FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to __________________________
Commission file number 1-12692
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MORTON'S RESTAURANT GROUP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-3490149
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(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
3333 New Hyde Park Road, Suite 210, New Hyde Park, New York 11042
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(Address of principal executive offices) (Zip code)
516-627-1515
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
As of November 9, 2001, the registrant had 4,179,647 Shares of its Common Stock,
$.01 par value, outstanding.
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000 3-4
Consolidated Statements of Operations for the three and nine month periods ended
September 30, 2001 and October 1, 2000 5
Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2001
and October 1, 2000 6
Notes to Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9-15
Item 3. Quantitative and Qualitative Disclosure about Market Risk 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
2
Item 1. Financial Statements
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(amounts in thousands)
September 30, December 31,
2001 2000
-------- --------
(unaudited)
Assets
------
Current assets:
Cash and cash equivalents $ 1,623 $ 2,296
Accounts receivable 1,498 4,639
Inventories 7,608 8,303
Landlord construction receivables, prepaid expenses and other
current assets 2,449 2,867
Deferred income taxes 5,772 5,653
-------- --------
Total current assets 18,950 23,758
-------- --------
Property and equipment, at cost:
Furniture, fixtures and equipment 40,226 35,842
Leasehold improvements 58,073 51,052
Land 6,241 6,337
Construction in progress 856 2,160
-------- --------
105,396 95,391
Less accumulated depreciation and amortization 24,332 17,344
-------- --------
Net property and equipment 81,064 78,047
-------- --------
Intangible assets, net of accumulated amortization of $4,971 at
September 30, 2001 and $4,668 at December 31, 2000 11,024 11,327
Other assets and deferred expenses, net of accumulated
amortization of $630 at September 30, 2001 and $518 at
December 31, 2000 7,234 6,412
Deferred income taxes 5,904 4,866
-------- --------
$124,176 $124,410
======== ========
(Continued)
3
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
(amounts in thousands, except share data)
September 30, December 31,
2001 2000
--------- ---------
(unaudited)
Liabilities and Stockholders' Equity (Deficit)
----------------------------------------------
Current liabilities:
Accounts payable $ 7,323 $ 8,677
Accrued expenses 16,305 21,375
Current portion of obligations to financial institutions
and capital leases 4,896 4,759
Accrued income taxes 42 1,004
--------- ---------
Total current liabilities 28,566 35,815
Obligations to financial institutions and capital leases,
less current maturities 94,025 85,012
Other liabilities 3,534 4,506
--------- ---------
Total liabilities 126,125 125,333
--------- ---------
Commitments and contingencies
Stockholders' equity (deficit):
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 6,803,801 shares at
September 30, 2001 and 6,778,363 shares at December 31, 2000 68 68
Nonvoting common stock, $.01 par value per share. Authorized
3,000,000 shares, no shares issued or outstanding -- --
Additional paid-in capital 63,478 63,077
Accumulated other comprehensive income (loss) (895) (150)
Accumulated deficit (17,827) (17,084)
Less treasury stock, at cost, 2,626,709 shares at September 30,
2001 and 2,630,361 shares at December 31, 2000 (46,773) (46,834)
--------- ---------
Total stockholders' equity (deficit) (1,949) (923)
--------- ---------
$ 124,176 $ 124,410
========= =========
See accompanying notes to consolidated financial statements.
4
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(amounts in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, October 1, September 30, October 1,
2001 2000 2001 2000
--------- --------- --------- ---------
(unaudited) (unaudited)
Revenues $ 52,274 $ 56,314 $ 175,623 $ 178,510
Food and beverage costs 19,097 19,522 61,369 60,550
Restaurant operating expenses 26,524 25,542 80,842 77,045
Pre-opening costs, depreciation, amortization and
non-cash charges 2,391 2,455 9,461 8,473
General and administrative expenses 3,213 4,435 12,991 14,365
Marketing and promotional expenses 1,759 1,342 5,632 4,887
Costs associated with strategic alternatives and proxy contest 155 -- 525 --
Interest expense, net 1,924 1,696 5,865 4,497
--------- --------- --------- ---------
Income (loss) before income taxes (2,789) 1,322 (1,062) 8,693
Income tax expense (benefit) (837) 397 (319) 2,608
--------- --------- --------- ---------
Net income (loss) $ (1,952) $ 925 $ (743) $ 6,085
========= ========= ========= =========
Net income (loss) per share:
Basic $ (0.47) $ 0.21 $ (0.18) $ 1.29
========= ========= ========= =========
Diluted $ (0.47) $ 0.20 $ (0.18) $ 1.25
========= ========= ========= =========
Weighted average shares outstanding:
Basic 4,177 4,322 4,170 4,704
========= ========= ========= =========
Diluted 4,177 4,548 4,170 4,886
========= ========= ========= =========
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
September 30, October 1,
2001 2000
-------- --------
(unaudited)
Cash flows from operating activities:
Net income (loss) $ (743) $ 6,085
Adjustments to reconcile net income (loss) to net cash (used by)
provided by operating activities:
Depreciation, amortization and other non-cash charges 6,732 5,629
Deferred income taxes (1,157) 1,775
Change in assets and liabilities:
Accounts receivable 3,130 183
Inventories 676 570
Prepaid expenses and other assets (345) (298)
Accounts payable, accrued expenses and other liabilities (7,392) (6,006)
Accrued income taxes (962) 135
-------- --------
Net cash (used by) provided by operating activities (61) 8,073
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (8,952) (10,879)
-------- --------
Net cash used by investing activities (8,952) (10,879)
-------- --------
Cash flows from financing activities:
Principal reduction on obligations to financial institutions and
capital leases (9,686) (7,723)
Proceeds from obligations to financial institutions and capital leases 17,575 29,877
Purchases of treasury stock -- (23,230)
Net proceeds from issuance of stock 462 92
-------- --------
Net cash provided by (used by) financing activities 8,351 (984)
-------- --------
Effect of exchange rate changes on cash (11) (14)
-------- --------
Net decrease in cash and cash equivalents (673) (3,804)
Cash and cash equivalents at beginning of period 2,296 5,806
-------- --------
Cash and cash equivalents at end of period $ 1,623 $ 2,002
======== ========
See accompanying notes to consolidated financial statements.
6
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001 and October 1, 2000
1) The accompanying unaudited, consolidated financial statements have been
prepared in accordance with instructions to Form 10-Q and, therefore, do not
include all information and footnotes normally included in financial statements
prepared in conformity with generally accepted accounting principles. They
should be read in conjunction with the consolidated financial statements of
Morton's Restaurant Group, Inc. (the "Company") for the fiscal year ended
December 31, 2000 filed by the Company on Form 10-K with the Securities and
Exchange Commission on March 30, 2001.
The accompanying consolidated financial statements are unaudited and
include all adjustments (consisting of normal recurring adjustments and
accruals) that management considers necessary for a fair presentation of its
financial position and results of operations for the interim periods presented.
The results of operations for the interim periods are not necessarily indicative
of the results that may be expected for the entire year.
The Company uses a fiscal year which consists of 52 weeks. Approximately
every six or seven years, a 53rd week will be added.
2) For the purposes of the consolidated statements of cash flows, the Company
considers all highly liquid instruments purchased with a maturity of three
months or less to be cash equivalents. The Company paid cash interest and fees,
net of amounts capitalized, of approximately $5,343,000 and $4,090,000, and
income taxes, net of refunds, of approximately $1,478,000 and $810,000, for the
nine months ended September 30, 2001 and October 1, 2000, respectively. During
the first nine months of fiscal 2001 and 2000, the Company entered into capital
lease arrangements for approximately $1,277,000 and $2,730,000, respectively,
for restaurant equipment.
3) Based on a strategic assessment of trends and a downturn in comparable
revenues of Bertolini's Authentic Trattorias, during the fourth quarter of
fiscal 1998, pursuant to the approval of the Board of Directors, the Company
recorded a nonrecurring, pre-tax charge of $19,925,000 representing the
write-down of impaired Bertolini's restaurant assets, the write-down and accrual
of lease exit costs associated with the closure of specified Bertolini's
restaurants as well as the write-off of the residual interests in Mick's and
Peasant restaurants. The Company performed an in-depth analysis of historical
and projected operating results and, as a result of significant operating
losses, identified several nonperforming restaurants which were all closed in
fiscal 1999. At September 30, 2001 and December 31, 2000, included in "Accrued
expenses" in the accompanying consolidated balance sheets is approximately
$1,755,000 and $2,153,000, respectively, representing the costs to exit
contractual lease obligations and costs for current litigation that was
initiated by a landlord as a result of closing one restaurant. This landlord has
alleged multiple claims, including breach of contract and breach of guarantee
and is seeking to recover substantial financial damages. Such litigation is
currently in the discovery stage and the trial date has been set for November
2002. Additionally, the analysis identified several underperforming restaurants,
which reflected a pattern of historical operating losses and negative cash flow,
as well as continued projected negative cash flow and operating results.
Accordingly, the Company recorded an impairment charge in the fourth quarter of
fiscal 1998 to write-down these impaired assets. During 2001, one such
underperforming restaurant was closed and during 1999 and 2000 three such
underperforming restaurants were closed. (See "Part II - Other Information, Item
1. Legal Proceedings".)
7
4) During the second quarter of fiscal 2001, the Company received $67,668 from a
certain institutional stockholder that had previously publicly reported
beneficial ownership of more than ten percent of the Company's common stock.
This amount purportedly represents profits earned by the stockholder from the
purchase and sale of the Company's common stock within a period of less than six
months. The Company credited this amount to additional paid-in capital in the
second quarter of fiscal 2001.
5) The components of comprehensive income (loss) for the nine months ended
September 30, 2001 and October 1, 2000 are as follows:
September 30, October 1,
2001 2000
------- -------
(amounts in thousands)
Net income (loss) $ (743) $ 6,085
Other comprehensive income (loss):
Foreign currency translation (198) (8)
Fair value of interest rate swap agreements (547) --
------- -------
Total comprehensive income (loss) $(1,488) $ 6,077
======= =======
6) The Company adopted Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities", as amended
by SFAS 137 and SFAS 138, as of January 1, 2001. SFAS 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measures those instruments at fair value.
The Company's derivative financial instruments consist of two interest rate swap
agreements with notional amounts of $10,000,000 each. The interest rate swap
agreements are designated as cash flow hedges for purposes of SFAS 133. Based on
regression analysis, the Company has determined that its interest rate swap
agreements are highly effective. The adoption of SFAS 133 on January 1, 2001,
increased assets by approximately $141,000 and liabilities by approximately
$385,000, with approximately $244,000 recognized in accumulated other
comprehensive income (loss). As of September 30, 2001, in accordance with SFAS
133, assets were increased by approximately $316,000 and liabilities by
approximately $863,000, with approximately $547,000 recognized in accumulated
other comprehensive income (loss).
7) As a result of the impact of the World Trade Center terrorist attacks on
September 11, 2001, the building in which the Morton's of Chicago Steakhouse
restaurant is located in the Wall Street area of downtown Manhattan (located at
90 West Street, two blocks from the World Trade Center) was damaged and has been
closed indefinitely and possibly permanently. The full extent of the damage to
the building and the restaurant cannot be determined at this time as access to
the building has not been permitted. The Company recorded a benefit in
"Restaurant operating expenses" in the accompanying consolidated statements of
operations of approximately $0.3 million at September 30, 2001 representing
anticipated business insurance recovery for lost operations from that restaurant
for the period relating to this event. The Company believes that additional
benefits will be recorded in the fourth quarter of fiscal 2001 and possibly
future periods relating to future insurance recoveries.
8) The Company is involved in various legal actions. See "Part II - Other
Information, Item 1. Legal Proceedings" on page 15 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 decreased $4.0 million, or 7.2%, to $52.3 million for the three
month period ended September 30, 2001, from $56.3 million during the comparable
2000 period. Incremental restaurant revenues of $5.7 million were attributable
to eleven new restaurants opened after January 2, 2000, which were offset by
$7.6 million or 14.9% attributable to a reduction in comparable revenues from
restaurants open all of both periods. Morton's of Chicago comparable restaurant
revenues declined approximately 26% during fiscal September 2001. Revenues
decreased $0.6 million for the closed Morton's of Chicago Steakhouse restaurant
located in the Wall Street area of downtown Manhattan. Revenues for the four
Bertolini's restaurants closed during 2001 and 2000 (see Note 3) declined by
$1.5 million compared to the third quarter of fiscal 2000. Average revenue per
restaurant open for a full period decreased 16.8% for the quarter ended
September 30, 2001.
Revenues decreased $2.9 million, or 1.6%, to $175.6 million for the nine
month period ended September 30, 2001, from $178.5 million for the comparable
2000 period. Incremental restaurant revenues of $16.3 million were attributable
to eleven new restaurants opened after January 2, 2000, which were offset by
$14.5 million or 8.6% attributable to a reduction in comparable revenues from
restaurants open all of both periods. Morton's of Chicago comparable restaurant
revenues declined approximately 26% during fiscal September 2001. Revenues
decreased $0.6 million for the closed Morton's of Chicago Steakhouse restaurant
located in the Wall Street area of downtown Manhattan. Revenues for the four
Bertolini's restaurants closed during 2001 and 2000 (see Note 3) declined by
$4.3 million compared to the first nine months of fiscal 2000. Included in
revenues in the second quarter of fiscal 2001 is approximately $0.2 million
representing the sale of the Company's interests in the Atlanta-based Mick's and
Peasant restaurants. Average revenue per restaurant open for a full period
decreased 10.2% for the nine months ended September 30, 2001. Revenues for the
first nine months of fiscal 2001 reflect the impact of price increases of
approximately 1% in February 2000 and in May 2000.
Percentage changes in comparable restaurant revenues for the three and
nine month periods ended September 30, 2001 versus October 1, 2000 for
restaurants open all of both periods are as follows:
Three Months Nine Months
Ended September 30, 2001 Ended September 30, 2001
Percentage Change Percentage Change
----------------- -----------------
Morton's -16.0% -9.3%
Bertolini's -2.9% -2.4%
Total -14.9% -8.6%
The Company believes that due to the severe nationwide impact of the World
Trade Center terrorist attacks, the continuing impact of the troubled economy,
unfavorable business conditions, corporate spending cutbacks and reduced
business travel, it continues to experience weak revenue trends and negative
comparable restaurant revenues. These adverse operating conditions, unfavorable
revenue trends, increased operating costs and investment banking, legal and
other costs associated with the Company's evaluation of strategic alternatives
resulted in a loss for the third quarter and nine months ended September 30,
2001. The
9
Company believes that if such unfavorable conditions continue or worsen,
fourth quarter and future results will also be adversely affected, the full
extent of which cannot be determined or forecasted at this time.
The employees of the Morton's of Chicago Steakhouse restaurant located in
the Wall Street area of downtown Manhattan (located at 90 West Street, two
blocks from the World Trade Center) escaped injury. The building in which the
restaurant is located was damaged and has been closed indefinitely and
possibly permanently. Accordingly the restaurant has been excluded from third
quarter comparable restaurant revenues. The full extent of the damage to the
building and the restaurant cannot be determined at this time as access to
the building has not been permitted. Insurance claims are in process. All of
the Company's other restaurants are open and operating.
The Company is continuing the process of exploring its full range of
strategic alternatives, including evaluating a potential sale of the Company.
The process includes discussions with interested parties, as well as an
evaluation of any offers received.
Food and beverage costs decreased from $19.5 million for the three month
period ended October 1, 2000 to $19.1 million for the three month period ended
September 30, 2001 and increased from $60.6 million for the nine month period
ended October 1, 2000 to $61.4 million for the nine month period ended September
30, 2001. Primarily as a result of higher meat costs, these costs as a
percentage of revenues increased from 34.7% for the three month period ended
October 1, 2000 to 36.5% for the comparable 2001 period and increased from 33.9%
for the nine month period ended October 1, 2000 to 34.9% for the comparable 2001
period.
Restaurant operating expenses, which include labor, occupancy and other
operating expenses, increased from $25.5 million for the three month period
ended October 1, 2000 to $26.5 million for the three month period ended
September 30, 2001 an increase of $1.0 million. For the nine months ended
September 30, 2001 these costs increased from $77.0 million during the 2000
period, to $80.8 million for the comparable 2001 period. Those costs as a
percentage of revenues increased 5.3% from 45.4% for the three month period
ended October 1, 2000 to 50.7% for the three month period ended September 30,
2001 and increased 2.8% from 43.2% for the nine month period ended October 1,
2000 to 46.0% for the comparable 2001 period. Included in the second quarter of
fiscal 2000 is a gain of approximately $1.1 million resulting from the
disposition of certain restaurant assets. Included in the third quarter of
fiscal 2001 is a benefit of approximately $0.3 million for anticipated business
insurance recovery related to costs incurred from the closure of the Morton's of
Chicago Steakhouse restaurant located in the Wall Street area of downtown
Manhattan as a result of the World Trade Center attacks. The Company believes
that additional benefits will be recorded in the fourth quarter of fiscal 2001
and possibly future periods relating to future insurance recoveries.
Pre-opening costs, depreciation, amortization and non-cash charges
decreased from $2.5 million for the three month period ended October 1, 2000 to
$2.4 million for the three month period ended September 30, 2001 and increased
as a percentage of revenues by 0.2%. For the nine months ended September 30,
2001, such costs were $9.5 million versus $8.5 million for the comparable 2000
period. In accordance with the adoption of SOP 98-5, the Company expenses all
costs incurred during start-up activities, including pre-opening costs, as
incurred. Pre-opening costs incurred and recorded as expense for the three month
periods ended September 30, 2001 and October 1, 2000 were $0.4 million and $1.2
million, respectively, and for the nine month periods ended September 30, 2001
and October 1, 2000 were $2.7 million and $2.8 million, respectively. The timing
of restaurant openings, as well as costs per restaurant, affected the amount of
such costs. Included in the first quarter of fiscal 2000 are charges of
approximately $0.5 million related to the March 2000 disposition of one
Bertolini's restaurant and included in the second quarter of fiscal 2000 are
charges of approximately $0.6 million related to the write-down, to net
realizable values, of another Bertolini's restaurant. Such charges were not
previously provided for in the fiscal 1998 charge. (See Note
10
3.) Effective April 3, 2000, the Company changed the estimated useful lives for
computer equipment and software. As a result of such change, the first quarter
of 2001 included approximately $48,000 of additional depreciation expense.
General and administrative expenses for the three month period ended
September 30, 2001 were $3.2 million, which decreased from $4.4 million for the
three month period ended October 1, 2000. For the nine months ended September
30, 2001 such costs were $13.0 million versus $14.4 million for the comparable
2000 period. Decreases in such costs were due in part to the Company's reduction
in certain overhead expenditures. Such costs as a percentage of revenues were
6.1% for the three month period ended September 30, 2001, a decrease of 1.8%
from the three month period ended October 1, 2000 and 7.4% for the nine months
ended September 30, 2001 a decrease of 0.6% from the nine month period ended
October 1, 2000.
Marketing and promotional expenses were $1.8 million for the three month
period ended September 30, 2001, an increase of $0.4 million from the comparable
2000 period, and $5.6 million for the nine month period ended September 30, 2001
an increase of $0.7 million from the comparable 2000 period. Such costs as a
percentage of revenues were 3.4% for the three month period ended September 30,
2001, an increase of 1.0% from the comparable 2000 period and 3.2% for the nine
month period ended September 30, 2001, an increase of 0.5% from the comparable
2000 period.
Costs associated with strategic alternatives and proxy contest were $0.2
million and $0.5 million for the three and nine month periods ended September
30, 2001. Such costs are associated with the Company's second quarter proxy
contest and its evaluation of strategic alternatives.
Interest expense, net of interest income, increased to $1.9 million for
the three month period ended September 30, 2001 from $1.7 million for the three
month period ended October 1, 2000. For the nine month periods ended September
30, 2001 and October 1, 2000, interest expense was $5.9 million and $4.5
million, respectively. The increase in interest expense was due to increased
borrowings.
Income tax benefit of $0.3 million for the nine month period ended
September 30, 2001 represents Federal income taxes, which were offset by the
establishment of additional deferred tax assets relating to FICA and other tax
credits that were generated during fiscal 2001, as well as state income taxes.
The effective tax (recovery) rate for the three and nine months period ended
September 30, 2001 was (30.0%) compared to last year's 30.0% rate for the
comparable periods.
LIQUIDITY AND CAPITAL RESOURCES
At present and in the past, the Company has had, and may have in the
future, negative working capital balances. The working capital deficit is
produced principally as a result of the Company's investment in long-term
restaurant operating assets and real estate. The Company does not have
significant receivables or inventories and receives trade credit based upon
negotiated terms in purchasing food and supplies. Funds available from cash
sales not immediately needed 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 Fleet National Bank ("Fleet") entered into the Second
Amended and Restated Revolving Credit and Term Loan Agreement, dated June 19,
1995, as amended, from time to time (the "Credit Agreement"), pursuant to which
the Company's credit facility (the "Credit Facility") is $89,750,000. The Credit
Facility consists of a $24,250,000 term loan (the "Term Loan") and a $65,500,000
revolving credit facility (the "Revolving Credit"). Loans made pursuant to the
Credit Agreement bear interest at a rate equal to the lender's base rate plus
applicable margin or, at the Company's option, the Eurodollar Rate plus
applicable margin. At September 30, 2001 calculated pursuant to the Credit
Agreement, the Company's
11
applicable margin, on the Revolving Credit was 0.75% on base rate loans and
2.75% on Eurodollar Rate loans and the Company's applicable margin on the Term
Loan was 1.00% on base rate loans and 3.00% on Eurodollar Rate loans. 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. Fleet has
syndicated portions of the Credit Facility to First Union Corporation, Comerica
Bank (formerly known as Imperial Bank), J.P. Morgan Chase & Co. and LaSalle Bank
National Association.
As of September 30, 2001 and December 31, 2000, the Company had
outstanding borrowings of $69,700,000 and $64,925,000, respectively, under the
Credit Facility. At September 30, 2001, $267,000 was restricted for letters of
credit issued by the lender on behalf of the Company. Unrestricted and undrawn
funds available to the Company under the Credit Agreement were $19,783,000 and
the weighted average interest rate on all borrowings under the Credit Facility
was 6.95% on September 30, 2001.
Quarterly principal installments on the Term Loan of $250,000 commenced
September 30, 2001 and $250,000 will be due at the end of each calendar quarter
through December 31, 2003; $2,500,000 from March 31, 2004 through December 31,
2004; and $3,000,000 from March 31, 2005 through December 31, 2005. The
Revolving Credit will be payable in full on December 31, 2005. Total future
amounts of principal payable by the Company under the Credit Facility during the
five years subsequent to September 30, 2001 amount to $250,000 in 2001,
$1,000,000 in 2002, $1,000,000 in 2003, $10,000,000 in 2004 and $57,450,000 in
2005. Borrowings under the Credit Agreement have been classified as noncurrent
on the Company's consolidated balance sheet since the Company may borrow amounts
due under the Term Loan from the Revolving Credit, including the Term Loan
principal payments which commenced in September 2001.
Borrowings under the Credit Facility are secured by all tangible and
intangible assets of the Company. The Credit Agreement contains, among other
things, certain restrictive covenants with respect to the Company that create
limitations (subject to certain exceptions) on: (i) the incurrence or existence
of additional indebtedness or the granting of liens on assets or contingent
obligations; (ii) the making of certain investments; (iii) mergers, dispositions
of assets or consolidations; (iv) prepayment of certain other indebtedness; (v)
making capital expenditures above specified amounts; (vi) the repurchase of the
Company's outstanding common stock above specified amounts; and (vii) the
ability to make certain fundamental changes or to change materially the present
method of conducting the Company's business. The Credit Agreement also requires
the Company to satisfy certain financial ratios and tests. As of September 30,
2001, the Company believes it was in compliance with such covenants.
On April 7, 1998 and May 29, 1998, the Company entered into interest rate
swap agreements with Fleet on notional amounts of $10,000,000 each. Interest
rate swap agreements are used to reduce the potential impact of interest rate
fluctuations relating to $20,000,000 of variable rate debt. Such agreements
terminate on April 7, 2003 and May 29, 2003, respectively. The adoption of SFAS
133 on January 1, 2001, increased assets by approximately $141,000 and
liabilities by approximately $385,000, with approximately $244,000 recognized in
accumulated other comprehensive income (loss). As of September 30, 2001, in
accordance with SFAS 133, assets were increased by approximately $316,000 and
liabilities by approximately $863,000 with approximately $547,000 recognized in
accumulated other comprehensive income (loss).
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 10.002% per annum interest rate. Principal and
interest payments will be made over the term of the loan. At September 30, 2001
and December 31, 2000 the outstanding principal balance of the CNL Loan was
approximately $1,672,000 and $1,837,000, respectively, of which approximately
$240,000 and $223,000, respectively, has been
12
included in "Current portion of obligations to financial institutions and
capital leases" in the accompanying consolidated balance sheets.
During 1999 and 1998, various subsidiaries of the Company and GE Capital
Franchise Finance (formerly known as FFCA Acquisition Corporation) entered into
loan commitments, aggregating $27,000,000, to fund the purchases of land and
construction of restaurants. During 2001, 2000 and 1999, $6,900,000, $1,927,000
and $4,757,000, respectively, was funded, with the interest rates ranging from
7.68% to 9.26% per annum. Monthly principal and interest payments have been
scheduled over twenty-year periods. At September 30, 2001 and December 31, 2000
the aggregate outstanding principal balance due to GE Capital Franchise Finance
was approximately $18,199,000 and $11,574,000, respectively, of which
approximately $428,000 and $282,000, respectively, of principal is included in
"Current portion of obligations to financial institutions and capital leases" in
the accompanying consolidated balance sheets.
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 sheets as of September 30, 2001 and December
31, 2000 are such capital lease obligations, related equipment of $1,830,000 and
$3,300,000, respectively, and a deferred gain of approximately $1,813,000 and
$3,173,000, respectively, each of which are being recognized over the three year
lives of such transactions.
During the first nine months of fiscal 2001, the Company's net investment
in fixed assets and related investment costs, including pre-opening costs and
net of capitalized leases approximated $11.7 million. Mortgage financing of
approximately $6.9 million offset this amount. The Company estimates that it
will expend up to an aggregate of $16.0 million in 2001 to finance ordinary
refurbishment of existing restaurants and capital expenditures, net of landlord
development and or rent allowances and net of equipment lease and mortgage
financing, for new restaurants. The Company has entered into various equipment
lease financing agreements with several financial institutions of which
approximately $3.1 million in the aggregate, is available for future
fundings. Subject to the Company's performance, which if adversely affected,
could adversely affect the availability of funds, the Company anticipates
that funds generated through operations and funds available through equipment
lease commitments, as well as funds available under the Credit Agreement will
be sufficient to fund planned expansion.
From fiscal October 1998 through fiscal September 2000, the Company's
board of directors authorized repurchases of the Company's outstanding common
stock of up to approximately 2,930,600 shares. The Company had repurchased
2,635,090 shares at an average stock price of $17.80. The Company suspended the
stock repurchase program on May 8, 2001.
NEW ACCOUNTING PRONOUNCEMENT
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") 141, "Business Combinations" which
supersedes Accounting Principles Board ("APB") Opinion No. 16, "Business
Combinations". SFAS 141 eliminates the pooling-of-interests method of accounting
for business combinations and modifies the application of the purchase
accounting method. The elimination of the pooling-of-interests method is
effective for transactions initiated after June 30, 2001. The remaining
provision of SFAS 141 will be effective for transactions accounted for using the
purchase method that are completed after June 30, 2001.
In July 2001, the Financial Accounting Standards Board also issued SFAS
142, "Goodwill and Intangible Assets" which supersedes APB Opinion No. 17,
"Intangible Assets". SFAS 142 eliminates the current requirement to amortize
goodwill and indefinite-lived intangible assets, addresses the amortization
13
of intangible assets with a defined life and addresses the impairment testing
and recognition for goodwill and intangible assets. SFAS 142 will apply to
goodwill and intangible assets arising from transactions completed before and
after the Statement's effective date. SFAS 142 is effective for the Company
beginning January 1, 2002.
In connection with the transitional goodwill impairment evaluation, SFAS
142 will require the Company to perform an assessment of whether there is an
indication that goodwill is impaired as of the date of adoption. To accomplish
this the Company must identify its reporting units and determine the carrying
value of each reporting unit by assigning the assets and liabilities, including
the existing goodwill and intangible assets, to those reporting units as of the
date of adoption. The Company will then have up to six months from the date of
adoption to determine the fair value of each reporting unit and compare it to
the reporting unit's carrying amount. To the extent a reporting unit's carrying
amount exceeds its fair value, an indication exists that the reporting unit's
goodwill may be impaired and the Company must perform the second step of the
transitional impairment test. In the second step, the Company must compare the
implied fair value of the reporting unit's goodwill, determined by allocating
the reporting unit's fair value to all of its assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price allocation
in accordance with SFAS 141, to its carrying amount, both of which would be
measured as of the date of adoption. This second step is required to be
completed as soon as possible, but no later than the end of the year of
adoption. A transitional impairment loss, if any, would be recognized as the
cumulative effect of a change in accounting principle in the Company's
consolidated statement of operations.
As of January 1, 2002, the Company would cease recording goodwill
amortization amounting to approximately $0.4 million annually. Because of the
extensive effort needed to comply with adopting SFAS 142 it is not practicable
to reasonably estimate the impact of adopting this Statement on the Company's
consolidated financial statements at the date of this report for any
transitional impairment losses.
In October 2001, the Financial Accounting Standards Board issued SFAS 144,
"Accounting for the Impairment of Long-Lived Assets", which addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. This statement supercedes SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of", while retaining
the fundamental recognition and measurement provisions of that statement. SFAS
144 requires that a long-lived asset to be abandoned, exchanged for a similar
productive asset or distributed to owners in a spinoff to be considered held and
used until it is disposed of. However, SFAS 144 requires that management
consider revising the depreciable life of such long-lived asset. With respect to
long-lived assets to be disposed of by sale, SFAS 144 retains the provisions of
SFAS 121 and, therefore, requires that discontinued operations no longer be
measured on a net realizable value basis and that future operating losses
associated with such discontinued operations no longer be recognized before they
occur. SFAS 144 is effective for all fiscal quarters of fiscal years beginning
after December 15, 2001 and thus is effective for the Company beginning January
1, 2002. The Company has not determined the effect, if any, that the adoption of
SFAS 144 will have on the Company's consolidated financial statements.
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
14
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, and cost increases, as well as risks from
the threat or effects of terrorist attacks or other unforeseen events 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 inherent risk in market risk sensitive instruments and positions
primarily relates to potential losses arising from adverse changes in foreign
currency exchange rates and interest rates.
As of September 30, 2001, the Company operated six international
locations; two in Hong Kong (opened December 1999 and May 2001), one in
Singapore (opened May 1998), one in Sydney, Australia (opened May 2001), one
in Toronto (opened September 1998) and one in Vancouver, Canada (opened
October 2000). As a result, the Company is subject to risk from changes in
foreign exchange rates. These changes result in cumulative translation
adjustments which are included in other comprehensive income (loss). The
potential loss resulting from a hypothetical 10% adverse change in quoted
foreign currency exchange rates, as of September 30, 2001 is not considered
material.
The Company is subject to market risk from exposure to changes in interest
rates based on its financing activities. This exposure relates to borrowings
under the Company's Credit Facility which are payable at floating rates of
interest. The Company has entered into interest rate swap agreements to manage
some of its exposure to interest rate fluctuations. The change in fair value of
long-term debt resulting from a hypothetical 10% fluctuation in interest rates
as of September 30, 2001 is not considered material.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
During fiscal 1998, the Company identified several under performing
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.
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.
15
Item 5. Other Information
Pursuant to a notice delivered to the Company during the first quarter of
fiscal 2001, an insurgent stockholder launched a proxy contest to nominate three
individuals for election as directors at the Company's 2001 Annual Meeting of
Stockholders. At the Annual Meeting, held May 10, 2001, the Company's
stockholders elected the individuals nominated by the Board of Directors.
During the second quarter of fiscal 2001, the Company announced that its
Board of Directors had determined to evaluate the full range of strategic
alternatives, including evaluating a potential sale of the Company. The Company
is continuing this process.
The Company expects future results to be adversely affected by the
investment banking, legal and other costs associated with the proxy contest and
with evaluating strategic alternatives.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter for which this
report was filed.
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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 13, 2001 By: /s/ ALLEN J. BERNSTEIN
--------------------- ------------------------------
Allen J. Bernstein
Chairman of the Board, President
and Chief Executive Officer
Date November 13, 2001 By: /s/ THOMAS J. BALDWIN
------------------------ ------------------------------
Thomas J. Baldwin
Executive Vice President,
Chief Financial Officer and Director
17