware
36. Morton's of Chicago/San Francisco, Inc. Delaware
37. Morton's of Chicago/Santa Ana, Inc. Delaware
38. Morton's of Chicago/Stamford, Inc. Delaware
39. Morton's of Chicago/Virginia, Inc. Illinois
40. Morton's of Chicago/Washington, DC, Inc. Delaware
41. Morton's of Chicago/Washington Square, Inc. Delaware
42. Morton's of Chicago/West Street, Inc. Delaware
43. Morton's of Chicago/Westbrook, Inc. Illinois
44. Morton's, Inc. Illinois
45. Porterhouse of Los Angeles, Inc. Delaware
46. Addison Steakhouse, Inc. Texas
47. Chicago Steakhouse, Inc. Texas
48. Houston Steakhouse, Inc. Texas
49. San Antonio Steakhouse, Inc. Texas
50. Morton's of Chicago Asia (Singapore) Pte Ltd. Singapore
51. Morton's of Chicago (Singapore) Pte Ltd. Singapore
52. Morton's of Chicago/Canada, Co. Canada
53. Morton's of Chicago/Toronto, Co. Canada
54. Peasant Holding Corp. Delaware
55. Peasant at Locust Street, Inc. Delaware
56. Mick's at the Forum/Minneapolis, Inc. Delaware
57. Mick's at Towson Commons, Inc. Delaware
58. Mick's at Pennsylvania Ave., Inc. Delaware
59. Mick's at Southdale Center, Inc. Delaware
60. Mick's at 19th Street, Inc. Delaware
<PAGE>
61. Mick's at the Bellevue, Inc. Delaware
62. Mick's at Fair Oaks, Inc. Delaware
63. Mick's at Willow Grove, Inc. Delaware
64. Mick's at Springfield, Inc. Delaware
65. Mick's at Annapolis Mall, Inc. Delaware
66. Mick's at Loehmann's Fashion Island, Inc. Delaware
67. Mick's at Hickory Hollow, Inc. Delaware
68. Mick's at Oak Court, Inc. Delaware
69. Mick's at Rivergate, Inc. Delaware
70. Italian Restaurants Holding Corp. Delaware
71. Bertolini's Restaurants, Inc. Delaware
72. Bertolini's of Circle Centre, Inc. Delaware
73. Bertolini's of Irvine Center, Inc. Delaware
74. Bertolini's of King of Prussia, Inc. Delaware
75. Bertolini's of Las Vegas, Inc. Delaware
76. Bertolini's at Market Square, Inc. Delaware
77. Bertolini's of Phipps Plaza, Inc. Delaware
78. Bertolini's of Phillips Place, Inc. Delaware
79. Bertolini's of Westbury, Inc. Delaware
80. Bertolini's of WhiteFlint Mall, Inc. Delaware
81. Bertolini's of Costa Mesa, Inc. Delaware
82. Quantum Restaurant Development
Corporation Georgia
83. Santa Fe Steakhouse & Cantina Corp. Delaware
</TABLE>
<PAGE>
Exhibit 23.01
KPMG Peat Marwick LLP
Consent of Independent Auditors
The Board of Directors
Morton's Restaurant Group, Inc.:
We consent to the incorporation by reference in the registration statement
on Form S-8 of Morton's Restaurant Group, Inc. of our report dated January
23, 1998 relating to the consolidated balance sheets of Morton's Restaurant
Group, Inc. and subsidiaries as of December 28, 1997 and December 29, 1996
and the related consolidated statements of operations, stockholders' equity
and cash flows for each of the years in the three-year period ended December
28, 1997, which report is incorporated by reference in the December 28, 1997
annual report on Form 10-K of Morton's Restaurant Group, Inc.
KPMG PEAT MARWICK LLP
Jericho, New York
March 23, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
28, 1997 FORM 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> DEC-30-1996
<PERIOD-END> DEC-28-1997
<CASH> 3,437
<SECURITIES> 0
<RECEIVABLES> 1,669
<ALLOWANCES> 0
<INVENTORY> 5,420
<CURRENT-ASSETS> 18,642
<PP&E> 41,091
<DEPRECIATION> 6,449
<TOTAL-ASSETS> 81,943
<CURRENT-LIABILITIES> 21,444
<BONDS> 24,931
0
0
<COMMON> 66
<OTHER-SE> 28,489
<TOTAL-LIABILITY-AND-EQUITY> 81,489
<SALES> 172,725
<TOTAL-REVENUES> 172,725
<CGS> 59,189
<TOTAL-COSTS> 141,797
<OTHER-EXPENSES> 19,353
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,396
<INCOME-PRETAX> 9,179
<INCOME-TAX> 2,295
<INCOME-CONTINUING> 6,884
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,884
<EPS-PRIMARY> 1.06
<EPS-DILUTED> 1.00
</TABLE>
