-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N1zY5eWgCojD6KiVlKUcaCa+cI4DcZVTyIMPHnDa9aRT4QmNCU0lBsj7mgbk5C5P DX9Qozt2R3XqIUUjd6ORHg== 0000912057-99-005351.txt : 19991115 0000912057-99-005351.hdr.sgml : 19991115 ACCESSION NUMBER: 0000912057-99-005351 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991003 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MORTONS RESTAURANT GROUP INC CENTRAL INDEX KEY: 0000883981 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 133490149 STATE OF INCORPORATION: DE FISCAL YEAR END: 0103 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12692 FILM NUMBER: 99750244 BUSINESS ADDRESS: STREET 1: 3333 NEW HYDE PK RD STE 210 CITY: NEW HYDE PARK STATE: NY ZIP: 11042 BUSINESS PHONE: 5166271515 MAIL ADDRESS: STREET 1: 3333 NEW HYDE PARK ROAD STREET 2: SUITE 210 CITY: NEW HYDE PARK STATE: NY ZIP: 11042 FORMER COMPANY: FORMER CONFORMED NAME: QUANTUM RESTAURANTS GROUP INC DATE OF NAME CHANGE: 19950315 10-Q 1 10-Q 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 ----------------- ------------------ Commission file number 1-12692 ------------------------------------------- MORTON'S RESTAURANT GROUP, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 13-3490149 - -------------------------------------------------------------------------------- (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 - -------------------------------------------------------------------------------- (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 MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES INDEX
PART I - FINANCIAL INFORMATION PAGE Item 1. Financial Statements 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
2 Item 1. Financial Statements MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES Consolidated Balance Sheets (amounts in thousands)
October 3, January 3, 1999 1999 ---- ---- (unaudited) ASSETS 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 ======== ========
(Continued) 3 MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES Consolidated Balance Sheets, Continued (amounts in thousands, except share data)
October 3, January 3, 1999 1999 ---- ---- (unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY 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 ========= ========
See accompanying notes to consolidated financial statements. 4 MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Income (amounts in thousands, except per share data)
Three Months Ended Nine Months Ended Oct. 3, Sept. 27, Oct. 3, Sept. 27, 1999 1998 1999 1998 ---- ---- ---- ---- (unaudited) (unaudited) 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 ======== ======== ======== ========
See accompanying notes to consolidated financial statements. 5 MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (amounts in thousands)
Nine Months Ended Oct. 3, Sept. 27, 1999 1998 ---- ---- (unaudited) 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 ======= =======
See accompanying notes to consolidated financial statements. 6 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 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:
OCT. 3, 1999 SEPT. 27, 1998 ------------ -------------- (amounts in thousands) Net income $ 4,125 $ 5,849 Other comprehensive income (loss): Foreign currency translation (83) (72) -------- -------- Total comprehensive income $ 4,042 $ 5,777 ======== ========
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 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:
Three Months Nine Months Ended Oct. 3,1999 Ended Oct. 3, 1999 PERCENTAGE CHANGE PERCENTAGE CHANGE Morton's 7.6% 3.1% Bertolini's -5.3% -5.7% Total 5.5% 1.7%
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 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 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 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 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 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 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 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 EX-27 2 EXHIBIT 27
5 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. 1,000 9-MOS JAN-02-2000 JAN-04-1999 OCT-03-1999 2,625 0 973 0 5,612 18,190 66,445 9,265 102,170 22,643 49,913 0 0 68 14,016 102,170 147,209 147,209 50,176 119,913 15,658 0 3,097 8,541 2,135 6,406 0 0 2,281 4,125 0.68 0.66
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