<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended October 3, 1999
OR
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-12692
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MORTON'S RESTAURANT GROUP, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3490149
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(State or other jurisdiction of incorporation (I.R.S. employer
or organization) identification no.)
3333 New Hyde Park Road, Suite 210, New Hyde Park, New York 11042
- -------------------------------------------------------------------------------
(Address of principal executive offices) (zip code)
516-627-1515
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
As of November 11, 1999, the registrant had 5,617,610 Shares of its Common
Stock, $.01 par value, outstanding.
1
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MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
<S> <C>
Consolidated Balance Sheets as of October 3, 1999 and January 3, 1999 3-4
Consolidated Statements of Income for the three and nine month periods ended October 3, 1999
and September 27, 1998 5
Consolidated Statements of Cash Flows for the nine month periods ended October 3, 1999
and September 27, 1998 6
Notes to Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9-13
Item 3. Quantitative and Qualitative Disclosure about Market Risk 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Stockholders 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
</TABLE>
2
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Item 1. Financial Statements
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(amounts in thousands)
<TABLE>
<CAPTION>
October 3, January 3,
1999 1999
---- ----
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,625 $ 2,117
Accounts receivable 973 894
Inventories 5,612 6,400
Landlord construction receivables, prepaid expenses and other
current assets 2,887 3,920
Deferred income taxes 6,093 6,005
-------- --------
Total current assets 18,190 19,336
-------- --------
Property and equipment, at cost:
Furniture, fixtures and equipment 28,078 20,658
Leasehold improvements 29,751 25,422
Land 6,203 4,287
Construction in progress 2,413 3,248
-------- --------
66,445 53,615
Less accumulated depreciation and amortization 9,265 7,804
-------- --------
Net property and equipment 57,180 45,811
-------- --------
Intangible assets, net of accumulated amortization of $4,166 at
October 3,1999 and $3,861 at January 3, 1999 11,829 12,134
Other assets and deferred expenses, net of accumulated
amortization of $695 at October 3, 1999 and $2,075 at 6,542 9,237
January 3, 1999
Deferred income taxes 8,429 8,466
-------- --------
$102,170 $ 94,984
======== ========
</TABLE>
(Continued)
3
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MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
(amounts in thousands, except share data)
<TABLE>
<CAPTION>
October 3, January 3,
1999 1999
---- ----
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable $ 5,132 $ 6,553
Accrued expenses 13,585 19,466
Current portion of obligations to financial institutions
and capital leases 3,774 1,801
Accrued income taxes 152 372
--------- ---------
Total current liabilities 22,643 28,192
Obligations to financial institutions and capital leases,
less current maturities 58,036 40,254
Other liabilities 7,407 3,581
--------- --------
Total liabilities 88,086 72,027
--------- -------
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 6,757,150 shares at
October 3, 1999 and 6,661,370 shares at January 3, 1999 68 67
Nonvoting common stock, $.01 par value per share. Authorized
3,000,000 shares, no shares issued or outstanding - -
Additional paid-in capital 62,827 62,717
Accumulated other comprehensive income (loss) (117) (34)
Accumulated deficit (31,472) (35,597)
Less treasury stock at cost, 982,790 shares at October 3, 1999 and
234,400 shares at January 3, 1999 (17,222) (4,196)
--------- -------
Total stockholders' equity 14,084 22,957
--------- --------
$102,170 $ 94,984
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
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MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Oct. 3, Sept. 27, Oct. 3, Sept. 27,
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues $ 45,688 $ 40,886 $147,209 $134,201
Food and beverage costs 15,538 14,005 50,176 45,932
Restaurant operating expenses 21,246 19,021 65,265 58,904
Pre-opening costs, depreciation, amortization and
non-cash charges 1,750 1,801 4,472 6,415
General and administrative expenses 3,594 3,105 11,703 9,921
Marketing and promotional expenses 1,174 1,063 4,114 3,516
Nonrecurring charges (benefit) (159) - (159) -
Interest expense, net 1,116 532 3,097 1,714
-------- -------- -------- --------
Income before income taxes and cumulative
effect of a change in an accounting principle 1,429 1,359 8,541 7,799
Income tax expense 357 340 2,135 1,950
-------- -------- -------- --------
Income before cumulative effect of a change
in an accounting principle 1,072 1,019 6,406 5,849
Cumulative effect of a change in an accounting principle, net of
income tax benefit of $1,357 - - 2,281 -
-------- -------- -------- --------
Net income $ 1,072 $ 1,019 $ 4,125 $ 5,849
======== ======== ======== ========
Net income per share - basic:
Before cumulative effect of a change in an accounting principle $ 0.19 $ 0.15 $ 1.06 $ 0.88
Cumulative effect of a change in an accounting principle - - (0.38) -
-------- -------- -------- --------
Net income $ 0.19 $ 0.15 $ 0.68 $ 0.88
======== ======== ======== ========
Net income per share - diluted:
Before cumulative effect of a change in an accounting principle $ 0.18 $ 0.15 $ 1.03 $ 0.84
Cumulative effect of a change in an accounting principle - - (0.37) -
-------- -------- -------- --------
Net income $ 0.18 $ 0.15 $ 0.66 $ 0.84
======== ======== ======== ========
Weighted average common and potential common shares outstanding:
Basic 5,777 6,652 6,056 6,634
======== ======== ======== ========
Diluted 5,920 6,930 6,208 6,927
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
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MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(amounts in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
Oct. 3, Sept. 27,
1999 1998
---- ----
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,125 $ 5,849
Adjustments to reconcile net income to net cash provided by
operating activities:
Cumulative effect of a change in an accounting principle 2,281 -
Depreciation, amortization and other non-cash charges 3,191 6,415
Deferred income taxes 1,306 1,650
Change in assets and liabilities:
Accounts receivable (79) (483)
Inventories 787 (58)
Prepaid expenses and other assets (50) 113
Accounts payable, accrued expenses and other liabilities (3,817) (6,188)
Accrued income taxes (220) (269)
------- -------
Net cash provided by operating activities 7,524 7,029
------- -------
Cash flows from investing activities:
Purchases of property and equipment (5,726) (8,923)
Capitalized payments for pre-opening costs and other deferred expenses - (2,072)
------- -------
Net cash used by investing activities (5,726) (10,995)
------- -------
Cash flows from financing activities:
Principal reduction of obligations to financial institutions and
capital leases (11,376) (4,296)
Proceeds from obligations to financial institutions 23,058 6,400
Purchases of treasury stock (13,026) -
Net proceeds from issuance of stock 111 495
------- -------
Net cash provided (used) by financing activities (1,233) 2,599
------- -------
Effect of exchange rate changes on cash (57) (55)
------- -------
Net increase (decrease) in cash and cash equivalents 508 (1,422)
Cash and cash equivalents at beginning of period 2,117 3,437
------- -------
Cash and cash equivalents at end of period $ 2,625 $ 2,015
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
6
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MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 3, 1999 and September 27, 1998
1) The accompanying unaudited, consolidated financial statements have been
prepared in accordance with instructions to Form 10-Q and, therefore, do not
include all information and footnotes normally included in financial statements
prepared in conformity with generally accepted accounting principles. They
should be read in conjunction with the consolidated financial statements of
Morton's Restaurant Group, Inc. (the "Company") for the fiscal year ended
January 3, 1999 filed by the Company on Form 10-K with the Securities and
Exchange Commission on March 31, 1999.
The accompanying financial statements are unaudited and include all
adjustments (consisting of normal recurring adjustments and accruals) that
management considers necessary for a fair presentation of its financial position
and results of operations for the interim periods presented. The results of
operations for the interim periods are not necessarily indicative of the results
that may be expected for the entire year.
Certain items previously reported in specific financial statement
captions have been reclassified to conform to the fiscal 1999 presentation.
The Company uses a fiscal year which consists of 52 weeks. Every six or
seven years, a 53rd week will be added. Fiscal 1998 consisted of 53 weeks.
2) For the purposes of the consolidated statements of cash flows, the Company
considers all highly liquid instruments purchased with a maturity of three
months or less to be cash equivalents. The Company paid cash interest and fees,
net of amounts capitalized, of approximately $2,736,000 and $1,616,000, and
income taxes of approximately $929,000 and $797,000, for the nine months ended
October 3, 1999 and September 27, 1998, respectively. During the first nine
months of fiscal 1999 and 1998, the Company entered into capital lease
arrangements for approximately $2,057,000 and $953,000, respectively, for
restaurant equipment. In addition, during the third quarter of fiscal 1999 the
Company entered into sale-leaseback transactions for existing restaurant
equipment aggregating $6,000,000.
3) Based on a strategic assessment of recent trends and a downturn in comparable
revenues of Bertolini's Authentic Trattorias, during the fourth quarter of
fiscal 1998, pursuant to the approval of the Board of Directors, the Company
recorded a nonrecurring, pre-tax charge of $19,925,000 representing the
write-down of impaired Bertolini's restaurant assets, the write-down and accrual
of lease exit costs associated with the closure of specified Bertolini's
restaurants as well as the write-off of the residual interests in Mick's and
Peasant restaurants. The Company performed an in-depth analysis of historical
and projected operating results and, as a result of significant operating
losses, identified several nonperforming restaurants which have all been closed.
At October 3, 1999 and January 3, 1999, included in "Accrued expenses" in the
accompanying consolidated balance sheets is approximately $2,694,000 and
$4,165,000 representing the lease disposition liabilities related to the closing
of these nonperforming restaurants. Additionally, the analysis identified
several underperforming restaurants, which reflected a pattern of historical
operating losses and negative cash flow, as well as continued projected negative
cash flow and operating results for 1999 and 2000. Accordingly, the Company
recorded an impairment charge in the fourth quarter of fiscal 1998 to write-down
these impaired assets and will contemplate potential closure upon future
operating results. During September 1999, one such underperforming restaurant
was closed. (See "Part II - Other Information, Item 1. Legal Proceedings".)
7
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4) In April 1998, Statement of Position 98-5 ("SOP 98-5"), "Reporting on the
Costs of Start-up Activities", was issued. SOP 98-5 requires that costs incurred
during start-up activities, including pre-opening costs, be expensed as
incurred. The Company adopted SOP 98-5 in the first quarter of fiscal 1999 and
recorded a charge for the cumulative effect of a change in an accounting
principle of approximately $2,281,000, net of income tax benefits of
approximately $1,357,000.
5) During fiscal 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income". The components of
comprehensive income for the nine months ended October 3, 1999 and September 27,
1998 are as follows:
<TABLE>
<CAPTION>
OCT. 3, 1999 SEPT. 27, 1998
------------ --------------
(amounts in thousands)
<S> <C> <C>
Net income $ 4,125 $ 5,849
Other comprehensive income (loss):
Foreign currency translation (83) (72)
-------- --------
Total comprehensive income $ 4,042 $ 5,777
======== ========
</TABLE>
6.) During the third quarter of fiscal 1999, the Company entered into
sale-leaseback transactions whereby the Company sold, and leased back, existing
restaurant equipment at 15 of its restaurant locations. Aggregate proceeds of
$6,000,000 were used to reduce the Company's revolving credit facility. These
transactions are being accounted for as financing arrangements. Recorded in the
accompanying consolidated balance sheet as of October 3, 1999, are such capital
lease obligations, related equipment of $6,000,000, and a deferred gain of
$5,440,000, which will be recognized over the three year lives of such
transactions.
7) The Company is involved in various legal actions. See "Part II - Other
Information, Item 1. Legal Proceedings" on page 14 of this Form 10-Q for a
discussion of these legal actions.
8
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MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Revenues increased $4.8 million, or 11.7%, to $45.7 million for the
three month period ended October 3, 1999, from $40.9 million during the
comparable 1998 period. Of the increase in revenues, $3.4 million was
attributable to incremental restaurant revenues from nine new restaurants opened
after December 29, 1997 and $2.1 million, or 5.5%, was attributable to
additional comparable revenues from restaurants open all of both periods.
Average revenue per restaurant open for a full period increased 7.1%. Higher
revenues for the third quarter of fiscal 1999 reflect the impact of price
increases of approximately 1% commencing in September 1999. Revenues for the
four closed Bertolini's restaurants (see Note 3) decreased by $0.7 million
compared to the third quarter of fiscal 1998.
Revenues increased $13.0 million, or 9.7%, to $147.2 million for the
nine month period ended October 3, 1999, from $134.2 million for the comparable
1998 period. Of the increase in revenues, $12.5 million was attributable to
incremental restaurant revenues from nine new restaurants opened after December
29, 1997 and $2.2 million, or 1.7%, was attributable to additional comparable
revenues from restaurants open all of both periods. Average revenue per
restaurant open for a full period increased 3.1%. Higher revenues for fiscal
1999 reflect the impact of price increases of approximately 1% in September
1999. Revenues for the four closed Bertolini's restaurants (see Note 3)
decreased by $1.7 million compared to the first nine months of fiscal 1998.
Percentage changes in comparable restaurant revenues for the three and
nine month periods ended October 3, 1999 versus September 27, 1998 for
restaurants open all of both periods are as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Oct. 3,1999 Ended Oct. 3, 1999
PERCENTAGE CHANGE PERCENTAGE CHANGE
<S> <C> <C>
Morton's 7.6% 3.1%
Bertolini's -5.3% -5.7%
Total 5.5% 1.7%
</TABLE>
Food and beverage costs increased from $14.0 million for the three month
period ended September 27, 1998 to $15.5 million for the three month period
ended October 3, 1999 and increased from $45.9 million for the nine month period
ended September 27, 1998 to $50.2 million for the nine month period ended
October 3, 1999. These costs as a percentage of revenues decreased from 34.3%
for the three month period ended September 27, 1998 to 34.0% for the comparable
1999 period and decreased from 34.2% for the nine month period ended
September 27, 1998 to 34.1% for the comparable 1999 period. The Company
benefited from lower meat costs.
Restaurant operating expenses, which include labor, occupancy and other
operating expenses, increased from $19.0 million for the three month period
ended September 27, 1998 to $21.2 million for the three month period ended
October 3, 1999, an increase of $2.2 million. For the nine
9
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months ended October 3, 1999, these costs increased from $58.9 million during
the 1998 period, to $65.3 million for the comparable 1999 period. Those costs as
a percentage of revenues remained constant at 46.5% for the three month periods
ended September 27, 1998 and October 3, 1999 and increased 0.4% from 43.9% for
the nine month period ended September 27, 1998 to 44.3% for the comparable 1999
period. Due to a more competitive labor market, such costs have increased.
Pre-opening costs, depreciation, amortization and non-cash charges
remained at $1.8 million for the three month periods ended September 27, 1998
and October 3, 1999 and decreased as a percentage of revenues by 0.6%. For the
nine months ended October 3, 1999, such costs were $4.5 million versus $6.4
million for the comparable 1998 period. Beginning in fiscal 1999, in accordance
with the adoption of SOP 98-5 (see Note 4), the Company expenses all costs
incurred during start-up activities, including pre-opening costs, as incurred.
Pre-opening costs incurred and recorded as expense for the three and nine month
periods ended October 3, 1999 were $0.7 million and $1.3 million, respectively.
The amount of pre-opening costs recorded for fiscal 1998 represents pre-opening
costs which were amortized over the 12 months following opening. This
amortization expense for the three and nine month periods ended September 27,
1998 was $0.8 million and $3.4 million, respectively. The timing of restaurant
openings affects the amount of such costs.
General and administrative expenses for the three month period ended
October 3, 1999 were $3.6 million, which increased from $3.1 million for the
three month period ended September 27, 1998. For the nine months ended October
3, 1999, such costs were $11.7 million versus $9.9 million for the comparable
1998 period. The increase in such expense is driven by incremental costs
associated with increased restaurant development, training and salary costs.
Such costs as a percentage of revenues were 7.9% for the three month period
ended October 3, 1999, an increase of 0.3% from the three month period ended
September 27, 1998 and 7.9% for the nine months ended October 3, 1999, an
increase of 0.5% from the nine month period ended September 27, 1998.
Marketing and promotional expenses were $1.2 million, an increase of
$0.1 million, for the three month period ended October 3, 1999 and $4.1 million,
an increase of $0.6 million, for the nine month period ended October 3, 1999.
Such costs as a percentage of revenues were 2.6% for the three month period
ended October 3, 1999, unchanged from the three month period ended September 27,
1998 and 2.8% for the nine month period ended October 3, 1999, an increase of
0.2% from the comparable 1998 period.
During the third quarter of fiscal 1999, the Company settled all claims
relating to a lawsuit (See Part II, Item 1. Legal Proceedings). The amount of
the final settlement, including all related legal and other costs, resulted in
the Company recording a nonrecurring benefit of approximately $159,000.
Interest expense, net of interest income, increased to $1.1 million for
the three month period ended October 3, 1999 from $0.5 million for the three
month period ended September 27, 1998. For the nine month periods ended October
3, 1999 and September 27, 1998, interest expense was $3.1 million and $1.7
million, respectively. The increase in interest expense was due to both
increased borrowings and an increase in interest rates.
Income tax expense of $2.1 million for the nine month period ended
October 3, 1999 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 1999, as well as state
income taxes.
10
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LIQUIDITY AND CAPITAL RESOURCES
In the past, the Company has had, and may have in the future, negative
working capital balances. The Company does not have significant receivables or
inventories and receives trade credit based upon negotiated terms in purchasing
food and supplies. Funds available from cash sales not needed immediately to pay
for food and supplies or to finance receivables or inventories are used for
noncurrent capital expenditures and or payments of long-term debt balances under
revolving credit agreements.
The Company and BankBoston, N.A. ("BBNA") entered into the Second
Amended and Restated Revolving Credit and Term Loan Agreement dated as of June
19, 1995, as amended from time to time (the "Credit Agreement"), pursuant to
which the Company's credit facility (the "Credit Facility") is $75,000,000,
consisting of a $25,000,000 term loan (the "Term Loan") and a $50,000,000
revolving credit facility (the "Revolving Credit"). The final maturity date of
the Term Loan and Revolving Credit is December 31, 2004. Loans made pursuant to
the Credit Agreement bear interest at a rate equal to the lender's base rate
(plus applicable margin) or, at the Company's option, the Eurodollar Rate (plus
applicable margin). At October 3, 1999, 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. BBNA has syndicated portions of the Credit
Facility to First Union Corporation, Imperial Bank and Chase Manhattan Bank.
As of October 3, 1999 and January 3, 1999, the Company had outstanding
borrowings of $38,275,000 and $29,475,000, respectively, under the Credit
Agreement. At October 3, 1999, $185,000 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 $36,540,000 and the
weighted average interest rate on all borrowings under the Credit Facility was
7.7%. 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.
Quarterly principal installments on the Term Loan of $250,000 will be
due at the end of each calendar quarter from March 31, 2000 through December 31,
2002, $2,500,000 from March 31, 2003 through December 31, 2003 and $3,000,000
from March 31, 2004 through December 31, 2004. The Revolving Credit will be
payable in full on December 31, 2004. 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 October 3, 1999 amount to $0 in 1999, $1,000,000 in 2000,
$1,000,000 in 2001, $1,000,000 in 2002 and $10,000,000 in 2003. The borrowings
under the Credit Agreement have been classified as non-current on the Company's
consolidated balance sheet since the Company may borrow amounts due under the
Term Loan from the Revolving Credit, including the Term Loan principal payments
commencing in March 2000.
The Credit Agreement, among other things, contains certain restrictive
covenants with respect to the Company that create limitations (subject to
certain exceptions) on: (i) the incurrence or existence of additional
indebtedness or the granting of liens on assets or contingent obligations;
(ii) the making of certain investments; (iii) mergers, dispositions of assets
or consolidations; (iv) prepayment of certain other indebtedness; (v) making
capital expenditures above specified amounts; and (vi) the ability to make
certain fundamental changes or to change materially the present method of
conducting the Company's business. The Credit Agreement also requires the
Company to satisfy certain financial ratios and tests. As of October 3, 1999,
the Company believes it was in compliance with such covenants.
On April 7, 1998 and May 29, 1998, the Company entered into interest
rate swap agreements with BBNA on notional amounts of $10,000,000 each. The
terms of the agreements are for three years and may be extended for an
additional two years at the option of BBNA.
11
<PAGE>
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. At October 3, 1999,
the outstanding principal balance of the CNL loan was approximately $2,086,000,
of which approximately $197,000 is payable within the next fiscal year and
therefore has been included in "Current portion of obligations to financial
institutions and capital leases" in the accompanying consolidated balance sheet
as of October 3, 1999.
During 1998, various subsidiaries of the Company and FFCA Acquisition
Corporation ("FFCA") entered into loan commitments, aggregating $12,000,000, to
fund the purchases of land and the construction for four restaurants. During
1998, $5,315,000 was funded, and during 1999 $4,757,000 was funded, with the
interest rates ranging from 7.68% to 8.06% per annum. Monthly principal and
interest payments are scheduled over twenty-year periods. At October 3, 1999,
the aggregate outstanding principal balance due to FFCA was approximately
$9,951,000, of which approximately $202,000 of principal is payable within the
next fiscal year and therefore has been included in "Current portion of
obligations to financial institutions and capital leases" in the accompanying
consolidated balance sheet for the period ended October 3, 1999.
During the first nine months of fiscal 1999, the Company's net
investment in fixed assets and related investment costs, net of capitalized
leases approximated $7.0 million. The Company plans to develop five new Morton's
of Chicago steakhouse restaurants during the fourth quarter of fiscal 1999. The
Company estimates that it will expend up to an aggregate of $12.0 million in
1999 to finance ordinary refurbishment of existing restaurants 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, sale-leaseback and mortgage financing
agreements with several financial institutions of which approximately $20.0
million in the aggregate is available for future fundings. The Company
anticipates that funds generated through operations and funds available through
equipment lease and mortgage financing commitments as well as funds available
under the Credit Agreement will be sufficient to fund planned expansion.
The Company has authority to purchase up to 1,330,600 shares
of the Company's outstanding common stock. As of October 3, 1999, the Company
had repurchased 982,790 shares. As of November 11, 1999 the Company had
repurchased 1,140,590 shares at an average stock price of $17.47.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("Statement
133"), was issued which is effective for fiscal years beginning after June 15,
2000. Statement 133 standardizes the accounting for derivative instruments and
requires that all derivative instruments be carried at fair value. The Company
has not determined the impact that Statement 133 will have on its financial
statements and believes that such determination will not be meaningful until
closer to the date of initial adoption in January 2001.
YEAR 2000
The Company has instituted a company wide initiative to examine the
implications of the Year 2000 on the Company's computer systems and
applications to ensure that the Company's computer systems will function
properly in the Year 2000 and thereafter. The Company's Year 2000 project is
substantially complete with continuous re-testing to be performed until the
end of the year. The Company believes that the Year 2000 issue will not pose
significant operational problems for its computer systems. The Company has
also initiated communications with suppliers and other third parties with
which it has a business relationship regarding compliance with Year 2000
requirements. The Company is not aware of any third party with a Year 2000
issue that would materially impact the Company's results of operations,
liquidity, or capital resources. However, the Company has no means of
ensuring that third parties will be Year 2000 ready. Where practicable, the
Company has assessed and, where possible, will attempt to mitigate its risks
with respect to
12
<PAGE>
the failure of these entities to be Year 2000 compliant. The effect, if any, on
the Company's results of operations from the failure of such parties to be Year
2000 compliant is not reasonably estimable. Management currently believes that
the costs related to the Company's compliance with the Year 2000 issue should
not have a material adverse effect on its consolidated financial position,
results of operations or cash flows.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains various "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Forward-looking
statements, written, oral or otherwise made, represent the Company's expectation
or belief concerning future events. Without limiting the foregoing, the words
"believes," "thinks," "anticipates," "plans," "expects," and similar expressions
are intended to identify forward-looking statements. The Company cautions that
these statements are further qualified by important economic and competitive
factors that could cause actual results to differ materially, or otherwise, from
those in the forward-looking statements, including, without limitation, risks of
the restaurant industry, including a highly competitive environment and industry
with many well-established competitors with greater financial and other
resources than the Company, and the impact of changes in consumer tastes, local,
regional and national economic and market conditions, restaurant profitability
levels, expansion plans, demographic trends, traffic patterns, employee
availability and benefits, cost increases, and other risks detailed from time to
time in the Company's periodic earnings releases and reports filed with the
Securities and Exchange Commission. In addition, the Company's ability to expand
is dependent upon various factors, such as the availability of attractive sites
for new restaurants, the ability to negotiate suitable lease terms, the ability
to generate or borrow funds to develop new restaurants and obtain various
government permits and licenses and the recruitment and training of skilled
management and restaurant employees. Accordingly, such forward-looking
statements do not purport to be predictions of future events or circumstances
and therefore there can be no assurance that any forward-looking statement
contained herein will prove to be accurate.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
The Company is subject to market risk from exposure to changes in
interest rates based on its financing activities. This exposure relates to
borrowings under the Company's Credit Facility which are payable at floating
rates of interest. The Company has entered into interest rate swap agreements
to manage some of its exposure to interest rate fluctuations. As of October
3,1999, the exposure to these market risks is not considered material.
13
<PAGE>
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
An employee (Plaintiff) of a subsidiary of the Company, initiated legal
action against Morton's of Chicago, Quantum Corporation and unnamed "Doe"
defendants on February 8, 1996 in California Superior Court in San Francisco.
Plaintiff's, Ms. Wendy Kirkland, complaint alleged under California law, among
other things, wrongful constructive termination, sex discrimination and sexual
harassment. Plaintiff sought general, special, and punitive damages in
unspecified amounts, as well as attorneys' fees and costs. The case was
subsequently removed to the US District Court for the Northern District of
California. By order dated October 14, 1997, the Court granted Plaintiff's
motion for partial summary judgment, finding that an employer is strictly liable
under California law for the sexually harassing conduct of the employer's
supervisory employees. On November 25, 1997, a jury in the 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 1997 fourth quarter
nonrecurring, pre-tax charge of $2,300,000, representing compensatory damages of
$250,000 (reduced by the Court to $150,000 in fiscal 1998), punitive damages of
$850,000, and an estimate of the Plaintiff's and the Company's legal fees and
expenses. The Company filed an appeal and on July 12, 1999, settled all claims
relating to the lawsuit. The amount of the final settlement, including all
related legal and other costs, resulted in the Company recording a nonrecurring
benefit of approximately $159,000 in the third quarter of fiscal 1999.
During fiscal 1998, the Company identified several nonperforming
Bertolini's restaurants and authorized a plan for the closure or abandonment of
specified restaurants which have all been closed. The Company is involved in
various legal actions relating to such closures, however, the Company does not
believe that the ultimate resolution of these actions will have a material
effect beyond that recorded during fiscal 1998. See Note 3 to the Company's
consolidated financial statements.
The Company is involved in other various legal actions incidental to the
normal conduct of its business. Management does not believe that the ultimate
resolution of these actions will have a material adverse effect on the Company's
consolidated financial position, equity, results of operations, liquidity and
capital resources.
Item 4. Submission of Matters to a Vote of Stockholders
No matters were submitted to a vote of stockholders during the quarter for
which this report was filed.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.0 Financial Data Schedule
(b) Reports on Form 8-K.
A report on Form 8-K was filed on July 19, 1999 relating to the
settlement of a lawsuit.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MORTON'S RESTAURANT GROUP, INC.
(Registrant)
Date NOVEMBER 12, 1999
By: /s/ ALLEN J. BERNSTEIN
--------------------------------
Allen J. Bernstein
Chairman of the Board, President
and Chief Executive Officer
Date NOVEMBER 12, 1999 By: /s/ THOMAS J. BALDWIN
---------------------------------
Thomas J. Baldwin
Executive Vice President,
Chief Financial Officer and Director
15
<PAGE>
INDEX TO EXHIBITS
The following is a list of all exhibits filed as part of this report.
Exhibit
NUMBER PAGE DOCUMENT
27.0 Financial Data Schedule
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE OCTOBER
3, 1999 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-02-2000
<PERIOD-START> JAN-04-1999
<PERIOD-END> OCT-03-1999
<CASH> 2,625
<SECURITIES> 0
<RECEIVABLES> 973
<ALLOWANCES> 0
<INVENTORY> 5,612
<CURRENT-ASSETS> 18,190
<PP&E> 66,445
<DEPRECIATION> 9,265
<TOTAL-ASSETS> 102,170
<CURRENT-LIABILITIES> 22,643
<BONDS> 49,913
0
0
<COMMON> 68
<OTHER-SE> 14,016
<TOTAL-LIABILITY-AND-EQUITY> 102,170
<SALES> 147,209
<TOTAL-REVENUES> 147,209
<CGS> 50,176
<TOTAL-COSTS> 119,913
<OTHER-EXPENSES> 15,658
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,097
<INCOME-PRETAX> 8,541
<INCOME-TAX> 2,135
<INCOME-CONTINUING> 6,406
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 2,281
<NET-INCOME> 4,125
<EPS-BASIC> 0.68
<EPS-DILUTED> 0.66
</TABLE>
